Matthew R. Simmons
London: Wiley, 2005, h/b
Ironic, perhaps, that I finished reviewing this book in Calgary, just south of the largest land-based oil project in the American hemisphere, the Athabasca shale tar sands oil recovery projects. Collectively these will realise investment between 50 and 100 billion dollars over the next ten years. Pipelines are being constructed to slake America’s insatiable thirst for energy even as the clouds of war gather once again over the Middle East.
This is a good book because I have been in the oil industry in non-exploration and production positions for many years and I learned a lot. The author is an engineer in the oil industry. He runs his own investment bank based in Houston and is a member of the CFR but his politics are shielded by a wealth of detailed investigation and practical reporting of facts. I have seldom come across a book which has been so logically presented and well researched; and it is simply written.
Briefly, he has studied over 200 technical reports from within the oil industry and identified common areas where geological phenomena indicate serious depletion of Saudi wells. The need for massive quantities of water to stop cavitation and consequent gas bubble formation is one of the indications of the oil diminishing. The need for horizontal as opposed to vertical wells and the lack of discoveries of any new reserves of substance since the 1960s, combined with some astounding political legerdemain, makes this book a necessary primer for the British government if it is to have any coherent energy policy over the coming decade. The message is that time is running out faster than anyone thinks. The ‘Peak Oil’ hypothesis certainly applies to the reserves of the Kingdom of Saudi Arabia (KSA).
In March 1979 Seymour Hersh published an article in The New York Times titled ‘Saudi Oil Capacity Questioned’. This claimed ‘Aramco managers had systematically over-produced the major oil-fields from 19701973’, essentially to suck as much out of the ground as possible prior to nationalisation by the Saudis. (p. 50)
Simmons explains that King Faisal’s October 1973 oil embargo was brought on as a direct response to America’s decision to arm Israel and clears up the mistaken but commonly held belief that this embargo raised prices. The fourfold to six-fold oil price hike was, in fact, due to the evaporation of spare oil capacity coupled with the fact that ‘global oil demand had become a runaway train’. (p. 55) This price increase had the positive effect of lifting a precious resource out of the ‘use it, it’s free and will never run out’ mindset and forced conservation to a degree. It also allowed the oil companies to avoid bankruptcy as the projected costs for exploration overran up to ten times and at two dollars a barrel all of them would have been bankrupted.
The stunning ignorance of US government energy planners and the secretive behaviour of Aramco are both very well illustrated. The US government and the International Energy Agency had for many years assumed that the KSA had the capacity to produce 20 to 25 million barrels of oil per day (mbd). In 2004 the capacity was demonstrated to be 10 mbd. (p. xiii) As information regarding the reserves is ‘treated as a state secret’ (p. xiv) Simmons relied on in-depth research of many technical papers, not the least of those which give details of reports on water injection requirements. (Water is used to displace oil when initial well head pressure decreases.) Huge usage of both aquifer and sea water evidences a serious depletion of oil recovered and there is a trend. Claims of oil production of 15 mbd have never been substantiated. The 260 billion barrels of ‘proven’ reserves idea is shown to be fanciful, to say the least. No significant Saudi oil fields have been discovered since the 1960s (the last being Zuluf in 1965) and this is not due to lack of trying with the most sophisticated equipment and (now) mathematical modelling available on earth.
It is interesting to get perspective on oil production. The US has between 500,000 and 550,000 wells (not fields). The KSA has 15 fields which in 1977 produced 9.2 mbd. Collectively these produced almost as much oil as the USA did when its production peaked in 1970. Saudi production peaked in 1978-1981 at the height of the Iranian crisis. Saudi Arabia deserves thanks for the effort it expended to squeeze every ounce of extra production capacity when the world needed its oil. However an interesting consequence of extracting at maximum capacity is that the well’s overall recoverable oil actually decreases due to the ingress of water. Hence the numerous times Saudi Arabia has jacked-up production has had a long-term detrimental effect. To put it another way, oil reserves, like athletes, need to rest. (This was mentioned as a problem in the Aramco handbook at that time.) In 1979 when KSA took control of Aramco, reserves were adjusted upward by an additional 50 billion barrels. ‘Eight years later they magically grew by another 100 billion bbl.’ (p. 73)
In 1979 a report on International Economic Policy by a subcommittee of the Committee on Foreign Relations discussed possible and probable reserves which it listed at 110 billion barrels. However the source documents for this report were sealed from public viewing for fifty years: ‘the facts this staff investigation uncovered were too alarming to be put in the public domain’. (p. 77) Data relating to production rates and volumes of wells in KSA have been ‘virtually non-existent for the past twenty years’. (p. 79) In fact the proven reserves estimate rose as high as 250 billion barrels with no data to substantiate this claim.
This next bit astounded me. To compute oil production statistics to fill the data void, the world relies on ‘Tanker Traffic Counters’. Emerging as the leader in this new field was a Geneva-based firm called Petrologistics, which still claims to harbour spies at all major loading ports watching tanker liftings and guessing at the tankers’ destinations. Reports from Petrologistics become a first source of OPEC production volumes. As far as anyone has been able to discover, Petrologistics has one key employee, Conrad Gerber. He heads the firm, counts the tanker traffic, and feeds the data to various media sources. Mr Gerber conducts his business from the global headquarters of the firm above a small grocery store in Geneva. (p. 80) Believe it or not, this man’s reports have become the reference standard even for the IEA’s Oil Monthly report for OPEC oil export data. This is the result of the OPEC members refusal to reveal the true statistics regarding their own countries’ production.
Simmons had found a document from the 1940s which set him on this trail and he went against all the received wisdom of his peers and colleagues in the industry. He was stunned that they could believe in the virtual unending supply and points out that the unreliable data was responsible for the belief in a glut of oil in 1999. (He cites the March 1999 cover story of The Economist, ‘Drowning in Oil’.) Saudi Arabia is now spending 18 billion dollars over the next few years to replace depletion not increase output.
Despite the best technology money can buy the oil is running out and sufficient new fields are not there to compensate for current usage. To counter critics, Simmons presents a 40 year paper trail, as he calls it, and challenges critics to research it.
To conclude: Simmons adds further insight into the energy problems within the KSA which are brutal. He delves into the natural gas business, too, as this is associated for example in GTL (gas to liquids) plants and for domestic consumption. Comparisons are shown with UK oil production which, as I worked on the North Sea Forties Field construction, are quite sobering as the field peaked in 1980 and was largely depleted by 2000. So much for virtually free energy for ever which I remember The Christian Science Monitor suggested to its British readers in 1971. Simmons states that oil will have to be rationed one way or another and unless addressed seriously by all countries, chaos could ensue. He points out that transportation is the biggest single user of oil and suggests the idea that the cost of moving people and goods is ‘incidental’ requires a major rethink. So much for globalisation?
He concludes with what he calls ‘The Smoking Gun’, the 1974 and 1979 Senate hearings which he managed to obtain and says if he had found them earlier he would certainly have included a chapter on them. The 1979 report, discussed above, parses the proven, probable and possible reserves in KSA and concludes there would be an irreversible decline sometime between 1989 and 1992. Unlimited investment could extend this period for another two or three years! (p. 379)
This book is a must read for anyone concerned with our culture of ‘conspicuous consumption’, future trends and making one’s way between sensationalist Peak Oil merchants and their counterparts writing about the ‘Peak Oil Scam’.