Matthew R Simmons: Twilight in the Desert

Matthew R Simmons: Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy (2005; paperback, 2005, Wiley)

Simmons is chairman of Simmons & Company International, a Houston-based investment bank specializing in the energy industry. He made a big splash with this book, which questions whether claims are true that Saudi Aramco can significantly expand their petroleum production to keep up with projected demand. His background is in business (MBA), not geology, but the book is remarkably detailed in terms of Saudi Arabia's oilfield geology and technology. I figured at first I'd just read the early history sections and skip the fine print, but the latter proved irresistible. Info toward the back of the book on non-Saudi oilfields is also very interesting.

Preface (p. xv):

The "twilight" of Saudi Arabian oil envisioned in this book is not a remote fantasy. Ninety percent of all the oil that Saudi Arabia has ever produced has come from seven giant fields. All have now matured and grown old, but they still continue to provide around 90 percent of current Saudi oil output. The Kingdom's three most important fields have been producing at very high rates for over 50 years. High-volume production at these key fields, including the world's largest, has been maintained for decades by injecting massive amounts of water that serves to keep pressures high in the huge underground reservoirs and also to sweep the mobile, more easily recoverable oil toward the producing wells. When these water injection programs end in each field, steep production declines are almost inevitable.

Did King Ibn Saud and President Franklin Roosevelt Discuss Oil? Roosevelt met with the Saudi King in 1945, the nominal beginning the the US alliance with Saudi Arabia (pp. 12-13):

Whether or not oil entered the five-hour conversation between FDR and the king is not recorded. It would be odd if it did not. An American oil company had made the first two significant oil discoveries in Saudi Arabia several years earlier, and one field was then in production. Abdul Aziz was eager to further develop Saudi Arabia's bonds to the United States as a balance to the strong British influence in the region. Access to Middle East oil was an Axis objective in WW II and the reason behind the North African campaign. And Roosevelt was keenly aware of the oil potential in Saudi Arabia. During the height of the war in 1943, Roosevelt instructed Harold S. Ickes, U.S. Secretary of the Interior, to dispatch a senior delegation from the Petroleum Reserves Corporation, the official entity responsible for supplying petroleum to the war effort, to inspect Saudi Arabia's oil resource. The Allies were gearing up for massive offenses in Southeast Asia which had to be fueled by Middle East oil; U.S. reserves could not sustain the wartime drain of two billion barrels of oil per year.

Leading this delegation was Everett Lee DeGolyer, one of the world's most distinguished geologists. Upon his return to the United States, DeGolyer reported to Roosevelt that the center of gravity for oil production would soon begin shifting from what he labeled the American-Caribbean area to the Middle East-Persian Gulf area. He estimated the Kingdom's oil resources at 2 billion barrels of proven reserves, 5 billion barrels of probable reserves, and 20 billion barrels of possible reserves.

The History of Major Saudi Arabian Oil Discoveries (p. 24):

The first significant Middle East oil discovery was made in Iran in 1908, where small amounts of oil had been found in the 1880s. Fires fueled by oil seeps and gas bubbles at the surface in various parts of the Middle East had been noted for several millennia. The Eternal Fires burning when Nebuchadnez'zar was king, as described in the Bible, were no doubt fueled by petroleum.

The first oil discovery on the western side of the Persian Gulf came in Bahrain in 1920. This small discovery attracted a team of seasoned explorers from Standard Oil Company of California. They, too, found only small amounts of commercial oil. But they glimpsed enough of the Arabian landscape across the strait to become interested in its petroleum potential.

The first oilfield of great size found on the Arabian Shield was Iraq's Kirkuk, discovered in 1927 within 2,500 yards of the Eternal Fires of King Nebuchadnez'zar's time. The Kirkuk discovery kicked off an aggressive search for oil throughout the Middle East. Kirkuk has remained one of the great super-giant oilfields in the Middle East for almost five decades, accounting for 50 to 70 percent of Iraq's oil production for most of that time. Kirkuk's production still represents about 30 to 40 percent of Iraq's oil output, although the field has been very poorly maintained over the past two decades and is now 76 years old. Sabotage damage after the second Iraq war has now shut down most of Kirkuk's production.

In the 1930s and early 1940s, several of Iran's greatest oilfields were found, including Gach Saran in 1935 and Agha Jari in 1944. Production from both fields peaked in the early 1970s. Today these once great fields only produce 10 to 15 percent of their peak rates.

