Saudi Oil Shortage

Matthew Simmons, Chairman and CEO of Simmons and Company International interviewed by Lise Doucette, 03 August 2005

Lise Doucette: Matthew Simmons is Chairman and CEO of Simmons and Company International, it's a Houston-based investment bank specializing in the energy sector. His new book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, is, he says, meant to scare us to death. So on this morning he joins us from Portland, Maine. Good morning.

Matthew Simmons: Good morning. How are you?

LD: Good morning. Yes, fine thank you, well at least until I hear what you have to tell to us. Now, the new leader of Saudi Arabia, Crown Prince Abdullah, says that they will continue their long standing oil policy which is to keep the markets well supplied. Do you believe that's possible to keep?

MS: I believe that they believe that it's possible, and that's probably one of the things that worries me the most. I think they're relying on the fact that for seventy years they've been able to keep this miracle going with a small number of fields, and my worry, based on two years of research through technical papers all written by technicians working within the national oil company in Saudi Arabia, would indicate that there's a real risk that their current rate of production can't be sustained for much longer and that the longer they produce at these rates, let alone increase the rates, they're risking production collapse in all of their key fields.

LD: Well let's just remind ourselves of how important Saudi Arabia is to the global oil market, a quarter of the world's reserves?

MS: A quarter of the world's reserves, regardless of what that number is. More importantly, it's about ten to twelve percent of the current daily supply, but it's the only country that all of the experts that look to the world needing to use more and more oil have always been certain that the more we need, the more Saudi Arabia can produce. And every serious long term energy plan being done by all of our governments that point to a world that can be consuming a hundred to a hundred and twenty million barrels a day of oil within the next decade or two assume that Saudi Arabia can increase their production from eight and a half to nine million barrels a day today, to twenty to thirty million barrels a day within twenty to thirty years. The likelihood of that is extremely low in my opinion.

LD: Well let me quote you from an official of the Saudi state oil company, Saudi Aramco, he says, "Our track record shows..." and you've just said it yourself, "...we've delivered for the past seventy years and we'll continue to deliver in the next seventy years and beyond." Is he deluding himself or is he hiding the truth from us?

MS: I think he's deluding himself actually. I think it would be a little bit more comforting if I thought that somehow or another this was just some sort of cover up and I think they actually believe, with some passion, that because they've done this for seventy years they'll be able to do it for another seventy years. I gracefully try to remind people that I've only been in the hospital involuntarily overnight one time when I was born. I don't think that has any predictability value for the next sixty-two years.

LD: That's a bit of a bombshell and not surprisingly not everyone, it's not just the Saudis, don't agree with you. Michael Economides teaches chemical engineering at the University of Houston, you may know him, he edits World Energy Monthly Review. Let's hear what he says Saudi Arabia is capable of.

Michael Economides: I think Saudi Arabia not only has the reserves, they have a lot more than what even we think about. Personally my own calculations suggest that Saudi Arabia can easily sustain current production levels for at least one hundred years. And in fact with relative ease they can actually produce fifty percent to a hundred percent more than the oil they are producing today. It's preposterous to say that the country with something like two hundred and seventy billion barrels of oil reserves could not deliver an extra five million barrels of oil a day today. Matt Simmons, while I have tremendous respect for him, we're not running out of oil, we're not running out of gas, we probably have commercial quantities of oil production for another three centuries, so it's outrageous that people, especially people that don't know better, go out there and create these alarmist kind of news brouhaha which is not really supported by anything technical that I know of.

LD: Well there you heard him, Matthew Simmons, he says he respects you but he calls your argument alarmist and outrageous. Where is the technical backing for your extraordinary point of view?

MS: It's interesting, I too have a lot of regard for Michael Economides and we've been on programs together but I would point to the industry's inability thirty five years ago to take seriously the warning that the United States of America which had been the largest oil producer on earth for the previous century, we were probably in the process of peaking and a decade later our oil production was down by thirty percent while the number of wells we were drilling went up four and a half times. The same experts a generation later were so casual about the North America natural gas as we turned the entire future of our economy onto a belief that we had plentiful natural gas as we'd already peaked, that we basically are coming close to destroying our economy because we've misunderstood natural gas here in the United States and Canada.

LD: This sounds like a modern-day The Emperor has no Clothes, why is that you seem to have come to this understanding when so many haven't? Let me quote you the Geneva-based International Energy Agency, which monitors oil output. They say production will more than double to twenty five million barrels per day within two to three decades in Saudi Arabia.

