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Economy

News

EXPERT SAYS SAUDI OIL MAY HAVE PEAKED
By Adam Porter

** As oil stubbornly refuses to fall below $45 a barrel, a major market mover has cast a worrying future prediction. **

Al Jazeera
February 22, 2005

http://english.aljazeera.net/NR/exeres/80C89E7E-1DE9-42BC-920B-91E5850FB067.htm

[PHOTO CAPTION: The Saudi Arabian oilfield al-Qatif east of Riyadh]

Energy investment banker Matthew Simmons, of Simmons & Co. International, has been outspoken in his warnings about peak oil before. His new statement is his strongest yet, "we may have already passed peak oil".

The subject of peak oil, the point at which the world's finite supply of oil begins to decline, is a hot topic in the industry. [This hastily written sentence is misleading: "peak oil" refers to the moment at which the extraction or 'production' of oil begins to decline, not the supply: the total supply, of course, has been constantly declining since the beginning of massive petroleum extraction in the latter half of the 19th century -- J.R.]

Arguments are commonplace over whether it will happen at all, when it will happen or whether it has already happened. Simmons, a Republican adviser to the Bush-Cheney energy plan, believes it "is the world's number one problem, far more serious than global warming".

SAUDI OIL PEAKING?

Speaking exclusively to Al Jazeera, Simmons came out with a statement that, if proven true over time, could herald by far the biggest energy crisis mankind has known.

"If Saudi Arabia have damaged their fields, accidentally or not, by overproducing them, then we may have already passed peak oil. Iran has certainly peaked, there is no way on Earth they can ever get back to their production of six million barrels per day (mbpd)."

The technical term for damaging an oilfield by overproduction is rate sensitivity. In other words, if the oil is pulled out of the ground too fast, it damages the fragile geological structure of the field. This can make as much as 80% of the oil within the field unextractable. Of course, at the moment, virtually every producer is at full tilt. The most important among them is Saudi Arabia; their Gharwar field is the world's biggest.

One of the first hints that Simmons got over possible Saudi Arabian overproduction was from researching an obscure U.S. Senate committee meeting in 1974.

FIELD DAMAGE

"A whistleblower in Saudi Aramco, Saudi Arabia's oil company, was first reported in the Washington Post. He had claimed that Aramco had been overproducing the giant Gharwar field and that if they did not slow down, they would damage the reservoirs.

"The committee, which swore witnesses in under oath, produced over 1400 pages of documentation on the subject, it included some specialist advice which advised cutting Saudi production to 4mbpd to maintain production levels."

Currently, at near maximum production, Saudi Arabia is producing about 9mbpd, though recently they claimed they could potentially produce 12mbpd or even as much as 20mbpd. A claim Simmons called "pie in the sky."

"The faster you pull a reservoir, the faster you pull out all of the easy-to-produce oil," explains Simmons. "What happens is that you lose massive amounts of what the oil industry calls oil-left-behind still inside the field. These issues, as you can see, have been known about for years."

OVERPRODUCTION

"If you look at what Iran is doing, they are actually going to inject natural gas to the tune of 2bcf (billion cubic feet), through a 72in pipe into their Aghajari oilfield. It is a $2bn project. This is in order just to boost production from 200,000bpd to 300,000bpd. In the 1970s Aghajari was producing 1mbpd. It has been overproduced."

Simmons also says the same thing happened with the oil company El Paso last year.

"At the same time as the Shell write-off, El Paso realised they had been producing their fields too hard. As a result they had to write off 41% of their reserves." In 2004 Shell first announced it had lost about 20% of its oil reserves.

Another clue came as Simmons discovered a ferocious debate that had been going on inside Saudi Aramco about overproduction.

"The company claimed in the early 1970s that it would be able to produce 20 to 25 mbpd, then by 1978 it was 12mbpd. Now it looks like 9.8mbpd is the maximum," he says.

PRECIOUS RESOURCE

"Luckily for them, demand quietened down in the 1980s. People thought when they cut production that they were simply trying to drive up oil prices, but in fact they were resting their fields to limit the damage.