Discoveries of Super-Giant Oilfields Bring Investments by Texaco, Exxon, and Mobil (pp. 30-31):

[Nestor "Sandy"] Sander arrived in Saudi Arabia in 1938, just six months after the Dammam #7 discovery, as part of an extremely talented group of younger geologists recruited by [Max] Steineke to map what was beginning to look like a very special concession. This team soon geared up to conduct a comprehensive gravity survey for oil throughout the concession area.

It took another two years before a drilling crew, based on Sander's recommendation, proved that the Abqaiq structure held oil. What was not initially apparent was the magnitude of the discovery. Unlike Dammam Dome, which turned out to be only a modest-size oilfield, further drilling would ultimately reveal that Abqaiq was a super-giant. Once Abqaiq was found, the miracle of Saudi Arabian oil was underway. Over the coming decades, oil would take the minor Kingdom of Saudi Arabia to the pinnacle of the world's energy industry and the front stage of twenty-first century geopolitical concern.

As SOCAL geared up its Saudi Arabian oil campaign, it soon brought in Texaco as a partner to help fund the expensive Dammam drilling and also gain Texaco's marketing facilities for the crude oil they were hopeful of discovering. The name of the operating company was changed from California Arabian Standard Oil Company (CASOC) to Arabian America Oil Company, or Aramco, in January 1944.

The two final Aramco shareholders, Standard Oil Company of New Jersey (later renamed Exxon) and Socony-Vacuum (later renamed Mobil Oil Company), were recruited in 1946 to provide more investment capital. Both were offered equal shares so that all four partners would own 25 percent each. Mobil was more conservative than Standard Oil and wanted to limit its participation to only a 10 percent share because of the political risk involved. Thus, the other three partners ended up owning 30 percent each. Mobil's decision probably turned out to be one of the most egregious business mistakes of the twentieth century.

These four of the original "Seven Sisters" (Exxon, Shell, BP, Mobil, Chevron, Texaco, and Gulf) became the sole owners of Aramco until the Saudi government began buying control in the late 1970s. (Long after control of Aramco was totally ceded to the Saudi government, its official name was changed to Saudi Aramco in 1989 or 1990.)

Further Discoveries and Production Growth: 1950s-1960s In addition to Abqaiq, the world's largest super-giant oilfield was also discovered in the 1940s: Ghawar. More oilfields were soon discovered: Haradh (1951), Qatif (1951), Abu Hadriya (1963), Fadhili (1964).

Exploration Moves Offshore: The Safaniya Oilfield (pp. 34-35):

By 1950, Saudi Arabia's oil output had grown to about 550,000 barrels of oil a day. All of this production still came from a handful of land-based fields in a small area within Saudi Arabia's Eastern Province. Aramco executives then decided to explore for oil in the adjacent waters of the Persian Gulf. At that time, offshore exploration was the newest, most exciting oil frontier, kicked off by Kerr McGee's discovery of the first oil beyond the site of land in the shallow waters of the Gulf of Mexico in 1947.

Shortly after Aramco began its offshore exploration efforts, Safaniya, the second largest field in Saudi Arabia, was found. Producing oil from sandstone layers in the Wasia formation, it eventually earned the rank of the world's largest offshore oilfield. Safaniya began production in 1957 with output of 25,000 barrels per day. Production steadily grew and crossed 500,000 barrels per day by the late 1960s. In 1980/1981, the field's oil output peaked at 1.5 million barrels a day, accounting for 15 percent of Saudi Arabia's record oil output.

Safaniya's oil was of far lower quality than the crude flowing from Ghawar and Abqaiq, quite a bit heavier (28° PAI) and with a much higher sulfur content. However, Safaniya's crude (and all other Wasia sands production) contains no hydrogen sulfide. Thus, the oil is called "sweet," and is safer to produce and far less corrosive.

Many More Oilfields, But None Are Large Producers (p. 37):

Shaybah was the twenty-eighth oilfield found in Saudi Arabia and the last of any great size. Two other fields, Barqan and Marzouk, were found in 1969. In the decade of the 1970s, 27 more oilfields were found. A further seven fields were found in the 1980s. With a single exception, none of these 1970-to-1990 discoveries ever produced any notable quantities of oil or gas. The exception was the Hawtah field, discovered in 1989. The Hawtah find led to discovery of a cluster of 11 or 12 other nearby fields in Central Arabia. Collectively, these fields, called the Hawtah Trend, reached peak production of around 200,000 barrels of oil a day.

Another dozen or more oil and gas fields were discovered in the 1990s in addition to the Central Arabia Hawtah Trend fields. Once again, none became large producers. Is Saudi Aramco simply waiting for the right time to bring these fields into production? Or have testing or initial production failed to qualify these fields for full-scale development? The answer may lie in the water encroachment challenges Saudi Aramco has been wrestling with for several decades, which will be described in Chapter 6 and discussed further in Part Three.

