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Saudi Oil and the World Economy

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Matthew Simmons
Author, "Twilight in the Desert"
Thursday, August 4, 2005; 3:00 PM

In his recently published book "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy," author Matthew Simmons argues that Saudi Arabia will in coming decades be unable to maintain its current level of oil production, with large-economic repercussions. Simmons also examines the political and social climate of the nation and its desire to conceal the potential shortfalls from global consumers.

Matthew Simmons , an oil industry analyst and CEO of Simmons & Company International, was online Thursday, August 4, at 3 p.m. ET to discuss Saudi oil supplies.

The transcript follows.

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Ottawa, Canada: There have recently been large oil discoveries in China's Bohai Bay. How do you see this affecting the oil supply situation over the next decade?

Matthew Simmons: The Bohai Bay is probably a very productive area but you're talking about fields that have production profiles of 50-100,000 barrels a day each and they're apparently not very long life reserves. So you'd have to have scores of them to replace the giant fields of Saudi Arabia.

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Suwanee, Ga.: Some analysts think the world will reach its Hubbert's Peak in the next year. What is your opinion of when this will occur?

Matthew Simmons: The biggest worry I have as a result of doing the research on Saudi Arabia's oil is that there is a real risk that they have already exceeded sustainable peak oil production and the longer the produce at current risk the higher the risk that they could start into a production collapse. If that turns out to be true than the odds are 95% that the world has then exceeded sustained peak oil production. What the people that get into the peak oil debate often don't think about is that peak oil is not the maximum amount of oil you could produce in a single day, it's realistically the amount you could produce per day for at least a half decade. Therefore it could already be happening. And we'll never know that until we get better data.

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Saint John, Canada: Given that there is a well understood technology for synthesizing other fossil fuels into oil (mostly coal) do you believe it will be possible to offset the production declines from conventional oil wells by increased coal liquefaction? How environmentally destructive is that process?

Matthew Simmons: I don't understand the environmental impact of coal gasification. Almost every single aspect of using unconventional oil, whether it's coal or Canadian tar sands or oil shales are all incredibly energy intensive, so they use a lot of energy to convert them into usable energy, and they don't come out of the ground at high amounts. So it becomes a daunting task to begin offsetting oil coming out of a highly pressurized oil field, which can come out at a rate of 5-10,000 barrels per day per well with unconventional oil sources, which are energy intensive and come out in small amounts.

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Mount Shasta, Calif.: Of all the sources of world oil/gas reserve estimates, which do you deem most accurate?

Thank you very much for authoring your book and making yourself available to answer questions today on washingtonpost.com.

Matthew Simmons: The most accurate are the small companies who have chosen to have their reserves audited by an independent third party. The smaller the company the more necessary it is to do that because it becomes your borrowing base, and your banks insist on it. It's like a company saying they don't need an audit. The bigger the reserve base the more likely it is that there was no third party assessment and the greater the odds that the estimates could be wrong. Thank you for the compliment.

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Philadelphia, Pa.: It seems to me that many of the potential energy policies that could improve national security would also help address the problem of global warming. Can you comment on this overlap?

Matthew Simmons: I think ironically if oil is approaching its peak then the worst fears about global warming aren't realized, because we can't produce the increased amount of oil that gives rise to the worry. Secondly, in the areas of the world that have experienced peak oil, they have in almost every case quickly gone into production declines which further lessens the global warming risk to the extent that global warming is created by fossil fuels.

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Melbourne, Australia: Have you had any feedback or response to your book from Saudi oil industry insiders?

Matthew Simmons: I've had a lot of interesting feedback from retirees. So far I haven't had any feedback from anybody that's currently within Saudi ARAMCO. I gather by what third party sources say is that there is an edict within Saudi ARAMCO to never again mention my book. They've had their say, they totally disagree with my book, and that's that-the issue's closed.

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Seattle, Wash.: Hello Mr. Simmons,

How would you respond to the Cambridge Energy Research Associate's analysis, as described in a recent Washington Post article "It's Not the End of the Oil Age" by Daniel Yergin, which paints a less urgent picture?

It's Not the End Of the Oil Age.

Thanks,

Kathy

Seattle, Wash

Matthew Simmons: I'm one of three co-authors of an op-ed piece that we have just submitted to The Washington Post that hopefully will get published. What the three of us collectively feel is that it is a very unrealistic assessment, it is not a detailed, bottom up field by field, they ignore by and large depletion issues, and it's based on an enormous belief that technology and enthusiasm and urgency will create new oil supplies. That is precisely the same logic that CERA used very loudly in 2001 and 2002 to dispute the critics views that natural gas in North America was running into trouble. And it took less than 24 months after they had dismissed any problems in natural gas before they made a discovery that we had a natural gas crisis. I think what they're doing being as casual on future oil supplies, let alone predicting we're headed toward another oil glut, is doing the world a great disservice.

