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Monday, September 24, 2018

Can Saudi Arabia increase, or even maintain, its present level of crude oil production?

In Weekly NEWS No. 37/05 (New thinking in the oil markets?) we wrote a brief summary about investment banker and energy industry analyst Matthew Simmons confronting the complacent notion that there are ample oil reserves in Saudi Arabia to fuel significant increases in world oil demand over the next 30-40 years.  

The conclusions at the end of his immensely detailed, but totally enthralling, book called ‘Twilight in the Desert – the coming Saudi oil shock and the world economy’, rock the fundamental assumptions used by virtually all forecasters - that the Saudis can open up the oil taps and increase their crude oil production to 15 or even 25m barrels a day over the next couple of decades as world demand grows. 

“My crispest conclusion is this: it is virtually impossible for Saudi Arabia ever to produce the 20 to 25 million barrels a day envisioned by the forecasters. This scenario is not totally inconceivable, but the odds of it happening are so low that this possibility should be abandoned by all energy planners, once and for all.” 

“Can Saudi Arabia begin boosting its oil output to 10, 12, or even 15 million barrels of oil a day for the next 10 or 20 years, let alone 50 years?” he asks. “Time will be the judge; however if the facts outlined in the Society of Petroleum Engineers (SPE) papers are correct, and if the experience with other mature giant oil fields is relevant, this answer is ‘quite unlikely’.” 

“If the probability of an oil production increase is low, is it safe to assume that Saudi Arabia can at least maintain its current output for the foreseeable future?” he continues. “Sadly the answer to this question is no better than ‘maybe’. Nothing in the data available at this time supports the claim that Saudi Arabia can maintain production at current levels for more than 5-10 years.” 

Equally fascinating is his revelation that a U.S. Senate Staff Report, produced as long ago as 1979, showed how premature water breakthrough into the oil wells, and reservoir pressures declining more rapidly than anticipated, meant that Aramco had to lower estimated sustainable production targets from 20-25 mbd in the early 1970s to 16mbd, and then saw even the 12m target being questioned as more senior experts were becoming convinced that it was too dangerous to produce at such high rates. “By late 1978, the realists at Aramco were predicting that even a rate of 12 mbd begun in 1985 would lead to declining production by 2000 to 2005.” 

The same report also stated that the owners of Aramco had reached a conclusion by 1979 “that the prognosis for future discoveries in Saudi Arabia is uncertain”. 

This 1979 report received no media coverage and key papers associated with it were locked away from public view for the next 25 years, asserts Simmons, years during which the entire world grew more and more convinced that Middle East oilfields were so prolific that they could be produced at virtually any rate through the first quarter of the 21st century. 

So what happens next? “When this desert twilight arrives, the world faces an energy future and, in turn, an economic future, far different from the one that all current forecasts and human expectations assume. The need to begin creating an energy blueprint for a world that has passed peak oil output is so urgent …” says Simmons. 

Such planning must begin “by realistically determining the long-term price of oil needed to maintain shrinking supplies at an adequate level for as long as necessary … massive investments are required to keep the current system working, albeit with a steadily decreasing amount of oil.” He calls this Plan B – a series of bridges to buy time.

But the ultimate solution “involves a transition to a new form or forms of energy that do not now exist.” (This does not mean hydrogen or solar or wind energy, he states, for they now work technically if not economically.) This he calls Plan C. 

“Creating a genuine new form of energy is by no means a simple task … But crises have an amazing way of jump-starting human ingenuity, and the need for some new form of energy could soon become critical … Accomplishing a Plan C for global energy might be the most daunting task the world has ever tackled.” 

Contact: Bill Box