MS: All of these predictions are demand based. And what they do is very carefully try to figure out how much oil will the world need to be consuming and astonishingly these numbers of a hundred and twenty, a hundred and thirty million barrels a day by 2025 are actually based on a bunch of very conservative assumptions. But once they get that number they then fill in the supply by taking all the known producers and getting the highest amount that is likely and then the plug figure for the last three decades has always been Saudi Arabia. And we've always assumed, without any data on even what the individual fields are now producing that has to be the case because it has to be the case.

LD: So why do you have access to data that nobody else seems to have?

MS: Well what I stumbled across as I started this research, when I was really in the process of doing a brief white paper two summers ago, was in the Library of the Society of Petroleum Engineers, which is the largest technical trade association in the world, are technical papers that have been published on all the seminars that they do around the world and I discovered over two hundred technical papers that had been presented as early as 1961 and as recently as February of this year that lay out the specific problems that each of these fields are facing. And it was that paper trail that was so frightening. That led me to the conclusion that we basically should be terribly concerned that the five key fields that have made up ninety percent of Saudi Arabia's oil production are all at risk of a production collapse, just as the North Sea had a production collapse, just as the United States had a production collapse. What this is basically all about is just the same aging process that happens to human beings. While modern technology keeps human beings alive a lot longer, you get to a certain age you're basically just not as productive and you walk slower. And that's what's happening with the new oil fields of Saudi Arabia.

LD: What the Saudis and other experts say to that is that with high oil prices they can use advanced recovery techniques and they reply there's a new technology and they'll avert the supply problems.

MS: That was precisely the theory that the United States felt, in the early seventies, it's interesting to just go back and look at the United States as a case study. In December 1970 we produced 10.2 million barrels a day, that was a world record. It was also our peak supply. This was before Alaska and before deepwater oil and today that same production base is down to just over two million barrels a day and we've used all the same technology that the Saudi Arabian technicians are now using. The basis for my research were over six hundred technicians within Saudi Aramco that actually wrote these reports. Now the critics of my work say well technical papers are a lousy way to do analysis because they just deal with the problems in an area and not the opportunities. When you read two hundred and thirty five of them which are listed very clearly in the bibliography of my book, you've basically covered every aspect of the key fields.

LD: If there's six hundred papers from the Saudi Aramco's own experts, why didn't even one of those papers land on the desk of the guy who's running the place?

MS: No idea. There's a culture of secrecy that has been installed within the Saudi Arabian oil industry that goes all the way back to when Aramco was being run by the four major oil companies in the United States. And for some reason or another, there's been a cult of "Don't ever talk about what you're doing in this specific area to anyone else," even though at technical conferences they were very forthcoming on these technical papers but the papers are individually so technical that reading one or two of them doesn't actually add up to anything. It really took an exhaustive study of really over two hundred before I was convinced that this was a very, very serious energy problem.

LD: But it's also an imperfect science, isn't it, as you know better than anyone just how difficult it is when it comes to the technical details? Just let's listen now to what Bob Tippee, someone else you might know, who's the editor of Oil and Gas Journal Magazine.

Bob Tippee: Oil and gas reserves are not measurements. They're estimates, that's all they can be. The reason for the difficulty is that hydrocarbons reside in a place where we can't see. Hundreds, or more often thousands of meters below the surface they're detected by well bores that are really not very wide so we don't really come in contact with that much of the substance and the rest has to be extrapolated. Because of the high degree of interpretation that goes into reserves estimation, two or three or four petroleum engineers, geologists acting in good faith can look at one set of data and come up with two or three or four often wildly varying estimates for the reserves in that place.

LD: Matthew Simmons, what do you say then to Bob Tippee?

MS: I think Bob did a fabulous job of summarizing why using proven reserves is such a specious measurement of where we might or might not be. You know it's interesting, if you go back to 1979 which is the last year that Exxon, Mobil, Chevron and Texaco ran Aramco, under subpoena by a U.S. Senate committee they basically reported that the fields of Saudi Arabia, using FCC standards, had a hundred and ten billion barrels of proven reserves left, they had a hundred and seventy seven billion barrels of proven and probable reserves, and they had two hundred and forty five billion barrels of proven, probable and possible reserves. Within another seven years with not a single new field being found, Saudi Aramco suddenly changed the number to two hundred and sixty billion barrels and it stayed at two hundred and sixty billion barrels from 1988 to 2005. And the longer it stayed there, even though they were producing more and more oil, the more people started believing that number must be real because look how long it's been in print.