"But then came the first Gulf war and they were forced to crank production up again and they have been fighting the problem ever since.

"In 1981 in their own book, Aramco and Its World, something they give out to new employees and such, they openly talked about how maximizing production would permanently harm their fields and that maximum production could not continue. They thought demand would fall and the fields would be sustained. Unfortunately that has not been the case."

The reasons for maximizing production are not always obvious, they can be technical, but also geopolitical.

"There is always a balance for producers. Do you want to conserve your fields and produce slowly? Or do you want to be a statesman? Would you rather be a market leader with all that brings, or a smaller, less powerful producer?"

The idea that Saudi Arabia could force its production up to 12mbpd or higher is met with scorn by Simmons.

"This is dangerous stuff," warns Simmons. "If we say they have not peaked and then they choose to further increase production, they will only hasten their field decline, and waste huge amounts of valuable oil into the bargain. And oil, as we are only now coming to realize, is the world's most precious resource."

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SAUDI UPS OIL OUTPUT TO CURB PRICES

Al Jazeera
September 28, 2004

http://english.aljazeera.net/NR/exeres/8FAE780F-EC92-4421-A6F8-9A1941FBD6E1.htm

Saudi Arabia, the world's largest oil exporter, is to raise production from 9.5 million barrels a day to 11 million barrels in an attempt to rein in prices that have topped $50 a barrel.

The increase will go into effect within weeks, according to a senior oil ministry official who spoke on condition of anonymity. No further details were provided.

OPEC had said producers were seeking ways to calm markets after the cartel's announcement that it would boost production by one million barrels a day beginning in November failed to bring down prices.

It was not immediately clear if all or some of that oil was included in the 1.5 million barrel increase the official described on Tuesday.

Saudi Oil Minister Ali Niaimi said last month his country was willing to provide an extra 1.3 million barrels of oil a day to the world market if required to do so.

RECORD PRICES

Yet, there has been some concern about whether Saudi Arabia has the excess capacity to significantly boost production.

Word of the decision came as crude oil topped $50 per barrel during Asian trading on Tuesday, pushing past the psychological milestone for the first time.

Traders bid oil to new highs in after-hours trading on the New York Mercantile Exchange in a reaction to the slow recovery of U.S. oil production.

The recovery has been slowed by Hurricane Ivan and political unrest in key producers Saudi Arabia, Iraq and Nigeria.

The price of oil is 75% higher than a year ago and some analysts are predicting the latest surge -- which is already hurting airlines and other big consumers -- could lead to a global recession.

NIGERIA OIL THREAT

Meanwhile, multinational energy companies have said oil should continue to flow from Nigeria despite a rebel threat to attack foreign oil workers.

The rebel Niger Delta People's Volunteer Force, fighting for autonomy of the oil-producing southern delta, issued a communiqué on Monday telling oil companies to shut production and withdraw their staff before an "all-out war on the Nigerian state" due to start on Friday.

The communiqueé singled out Royal Dutch Shell Group and Italy's Agip for what it said was collaboration "in acts of genocide against our people," according to rebel leader Mujahid Dokubo-Asari.

Shell, the largest oil producer in the OPEC member nation, and Agip have both denied helping the military, which fired on rebel positions earlier this month using helicopter gunships.

Shell said it had already evacuated 235 staff from two oilfields to address specific threats of violence.

A small volume of oil production has been lost due to heightened security restrictions, an industry source said.

FIGHTING

Shell confirmed on Tuesday it had already cut oil output by about 30,000 bpd at the Santa Barbara flow station due to security restrictions in the delta.

A source close to Agip's parent Eni said the company had no plans to stop its Nigerian oil output.

"We have received threats like this in the past. We have made a precautionary withdrawal from areas where we see a security risk," the Shell spokesman said.

"We are watching developments, but for now we see no reason not to continue our operations."

Until now, fighting has been focused on the eastern delta around Port Harcourt, particularly Asari's native Kalabariland southwest of the city.

Nigerian oil is produced by five multinational oil companies: Shell, ExxonMobil, Total, ChevronTexaco and Agip.

The country is the fifth largest supplier to the United States.

--Agencies.