Oil and Gas

'Twilight in the Desert' author Simmons talks Saudi oil supply, int'l economy

Are the Saudis running out of oil, and are their reserve estimates accurate? What other sources might help fill the gap if Saudi production declines? And what will be the effects on the U.S. and world economies from steep drops in Middle East oil production? On today's OnPoint interview ... E&E Daily's Brian Stempeck talks with Matthew Simmons, veteran oil analyst and author of a new book, "Twilight In The Desert: The Coming Saudi Oil Shock and World Economy," about the future of world oil supplies and what it means for the international economy.


Brian Stempeck: Hello and welcome to OnPoint. I'm Brian Stempeck. Joining me today is Matthew Simmons, a longtime energy analyst and author of the new book, "Twilight in the Desert." Mr. Simmons, thanks a lot for joining us.

Matthew Simmons: Thank you.

Brian Stempeck: In the book you basically are arguing that there five major oil fields in Saudi Arabia are past their peak and this is going to have major implications for the world economy. Tell us a little bit about the book and about what you found researching some of these fields.

Matthew Simmons: Well first of all, I for years had assumed that everything I'd heard about Middle East oil was true. That it was, I don't think I'd ever heard someone say that it's unlimited, but certainly the impression was that it's unlimited for any sort of a relevant timeframe and also that it was probably kind of equally distributed all over the Middle East and if you just drill the well there it was almost free and the only thing we had to worry about were geopolitical problems. I've been a 35-year student of the energy business from an investment banking standpoint. Our firm is one of the few independent firms to start in the '60s or '70s or '80s to still be around and we went through a depression in that period of time, when the oilfields collapsed.

Brian Stempeck: Sure.

Matthew Simmons: We survived through highest quality analysis and then knowing how to communicate that. Over the last 10 years I've found time after time after time that there were just myths, like a rig today is like eight rigs. Somebody just said that one day and by the time it was said 20 times, it was a fact. But about 2001, I decided that it was so odd that all these experts knew how much oil was going to be coming on the market over time, but nobody seemed to have an idea of the list of the top 50 oil fields in the world from current production.

Brian Stempeck: Now you've basically been looking at some of the past documents from the 1970s, looking at how the analysts inside Saudi Arabia have talked about how much oil is left, how much they think they can preruse today.

Matthew Simmons: Right.

Brian Stempeck: How have of those numbers changed, and why don't we have an accurate sense of how much oil there is in Saudi Arabia? Is that just them closing it off to us?

Matthew Simmons: No, it was actually the owners of Aramco that --

Brian Stempeck: This is a major national oil firm.

Matthew Simmons: Yeah, Exxon, Chevron, Texaco and Mobile. This was the strangest thing I found, they actually decided to create the impression that there was unlimited amount of oil so they could ramp the production up to 20 to 25 million barrels a day before they had the risk of being nationalized. To do that they'd have to basically convince the Saudi Arabians that there was no right sensitivity to how these fields were produced and out of that came a general impression that Middle East oil was basically so plentiful that demand could grow as high as high as you ever want to make demand and just worry about geopolitics. It was all an illusion.

Brian Stempeck: Basically the idea was that the Saudis would always be able to meet our demands.

Matthew Simmons: Yeah, yeah.

Brian Stempeck: But now that we're seeing a lot more demand from China and India --

Matthew Simmons: Yeah, and the United States.

Brian Stempeck: And the high price of oil isn't making demands lessen any, kind of going as your basic economic theory. What's your sense now on how much oil the Saudis have left? Are they giving us an illusion about, when they say they can go up to 12 million barrels per day production, what do you think they actually have left?

Matthew Simmons: Fifteen.

Brian Stempeck: They say 15 million more --

Matthew Simmons: For 50 or more years. First of all, you and the world are actually asking the wrong question, because I think they have billions of barrels, hundreds of billions of barrels of oil left. I think that their production in these five fields is highly at risk of a pending production collapse, but when the production collapse happens, they'll still have billions of barrels of oil, just like there's still billions of barrels of oil in West Texas. What they will have lost is the high reservoir pressure that keeps a fabulous amount of well oil flowing from a small number of wells.

Brian Stempeck: Now why do you say, I was reading part of the book and some of your recent studies where you talk about the reasons for these production collapses and when the Saudis refute your claims, people from Saudi Aramco will say, "Well, we have this new technology. We have more central wells. We have ways to access oil in ways we didn't before and that's why our estimates keep going up on how much we can run." You say that's not the case. You say that technology can actually be a bad thing in terms of these kind of looming collapse stakes. Can you explain what you mean by that?