The real history of Saudi Arabian oil exploration has been rather different than conventional wisdom has assumed. The lack of additional great finds sine the late 1960s was not due to a lack of effort. The effort was there. The oil was not.

History of U.S. Oil Development Surplus to Decline (pp. 43-44):

The United States became the world's dominant oil producer in 1901 when the Spindletop field was discovered in southeast Texas. Other giant fields followed in Texas, Oklahoma, and California. From 1930 onward, the United States had so much oil that state agencies in Texas and Oklahoma prorated output among all producers, allowing each to produce oil for only a limited number of days each month. These proration policies were established to prevent oil prices from dropping so low that the U.S. oil industry would disintegrate. Proration remained in place until the end of the 1960s. As a beneficial unintended consequence, proration also extended the lifespan of many U.S. giant oilfields, which would have depleted far faster had they not been artificially choked back.

Proration was the only major U.S. oil policy until 1959, when President Eisenhower imposed an import limit restricting the amount of foreign crude that oil companies could bring into the United States. He did this to ensure the United States would remain a strong producer of oil for domestic consumption and military use.

As world oil consumption grew, the need to prorate U.S. oil production gradually dwindled. By the close of the 1960s, world oil demand became so great that U.S. oil companies were finally able to escape proration in Texas and produce as much as their wells could flow each day without a fear that oil prices would collapse.

Oil Disasters in Europe Affect Exploration in the United States (pp. 45-46):

U.S. oil production reached an all-time high in December 1970 when output from the lower 48 states and the Gulf of Mexico briefly topped 10 million barrels per day (Figure 3.1). Then, out of the blue and totally unexpected, U.S. oil output peaked and began a steady and relentless decline. The peaking of U.S. oil production ended the century-long run during which the United States dominated global oil supply. This production decline was sufficiently steep that the 1970 record stood as the peak U.S. oil output even after Alaskan oil finally came on stream. The delayed arrival of Alaskan oil and the blocking of any new production offshore California magnified the impact of the unexpected peaking on global oil markets. Ironically, U.S. oil production peaked in exactly the timeframe that the petroleum scientist Dr. M. King Hubbert had predicted 14 years earlier, a prediction that had been almost universally dismissed and even ridiculed.

The peaking of U.S. production immediately increased the pressure for prime international oil producers to make up the deficit. This was especially true for Saudi Arabia, which, along with Iran, was the only global oil producer capable of filling the void created by the U.S. decline and growing worldwide demand. To meet this need, Saudi Arabia's oil output had to grow by leaps and bounds. [ . . . ] Global oil demand was experiencing its greatest growth ever seen as the 1970s began. In 1960, global oil demand was only 20 million barrels a day. Ten years later, global demand was approaching 50 million barrels a day.

Saudi Arabia Replaces the United States as the King of Oil (pp. 48-49):

In a classic "Tale of Two Cities," Saudi oil production soared as U.S. oil production dropped. The decline of U.S. oil production enabled Saudi Arabia to take advantage of its resource potential. As the world's appetite for oil grew, Saudi Arabia had both the opportunity and the need to increase its oil output as fast as possible. Luckily, the Kingdom also had the capacity to step into the leadership role being thrust upon it. With its oil coming from a small number of prolific, choked-back wells in five super-giant oilfields, Saudi Arabia in fact could increase production to supply the new demand. [ . . . ]

The money that Saudi Arabia generated from this surging oil production was as astonishing as the rise in the volume of oil it produced, even though oil prices at the start of the 1970s were still only $1 to $2 a barrel. Since the population of Saudi Arabia was still small, the Kingdom became a font of enormous wealth virtually overnight.

The Dramatic Downside of Increased Saudi Oil Production (pp. 50-51):

The first information about a potential downside to the great ramp-up of Saudi production in the early 1970s did not emerge into the public domain for several years. In March 1979, Seymour Hersh, one of America's top investigative reporters, finally published an article in the New York Times titled "Saudi Oil Capacity Questioned." His story claimed that Aramco had systematically overproduced the major Saudi oilfields from 1970 to 1973 because the senior managers (essentially all employees of Chevron, Texaco, Mobil, and Exxon) feared nationalization was imminent, and the shareholders wanted to extract as much wealth from these fields as fast as the oil could be produced.

