Dueling Editors
Posted by Stuart Staniford on September 28, 2005 - 3:48am
Topic: Supply/Production
Heading Out offers some support for the integrity of our beloved Mr al-Naimi here. I differ strongly. En garde, sir! Here are some of the things one has to believe in order to believe Mr al-Naimi:
- A consortium of world class oil companies with over 40 years free rein over the province and extensive production experience in it, grossly under-estimated the original oil in place (they said 530 bbls, implying Mr al-Naimi's 460bbl reserves plus 110bbl cumulative production to date would represent a greater than 100% recovery rate), or in the alternate, lied under oath to the US Senate about it for unknown reasons.
- That in realizing the errors of the Americans, the Saudi's made that realization in two giant leaps, one in 1988 and one in 2005, but did not attribute these sudden massive realizations to any particular cause, or in the alternate, that they maintained internal estimates of reserves different than the external estimates between those giant leaps, but despite this misleading behavior, are now telling the truth.
- That, more specifically, Saudi Arabia must have been telling the truth last year when it said it's reserves were 260bbl, but Mr al-Naimi must also be telling the truth now that it's new reserves estimate will be 460bbl. These are honest guys, right? So the wonderful technological advances must have been made this year, or at least the work of re-estimating reserves based on the wonderful new technology must all have been done this year. Ditto for 1988.
- That, despite the fact that cumulative production is less than 1/5 of (cumulative production + claimed reserves), the Saudis cannot readily increase production very much now, even though they were able to raise it readily in the past.
- That, despite the fact that cumulative production is less than 1/5 of (cumulative production + claimed reserves), the Saudis are increasingly producing heavy sour oil that they have to discount, implying they are able to produce less light oil than in the past. Since light oil produces very readily, we would have to believe that most of the 460bbl remaining reserves were heavy oil. But the pre-Saudi Aramco believed most of the OOIP was light.
- That, despite the fact the Saudis are less than 1/5 of the way into reserves, they have had to rework most of their big fields with horizontal MRC wells because of water breakthrough into the original vertical well developments, and increasingly need to start doing water-control downhole even in those wells.
- That, despite the fact that the Saudis are less than 1/5 of the way into reserves, it was financially rational to develop the Shaybah field under very difficult conditions in the middle of massive sand dunes hundreds of miles from anywhere in the empty quarter, or in the alternative that the Saudis use Tarot cards to decide what project to do next.
- That, despite the fact that they are less than 1/5 of the way into reserves, it was worthwhile to develop the Manifa field which has oil too contaminated with vanadium and sulphur for anyone to refine it, or in the alternate that Allah made them do it.
- That, despite the fact that they are less than 1/5 of the way into reserves, production is depleting at 5% to 12% per year.
- That, despite the fact that they are less than 1/5 of the way into reserves, and despite the fact that even heavy sour oils are selling in the range of $50/barrel, they are warning us that production will drop next month.
- That an authoritarian Middle Eastern government is not truthful (like Iraq under Saddam, like Iran about it's uranium enrichment, and like Palestine under Arafat).
- That the Saudi government has a motive to mislead people that there is more oil than there really is (such as that the US won't protect them if they don't have much oil left, and their own people will be outraged if they discover the regime sold most of the oil cheap to the West).
My gut feeling is that this development is extremely worrying. It has a flavor of desperation about it. When you combine that they are now explicitly saying their production is about to decrease, along with insider anecdotes like this one (thanks Nihilist), it does indeed have a flavor of the Iraqi Information Minister becoming even more delusional as the situation deteriorated (as Dave has suggested).
But they haven't, and most likely won't, judging them by long-established past behaviour.
All we have to go on is raw total production, and the quality of the stuff, by which to judge their situation and claims, and coming out of the pipe is evidence to the contrary - heavier, sourer crude.
The market is going to settle for whatever the Saudis decide to give it. The market has no power to enforce transparency. You've got the power relationship backwards. The junky doesn't tell the dealer what to do; the dealer tells the junky what to do.