Matthew Simmons: Yeah. The technology, and it's all technology that our firm did investment banking projects on during the '80s to make sure these companies stayed around. What they basically allowed companies to do is actually extract highly flowable oil and gas far, far faster than they could ever do it before. So it creates the semblance of longevity, while you basically pull the reservoirs out so fast that you then get decline curves. There's some natural gas wells in the United States now that once they peak, in about 11 months, in one year down to 5 percent of what they peaked at, in one year.

Brian Stempeck: So a really dramatic drop then.

Matthew Simmons: So that's what the technology created and I've been arguing that all during the '90s in the North Sea. I've been arguing that the single biggest supply problem that we have in the world was trying to get better data on decline curves, so to then find that in fact the people at Saudi Aramco had convinced themselves of the same argument that all the majors in the North Sea did in the '90s. I said, "I can't believe this." I shouldn't know more about this issue than they do, but they apparently believe that these technical tools will basically keep this oil flowing forever. I think there's always a chance of that, but when you get down to very small percentages of a chance, we shouldn't basically be saying there's much of a chance.

Brian Stempeck: Right. Now what's the worst case scenario? With what you're talking about, these fields out on kind of the brink of collapse, if indeed you're right, that the technology is kind artificially boosting them up. If they do collapse and we see the Saudis have a severe drop off in how much oil they can produce, who's going to meet that demand? Where can that come from and I guess, how does this play into the whole idea of the notion of peak oil?

Matthew Simmons: Well, I have said very clearly that when it becomes clear that Saudi Arabia is past stainable peak oil, when you redefine peak as not the highest you can do in a day, but the highest you can sustain for close to a decade, then there is almost total proof, if you want to get to looking at it, that the world has then passed sustainable peak oil production. You're really down to a small list of realistic candidates. Things like, look at a map of how large Russia is and they obviously must have more oil there. I say, look at how urgently the Russians destroyed their giant Siberian fields because they couldn't find anything else. So I do think this is basically the big event if we're going to find any peak oil and that we might have already now passed the sustainable level of production.

Brian Stempeck: Now, has Saudi Aramco, have they been more open about how much oil they have left since you've begun your investigation? I mean you've been talking about this for several years now and they've come out with documents and they counter as saying that they've only used 28 percent of their reserves. They have hundreds of billions of barrels left, there's plenty left. What's your reaction to that?

Matthew Simmons: First of all, I have an enormous amount of respect for the role that Saudi Arabia plays in the oil markets and I've made that clear from day one, but I also know how to listen very carefully and I've heard their arguments. What their arguments are, are just boasts and what I've continued to say from day one, when this first came up, is that we urgently need data reform and we need the whole world, from Exxon to Shell to BP, particularly Saudi Aramco, to start producing quarterly reduction reports by field and the number of well bores that create that production so that an analyst can do a well productivity acceleration or decline curve and reserve data by field. Once that data is in public domain it would take me a day to go through Saudi Arabia's data, verified by a third party, not performed by a third party, just verified by an auditor that this is the right set of books. It would take me one day to either publicly apologize that I made a horrendous mistake or to say, "Gosh, it's actually worse than I thought." As long as we get the reaction of there is no reason to share that data. We have no interest in sharing that data. Trust me, we have delivered the goods for 70 years and we have conservative numbers and we can produce 15 million barrels a day for 50 years or once in awhile they say a hundred years, then I say, give me a break. I can sit here today and tell you, and it's perfectly legal, that by 2030 my net worth will exceed Bill Gates or that because I'm 62 and the only time I've ever spent the night in hospital was when I was born, that means for the next 62 years I will never spend the night in a hospital.

Brian Stempeck: Sure.

Matthew Simmons: It's just preposterous.

Brian Stempeck: Now when you talk about these audits, these are already happening in the United States.

Matthew Simmons: Yeah, yeah.

Brian Stempeck: We've seen a lot of controversy about oil companies in the United States having problems with their estimates. Why isn't this happening around the world? Why aren't people calling for this in Saudi Arabia, in Iran, in other countries with some of these shaky oil estimates?

Matthew Simmons: Well, the interesting thing is that two years ago there wasn't any mention of this as an issue. This March there was a meeting scheduled for March 11, I believe, on a Friday in Geneva and it got postponed at the last minute because there was a huffiness about who wasn't coming. It was cosponsored by the United Nations and the International Energy Agency and it was going to have representatives from the FCC, from the Financial Accounting Standards Board, the IMF, the G7, it was a real who's who, to get closure on a new mandated energy data reform. That's me pushing that, so I think that we're on the verge of having this done. I hope that the best single thing that happens is that my book creates such controversy that it forces data reform. If it turns out I'm wrong, I'll say, boy, I am so glad because I just ... but we now have data reform versus right now, we're basically just blissfully assuming that trust me and I say good supply chain management. Can you imagine a car company redesigning its car line and somebody says, "Well, who's going to supply the steel?" Well, that's a good question. Oh, I know who it is. What shape are they in? Oh, they're in great shape, I called them.

