Matthew R. Simmons: A Diminished Future for Saudi Oil

Part Two in our series on the coming crisis of oil politics and production shortages:

When Matt Simmons hears someone describe him as a “Bush energy advisor,” he winces. Yes, he talks to President Bush about oil sometimes, but what he has to say isn’t colored by partisan politics. Simmons wants everyone to realize the energy crunch we’re in, and that’s why he wrote Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy (Wiley, $24.95), which will be published in July.

Matthew R. Simmons: don't count on Saudi oil.

Simmons, chairperson and chief executive of the energy-oriented Simmons & Company International investment bank in Houston, is a member of the National Petroleum Council and the Council on Foreign Relations. He writes, based on considerable research, that “Saudi Arabian oil production is at or very near its peak sustainable volume (if it did not, in fact peak almost 25 years ago), and is likely to go into decline in the very foreseeable future [emphasis in the original]. 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.”

The implications of this are huge, since Saudi Arabia has the planet’s largest proven reserves and is the world’s largest oil exporter, from which the U.S. buys 1.5 million barrels a day (15 percent of total consumption in 2004). Some 60 percent of the 20 million barrels of oil the U.S. consumes every day (enough to cover a football field with a column of oil 2,500 feet tall) is imported, and replacing the supply from Saudi Arabia would be no simple task.

E Magazine: You’re doing the world a real service by shaking up commonly held assumptions about future energy supplies, specifically about how much oil remains in the Middle East, and in particular Saudi Arabia.

Matthew R. Simmons: First of all, thank you. The last thing I wanted to do over the last two years was write a book, but I was unbelievably surprised when I started reading very specific technical papers about these oil fields. It was only when I’d gotten through a hundred of them that I realized that I had done a thorough examination of Saudi oil. And in fact the real risk is not the question of proven reserves, which is a very fuzzy area. The real story is that there are basically just five old, mature fields that account for 90 percent of all Saudi production, and a remarkably small number of wellheads that produce the oil from these fields. It leaves the Saudis with no diversification if any one of the fields suffer a production collapse.

You say in your book that the water injection methods they’re using to pump oil out almost always lead to such a collapse.

They always lead to collapse; the only question is when. Take a look at Ghawar, the most important field in the world, with 70 billion barrels of proven reserves. It turns out that North Ghawar, about 20 percent of the field, was producing about four and a half million barrels a day of the total field’s 5.3 to 5.5 million barrels in 1979 and 1980. And the other 80 percent of Ghawar is a totally different series of reservoirs that will take years and years to produce oil.

The basic assumptions of energy planners at the highest levels have been that the Saudis will continue to increase their output to meet rising demand. But you’re saying that they couldn’t really produce more oil if they wanted to.

I’m basically asserting, without complete proof, that from a planning-for-risk point of view we should start assuming that it is quite risky for them to keep producing oil at high levels. It is not at all certain that the Saudis could sustain high rates for even as much as a decade, let alone what they claim. They said in Washington recently that they could increase their production to 15 million barrels a day and keep it there for at least 50 years.

Wasn’t that one of the reasons for the recent Saudi visit to the U.S., to get them to increase oil production and ease prices?

I don’t think it’s at all unusual for the head of state to come see a president. I also think it wouldn’t be that unusual for the President of the United States to quietly and politely ask for real data about oil reserves and pumping capacity. For 30 years, we just have had numbers stated in the public domain without any verification. Saudi Arabia never once said, “You know, guys, that’s an interesting concept but don’t count on us to actually achieve that.” History is rife with times that we just basically assumed something and then finally realized that there was no basis for it.

Iran’s oil has peaked and Iraqi production isn’t being ramped up to previous levels either. What is your understanding of that?

Iran’s oil peaked in 1971 or 1972 at six million barrels a day. And when it was at that peak level they had four fabulous fields that each produced over a million barrels a day. Each of those great fields now struggles to produce between 100,000 and 150,000 barrels a day. Iraq has two great fields, Kirkuk and Rumaylah, which have been about 80 percent of its production for the last 25 years. Kirkuk was discovered in 1927; it’s the oldest producing field in the Middle East. Rumaylah was discovered in 1951. And those fields have been badly abused. And the real question is: Until Iraq develops some new fields, how much longer can Kirkuk and Rumaylah sustain the current 1.5 to 1.8 million barrels a day before they go into a production collapse?

There are an awful lot of energy analysts who thought that as soon as the war was over we were going to get Iraq back to six million barrels a day. A year before the war I would occasionally get a call from some planner in Washington saying, “Apparently you’re on the list of people who really seem to understand Iraq’s production.” I used to say, “Well, bear in mind I’ve never been there; I’ve just read reports.” But anybody thinking they can get back to six million barrels a day is basically wallowing in naivety.

Do you agree with analysts like Colin Campbell who say we’re at or near the world’s peak oil?

I recently spent time with Colin Campbell and some of his scientific colleagues at a large peak oil gathering, and I recently spoke to the Swedish Royal Academy of Sciences about the same issue. And what I was basically saying is that we urgently need an overhaul in our energy data transparency. We need a global mandate to force every significant oil producer and energy gas producer to start releasing timely historical and current field-by-field production statistics. We have to start mapping out a reliable roadmap. We need to know if we’ve exceeded peak oil on a sustained basis.