I do believe there are those in power who would kill to find out exactly what the real scoop in Saudi Arabia is. The implications of a positive or negative answer are subtantial, affecting all of humanity.
At some point they will have to come clean in a transparent way or, I fear, they will do so at the point of someone's gun.
Lack of transparency will be what kills us.
Needing transparency and getting it are two different kettles of biodiesel, though.
This is the unspoken subtext, isn't it. "Transparency" is a veiled threat. "We" have a right to know how much oil is there because it's our oil.
This is why the Saudi's are right to resist calls for transparency. Inspectors are the vanguard troops of invasion and appropriation, just like they were in Iraq.
As far as I'm concerned, Saudi oil belongs to the Saudis, and "our" dependence on it is our problem, not theirs. Personally, if I were them, I would have a contigency plan for destroying the infrastructure and poisoning the fields, just in case.
I said here--or somewhere--long ago that I think peak oil needs geological/economic models to demonstrate, for example, how difficult it will be to use tar sands and shale oil to meet our energy needs. And a better understanding of future production is also useful. But many at peakoil.com, have argued that we have the right to pull those numbers out of Saudi Arabia.
Sorry folks. These are more arguments from whining little children who have eaten their cookies and now are demanding that the other kids declare how many cookies they have.
Transparency is not going to help us. The world will slam into the limits and will have to adapt. Hirsch gaps and whiners-for-transparency be damned.
and all the whiners about "those who endanger our children", should wake up and realize WE are endangering our children, and have been for decades (if not longer), with endless consumption of globally created corporate "goods" along with our addiction to cheap oil. not to mention the adoption of unsustainable economic systems, such as debt financing/banking and fiat currency. we (govt., multinational corporations, the unquestioning public) all share the blame in this, and to finger the "untransparent" ones is merely scapegoating.
Peak Oil seems to be a convienent excuse for imperialistic tendencies...subtle or not.
I note that when prices are rising, no one whines.
What gives ;-)
If the government is a real force in energy prices via actual trading in open markets, I will eat my hat.
** Disclaimer, I own no hats.
That was meant to be a joke, but I'm not so sure now...
That was some short squeeze today...
http://www.trendvue.com/charts/2005/09/tv20050928-16.gif
After Katrina, I thought this was a good idea: The SPR is designed to help recover from short-term disruptions, and if they sold at the post-Katrina price, they might even make a profit. But after seeing another devasting Cat 5 hurricane within a month, I'm not so sure. Unless they replenish the SPR between hurricane seasons, it'll rapidly be depleted.
US domestic oil creaks down year by year on a steady basis.
http://epiccs.com/Publications/CIM2004_272.pdf
And your response to my other nine points?
You can have reserve growth driven by mistakes in calculation or new technology, but ultimately there is a finite limit to what can be extracted, at any price.
What part of that do you not understand?
These trusts by and large are set up for one purpose - to extract the value out of the ground and pay an income stream to investors at fairly high rates... much higher than any mainstream oil and gas company involved in exploration and reserve building activity.
Why?
Because they expect the resource - the land - to ultimately be worthless. Eventually some of these trusts will pay their last dividend and close up, because there'll be nothing left to pump.
Slightly simplistic but gets to the heart of the matter.
I'm not saying this is true of you, JD, but transparency is crucial if we are to convince the rest of the world that there's a problem regarding world oil supply.
Last year, didn't Aramco announce that their OIP was actually closer to 1200 Gb? (I may be confused on what that number referred to; this ArabNews story from April 2004 says Al-Naimi meant proven reserves, but that's absurd.)
Is it plausible? Circa 1975, estimates of Saudi OIP were 500 Gb, with "proven" reserves of 160 Gb. Adding the 25 Gb produced to then, and that's a recovery rate of 35%
But maybe that's how it all hangs together. If Original OIP is now 1200, and proven reserves now 461, that implies 38% recovery.
