Seven Questions: The Future of Oil
High gasoline prices have returned oil to the forefront of the national debate. Matthew Simmons, an energy industry investment banker, is a leading voice warning of “peak oil”—the theory that world oil output will soon decline. Saudi officials and many economists say oil production will increase to meet growing demand, but Simmons doesn’t buy it.
FRIENDS, INDEED: President George W. Bush pictured with King Abdullah of Saudi Arabia, the key pl
Friends, indeed: President George W. Bush pictured with King Abdullah of Saudi Arabia, the key player in efforts to expand world oil output.
FOREIGN POLICY: Cambridge Energy Research Associates (CERA) estimates that by 2010, production capacity could grow from 85 million barrels per day (bpd) to 101 million bpd, and that “peak oil” won’t happen before 2020.
Matthew Simmons: CERA identifies 30 new fields with specific dates and production targets, and 10 with fuzzy numbers. The 30 specific fields yield 40 percent of the 16.4 million bpd boost that they are projecting. The study also doesn’t account for the decline in the existing production base. The annual rate of decline of existing fields—there aren’t good data on this—is around 5 percent. If we take that into account, even adding 16.4 million bpd by 2010 doesn’t make up for the depletion of existing fields. Many energy economists believe that ingenuity and technology will ensure that we will have cheap energy. But there is nothing on the drawing board that we know of that can do that. As an investment banker, I know you usually can’t raise very much money for highly optimistic projections.
Peak oil does not mean “running out”; it means that production peaks and starts to decline. I think there’s a strong possibility that 10 years from now, we’ll be producing 75 million bpd, down from about 85 million bpd today. That doesn’t mean that we’ve run out. But it is a cataclysmic event unless we gear up and understand what it’s all about.
FP: What makes you think some fields are in for a production collapse?
MS: The faster you extract oil from a reservoir, the faster you dissipate the reservoir pressure. Once you get below a certain level of pressure, you have to get oil out using an artificial lift or water injection, and some oil will be trapped in the reservoir.
Overproduction leads to production collapse. The Brent field in the North Sea for instance, came on line in 1976 and peaked at 500,000 bpd in the early 1980s. I think that field now produces around 30,000 bpd. Take the Yibal field in Oman. Shell was so convinced that modern technology was a production miracle that it increased the production facilities at Yibal by 30 percent. And just as that happened, the field peaked at 225,000 bpd in 1997, and by 2003, it was down to about 80,000 bpd. When I talk about production collapse, I’m not talking about a drop of 5 or 10 percent.
FP: You’ve written that Saudi Arabia relies on old and overproduced oil fields that are likely to start declining in output. How has Riyadh responded to your analysis?
MS: They’ve said “trust me, we have no problems.” Petroleum Minister Ali Naimi said that they could pump up to 15 million barrels per day for as many as 100 more years. The likelihood of that is as remote as me being on the moon 10 years from now. They dismiss requests for any field-by-field data as preposterous, and simply say that they’ve been a reliable supplier of oil for 70 years. My view is that it’s just good supply chain management to ask a key vendor for details about their capacity. Plus, they are shopping the market so hard for drilling rigs right now. If they can produce 15 million barrels per day for another 50 to 100 years, why do they need new rigs?
FP: If you were the secretary of energy right now, what policies would you recommend to President Bush?
MS: If we restructure the way we use fuels, we might be able to get along very well with oil in decline. The single-most energy inefficient way we use oil is large trucks delivering goods over large distances. If you take all the goods that are trucked more than, say, 50 miles, onto railroad tracks, depending on the length of travel, you’d use between 3 to 10 times less energy. If you put them on a marine vessel, it’s even more efficient. So forget about just-in-time inventory. Once you get the large trucks off the road, you make a tremendous dent in traffic congestion, which is public enemy one through five on passenger car fuel efficiency.
We also need to embrace the concept of distributed work. In most of our non-manufacturing commercial jobs, we assume that it’s better to have a lot of people working at the same site, even though it’s not necessary. By allowing people to work at home and keep their jobs, all they have to do is invest in communications such as video conferencing, the Internet, and cell phones. We also have to change the way we distribute food. An amazing amount of the global food supply is transcontinental and produced by energy-intensive large-scale agriculture. Whole Foods, a successful grocery retailer, has basically created organic farming near each store it builds. The produce is less energy-intensive to grow and ship.
FP: In the wake of Hurricane Katrina, some on Capitol Hill suggest Washington should expand provisions for domestic drilling offshore and in Alaska.
MS: It’s very important. Everything we can do to stabilize supply buys us more time to adjust to peak oil. People ask what difference it would make if we drilled for oil in the Arctic National Wildlife Reserve. There could be up to 1.5 million bpd of oil there. It doesn’t solve the larger problem, but it’s a safety valve.
FP: When you look at the world, are there any areas of exploration that are promising? Some say countries such as Canada, Kazakhstan, and Angola will expand output in the years ahead.
MS: The largest project in Kazakhstan is so unattractive that three of the major players have bailed on it. It’s scheduled to come on stream in 2009 at 75,000 bpd and peak in 2016 at 1.2 million bpd, and its current cost estimate is $60 billion. And that is for poor quality crude. The tar sands of Canada have potential, but getting it out and processing it is an energy-intensive process, and the product will be of inferior quality. Since we don’t know the depletion rate of Angola’s old base of production, which is about 900,000 bpd, there’s a chance that all of Angola’s deep-water projects come on line, and by 2010, Angola is still producing 900,000 bpd.
FP: Which countries are best positioned to deal with a decline in oil production?
MS: Papua New Guinea. Unfortunately, that’s an honest answer. The countries that haven’t yet built a society that needs an exponential amount of oil are in the best shape. Around 30 years ago, around half the world didn’t really use oil. And now look, cities like Hanoi have millions of motorcycles they didn’t have five years ago. We’ve built the global economy based on the false assumptions that oil is just another commodity, that the Middle East has basically unlimited amounts of oil, technology will improve, and that the price of oil would get progressively cheaper.
The more I’ve gotten into this, the more similar it is to what we do in our own minds with ignoring people's getting old. When do you take your parents’ car keys away? It’s so painful that you go into denial that they’re getting really old.
Matthew Simmons, chairman of Simmons & Company International, is author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy (John Wiley & Sons, 2005).