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Oil Prices and Saudi Arabia: Interview with Matthew Simmons (Part 2)

Sean-Paul Kelley - 6/8/2005

Matthew R. Simmons founded Simmons & Company in 1974. The company's focus is on oil services, mergers and acquisitions, as well as bankruptcy workouts. In 1995, the company began providing "total energy services" to the industry. It has offices in Texas, Louisiana and Scotland, with 126 employees, including 76 professionals. This is Part 2 of the interview with Mr. Simmons on the energy policies of the George W. Bush Administration. You can find Part 1 Here and Part 3 Here.


SPK: I want to get into the specifics of your book and some questions about Saudi Arabia. My first question is about Ghawar, the super giant field in Saudia Arabia. What is its decline rate in real terms?

MRS: No one really knows but I will say this: its production is so totally different from normal fields and Ghawar is a prime example of this is that the reason normal fields start in decline is that the reservoir pressure finally drops to a level that the gas starts to bubble to the top of the field and the water starts intermingling at the bottom and the water and the gas crowd the oil out of the well bore. In very simple terms that's what declines are all about. In the early 60s as the Saudis, Saudi Aramco that is, started becoming very, very nervous about the rapid drop in reservoir pressure in these keys fields, and there are only three of them basically really being produced, they first experimented with gas injection to see if that would maintain higher reservoir pressure and that didn't work. So they then went to a novel approach, it's not novel any more as it's become sort of routine, of water injection as you produce oil producing at least a barrel of water and then a barrel and a half and then two barrels of water until now it's almost three barrels of water for every barrel of oil produced and what you are doing, is that you are basically doing that to continually drive the water column up towards the top of the reservoir to keep the reservoir artificially high. Incidentally you're squeezing the oil from the flanks to the center. And so all during this period of time you have at the surface the appearance of, "oh there's no decline rate."

What you are doing is primary and secondary recovery at the same time. And there is a lot of evidence if you read through these technical papers that within the most prolific part of Ghawar which was Northeast Uthmaniyah that in 1979 when they were reaching peak production rates Ghawar was doing about 5.8 million barrels of oil a day, Uthmaniyah was producing three of the 5.8mbd. My guess is that North Uthmaniyah is now almost gone.

SPK: You talk about the watering and what not but it is kind of an aside, do you anticipate something like the rapid decline in production at the Yibal field in Oman happening in Saudi Arabia?

MRS: Yup. That's the reason I've basically used the Yibal field as a case study. It's one of the most sensitive areas where I have gotten the most knee-jerk response. I've been told numerous times by Senior Petroleum Ministry and Aramco people, "Matt the Yibal field is nothing like our carbonate reservoirs." And I said, " I know its not, it's exactly like the reservoir you would have in China."

I'm not using it for the reservoir, I'm using it because it was the first giant field in the Middle East to import the technical tools that you think are destructive technologies and will allow you to produce for another 50 years and so do the technical best people at Shell.

The best technical people at Shell were so enamored with the use of these technical tools that they convinced the Oman government with a field of 250,000 barrels to ramp it up another 30% for ten years. That was in 1997. Just as they were starting the field went into collapse and by 2003 was producing 30,000-40,000 barrels a day.

That's the scary thing in my opinion. It's not the proven reserve controversy. That is a different issue. But the scary thing is that we should basically presume and then be surprised if they ever opened up the data I believe that all five of these great fields that are still close to 90% of production are headed towards collapse.

SPK: How well do you think Saudi Arabia could fake a massive decline rate? How long do you think they could keep something like that under wraps?

MRS: Until the production collapsed. What's ironic is that three years ago today I had no earthly idea I was going to write a book. But I read 15 to 20 technical papers as of this time two years ago and I said to myself, "Gosh, this is troubling." They are encountering a lot more problems than I ever would have imagined. I don't think there is any reason in the world to think that anybody would be any more concerned about Saudi Arabia than the gasps I got two years ago when I started saying, "you know what, I'm actually starting to think Saudi Arabia is an illusion."

I can't tell you the gasps I got from people, "you know Matt, I know you kind of picked the gas problems, natural gas here in the US, but you're going over the top. Saudi Arabia? Gimme a break!"

SPK: People these days don't like a Canary in the coalmine!

MRS: Well, you know it's amazing how the human mind works. Here's an example: somebody basically said the USSR is the only super-power that is as big as the US and by the hundredth repetition every single person in the world believes it and then the wall comes down. And people say, "oh my gosh, it's a third world country."

This is the same sort of a deal.

SPK: Do you think that Saudi Arabia can drill their way out of the current decline rate? Exploration?

MRS: Nope. Part of the issue is, I want to go back to the Ghawar field. The top 20% of Ghawar which is referred to as North Ghawar is basically where this very, very high permeability within the Arab B Zone 2B resides. Within the Arab B Zone 2B there is unbelievable permeability.

When you get outside North Ghawar you have the bottom 80% of the field that will basically produce 300,000 barrels a day for 30 years. That's the bottom 47 miles of Ghawar. And the top 30 miles were basically 4.5 million barrels a day.

If you could take the rig counts in Saudi Arabia from 45 to 50 up to 2,000 over a decade they could basically sustain their current production. What you have to do is take every rig in the world to Saudi Arabia. They are going to have one hell of a time going to 100 rigs by the end of 2006, which is their announced plan.

SPK: How large are the Saudi tank farms in country and internationally, like the ones in the Caribbean?

MRS: Somewhere between 50 and 70 million barrels of domestic tank farms and they have about 10-15 million barrels of Atlantic basin tanks farms that is broken out between some storage they rent in Rotterdam but the majority is in the Caribbean. The only times there is clear evidence of a Saudi surge was during the Iraq war where it jumped by about 800,000 barrels a day for about 45 days. I bet you they were just emptying the tanks farms.

SPK: Do you think there is any truth that the wells in the Neutral Zone are long horizontal wells and is it possible to run a multi-model horizontal leg into Iraq and tap it that way.

MRS: No, they can't reach that far. Not that I know of. And the Neutral Zone fields are so crappy. Why bother. Bear in mind that that is the northern extension of the Safiniyah field.