It's also possible that the 1200 is OIP remaining - i.e. after subtracting the 100 Gb already extracted. In that case, total recovery should be 43% Take your pick...
Hmmm...
Also, check this out: It's not new - we were warned last year!
Washington Post, Dec 27, 2004:
That would imply that last December, when he said "we may be able to increase..." he was really saying "if prices go over $50 and stay there..."
But in any case, the ground work for this was laid over a year and a half ago - before Simmons hit the publicity trail for his book and more people started asking the hard questions. I find that interesting.
Since we don't know WHAT the Saudis have done in the interim, I agree, it is difficult to take them at face value. But at the same time, the Saudis ARE doing further exploration.
Here's Al-Naimi
http://www.gasandoil.com/goc/news/ntm52126.htm
Lots more news here:
http://www.gasandoil.com/goc/news/h_ntm_left.htm
Discoveries here:
http://www.gasandoil.com/goc/discover/h_left.htm
I also suggest that linking to enormous lists of articles about all discoveries worldwide do not provide us with any insight into the question at hand.
My suggestion is that you go read Twilight in the Desert and then come back and try again if you aren't persuaded by it. It certainly would be a great service for a sceptic to attempt a detailed and careful rebuttal of that book.
Proving Proven Reserves Are Proven: An Art Form Or A Science?
http://www.simmonsco-intl.com/research.aspx?Type=researchspeeches
It is better to look good, than to feel good.
Pulling a few rigs over to their waters, lots of talk but no action and heavier and more sour oil in the OPEC reference basket, and the finishing touch: upping reserves - again - does smack somewhat of looking good.
But seriously, every damn point you just made is right on target IMHO. I've said this in some comments but I will state it here altogether as one statement.Well, at least that's my take. Have a good one....
But it may well be that they are giving such optimistic statements for security reasons. At home their people would be shocked to realize that that days of oil riches may be soon gone and that the there is not much left for the ordinary Saudis after the princes have pocketed most of them. Internationally acknowledging future production declines would worsen the situation in Middle East. Now the Saudis assure that there will be enough for everybody, no need to start securing the shares of supply. May be they fear a rush to grab the remaining oil?
In Britain there is a little grumbling about the royals <$100m annual income from the public purse, but not much. And, the public is well aware of the big draw to the American tourist, always agog at the possibility of seeing a real live prince. In Saudi the locals might see too much of theirs.
I suspect the legions of Saudi royals are well aware they're not very popular, and therefore are worried about their grip. They might look at the Saudi oil wealth from the same perspective as the Americans did in the seventies - produce every drop while they can, don't worry about possible damage to the fields, as the old Senate hearings did do. Focus - every year we hang on is (now) another $75b, much of which is usefully flowing into Swiss bank accounts. The last thing they want to do is let the public begin to worry about the quality of their stewardship. The truth is the first ballast to go overboard when the ship of state is insecure.
Regarding Russian reserves and output, there might well be substantial reserves still to be found in the forbidding north. However, these reserves, if they exist, would take many years to bring on line, not least on account of their new policy to limit foreign investment. In any event they would not delay the peak if, as many predict, it comes between now and 2008. On the other hand, Russia's political influence, already growing sharply in Europe on account of gas exports, will grow further if Saudi oil output begins to decline while Russia's continues to grow.
I think HO really wanted to get a discussion going about SA comments in the media. If so he succeeded wonderfully.
I think Stuart brought to light the non oil related reasons for making reserve statements. He defined the political environment well.
All other posts have brought great data to bear on both sides of these arguments, the technical and political. I have been greatly educated with respect to the interplay between geologic reserves and need for political position by oil producing entities. It strikes me this is a lot like the energy markets recently. The price and the trends of oil, NG, etc. aren't directly linked to the measurable (production)supply on any particular day. The spin is as (more?) important in manipulating the market than the data.
Thanks to all for having this discussion in the public forum where I can see all sides and make up my own mind. I am trusting the markets less and less every day because they are too easily manipulated by those with more information and clout than little old me.