Peak Oil News - Water, Water Everywhere (but not a drop to drink)

Excerpt: I will never believe Mike Lynch again because he just makes up
his own facts.

To which I would add... Nice grammar Mike!
aramcoexpats.com

original article

Water, Water Everywhere (but not a drop to drink)
Author: Michael C. Lynch, President, Director Petroleum Services February 27, 2004 - Released: 3/6/2004

GLOBAL Petroleum SEER Alert:
This week saw a most unusual spectacle, resulting in a spate of news articles that may be difficult for the uninitiated to understand. Matt Simmons, an investment banker based in Houston and a longtime oil and gas price bull, presented an extremely alarmist view of Saudi Arabia’s oil production capacity and was rebutted by two officials from Saudi Aramco, which historically has been extremely reticent to release any details of its operations. The arguments presented are interesting not for their content but for the nature of the debate (reliance on inference instead of analysis) and the provision of data from Saudi Aramco about their operations.

Much of the work done by Matt Simmons in the past few years on global oil and gas has relied heavily on inference, suspicion, and concerns while containing little or no real data. Yet, he claims that his new report is based primarily on readings of nearly 200 technical papers published by Saudi engineers and various publications of the Society of petroleum engineers (SPE). Although there is no reason to doubt this, the nature of the information he has collected must be questioned. A quick perusal of the draft report shows that there are virtually no tables or diagrams relating to Saudi oil fields, and the only hard information consist of scattered numbers, anecdotes and facts. Few if any are presented in any type of context.

(Much of his presentation on Tuesday followed a similar pattern, with lots of general remarks about the world oil industry and the importance of Saudi Arabia therein, but instead of providing information supporting his concerns, he tended to provide leading questions. For example, he mentioned a visit to Saudi Arabia and the view of some of their large petroleum installations, adding “Where is the extra capacity hiding?” The implication is that the extra capacity should have been readily perceptible to his tour group, and his failure to notice it implies that it might not exist.)

The primary concerns he raised were as follows:
Saudi production comes from a few old oil fields;
The Saudis rely on far fewer wells to produce more oil than the US and Russia do;
Over time, the problems described in the technical papers appear to worsen;
The error of the easy oil appears to be near nearly over some call;
Vertical wells are obsolete and no longer used;
The Saudi’s rely on MRC1 wells, which caused production in Oman’s Yibal field to collapse;
The Saudis have only found the few relatively large oilfields in recent decades;
The big five oilfields account for 90% of production and all use water drive;
If BPs 1975 estimates of the Saudi field reserves are correct, then Ghawar has produced 90% of its oil;
Saudi Arabia is now intensively explored;
85 of its oil and gas fields are untested; and
Abqaiq and Berri are near the end of their production.
He added a number of ‘observations’ about oil production, including “oil passed over is gone forever” and “technology accelerates the production in existing fields but doesn’t seem to add two recoverable reserves”. Both of these statements are at best questionable.

His conclusions from this were quite startling: Saudi Arabia is leaving a lot of oil in bypassed pockets, the remaining oil deposits will be smaller and harder to find and produce, capital expenditures in Saudi Arabia will soar, and within two to three years we will know if world oil production has peaked. He also remarked that he expects reserve write-offs to be widespread, largely representing companies thinking that new technologies, like MRC, would increase reserves but that this is not the case.

Two officials from Saudi Aramco presented a detailed look at the situation in Saudi Arabia (Nansen Saleri, Manager of Reservoir Management and Mahmoud Abdul-Baqi). Although they were not directly responding to Matt’s arguments, they contradicted a number of things that he said and explained away virtually all of his concerns. The primary points included the fact that Saudi reserves are, in fact, the very conservatively estimated, with proved reserves been more even conservatively estimated then called for by the definitions created by professional organizations(SPE, AAPG, WPC), which are relied on by Western companies. Saudi depletion rates are quite low, even when broken down by field and subfield, running at about 2% or so.

Background
The genesis of this meeting was a draft report which Matt Simmons has been circulating describing what he calls nine months of research into the technical aspects of Saudi oil production. He is currently revising the draft in response to comments, and is seeking a publisher (or hasn’t decided on one yet). Matt is a well-known pessimist when it comes to the ability of the industry to meet global oil and gas demand, and has spent over a decade arguing that the rental rates for drilling rigs are too low, which will lead to tighter markets. (Drilling companies are most of his primary clients.)