Hersh's story was the only report ever to make its way into print on the findings from a 1974 U.S. Senate closed investigation following the 1973 Oil Shock. At this secret Senate hearing, investigative reporter Jack Anderson claimed under sworn testimony that in 1972, Aramco's owners began to realize that high production was causing some damage to these fields, but sine they would soon lose their ownership, a conscious decision was made to "milk these fields for every salable drop of oil and put back as little investment as possible." [ . . . ]

The Hersh disclosures revealed for the first time that serious questions had been raised in the early years of the 1970s about the potentially harmful effects of high production rates at Ghawar, Abqaiq, and Safaniyah. The critical issue the hearing described involves an oil reservoir's sensitivity to the rate at which it is produced. Fields with high reservoir pressures that enable high wellhead flows are likely to be particularly sensitive to the rate of production and vulnerable to damage from too high a rate, or overproduction. As high reservoir pressure dissipates, water begins to commingle with the oil, gas bubbles to the top of the reservoir where it forms a gas cap, and soon the oil remaining underground becomes inert and ceases to flow. It can then be pumped out, but the pumping process also brings out far more water and gas that crowd out the oil. The faster a high-pressured oilfield is produced, the faster the advantages of this high-pressure production are lost. This phenomenon is commonly called "rate sensitivity of oilfields."

1973: Saudi Arabia Draws Its Oil Sword (pp. 52-54):

King Faisal's concern was justified. When President Truman announced he would support the UN resolution creating the State of Israel, Secretary of State George Marshall is reputed by historians to have said, "Mr. President, you can't do this. The Arabs will never forgive us." Truman apparently responded that Arabs did not vote in United States elections and Jews did. With the benefit of hindsight, Marshall, sadly, was right about Arab intransigence.

As King Faisal's frustration mounted, the Yom Kippur War erupted without warning. Without the hostilities intensifying, Faisal was pained to see the U.S. tilt strongly toward the Israeli side. [ . . . ] Faisal responded by unsheathing his "oil sword," a threat he had occasionally made in hopes of encouraging a more even-handed U.S. policy towards the Middle East. Ten Arab oil ministers met in Kuwait a day or two later. All quickly agreed to reduce their collective oil production by 5 percent per month until the Middle East conflict was resolved. The next day, Saudi Arabia announced a 10 percent reduction in its oil production and a complete ban on petroleum shipments to the United States and the Netherlands. The Netherlands was probably targeted because Rotterdam was a key receiving port for Middle East Oil.

While this cutback amounted only to a tiny percentage of global production, it created a genuine panic that reverberated through all oil-consuming nations. It was also a wake-up call to many national economies that they had become addicted to a lavish diet of imported oil, with no strategic stockpiles, little data about the commercial stocks each consuming nation held, and few alternatives to turn on if any of their oil supplies were cut off.

(p. 55):

Oil prices had stayed so low for so long that by the end of the 1960s no respected energy analyst thought they would ever rise. The majority of oil experts assumed the price would steadily fall. This assumption was vividly illustrated in the last days of the low oil price era. The Shah of Iran, a strong U.S. ally, attended President Eisenhower's funeral in 1969. During this visit, he quietly offered the new President of the United States, Richard Nixon, a 10-year contract to supply the United States with oil for one dollar a barrel. According to Henry Kissinger's memoirs about the Nixon administration, the United States politely declined the Shah's offer because it was not clear to any senior government official that oil prices in a free market would stay as high as one dollar per barrel over this lengthy period of time.

Within days after the 1973 oil embargo was announced, oil prices began to soar. By the end of 1973, oil prices had risen almost fourfold, finishing the year at $11.65 per barrel. The embargo was soon lifted, but long after it faded into distant history, the price of oil climbed steadily. By mid-1978, oil was selling in a stable price band of $16 to $17 per barrel.

Demand for Oil Overwhelms Supply: The Effect of Oil Prices on the Global Economy (p. 59):

In 1969, the last year when oil was really cheap, world oil demand was only 45 million barrels a day. Oil prices were just over $1 per barrel, and many experts thought they were overpriced by a factor of three to four. By the time the Iranian Revolution began in mid-1979, oil prices were about $18, setting the stage for the second oil shock of the 1970s. When Iran's troubles began, oil prices soared once more, going from $18 to a peak of over $40 a barrel. In the meantime, how much did this explosion in oil prices really impact demand? Between 1969 and 1978, global demand grew from 45 to 65 million barrels a day, an increase of 44 percent in a decade, despite the fact that oil prices had soared by about 14-fold.

Search for New Oilfields or New Wells (p. 73):

Aramco's entire 1977 drilling program was aimed, however, at adding development wells in the existing producing fields. Aramco's management told the GAO team that various yet-to-be-developed reservoirs in its super-giant fields probably contain several hundred million barrels of additional oil. As noted previously, at the end of 1979, when Aramco was taken over by a Saudi Arabian management team, proven reserves in the same fields were adjusted upward an additional 50 billion barrels. Eight years later, they magically grew by another 100 billion barrels.

