Wishful Thinking and the Price of Oil
The relevance to Maine of Twilight in the Desert by Matt Simmons is not just that its stunning conclusions first leapt to the author’s mind on the porch of his Rockport home overlooking Penobscot Bay, but that as residents of a chilly northern state utterly dependent on oil, each of us and every policy maker will need to carefully consider the book’s deeply disturbing insights. If you read no other book this summer, you should read the first and last parts of this one, all the while pondering your future.
Matt Simmons is an oil industry investment banker, and a very good one to judge from his demonstrable success in analyzing which industry investments make good financial sense and which are based on the combination of wishful thinking and luck that have always been a characteristic of the industry from its early wildcat drilling days.
Simmons decided to educate himself about the current status of Saudi oil production following a visit to the headquarters of Saudi Aramco, the national oil production company, in 2003. As a guest of the company at its technologically sophisticated Exploration and Petroleum Engineering Center in Dahran, Simmons was struck, during one presentation, by a single power point image showing a galaxy of dots at the northern end of the “super giant” oil field known as Ghawar. Simmons asked why all the wells there were all clustered together and not more evenly distributed throughout this large and exceptionally prolific oil field. “Oh,” said the Saudi Aramco senior executive, “all the wells are at the northern tip of the field because we intend to have an orderly progression of drilling from north to south along the 170 mile stretch of this fabulous of all oil bearing bedrock units in the world.” A few hours later while touring the Saudi Aramco Museum, Simmons came across a reference to Ghawar’s oil bearing bedrock units that described two highly important characteristics for oil production — permeability and porosity — as declining from north to south. Hmmm…, thought Simmons.
With these two mildly problematic data points, Simmons decided to investigate further. He wanted to reassure himself that Saudi Arabia’s bald assertion that it can pump oil to its customers around the world at its present rate of 10 million barrels per day, or even higher, to satisfy the world’s ever increasing demand for this miraculous energy, and that furthermore this rate can be sustained for the next 50 years. Unfortunately getting this reassuring information is easier said than done because as a matter of national policy, Saudi Aramco has extended “a veil of secrecy” over production details at individual fields since 1982. In his research, however, Simmons found pieces of the puzzle in approximately 200 Society of Petroleum Engineers (SPE) technical papers on Saudi oil fields that he downloaded off the Internet for $5 apiece. He calls this “perhaps the best energy industry investment in the world,” and he painstakingly put these pieces together like assembling a giant jigsaw puzzle
What Simmons found in paper after paper published over a two-decade period by over 600 hundred experts is a litany of technical problems in all of the Kingdom’s “super giant” oil fields. These production problems include increasing rates of water intrusion, gas cap formation that strands oil in unrecoverable deposits, impermeable layers of tar and increasing water pumping costs to maintain reservoir pressure, among other challenges. They all add up to a picture of rapidly aging giants that are near or at peak production from which they can only decline. Furthermore, Saudi Aramco’s record of finding new oil fields, while impressive in one sense, pales in terms of replacing the legendary flows from its existing five super giant fields.
There are other twists and turns to this detective story, some of which is necessarily technical and some almost comic, if it weren’t for the seriousness of the concern. Because Saudi Arabia does not publish information on its daily rates of oil production, there is a global industry of “guess-sperts” who try to estimate how much Saudi oil is being pumped that influences the oil futures market. One of the key “experts” whose views move global oil markets, is a company called Petrologistics that maintains a network of “harbor spies” in producing countries’ ports to count the number of tankers departing. This company has one key employee who, according to Simmons, maintains a small office over a corner grocery store in Geneva. The state of the oil consuming nations’ knowledge of oil supplies is laughably scarce. Instead experts flock with one another to create consensus estimates that are often wildly inaccurate, hence the wild swings in oil market pricing.
Is this any way to run an industry, asks Simmons. Especially one that has already demonstrated how vulnerable we all are to sudden shocks to the secrecy-laden pricing system. A truly rational system can only be based on transparent information about both worldwide supply and demand. In the absence of developing this kind of transparency, continuing gyrations in the market, bad for both consuming and producing nations alike, will be the rule. Whether we can reasonably expect oil prices to return to $25-30 a barrel level where they have been for about the past half-decade, or will inexorably head from $60 toward $100 or even $200 per barrel in the foreseeable future is anyone’s guess.
No, this is certainly no way to run a world-class industry, Simmons says. And all of us who acutely depend on the price of oil to run our businesses and daily lives can only meekly agree.
Philip Conkling is president of the Island Institute.