Sunday, October 09, 2005

The Saudi oil bombshell

Asia Times

By Michael T Klare
June 29, 2005

For those oil enthusiasts who believe that petroleum will remain abundant for decades to come - among them President George W Bush and Vice President Dick Cheney, and their many friends in the oil industry - any talk of an imminent "peak" in global oil production and an ensuing decline can be easily countered with a simple mantra: "Saudi Arabia, Saudi Arabia, Saudi Arabia."

Not only will the Saudis pump extra oil now to alleviate global shortages, it is claimed, but they will keep pumping more in the years ahead to quench our insatiable thirst for energy. And when the kingdom's existing fields run dry, lo, they will begin pumping from other fields that are just waiting to be exploited. We ordinary folk need have no worries about oil scarcity, because Saudi Arabia can satisfy our current and future needs. This is, in fact, the basis for the Bush administration's contention that we can continue to increase our yearly consumption of oil, rather than conserve what's left and begin the transition to a post-petroleum economy. Hallelujah for Saudi Arabia!

But now, from an unexpected source, comes a devastating challenge to this powerful dogma: in a newly released book, investment banker Matthew R Simmons convincingly demonstrates that, far from being capable of increasing its output, Saudi Arabia is about to face the exhaustion of its giant fields and, in the relatively near future, will probably experience a sharp decline in output. "There is only a small probability that Saudi Arabia will ever deliver the quantities of petroleum that are assigned to it in all the major forecasts of world oil production and consumption," Simmons writes in Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. "Saudi Arabian production," he adds, italicizing his claims to drive home his point, "is at or very near its peak sustainable volume ... and it is likely to go into decline in the very foreseeable future."

In addition, there is little chance that Saudi Arabia will ever discover new fields that can take up the slack from those now in decline. "Saudi Arabia's exploration efforts over the last three decades were more intense than most observers have assumed," Simmons asserts. "The results of these efforts were modest at best."

If Simmons is right about Saudi Arabian oil production - and the official dogma is wrong - we can kiss the era of abundant petroleum goodbye forever. This is so for a simple reason: Saudi Arabia is the world's leading oil producer, and there is no other major supplier (or combination of suppliers) capable of making up for the loss in Saudi production if its output falters. This means that if the Saudi Arabia mantra proves deceptive, we will find ourselves in an entirely new world - the "twilight age" of petroleum, as Simmons puts it. It will not be a happy place.

Before taking up the implications of a possible decline in Saudi Arabian oil output, it is important to look more closely at the two sides in this critical debate: the official view, as propagated by the US Department of Energy (DoE), and the contrary view, as represented by Simmons' book.

The prevailing view goes like this: according to the DoE, Saudi Arabia possesses approximately one-fourth of the world's proven oil reserves, an estimated 264 billion barrels. In addition, the Saudis are believed to harbor additional, possible reserves containing another few hundred billion barrels. On this basis, the DoE asserts, "Saudi Arabia is likely to remain the world's largest oil producer for the foreseeable future."

To fully grasp Saudi Arabia's vital importance to the global energy equation, it is necessary to consider the DoE's projections of future world oil demand and supply. Because of the rapidly growing international thirst for petroleum - much of it coming from the United States and Europe, but an increasing share from China, India and other developing nations - the world's expected requirement for petroleum is projected to jump from 77 million barrels per day in 2001 to 121 million barrels by 2025, a net increase of 44 million barrels. Fortunately, says the DoE, global oil output will also rise by this amount in the years ahead, and so there will be no significant oil shortage to worry about. But over one-fourth of this additional oil - some 12.3 million barrels per day - will have to come from Saudi Arabia, the only country capable of increasing its output by this amount. Take away Saudi Arabia's added 12.3 million barrels, and there is no possibility of satisfying anticipated world demand in 2025.

One could, of course, suggest that some other oil producers will step in to provide the additional supplies needed, notably Iraq, Nigeria and Russia. But these countries together would have to increase their own output by more than 100% simply to play their already assigned part in the DoE's anticipated global supply gain over the next two decades. This in itself may exceed their production capacities. To suggest that they could also make up for the shortfall in Saudi production stretches credulity to the breaking point.

It is not surprising, then, that the DoE and the Saudi government have been very nervous about the recent expressions of doubt about the Saudi capacity to boost its future oil output. These doubts were first aired in a front-page story by Jeff Gerth in the New York Times on February 25, 2004. Relying, to some degree, on information provided by Simmons, Gerth reported that Saudi Arabia's oilfields "are in decline, prompting industry and government officials to raise serious questions about whether the kingdom will be able to satisfy the world's thirst for oil in coming years".

Gerth's report provoked a barrage of counter-claims by the Saudi government. Their country, Saudi officials insisted, could increase its production and satisfy future world demand. "[Saudi Arabia] has immense proven reserves of oil with substantial upside potential," Abdallah S Jum'ah, the president of Saudi Aramco, declared in April 2004. "We are capable of expanding capacity to high levels rapidly, and of maintaining those levels for long periods of time."

This exchange prompted the DoE to insert a sidebar on this topic in its International Energy Outlook for 2004. "In an emphatic rebuttal to the New York Times article [of February 24]," the DoE noted, "Saudi Arabia maintained that its oil producers are confident in their ability to sustain significantly higher levels of production capacity well into the middle of this century." This being the case, we ordinary folks need not worry about future shortages. Given Saudi abundance, the DoE wrote, we "would expect conventional oil to peak closer to the middle than to the beginning of the 21st century."