In hindsight, Aramco's optimism about exploration prospects would prove unfounded. After 25 years of increasingly intense geological and geophysical efforts and equally intense exploratory drilling, Saudi Arabia failed to discover any significant new fields other than the series of complex, lower-productivity, tight reservoirs in the Hawtah Trend.

The Lack of Oil Information Drives Down Prices (pp. 82-83):

The lack of reliable OPEC oil production data occasionally wreaked havoc on the global oil markets. A classic case of the unintended consequences of unreliable data started in late 1997 and lasted through early 1999, when the oil industry experienced the worst collapse in prices in 50 years. This collapse was blamed on a perceived massive oil glut that was supposed to be flooding the world markets. The glut was attributed to OPEC's chronic overproduction. Most oil observers believed the chief architect of this apparent folly was Saudi Arabia's recently appointed oil minister Ali Naimi. In reality, Mr. Naimi only encouraged OPEC members in a November 1997 meeting in Jakarta to ratify a higher production quota to match the additional amount of oil they were producing and exporting because a forecasted surge in non-OPEC supply failed to materialize. [ . . . ]

At the nadir of this historic oil price collapse in the first week of March 1999, The Economist produced a cover story titled "Drowning in Oil." The lengthy article asserted that Saudi Arabia had finally tired of being the world's swing producer while more recent entrants to the oil export business, such as the North Sea, Angola, Russia, and Central Asia, continually stole its rightful market share. Thus, according to this now infamous story, Saudi Arabia had decided to flood the world with enough extra oil to drive prices to five dollars per barrel. Moreover, it was likely that oil prices would then stay at these low levels for at least five years. [ . . . ]

Just a few days after this cover story hit the newsstands, the Petroleum Ministers of Saudi Arabia, Venezuela and Mexico finally engineered a 2.1-million barrel a day cut in OPEC oil output because $10 to $12 oil was destroying the economic foundations of all three countries. The production cut was badly needed to put an end to the savage decline in oil prices. The problem with this large physical reduction, though, was that it occurred when the real global oil markets were essentially in balance. As a result, oil prices soon spiraled up over threefold in a short 18 months. There was never an oil glut. There was merely a glut of bad data.

Simmons is an oil industry analyst, so it's natural that he would complain about any shortages or discrepancies in available data about supply, reserves, and demand. He's evidently had a lot to complain about, especially from the 1980s on when OPEC countries inflated their reserve claims to increase their market share to make up for falling prices due to increased non-OPEC production (e.g., from the North Sea, the Soviet Union, and Nigeria). You may recall that Kuwait's "overproduction" was held responsible by Saddam Hussein for the collapse of oil revenues which Iraq badly needed to rebuild after the costly war with Iran. Hussein attempted to remedy his problem by annexing Kuwait, which got Iraq into even deeper trouble.

(p. 84):

When Saudi Arabia and its OPEC cohorts abandoned oil data transparency, they had no idea of the disruptive consequences that would follow. In the end, their actions left even the financial viability of their national economies at the mercy of oil traders and hedge funds that now vigorously bet on the future direction of oil prices. These speculators, of course, have little solid basis for the bets they make; but it is precisely the lack of good information that turns the oil markets into a high-stakes game in which the speculators can be players. Thus, loss of control of the markets and their own economic fates became the greatest and most painful aftermath of the data storm that resulted from OPEC's policy of secrecy.

New Century Brings Surprises Regarding Oil Supply and Demand: The Decline of the Ghawar Oilfield (p. 92):

While problems of maturity at each key Saudi Arabia oilfield grew, the Kingdom's importance to the world oil supply also increased. By 2004, Saudi Arabia had become the only country in the world with any meaningful unused production capacity. Every other key oil producer around the globe had started acknowledging that they were producing at peak sustainable rates, give or take a few hundred thousand barrels a day. Moreover, many of OPEC's key producing fields and a few key oil-producing OPEC countries had now entered a steady and permanent decline. Indonesia, for instance, at the start of 2004, suddenly became an oil importer for the first time in its history.

Saudi Aramco: This chapter provides a detailed review of how Saudi Aramco produces oil, their technology (including their reservoir modelling software) and their infrastructure investments (including the critical GOSPs [Gas-Oil Separation Plants]). Very interesting chapter.