Brian Stempeck: Now what do you see as, clearly one of the reasons the Saudi's are doing this, they're not open about how much oil they have left and being honest about these questions maybe, is because of foreign policy ramifications. If the Saudis do come clean and it turns out that a lot of these wells, as you're asserting, don't have much oil left, what does that mean as far as the US foreign policy toward Saudi Arabia goes?

Matthew Simmons: That Saudi Arabia gains in relevance.

Brian Stempeck: Are you saying total irrelevance?

Matthew Simmons: No, gains in relevance. I think one of the reasons that people just don't seem to like the Saudi Arabians is they think they have unlimited amount of oil that's free and the jerks are charging us too much. I think on data reform, if it turns out I'm right, my analogy is when you have a really, really wealthy uncle that nobody in the family likes and all of a sudden you hear that he's basically got some terminal disease, everybody starts liking him more. So I think the idea that they'd lose relevancy is a really upside-down idea.

Brian Stempeck: Now what do you say about, we were talking about kind of the idea of peak oil, that once the Saudi's go, as goes the world. But aren't there other, going back to the technology question, as the oil sands from Canada come online, as we look at oil shales, as we look at production throughout the world, a major new find out West, why aren't these going to make up for Saudi Arabia? Is it just a question of size or why is that?

Matthew Simmons: It's a question of size first of all and it's a question of the loosey goosey way that we basically switch from high flow rate to high quality oil into bitumen. Bitumen should be called a first cousin of tar or coal and it's a very energy intensive process to turn unconventional oil into usable oil and it comes out and it rates the ooze versus high flow rates. So we just make, it's a terrible mistake that's made all the time, and part of their proven reserves at [Saudi Arabia's] Ghawar [oil field] for instance, without any question, are almost 100 mile long tar mat that's 500 feet thick, well that's bitumen.

Brian Stempeck: And that's what their counting as part of their possible reserves?

Matthew Simmons: Yeah, yeah, yeah.

Brian Stempeck: So that's one of the reasons that you think these are inaccurate?

Matthew Simmons: Yeah, yeah. I happen to believe that, I know because it's a matter of public record, it's just no one ever looked at this and it's in the book, that in 1979 the senior management of Aramco, under subpoena, told an investigation by a subcommittee of the House on Foreign Relations, I mean the Senate Foreign Relations Committee, that if Saudi Arabia produced 9.8 million barrels a day, which was the current rate, that by the early 1990s the North Ghawar, Abqaiq and Berri, which is basically 7 million barrels a day of production --

Brian Stempeck: Major fields.

Matthew Simmons: Would go into irreversible decline. They also said that they had under FCC standards 110 billion barrels of proven reserves, they had 177 billion barrels of proven and probable reserves and 245 billion of proven, probable and possible reserves and eight years later, without a single additional find, that number turned into 260. To think that, this chief engineer that did that work sent me an e-mail on Friday saying, "I've just finished your book. You have liberated me. I can now talk openly. It was me that actually did the work."

Brian Stempeck: So the stats are coming true basically.

Matthew Simmons: The stats are coming true.

Brian Stempeck: One last question for you because we're running out of time, the energy bill this week of courses on the floor of the Senate. Though it's not your business to recommend new policies, but as we're talking about peak oil, as we're talking about where to go from here, what do you see as the path forward, whether it be hydrogen or hybrid cars, and is the Senate bill the right way forward?

Matthew Simmons: First of all, the Senate bill is a start to going on to a war footing to fight the energy war. I think that's the way we have to look at this. It's not the end of it, it's just getting started. The most important provision in the energy bill is the most contentious provision and that's, at the very least, doing a scientific survey of our outer continental shelf to see what energy we might have. If the senators are so haughty about that that they say, "We won't do that," then we should start today dismantling the U.S. economy.

Brian Stempeck: All right. Well that will be the last word right there.

Matthew Simmons: Thank you.

Brian Stempeck: I'd like to thank our guest today. That was Matt Simmons. He's a longtime energy analyst and also the author of the new book, "Twilight in the Desert." I'm Brian Stempeck. This is OnPoint. Thanks for watching.

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