Twilight in the Desert

>> Thursday, January 24, 2008

Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy by Matthew R. Simmons
I've been holding this book hostage from the library for almost a month, so it's time I post on it and return it.

I read most of this book. I did not read the entire section on the field-by-field analysis. The book has four parts: history of Saudi Arabia, the Saudi Arabian oil industry, a field-by-field assessment of 12 oilfields and conclusions. The first two and the final parts were the most interesting to me. I mentally topped out on reading the field-by-field assessment chapters since those are written for those who are more familiar with the oil industry and its difficulties; although, I do believe Mr. Simmons writes very clearly and is able to refrain from using an overwhelming amount of technical jargon. I was able to get through the entire chapter on Ghawar, which I consider an accomplishment since I am not associated with the oil and gas industry.

The gist of the book is easily ascertained by its subtitle, "The Coming Saudi Oil Shock and the World Economy." Saudi Arabia, the world's largest producer of oil, will in the near future begin reducing its oil output for the simple reason that it will have peaked its maximum production and cannot increase it to meet world demand.

Some Saudi oil facts (as quoted from the book):

  • Almost all the kingdom's daily output comes from a handful of giant and super-giant field.
  • These stalwart producers were found four to six decades ago and have been producing almost that long.
  • Only Shaybah among the major producing fields came onstream within the last 10 years, and it was discovered in 1967.
  • The rest of the major fields are mature, and as they age further each year, they present new challenges to the engineers and managers charged with sustaining their high production rates.
The book debunks these commonly held and very optimistic assumptions made about Saudi oil (as quoted from the book).
  • The secretiveness of the Saudi oil establishment as well as other Middle Eastern and OPEC producers for the last 25 years has not been part of an effort to conceal troubling realities or enhance political interests.
  • Aramco and its contractors have developed proprietary technology for wringing oil from mature fields and sustaining production that is far superior to that applied by the world's best known publicly held oil companies in other major provinces.
  • The phenomena that have signaled the onset of decline at oilfields elsewhere in the world, and that have been observed in Saudi Arabia's mainstay fields for many years, somehow do not mean coming decline for Saudi oil production.
  • The Saudis have chosen to concentrate production in their aging super-giant fields, even if this risks hastening depletion by overproducing, rather than spread the burden by developing additional discovered fields. But, many other fields have been kept in reserve and could make a significant contribution once they are brought onto production.
  • Saudi Aramco's exploration program has missed additional giant or super-giant oilfields lying beneath the desert sands, but future exploration efforts will surely find them in time to head off a supply crisis.
  • The reserves in Ghawar field really do greatly exceed the estimates made by Aramco in the 1970s.
  • Ghawar, by virtue of its unprecedented size, is simply an exception to all the truths and principles that have governed production and depletion of oil in all the world's other super-giant oilfields.
  • Aramco could have grown its oil output at any time it wanted during the last 20 years, but the world markets never had need for more of its oil.
Or, more simply put:
  • Saudi Arabia has something to lose by revealing the production problems of its oil fields. Saudi Arabia has a growing population and relies on its oil revenues to provide for its large population.
  • Technology cannot solve the problem of production.
  • Saudi fields will decline like other fields around the world because the physics of oil field pressure and water encroachment do not change based on field nationality.
  • They don't have spare oil fields to make up the difference in declining production!
  • All the major oil fields have been found.
  • The estimates of Ghawar's reserves made in the early 1970s are reliable and were not inflated due to political or OPEC influences.
  • Ghawar is not special. It is big. It is the king of kings of oil fields, but its depletion dynamics are the same as any other oil field. Take oil out and the field pressure will drop thereby making oil more difficult to extract. Removing oil at a faster pace depletes the field faster and creates a situation where remaining oil cannot be recovered.
  • Aramco has not been able to increase its daily production since the early 1980s. In fact, these oil fields need to have production decreased so that the life of the oil field can be extended.
Once the world's oil supply begins to decline, everyone will face these issues (again, quoted from the book):
  • The long-term price and affordability of oil
  • Prolonging or extending conventional oil supplies
  • Allocation of available supplies
  • Modification of consumption patterns and habits
  • Sources of investment in conventional oil production and alternative energy forms
  • The need for accurate, comprehensive oil resource data
  • Impacts on the globalization of economic activity
  • Creation of a middle-class in OPEC nations
  • The environment and emissions patterns and controls
  • Development of new or alternative forms of energy
It's important to remember when thinking about the price of oil that most of our best and easiest to find oil was sold for two cents a cup! To convert the price of one barrel of oil down to one cup, follow these calculations. Price of a barrel of oil divided by 42 equals the price for 1 gallon. Price of 1 gallon divided by 8 equals the price of one pint. The price of one pint divided by two is the price of a cup. For example, $100 barrel oil is oil sold for fifteen cents a cup! That is still relatively cheap considering how useful and vital oil is to the world.

I'd like to point out that Mr. Simmons is not a doom-and-gloom person when it comes to the upcoming oil crisis. He admits that he's an optimist.
I happen to think the world can make the transition into what we might call the post-Saudi oil era in some very rational ways that will limit economic disruption. As a perpetual optimist, I believe the world still works beyond Peak Oil. While oil prices in this new world will obviously rise, this rise can be a blessing, not a curse. Far higher oil prices make all other forms of energy more competitive and spur on energy research programs that might discover some real long-term fixes.

Once oil supply peaks, the world will be forced to create ways to substantially conserve our oil and other energy sources. This shift should force a rapid rethinking of the notion that transporting people and products anywhere in the world is an almost incidental cost of doing business. "Transportation" turns out to be the biggest single user of oil, and we need to begin finding ways to minimize everyone's transportation needs and make the use of transportation fuel as efficient as possible. Today, the most wasteful use of transportation fuel is probably traffic congestion. A world beyond Peak Oil will be forced to solve this problem, too. Whether its solution is living closer to one's work or using more mass transportation, both become viable ways to address traffic congestion and use oil more efficiently as prices rise. Simply building additional miles of wider and wider roads no longer works. Even a new fleet of more fuel-efficient vehicles will take too long to implement and may still use too much oil. If we do not alter our transportation systems as a matter of policy and public planning, the inexorable operation of pricing mechanisms will do it for us. At some price for gasoline, traffic congestion will diminish.
If you are looking for some audio interviews with Matt Simmons on this topic, I'd highly recommend these interviews from Financial Sense Newshour (click here). Also, a transcript of a more recent interview regarding $100 oil can be read here.

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