Oil Is Not Just Another Commodity: A Primer on the Science of Producing Oil and Gas: A lot of general information, especially on the use and effects of water (p. 142):

Aramco began peripheral water injection early in the history of production at the Abqaiq and Ghawar oilfields as a means of halting rapid pressure declines. When this relatively new, unproven practice worked, it was adopted as a core element of the primary production phase instead of waiting for the effect of the natural primary production mechanism, the underlying aquifer, to wane. This was by no means standard oilfield practice at the time and would have been considered experimental.

Before this experiment began, water injection was typically used throughout the industry as a secondary recovery technique once the high natural reservoir pressure had depleted. By the late-1970s and 1980s water injection during primary production (sometimes virtually from field startup) became a common practice in areas such as the North Sea, where it accelerated production buildup to peak levels and thereby gave the owners faster cash flow and payback on their considerable investment. Gas produced in association with oil can also be injected back into the reservoir to maintain reservoir pressures. This technique became a standard practice in the North Sea and the North Slope of Alaska, where it not only helped to conserve reservoir pressures but also conserved the gas itself for future recovery.

(pp. 144-145):

A large pressure differential may be desirable when the fluid near the wellbore is all or mostly oil. But when water nears the wellbore, it may be prudent or necessary to reduce the pressure differential by choking back the well and thus lowering the production rate. Again and again, the rate at which an oilfield should be produced to maximize sustained output arises as an issue for reservoir engineers and production managers, as well as for executive management.

The effect of production rate on water cut and the duration of high oil output brings us again to the issue of an oilfield's rate sensitivity. Determining this has been one of the great challenges for production managers and reservoir engineers for years and is as problematic in 2004 as it was decades ago. The overarching issue involves the ultimate objective of the resource owner -- to extract large volumes of oil as quickly as possible (whether the motive is economic or political) or to maximize total recovery of the oil-in-place over a longer time. When an owner opens the chokes to increase oil production in a rate-sensitive, maturing field with water already entering the wells, the result is likely to be a proportionally greater increase of water flow relative to oil flow. In this whole process, the rate of oil production then falls. More importantly, this problem often damages the reservoir in ways that reduce ultimate recovery.

Note: this implies that the more Saudi Arabia accelerates depletion of its oil reservoirs for political purposes (e.g., as the "swing producer" to maintain steady oil prices) the more it risks and limits the ultimate value of those reservoirs.

This is followed by a discussion of horizontal drilling as a way of avoiding water coning. The net effect is that as the water level rises and the water cut increases, it becomes more and more expensive to extract the remaining oil in the reservoir.

Giants at the Tipping Point: This section assesses each major Saudi oilfield. These detailed sections are fascinating, as they allow one to look at the actual granularity of the Saudi oil system. Of course, this starts with the super-giant Ghawar (pp. 163-164):

When Iraq invaded Kuwait in 1991, Saudi Arabia was suddenly forced to raise its total oil output from around five million barrels a day in 1990 to over eight million barrels a day by the end of 1991. To achieve this output, production at 'Ain Dar/Shedgum jumped back to a level of 2.2 to 2.5 million barrels a day. This rapid increase led to a doubling in water cut. As horizontal wells began replacing vertical wells, the water cut soon stabilized, but it was now a steady 35 to 36 percent of all fluid produced.

This rapid water-cut rise was the triggering event for Aramco's intense new efforts to overhaul its reservoir modeling program to control this erratic water behavior. By the end of 1992, revised and upgraded reservoir simulation modeling indicated that water produced as a byproduct of Ghawar's oil would soon exceed the capacities of several key Ghawar GOSPs. A special task force was formed to develop and implement a solution to a water production problem that could soon become lethal.

Dramatic Decline in Production: at the second-tier Berri oilfield (p. 196):

Regardless of these technically advanced well systems, Berri has clearly seen its prime. It is now a mere shadow of the great producer it used to be. Its daily production in 1994 was 300,000 barrels per day, a decline of 62 percent from its peak of 800,000 barrels per day two decades earlier.

When water injection can no longer maintain adequate pressure to drive fluid flow, there will still be massive amounts of oil left behind at Berri. If the factors for microporosity, aerial sweep, and vertical sweep, are correct, then 21 percent of the oil will have been recovered, leaving behind the remaining 79 percent. Some of this oil could still be extracted, but the volumes of sustained output would never be high; and as the wells begin to produce more water than oil, the number of wells needed will increase exponentially. At some point, tertiary recovery techniques (such as a carbon dioxide flood) will be required. But even this would raise the challenge of finding a source of this gas.

