Check That Oil
By David Ignatius
Friday, November 14, 2003; Page A29
LONDON -- Even when the bombs are going off in Saudi Arabia, people tend to take it for granted that the kingdom has a bottomless reservoir of cheap oil. But that perception of low-cost abundance may change if a U.S. investment banker's revisionist critique of Saudi oil reserves proves accurate.
"The prevailing view has been that the Saudi oil fields are great big caverns of oil, and that recovery is so easy they will basically last forever," says Matthew Simmons, the chief executive of a Houston-based investment banking firm called Simmons & Co. International.
Simmons believes that this traditional image of Saudi Arabia as a perpetual gusher of cheap oil is wrong. He is finishing a book documenting his argument that in the future Saudi oil will be scarcer and more expensive than many people expect.
Simmons's analysis has been generating a buzz in oil circles, and he presented some of his findings last week to experts attending a conference here sponsored by the Energy Intelligence publishing group. Essentially, Simmons was revisiting a question that has vexed the CIA since the late 1970s: How much oil can Saudi Arabia produce, and at what cost?
Top industry experts caution that Simmons's analysis doesn't change some basic facts: Saudi Arabia still has the world's largest oil reserves, with an estimated 266 billion barrels; and it still has extra capacity to "surge" from its current production of about 8.5 million barrels a day to about 10 million barrels a day. The Saudis used that surplus capacity last spring to make up for lost production from Venezuela, Nigeria and Iraq -- and it's a big reason why the oil market stayed relatively calm.
But high Saudi production "is not something one can just count on passively," says a U.S. government energy official who closely monitors the market. He predicts that the Saudis will need to spend more to maintain current production levels -- which could roughly double Saudi production costs from their current $2 a barrel to as much as $4. That would put the Saudis closer to the global industry average cost of about $4 to $6 a barrel.
"They will need to invest to keep production up," says a geologist who has worked in the kingdom for Saudi Aramco and is now a top executive with one of the major oil companies. "That means it will become more expensive."
Simmons bases his analysis on a review of about 150 technical papers that have been written since 1962 by geologists and engineers at Saudi Aramco and its predecessor, Aramco. The papers, published by the Society of Petroleum Engineers, examine sensitive production issues that are rarely discussed outside the kingdom.
It turns out that Saudi oil structures aren't the cavernous reservoirs the world imagines. Rather than having the smooth underground topography that geologists call "homogeneity," which provides strong wellhead pressure and easy recovery, some of the biggest Saudi fields, such as Ghawar and Abqaiq, are instead "heterogeneous," with complex underground fractures that can impede recovery.
To maintain its high production level, Saudi Arabia since the 1970s has used a recovery technique known as "water injection" -- in which heavy, salty water is pumped into the reservoirs to push oil toward the surface. According to Simmons, the Saudis are now injecting about 7 million barrels a day of seawater through three big pipelines.
"Water injection gives the appearance of eternal youth," Simmons says. "That's why the Saudi fields look so robust." But he argues that injection can damage wells and create unpredictable flows underground, sometimes known as "rogue water," that prevent full recovery of reserves.
The decision to pump water into the Saudi reservoirs worried the CIA enough that it commissioned a special study in the late 1970s. But the practice was urged by Exxon Corp., the leading Aramco partner at the time, which argued that it was essential for prudent management of reserves. The CIA eventually agreed.
CIA worries about Saudi production capacity returned in the early 1990s, when the Persian Gulf War halted Iraqi and Kuwaiti production. Again, the agency concluded that the Saudis had the necessary extra margin. Saudi surge capability was tested once more this year. Saudi production briefly spiked above 10 million barrels, but some industry experts believed it was not sustainable at that level without more investment.
The world has taken for granted that cheap Saudi oil will always be there to buffer the market. That abundance made the kingdom a tempting target. But if Simmons is right, there may not be quite so much Saudi oil, at quite so cheap a cost, as the world imagined.
© 2003 The Washington Post Company