LD: But in your book what you describe as the smoking gun, in other words the real evidence, doesn't actually point to the Saudis but actually points to the United States and the '74 and '79 Senate hearings where they heard all these arguments and according to what you say the American leaders, for the last several decades, are actually hiding the truth as well.

MS: Certainly what a careful reading of the 1974 Senate hearings that were held in secret, but after they were held all of the subpoenaed papers were published and were residing in the Library of Congress from 1974 until I finally checked them out in the spring of 2005. And if you read the memos that were going on between the various senior people within the Aramco companies it was absolutely clear that they either didn't know what the technical words meant, or they knew that they were basically creating an illusion that Saudi Arabia could produce twenty to twenty five million barrels a day.

LD: So what do you think it is? Do they know or they don't want us to know?

MS: I think they were creating an illusion.

LD: It's a very dangerous illusion, isn't it?

MS: Yeah, a decade later a lot of the same people that created the illusion started believing it themselves, but that tends to be what happens in human nature, once you start creating an illusion.

LD: Let's get this straight. Why are they creating all these mirages? It seems like an incredibly dangerous strategy for all of us.

MS: It was a strategy in the early '70s, before nationalization came, to get as much oil out as they could, and by the early '80s it's hard to know what was going on in their minds, but in '79 when subpoenas went out again by the Senate Committee on Foreign Relations they very clearly were told, the Senate investigators were told, that instead of producing twenty to twenty five million barrels a day or sixteen million barrels a day or even twelve million barrels a day if these key fields continued production at 9.8 million barrels a day, by the early 1990s they would go into irreversible decline and that's what led Saudi Arabia in 1982 ironically when King Fahd became king, to go on a very rapid conservation plan and ramp their production down from what had been ten million barrels a day to about two and half million barrels a day to let these fields rest while they tried to get on top of their technical problems.

LD: I think some of us would find this really hard to believe, especially those people who believe that oil is what drives all of American policy. What kind of reaction have you had even from fellow Texans like George W. Bush?

MS: He had a copy of the book. I hope sometime this summer he reads it. The book's only been out for two months but I've had a fabulous amount of feedback from technical people within the industry, several of the CEOs running the large independents have ordered as many as four to five hundred copies for their key employees, so I think the people that have read the book that technically know what they're talking about have by about a nineteen to one feedback that I've received have basically applauded me for the effort that I've done and for the way I've described these technical issues.

LD: But as we've also been hearing in this program there are also the skeptics who question your work.

MS: Absolutely, and they should question the work because if I'm right, it's the single most important problem the world is going to face in the twenty first century.

LD: So if it is that problem, what should we do to avert it? What's the solution?

MS: The first thing we should is that everybody who has a stake in this, and that happens to be everyone in the world, should basically rise up and demand an immediate data reform so that all major oil and gas companies, whether they're national companies or the publicly traded companies, start having to report quarterly field-by-field production reports. And also audited, so that it's not just someone's own opinion, because production reports, that's a physical number, as opposed to an estimate of proven reserves.

LD: Yes, and to be fair to Saudi Arabia there's hardly no major oil producer that actually produces those audited accounts.

MS: Absolutely, and they all basically sort of say, "No, that's really not data we want to disclose," and I say it would be really unfair to force Saudi Aramco for this disclosure and not force Exxon and Chevron and Shell and BP. While we think proven reserves might be easy to do, look at the experience of Shell in the last year. They thought a year and a half ago they had twenty one billion barrels of oil proven reserves and they now think they have less than thirteen.

LD: Very briefly, how much time does the world have to wake up as you'd like to say?

MS: If we did a data reform in the next three months, it would take about thirty days for serious people to say we're either in an enormous jam today or we have two or three more years before we're going to be in a jam. If we don't do the data reform we're just going to smack into a wall and then face a problem that's just as important as we found out in 1939 that we basically after a decade of being in denial we were basically facing World War II.

LD: Matthew Simmons, thank you very much for joining us with your warnings and your analysis.

MS: Thank you, I appreciate being on the program.

LD: Okay, goodbye. Matthew Simmons, the author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. We reached him in Portland, Maine.