Safety Problems at Qatif (pp. 218-219):

Unfortunately, all three of Qatif's producing zones have high concentrations of hydrogen sulfide, ranging as high as 10 to 20 percent. The safe level for breathing hydrogen sulfide is the same as for cyanide -- one part per million. Rapid growth of the suburban and agricultural areas around the Qatif project adds a whole new dimension of life-and-death challenges to the expansion project. Stringent safety guidelines have already resulted in the rejection of almost half of the possible new drill sites as too dangerous, given the potentially high concentrations of toxic gas. A concentration of only 2 percent hydrogen sulfide in the crude oil at a drilling site creates a need for all workers to keep gas masks with them at all times, as a few whiffs of this poisonous gas can be fatal. A release of large amounts of hydrogen sulfide into a populated area has the potential for truly tragic consequences.

In addition to the all-pervasive safety issues, hydrogen sulfide creates a variety of serious operational complexities. One is the risk of severe corrosion in well casings, which showed up even during production testing. This corrosion will hopefully be minimized by coating all external exposed well casing surfaces and the entire internal surface of the production tubing with fusion-bonded epoxy. The only new wells that will be excluded from this high technology treatment are the water injectors because of fears that the internal fusion-bonded epoxy coating may peel off over time and plug the formation.

To mitigate the dangers inherent in trying to ramp up Qatif's highly sour crude production, a state-of-the-art supervisory control and data acquisition system (SCADA) will be employed for the first time on any Aramco-operated field. This SCADA system will monitor each well with best-in-class hydrogen sulfide sensors. A contingency response plan has also been put in place providing procedures for containing and normalizing well problems. Disaster emergency evacuation drills have already been conducted in the heavily populated areas around Qatif.

The goal at Qatif is to produce 500,000 barrels a day, although Simmons rates the odds of achieving that as "rather slim."

Turning to Natural Gas: Historically Saudi Arabia tended to just flare off natural gas. Now, of course, it is becoming increasingly important, used for chemical feedstocks, electricity, and to power water desalination plants (p. 260):

A story in the Oil & Gas Journal, July 29, 2002, described Saudia Arabia's current water desalination system and made some rough, and seemingly conservative, estimates of the Kingdom's growing water needs through 2010. This story reported that Saudi Arabia now accounts for 21 percent of the world's desalinated water production. Its 30 desalination plants cost more than $20 billion to build. Annual maintenance and operational costs of these plants total $4 billion a year. By 2002, 70 percent of the local water consumed in Saudi cities was coming from desalinated seawater. Over the next 20 years, another $40 billion or more will be needed for future water desalination. The production, pumping, and transport of desalinated water costs the Kingdom of Saudi Arabia $1.10 per cubic meter. It is sold to customers at only 30 percent of this cost.

The bottom line for Saudi Arabia's natural gas challenge is simple. For the Kingdom to function securely and comfortably in 2010 and beyond, it must find and develop massive amounts of natural gas. If this gas can actually be found and developed, it is hard to imagine that it can be done at prices of $0.75 per thousand cubic feet. These economics would now be deemed a bad joke in the United States. The real price for Saudi Arabia to produce gas supplies sufficient to meet its inherent needs could easily exceed the prices needed in the United States.

Twilight in the Desert: Saudi Oil Reserves Claims in Doubt (p. 276):

In many formations, it is also very difficult to cut and retrieve solid cores, and the risk of getting the coring tool stuck in the hole is high. This led to an industry-wide assumption that 3-D seismic, advanced well logs, and computer simulations could substitute for appraisal wells that were cored and flow-tested. Many veteran geologists and reservoir engineers are highly skeptical of this modern oilfield practice and agree it has led to a sizable or even massive overstatement of the total recoverable reserves in many fields around the world.

Facing the Inevitable: The Dimming Future of Saudi Arabia's Oil Industry (p. 285):

Amidst these uncertainties, the only sure fact is that when Saudi Arabia's oil production peaks and begins to decline, it will take energy forecasters and policy-makers by total surprise. not a single serious energy plan devised in the past three decades has envisioned such a scenario. Too many seemingly knowledgeable oil observers have assumed that Saudi Arabia's giant oilfields are so large that they might even defy the peaking phenomenon, or at least avoid the event for years to come. While ignorance is bliss, ignoring the consequences of a peaking of Saudi Arabian oil will be far more dangerous than the scorn that many experts directed at the notion that U.S. oil would peak in the 1970s.

The Fates of Giant Oilfields Outside Saudi Arabia: Looks at Alaska's Prudhoe Bay, Russia's Samotlor, China's Daqing, Mexico's Cantarell, the North Sea oilfields, and older U.S. oilfields (pp. 291-292):

Spindletop, the first giant U.S. oilfield, peaked in the first year or two following its discovery because competing owners virtually carpeted the field with wells. No authority existed to manage the field's development and depletion. Most of Spindletop's oil was never captured and refined -- it simply blew out of poorly controlled wells and drained back into the ground.