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London, U.K.: Mr. Simmons.

In your book you claim that Saudi Arabian oil production has peaked or is on the verge of peaking. However the Saudi authorities claim that they will be able to increase daily production to more than 12 million barrels per day in the near future.

If what you are saying is true then why would the Saudis claim that they can increase production?

Matthew Simmons: I suspect that they actually believe they can, and I would point to the unfortunate experience of almost all our major oil companies in the U.S. and England who five years ago were just as confident they could grow their production over the next decade by 5-7% per annum. And all of this turned out to be unjustified optimism. Today most of the major oil companies are witnessing production declines. It turns out that estimating future oil production is just as difficult as measuring future earnings per share. It's an art vs. a science and it's very easy to get fooled, especially when you're dealing with old oil fields.

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Laurel, Md.: How significantly will the new Caspian Sea oil pipeline effect world supplies?

Are any other important delivery systems in the works to increase economically feasible supplies?

Matthew Simmons: The Caspian Oil system is one of the largest new oil pipelines built in two or three decades. But what's interesting is that it's being built on the assumption that two or three major Caspian oil projects that will take the next 5-7 years to create and then the further 5-7 years to reach peak production will actually work. And if they do work it adds less than 2 million barrels a day to the world oil market by 2016.

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Wheaton, Md.: Are you predicting a world oil shortage? Don't you think newly discovered oil in central Africa and the former Soviet states will compensate for the loss of oil from Arab-occupied lands?

Matthew Simmons: The oil coming out of West Africa and Central Africa is not likely to significantly increase the oil supply of Africa because of the declines taking place in the existing base. The oil coming out of Russia is now apparently starting back into decline because they haven't really come up with any significant new discoveries. So it's hard to find an area that could come on fast enough to ever start to mitigate a decline in Middle East oil.

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Detroit, Mich.: In the short run, which country do you expect can best make up any shortfall of oil production by Saudi Arabia?

Matthew Simmons: If things really went well, Libya. Libya's new opening up could potentially add 2-3 million barrels a day, but it would take at least 5-10 years for that to happen. Algeria could add possibly a million barrels, with everything going right. Some think the UAE could maybe had 500,000 barrels a day, some say Kuwait could add 500,000. But these are all best case scenario estimates and they all assume that the current production bases in each of these countries stays flat.

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London, Ontario: I have read recently that now King Abdullah will have a bit of a time reining in members of the extended family who want to pursue a policy of protecting their oil reserves and getting the best price the market will bear. He was somewhat insulated from this sort of criticism while he was the power behind the thrown, but it appears that his policy of supplying as much oil as possible may be under attack from factions looking out for Saudi interests. Could this spell the end of $60/barrel oil? Will we look back at this as the "golden age" of cheap energy?

Matthew Simmons: I think it will be very interesting to see what changes if any come from the fact that King Abdullah is now king vs. de facto king. It wouldn't surprise me if even King Abdullah led a new era of taking more seriously cutting back on their production so that they can ensure that it lasts for a long period of time, and that policy would not be driven by greed or anger toward the west but simply a husbanding of their only resource to make sure they don't risk a production collapse. And from where those pressures arise is unclear, but once people spend time reading the detail that they could have read if they had just gathered the papers written by all their own technical people because that's the logical conclusion all these cumulative technical papers leads to--production conservation as the only solid insurance policy to protect against a pending production collapse. There's nothing that worse Saudi Arabia could accidentally do to harm the west than accidentally create a production collapse in their oil flows.

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Aurora, Ill.: There are some people who say deep well drilling will provide the oil we need and cite several wells in Russia that are designed for deep drilling. I don't think the flow rate or the quality from those wells is really going to help us, but I'm curious as to what you tell people when they talk about deep drilling?

Matthew Simmons: There are two elements of deep drilling that get bandied about-first is deep water oil, and second is deep formation oil (lower depths in the earth), and then there's the combination. What's interesting is from what we know of these virgin areas is that they are very expensive to drill, the expiration risk is very high (about 1 in 5 to 1 in 8 seem to work) and then most of the production, once it comes into stream, rapidly goes into decline. For example in the Gulf of Mexico where you have deep water oil being produced also from deep formations, once they come onstream they tend to peak within 18 months and they tend to decline by as much as 70-80% in a 5-7 year period of time, so it's hard to envision that we could ever find enough of these to sustain an offset when Saudi Arabia's production goes into decline.