In the absence of such detailed records, we’re basically guessing then?

We have no data whatsoever and we’re guessing. So if we’re going to guess, I think the quicker we start assuming that we’re beyond sustained peak oil today the better off we’re going to be. So, within this lunatic fringe group of peak oil people, I’ve probably moved to the head of the class.

Oil demand is rising, and there seems to be this serene assumption that we can meet this rising demand with a diminishing supply. What do you think are the implications for a post-oil peak world?

It’s going to be one of two courses and there’s not a lot of middle ground. It can easily be one of the really awful events that have ever happened to the world. And that is probably where we’re headed today; it’s the most likely course. Or we can come to the recognition that we now need to go on a war footing. It’s like we’re drifting to the end of 1938 with war clouds all over the horizon. And if we can conduct some intense analysis of where we actually are with the world’s oil supply, we’ll realize that what we have is a very scarce and invaluable resource. Maybe if we had good, scientific data people won’t get quite as pessimistic and angry when the price starts to soar.

Do you foresee a hydrogen-based energy economy being ready to take over when the oil runs out?

Nope. The problem with a hydrogen-based energy economy is that we need fuel-cell technology that we don’t have yet, and we need a primary form of energy to extract hydrogen, and that’s in scarce supply. So it actually has to be a far more basic sort of overhaul. I think, for instance, that we have to get our freight business off the roads and back onto rail. That would be five to 10 times more energy efficient. Tearing up our rail network was just a tremendous mistake, but luckily we didn’t do away with the right-of-ways. Over a five-year period of time we could go on a crash course and we could basically take the existing right-of-ways and build a super generation of railroads. And get all the goods that now travel on highways onto rails. By getting rid of truck traffic, we would also do an enormous amount to alleviate traffic congestion. And traffic congestion is public enemy one through five of passenger car efficiency.

Do you have any optimism about the future of, say, wind technology?

Yes, but I am even more encouraged about developments in solar technology. Once you start using layers of solar films on roofs you can have some big energy breakthroughs. On the other hand, in the case of both wind and solar you don’t have a constant source of energy. You’re still heavily reliable on the wind happening or the sun shining. We’re desperately in need of battery technology that can actually store electricity overnight. Our nuclear plants and power plants have to run all night; you can’t shut them down. So we have vast amounts of electricity that just disappear into the atmosphere during the dark hours of the day.

Let’s go back to scenario one, in which you say we would fight over the remaining oil supplies and eventually drift into chaos.

We drift into chaos thinking that these current prices are just a spike. And so as the prices keep going up we start thinking that someone’s ripping us off. And the more we think someone’s ripping us off, the madder we get. And in the meantime India and China, both of which are nuclear powers, decide that they are terrified that we have scarcity, so they buy up all of the world’s energy supplies. Meanwhile, we sit around saying these are just spike prices. And then we find that Nigeria collapses, and Hugo Chavez in Venezuela decides that he is actually in the catbird seat of all time. He is the most beloved politician in Latin America because the higher the energy prices go, the more he distributes wealth to the lower class. And so finally he decides to actually hurt the U.S. economy by cutting off his oil. And at the same time, China and India bought all the extra oil of the world and so our economy goes into a tailspin. In a panic, it might be us that starts the war.

How far do you think the U.S. is prepared to go to keep the oil channels open?

I think we have an ability to do some simple things, if that was the problem. If someone blocked the oil chokepoints, we would basically unblock them. But we have many other problems, including the fact that we’re challenged by a lack of refinery capacity. I thought it was really interesting when the Bush administration suggested recently that we would be happy to open up land on any of our military bases if some third party wanted to build a refinery. Guess how many people lined up to do that? Zero. But why would anyone build a refinery? What if prices collapse?

And nobody wants to build a nuclear plant either.

It would probably be 2010 before any power company applying for a license today could start construction, and 2016 to 2020 before they have a nuclear plant in operation.

In the long run, are you optimistic or pessimistic?

History has shown that we react really well when our back is against a wall. And I go back to my analogy of perhaps we’re basically in 1938 today. It’s amazing that in the fall of 1939, World War II began in earnest and England, Canada, Australia, New Zealand and the United States had zero war machines. The U.S. on Dec. 6, 1941 didn’t fully realize we were at war and the war was already 40 percent over. But from late 1939 until the early fall of 1945, the Allies put together from scratch a military force that actually stopped dead the most lethal war machine ever created.

Even more remarkably, in another unbelievable burst of creativity starting in early 1947, we created what’s known today as the Marshall Plan. And the U.S. single-handedly organized an effort to create the architecture and the blueprints and the foundations for rebuilding Europe and then Japan. So I say if you look at those two world-class crisis events between the start of 1940 and the start of 1951, we destroyed Europe and then rebuilt it. If we could do those two things back to back, then we can actually win the energy war.


Simmons & Company

Research assistance by Divya Abhat and Kate Slomkowski.