The great East Texas field, by far the most productive oilfield ever found in the lower 48 states, flowed at extremely high volumes until proration, strictly enforced by the Texas Railroad Commission, limited the amount of oil this field and every other field in the state could produce each month. In 2004, the East Texas oilfield was still producing about 14,000 barrels of oil each day, but the saline water these wells were also lifting exceeded one million barrels a day.

The great oilfields in West Texas also were subject to the strict proration rules imposed by the Texas Railroad Commission from the 1930s through 1969. [ . . . ] As soon as proration ceased in 1969, almost all the giant oilfields in Texas quickly hit their peak production rates as their owners raised output. Shortly after peaking, production began to plummet at all these fields, quite rapidly in some cases. Afterwards, they entered secondary and tertiary production phases. The fact that Texas is still a large oil-producing state is testament to the improving ability to recover oil left behind. The biggest population of stripper wells in the world (a designation for a well that produces less than 10 barrels per day) is in West Texas. The average water cut of these wells is in excess of 90 percent. Luckily, there are several hundred thousand of these marginal wells, so U.S. oil production from stripper wells is still around one million barrels per day.

In Search of Crisper Truths among the Confident Saudi Claims (p. 334):

Based on the findings of my research for this book, it seems clear that not even the fuzziest logic can create a plausible scenario under which Saudi Arabian oil production could increase to levels that would fulfill the fantasies of the forecasters. Such an outcome is an extremely unlikely even. Absent a series of new giant oilfield discoveries, or a new technology that causes difficult oil now being left behind to flow readily into prolific high-recovery wells, Saudi Arabia clearly seems clearly to be nearing or at its peak output and cannot materially grow its oil production. In all probability, output peaked in 1981 at an unsustainable level of about 10.5 million barrels per day. Even worse, the Kingdom might now be accidentally overproducing its old war-horse oilfields.

Aftermath: Coping with Post-Peak Oil (pp. 342-343):

In my opinion, based on extensive historical production data from around the rest of the world, when Saudi Arabia can no longer raise its oil output at will to meet steadily increasing oil demand, the world's oil supply will also have reached its peak output. This does not imply that the world is running out of oil. There will still be a trillion barrels of usable oil left. When the world's non-conventional oil reserves are added to total oil resources, we might have several trillion barrels of oil left to produce.

Unfortunately, it does mean that the world's great oil producers will no longer be able to raise global supplies to meet ever-increasing demand without grave risk of damaging their fields. Moreover, as peak oil approaches, the higher we push global oil supply, the faster peak output will become past tense, and the more rapidly oil output will then decline.

Can the world cope with the peaking oil supplies? After all, it was the oil miracle that made the twentieth century an unprecedented era for wealth and personal freedom in the developed nations, changing almost every aspect of how we live, travel and eat. This twentieth-century oil miracle was enjoyed by only a fraction o the world's population, however. As the twenty-first century gets under way, the other 80 percent of the world want to share in these same wonders. This is why so many long-term global demand models arrive at the need to produce between 115 and 130 million barrels of oil each day by the third decade of the twenty-first century. Amazingly, when the assumptions underpinning these high oil demand models are unbundled, the assumptions are actually conservative, as they are grounded in a slowing of population growth, increasing energy efficiency, and per capita oil consumption in countries like China and India rising to only a fraction of the use in the European Union, Japan, Korea, Australia, and New Zealand.

Saudi Arabia Will Not Lose Global Relevance After Its Oil Peaks (p. 345):

On the surface, it is easy to assume that Saudi Arabia, and perhaps the entire Middle East, will suddenly fade in importance once their oil production peaks. I would argue against this notion. Instead, Saudi Arabia's relevance to the world becomes even more important once energy planners finally accept the notion that even Saudi Arabia is limited in its ability to pump extra barrels of oil. Saudi Arabia's oil will never run out, just as the United States still produces vast amounts of oil 35 years after its production peaked. It is far more important to extend the longevity of Middle Eastern oil production, even as its supply shrinks, instead of proceeding as we do today in the mistaken view that this oil will last for the foreseeable future and will always be cheap.

How Does the World Fill the Oil Gap? (p. 347):

High oil prices do not mark the end of a healthy economy around the world, but they also do not automatically fill the untidy gap between growing demand for oil and a shrinking supply. For short periods, this gap can be met by drawing down oil stocks and squeezing efficiencies out of the oil system. But this is not a sustainable solution.

posted 2008-07-05