In these, and other such assertions, US oil experts always come back to the same point: Saudi oil managers "are confident in their ability" to achieve significantly higher levels of output well into the future. In no instance, however, have they provided independent verification of this capacity; they simply rely on the word of those oil officials who have every incentive to assure us of their future reliability as suppliers. In the end, therefore, it comes down to this: America's entire energy strategy, with its commitment to an increased reliance on petroleum as the major source of our energy, rests on the unproven claims of Saudi oil producers that they can, in fact, continuously increase Saudi output in accordance with the DoE's predictions.

And this is where Simmons enters the picture, with his meticulously documented book showing that Saudi producers cannot be trusted to tell the truth about future Saudi oil output.

First, a few words about the author of Twilight in the Desert. Matthew ("Matt") Simmons is not a militant environmentalist or anti-oil partisan; he is chairman and chief executive officer of one of the nation's leading oil-industry investment banks, Simmons & Company International. For decades, Simmons has been pouring billions of dollars into the energy business, financing the exploration and development of new oil reservoirs. In the process, he has become a friend and associate of many of the top figures in the oil industry, including Bush and Cheney. He has also accumulated a vast storehouse of information about the world's major oilfields, the prospects for new discoveries, and the techniques for extracting and marketing petroleum. There is virtually no figure better equipped than Simmons to assess the state of the world's oil supply. And this is why his assessment of Saudi Arabia's oil production capacity is so devastating.

Essentially, Simmons' argument boils down to four major points:
Most of Saudi Arabia's oil output is generated by a few giant fields, of which Ghawar - the world's largest - is the most prolific.
These giant fields were first developed 40 to 50 years ago, and have since given up much of their easily extracted petroleum.
To maintain high levels of production in these fields, the Saudis have come to rely increasingly on the use of water injection and other secondary recovery methods to compensate for the drop in natural field pressure.
As time goes on, the ratio of water to oil in these underground fields rises to the point where further oil extraction becomes difficult, if not impossible. To top it all off, there is very little reason to assume that future Saudi exploration will result in the discovery of new fields to replace those now in decline.

Twilight in the Desert is not an easy book to read. Most of it consists of a detailed account of Saudi Arabia's vast oil infrastructure, relying on technical papers written by Saudi geologists and oil engineers on various aspects of production in particular fields. Much of this has to do with the aging of Saudi fields and the use of water injection to maintain high levels of pressure in their giant underground reservoirs.

As Simmons explains, when an underground reservoir is first developed, oil gushes out of the ground under its own pressure; as the field is drained of easily extracted petroleum, however, Saudi oil engineers often force water into the ground on the circumference of the reservoir in order to drive the remaining oil into the operating well. By drawing on these technical studies - cited here for the first time in a systematic, public manner - Simmons is able to show that Ghawar and other large fields are rapidly approaching the end of their productive lives.

Simmons' conclusion from all this is unmistakably pessimistic: "The 'twilight' of Saudi Arabian oil envisioned in this book is not a remote fantasy. Ninety percent of all the oil that Saudi Arabia has ever produced has come from seven giant fields. All have now matured and grown old, but they still continue to provide around 90 percent of current Saudi oil output ... High-volume production at these key fields ... has been maintained for decades by injecting massive amounts of water that serves to keep pressures high in the huge underground reservoirs ... When these water projection programs end in each field, steep production declines are almost inevitable."

This being the case, it would be the height of folly to assume that the Saudis are capable of doubling their petroleum output in the years ahead, as projected by the DoE. Indeed, it will be a minor miracle if they raise their output by a million or two barrels per day and sustain that level for more than a year or so. Eventually, in the not-too-distant future, Saudi production will begin a sharp decline from which there is no escape. And when that happens, the world will face an energy crisis of unprecedented scale.

The moment that Saudi production goes into permanent decline, the Petroleum Age as we know it will draw to a close. Oil will still be available on international markets, but not in the abundance to which we have become accustomed and not at a price that many of us will be able to afford. Transportation, and everything it effects - which is to say, virtually the entire world economy - will be much, much more costly. The cost of food will also rise, as modern agriculture relies to an extraordinary extent on petroleum products for tilling, harvesting, pest protection, processing and delivery. Many other products made with petroleum - paints, plastics, lubricants, pharmaceuticals, cosmetics and so forth will also prove far more costly. Under these circumstances, a global economic contraction - with all the individual pain and hardship that would surely produce - appears nearly inevitable.

If Simmons is right, it is only a matter of time before this scenario comes to pass. If we act now to limit our consumption of oil and develop non-petroleum energy alternatives, we can face the "twilight" of the Petroleum Age with some degree of hope; if we fail to do so, we are in for a very grim time indeed. And the longer we cling to the belief that Saudi Arabia will save us, the more painful will be our inevitable fall.

Given the high stakes involved, there is no doubt that intense efforts will be made to refute Simmons' findings. With the publication of his book, however, it will no longer be possible for oil aficionados simply to chant "Saudi Arabia, Saudi Arabia, Saudi Arabia" and convince us that everything is all right in the oil world. Through his scrupulous research, Simmons has convincingly demonstrated that - because all is not well with Saudi Arabia's giant oilfields - the global energy situation can only go downhill from here. From now on, those who believe that oil will remain abundant indefinitely are the ones who must produce irrefutable evidence that Saudi Arabia's fields are, in fact, capable of achieving higher levels of output.


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