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Cabot, Vt.: Mr. Simmons - The people of the United States owe you a tremendous amount of appreciation for the work you have done, the spirit of fairness and scholarship you've brought to the debate on oil depletion, and the strength of character with which you maintain the discussion with your peers. We're all rooting for you. Keep up the good work of informing the public.

Matthew Simmons: I really appreciate that, particularly since I spent two and a half years of hard work making sure I got a very important message out in the public domain. I have really been incredibly touched by the outpouring of letters and emails that I've received in the last eight weeks from a wide variety of people in a wide variety of countries, some experts in oil and some observers of oil.

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Arlington, Va.: Mr. Simmons,

Can you give us a quick short, medium, long term outlook on Natural Gas in North America ? Should I enter into a fixed price/therm contract with my gas company?

Thanks

Matthew Simmons: The short, medium and long term outlooks for natural gas in North America are really poor. It gets more dismal the further you go out. Ironically we peaked in U.S. natural gas supply in 1973, only two years after we peaked in oil supply. And for an odd number of reasons there was so much confusion in our natural gas markets that only a handful of people began observing that we clearly peaked almost three decades later.

If you take the current estimated gas production and strip out all of the sources of unconventional gas, such as deep water associated gas, coal-bed methane gas, and tight-sands gas, the conventional base that peaked at 63 bcf per day is now down to around 30-35, and it went entirely unobserved. I would basically take a long term contract in any instance because we still have very cheap natural gas prices.

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Arlington, Va.: Mr. Simmons,

On Monday there was a chat with Middle East Scholar Thomas Lippman in which I asked and received the Q/A below. Do you have any comment on this question and his response?

---Arlington, Va.: Do you envision that King Abdullah will allow any more candor in discussing Saudi oil production status? It seems in the past year there have been very much mixed reports from Saudi official from saying that they had plenty of capacity to saying they needed to develop more capacity to saying they will not have the capacity to meet future demand for petroleum.

Thomas Lippman: I disagree that the Saudis have been less than forthcoming about their oil resources and their plans for expansion. The most complete articulation of these points that I know of was in the Wall Street Journal on the Friday before Abdullah met with Bush in Texas in April. There have been a few reports to the effect that Saudi Arabia has overstated its reserves and that its aging wells have passed their peak, but those reports have not been substantiated. Note that the joint statement issued by Bush and Abdullah in Crawford says, "the United States appreciates Saudi Arabia strong commitment to accelerating investment and expanding its production capacity to help provide stability and adequately supply the market."

Matthew Simmons: Saudi Arabia and the petroleum industry have been at their own admission and almost anybody's observation far more transparent in releasing data over the course of the past 18 months than they have ever been. If you closely listen to and read the data they are releasing it is not as comforting to me as the casual statements made by their leaders as to the ease of their being able to produce 12-15 million barrels a day for 50-100 years. There's no question that they're working on a series of new projects but none of these projects are new fields, they're complicated old fields that could never properly produce in the 1960's and 1970's. They're still silent on any production declines taking place in the old fields. They adamantly refuse to release and field by field production data and within private circles there are people starting to whisper to people in the west that it is probably unlikely that Saudi Arabia can produce 12 million barrels a day ever. But at the same time the public relations campaign says 15 million barrels a day if it's needed for 50-100 years. So I would stay we still have an awful lot to learn. Too many people that should know better are now asserting that the officials in the oil industry have proved they can produce 15 million barrels for 50-100 years and all they have done is show power point graphs that draw a line saying this is what the production will be. I could just as easily project my net worth over the next 30 and have it exceed the net worth of Bill Gates by 2030 but there's absolutely no basis or no probability that will ever happen. That technique should never be described as technically proving something.

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Groningen, Holland: Hello Matthew,

I appreciate your work very much. It's important that someone really puts all the puzzle pieces together. My question is: Why do you think most of the optimistic oil marketeers, energy-advisors and politicy don't talk about depletion at all? Don't they know about the depletion, do they think better techniques are going to offset depletion, or do they think we will find enough oil to offset the decline? Because it seems to me that the current world-depletion rate of 5% annually is going to be the biggest factor in the supply-demand gap. At 5% annual decline, we will need an extra 20 million barrels a day just to keep up with the current daily supply rates.

