Saturday, October 21, 2006
Twilight in the Desert - Piercing the Veil of Saudi Oil Secrecy
Matthew Simmons is a well-connected oil industry insider who has concluded that some of the world's largest oil beds may be on the verge of production collapse.
Author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, published in May 2005, Simmons is founder of Simmons & Company International, an investment bank that handles mergers and acquisitions among energy companies, and counts among its clients Halliburton, General Electric, and the World Bank. A graduate of the Harvard Business School, he served as an energy-policy adviser to the 2000 Bush-Cheney campaign.
A new review of Simmons' book recently ran on the Motley Fool website, and I thought it was worth sharing here.
Book Review: "Twilight in the Desert"
By Jean Graham
In Twilight in the Desert, Matthew Simmons has written a pivotal and accessible work confronting the complacent notion that there is an inexhaustible supply of oil to be readily tapped when needed. Simmons has searched through hundreds of obscure SPE documents (Society of Petroleum Engineers) and found the paper trail that suggests the Saudi Oil Miracle may be entering its senescence, taking with it the capacity to produce more oil on demand.
The importance of Saudi oil cannot be disputed. The Saudis claim petroleum reserves of 262.7 billion barrels. In the Middle East, Iran reserves run a distant second at 130.7 billion barrels, and Bahrain has 0.7 billion barrels. There are 726.6 billion barrels under the sands of the Middle East, representing 63.3% of the world reserves. The Saudis have 22.9% of world reserves.
Matthew Simmons questions the accuracy of Saudi estimates of 262 billion barrels, and the capability of the aging giant fields to increase oil output on demand.
The golden age of exploration in Saudi Arabia lasted from 1941-1965 and saw the discovery of the major fields -- Ghawar, Abquaiq, Safaniya, and Berri. The Saudi oil miracle has been anchored by the largest and inarguably greatest oil field ever found -- Ghawar. Ghawar output has been strongly supported by the other super-giant fields -- Abqaiq, Safaniya, and Berri. In 1979, when Saudi Arabia's oil output was near its peak, these fields produced 8.5 million barrels per day (bpd) of the 9.8 million barrels a day of Saudi output. U.S. oil production peaked in 1970 at 10 million barrels per day and is now around 5 million bpd. The giant U.S. fields are in decline, as are many of the greatest oil fields around the world. Declining production is an inevitable, calculable series of events. Are the Saudi fields the exception? Simmons says no.
Ghawar has produced 55 billion barrels of oil and accounts for 55%-65% of all Saudi output. Because the world has relied on the Saudis' ability to open wellhead valves and provide the spare capacity in oil production needed in times of crisis and shortage, Simmons believes there may have been irreparable damage done by overproducing the giant oilfields, including Ghawar. This will ultimately lower the volume of recoverable oil. Since field-by-field data has not been available for more than two decades, it is difficult to know how the fields are faring.
Simmons clearly discusses the critical components of oil recoverability -- oil reservoir pressure, porosity, and permeability of the rock formations, fractures, and faults in the field. Reservoir pressure is produced by the presence of aquifers below the oil. This keeps gas bubbles trapped in the oil, much like the fizz in a can of soda. When fields are young, the pressure is naturally high, and the oil flows to the surface without artificial lifting or pushing. As the Saudi (and all) oil fields age, pressure can be created by injecting water at the edges of the field, which is what the Saudis have been aggressively doing for decades. More injected water produces higher percentages of water mixed with the oil (water cut).
As more complicated technology is used to suck oil out of declining fields, oil becomes expensive and the fields less productive. Even the greatest fields decline and fail. Prudhoe Bay, the last great U.S. giant, peaked at 1.5 million bpd in 1989 and has since declined to 300,000 bpd. The peak output lasted only 10 years. It happens to the best of them.
Ghawar was blessed with:
Very thick columns of oil
In its first decade of production, reservoir pressure was high enough to produce vast quantities of water-free oil. To maintain critical pressure, the Saudis began an early and intensive program of water injection at the flanks of the field. As water cuts reach unacceptable percentages, those wells must be shut down.
Ghawar has had water cut problems since the 1970s. The presence of water also makes measurement of oil production difficult, which throws into question any predictions of recoverable reserves. These are classic signs of problems in an aging field. Twilight for Ghawar may be approaching.
Abqaiq, Safaniya, and Berri are subject to similar aging problems:
Falling reservoir pressure
Rampant corrosion from years of water injection
Erratic water flow behavior in the rock
Growing water cuts in the oil
Lower productivity in the parts of each field remaining to be drilled
Although the Saudis have drawn a veil of secrecy over both individual field production and their technical problems, glimpses of the challenges involved in producing oil from aging fields are found in Aramco brochures meant to extol Saudi technology, but which are in fact admissions of difficult oil recovery. Technological advances include newer, vastly more expensive drilling techniques involving horizontal wells instead of vertical wells and the most sophisticated computer models of 3-D reservoir structures available, requiring millions of data points. Clearly, increasingly expensive and complex technology is necessary to produce the remaining oil, while massive water injection creates lower production in the form of higher water cuts.
If there were easy spare capacity available to increase production from the current nine million barrels a day to 12 or 15 million barrels a day the Saudis claim is possible, they wouldn't require these recovery methods. It's an admission of difficult production in aging fields, according to the author.
In spite of high oil prices, levels of non-OPEC oil production have been largely disappointing. The most surprising and unanticipated gains were from the former Soviet Union (FSU), emerging from reworked oil fields. There is little spare capacity available from non-FSU and non-OPEC fields, and there is uncertainty around the sustainability of Russian production. Because the Saudis have kept much of the intelligence regarding their oil output and field-by-field reserves secret, the world can only speculate about their ability to supply the ever-increasing global oil demands. Most of the world chooses to believe Saudi reassurances that the reserves are there.
Mr. Jum'ah of Aramco, the Saudi Arabian production and distribution company, was recently quoted in The Wall Street Journal as confirming more than a century's worth of recoverable oil reserves (5.7 trillion barrels) worldwide. Only 1.2 trillion barrels are deemed recoverable with current technology. The other estimated reserves will require technology that is yet to be developed or has been too expensive at current prices (as in tar sands) Of the proven recoverable reserves, the Saudis claim to have 262 billion barrels, which Simmons disputes, citing inaccurate measurement from water cuts and recovery methods that are forced to bypass much of the estimated recoverable oil in the ground.
Simmons believes that the other pillars of predicted reserves -- undiscovered super-giant fields -- are not there. The Saudis have failed to discover any notable fields since Shaybah in 1968, despite intensive exploration. It is their last multibillion-barrel field (reserves 14 billion barrels), able to produce 500,000 barrels per day. The recent Jack field discovery in the Gulf of Mexico may contain 3-15 billion barrels, which pales in comparison to the giants in the Kingdom. When these aging fields begin to fail, the world will experience oil shortages much sooner than the predicted 100 years.