Expert says Saudi oil may have peaked

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By Adam Porter Tuesday 22 February 2005, 6:46 Makka Time, 3:46 GMT
http://english.aljazeera.net/NR/exeres/80C89E7E-1DE9-42BC-920B-91E5850FB067.
htm

As oil prices remain above $45 a barrel, a major market mover has
cast a worrying future prediction.

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.

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 Aljazeera, 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)."

Simmons believes Iran's oil production has also peaked

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 US 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."

In 2004 Shell said it had lost 20% of its reserves

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
maximising 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 maximising production are not always obvious, they
can be technical, but also geo-political.

"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 realise, is the world's most precious resource."