Matthew Simmons: First, I'm worried that the real current average daily decline rate is probably more like 8-10% per annum, which makes the problem far more of a challenge. The only thing I can imagine as to why so many "oil experts" seem to ignore depletion is that no company has ever produced any data about their decline rates. Economists tend to believe that good things happen for good causes and because energy is so important, if there is a need for energy we will just find more energy. There is also a wide body of optimists that believe that modern oil field technology has effectively defeated depletion. And I know that modern oil field technology has created far higher decline rates than we ever had the ability to do before this technology. Then there is a final belief that a host of new unnamed technologies will make it even easier to offset depletion, but no one has any idea what the unnamed technologies are and there aren't any being worked on that have any significance. All the technologies that have gotten so much attention in the past decade took 30 years to invent, commercialize, and introduce around the world. And the new technology blackboard is bare today.

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Cambridge, U.K.: Do you believe the E.U. will be able to weather the effect of peak oil better than the U.S. and what result could this have on the geopolitics and business of energy?

Matthew Simmons: The E.U. has a totally different crisis because of peak oil than the U.S. The U.S. has a motor gasoline crisis because of the number of vehicles we have and the 12,000 miles on average each one of them travels per year and the lack of any viable forms of public transportation in most parts of the country. Conversely the E.U. has the world's largest use of diesel future because transporting of goods by truck vs. rail or water is about three times what it is in the U.S. The European waterways aren't wide enough or deep enough to use viable water based transportation which is the single most efficient way of transporting goods (about 20 times more efficient than a truck). And the train systems of Europe are now all used to transport people vs. goods. So Europe is just as vulnerable as the U.S. but for a totally different reason.

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Portland, Ore.: If Saudi oil dries up I can envision the economic shock to the West and probably Asia too, but what I'm curious about is how this will play out in Arab lands.

How long would the cash reserves of Saudi Arabia, Kuwait, etc. last with dwindling oil output?

Would this also mean mass numbers of Saudis would try to emigrate to Europe?

Surely lower oil revenue would translate into unrest at home. Any ideas how this might play out?

Matthew Simmons: First of all Saudi Arabia's oil won't run out. The risk is that it will go into production decline. It's really important for people to realize that production decline is not the same as running out. Once they start the production decline the price of oil will and should go way up, and in a strange sense this opens a window for Saudi Arabia and the other Middle East oil producers to rapidly address an issue they have ignored for the past 50 years. None of the Middle East countries have an economy that is stable outside of oil. They all have exploding birth rates, 40-50% populations under 20 with no jobs, and if they understand this is happening and the oil has peaked, they have a marvelous opportunity of using this era of extremely high oil prices to create sustainable economies over a 5-10 year period of time and create an economic average GDP per capita equal to at least Greece or Portugal or Eastern European countries and that would start to narrow the incredible gap between the handful of incredibly rich and the rest who are poor. In time they could actually create a long period of economic stability and widespread economic stability if high oil prices are wisely used to create a sustainable and diversified economy and more equal distribution of wealth per capita.

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Boston, Mass.: If Saudi oil production is in decline, won't that make the competition for the remaining world oil supplies between China and the U.S., in particular, and China/India and U.S./Europe, in general, all the more intense?

Matthew Simmons: Absolutely, which is why we need a global economic cooperative framework for how we allocate oil use and in this framework we need to give India and China, for instance, an incremental use of another 50% more oil while we go on out diet to have any sense of equality. If we don't do this than we will basically end up playing musical chairs, and musical chairs can get violent very fast.

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Bethesda, Md.: What an interesting and informative session!

In one of the presentations available on your company's Web site you indicated that the precise amount of uranium available is a bit mysterious.

Would you say some of the same questions about the sustainability of fossil fuel apply to nuclear power as well?

Matthew Simmons: The quality of data we have on coal isn't very good. The quality of data we have on uranium, because we haven't needed any more uranium for the last 35 years because in 1979 Three Mile Island happened and after that we never though we needed any more uranium, so our resource knowledge is really skimpy.

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Maryland: Are you coming to speak in the D.C. area any time soon? And what can we as citizens do to get our government to talk about it and plan for the peak in oil production? Thanks.

Matthew Simmons: I have several speaking engagements in the D.C. area in the fall and we'll post them on the Simmons & Company Web site, Simmons & Co Intl..

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Munich, Germany: It may seem unrealistic at the moment, but how many barrels a day could a peaceful Iraq add to the world market?

Matthew Simmons: That's a complicated question because the two fields that make up 80% of their production are in a bad state of repair. Over a 10 or 15 year period of time we would be lucky to sustain 2-3 barrels a day from Iraq.

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Matthew Simmons: Thank you for some very thoughtful questions.

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