Some years ago, a detailed report by his company described the rising depletion rate in shallow water natural gas fields in the US Gulf of Mexico. Based on this, he correctly called the recent tightening of the US gas market, which has boosted his credibility quite a bit. But since then, he has expressed concern about global oil and gas supplies without publishing detailed research to back it up. He has also been known for making extreme predictions verbally while being much more cautious in writing.

(Apparently, the New York Times was preparing a story on this issue based on Matt Simmons’ new report, and decided to publish the story before the Washington seminar, in order to preempt other members of the press. The follow-up story backtracked somewhat by presenting at least some of the Saudi rebuttal.)

The elephant labored mightily but brought forth a mouse
Much of the work done by Matt Simmons in the past few years on global oil and gas has relied heavily on inference, suspicion, and concerns while containing little or no real data. Yet, he claims that his new report is based primarily on readings of nearly 200 technical papers published by Saudi engineers and various publications of the Society of petroleum engineers (SPE). Although there is no reason to doubt this, the nature of the information he has collected must be questioned. A quick perusal of the draft report shows that there are virtually no tables or diagrams relating to Saudi oil fields, and the only hard information consist of scattered numbers, anecdotes and facts. Few if any are presented in any type of context.

(Much of his presentation on Tuesday followed a similar pattern, with lots of general remarks about the world oil industry and the importance of Saudi Arabia therein, but instead of providing information supporting his concerns, he tended to provide leading questions. For example, he mentioned a visit to Saudi Arabia and the view of some of their large petroleum installations, adding “Where is the extra capacity hiding?” The implication is that the extra capacity should have been readily perceptible to his tour group, and his failure to notice it implies that it might not exist.)

The primary concerns he raised were as follows:
Saudi production comes from a few old oil fields;
The Saudis rely on far fewer wells to produce more oil than the US and Russia do;
Over time, the problems described in the technical papers appear to worsen;
The error of the easy oil appears to be near nearly over some call;
Vertical wells are obsolete and no longer used;
The Saudi’s rely on MRC1 wells, which caused production in Oman’s Yibal field to collapse;
The Saudis have only found the few relatively large oilfields in recent decades;
The big five oilfields account for 90% of production and all use water drive;
If BPs 1975 estimates of the Saudi field reserves are correct, then Ghawar has produced 90% of its oil;
Saudi Arabia is now intensively explored;
85 of its oil and gas fields are untested; and
Abqaiq and Berri are near the end of their production.
He added a number of ‘observations’ about oil production, including “oil passed over is gone forever” and “technology accelerates the production in existing fields but doesn’t seem to add two recoverable reserves”. Both of these statements are at best questionable.

His conclusions from this were quite startling: Saudi Arabia is leaving a lot of oil in bypassed pockets, the remaining oil deposits will be smaller and harder to find and produce, capital expenditures in Saudi Arabia will soar, and within two to three years we will know if world oil production has peaked. He also remarked that he expects reserve write-offs to be widespread, largely representing companies thinking that new technologies, like MRC, would increase reserves but that this is not the case.

Two officials from Saudi Aramco presented a detailed look at the situation in Saudi Arabia (Nansen Saleri, Manager of Reservoir Management and Mahmoud Abdul-Baqi). Although they were not directly responding to Matt’s arguments, they contradicted a number of things that he said and explained away virtually all of his concerns. The primary points included the fact that Saudi reserves are, in fact, the very conservatively estimated, with proved reserves been more even conservatively estimated then called for by the definitions created by professional organizations(SPE, AAPG, WPC), which are relied on by Western companies. Saudi depletion rates are quite low, even when broken down by field and subfield, running at about 2% or so.

The production practices that so concerned that Simmons, such as the use of MRC Wells, reflected the behavior of a nonprofit maximizing organization, i.e., a state oil company. The Saudis are attempting to maximize recovery, not value in their fields. They are willing to produce more slowly and with the best possible technology in virtually every instance, even if that means not producing it economically optimal rates. That is to say, the net present value of production in the field is reduced by some other practices, even though the ultimate recovery of physical oil is maximized. The Saudis pointed out that the Yibal field in Oman suffered from the use of the MRC Wells, specifically because the producing company had not done the type of expensive geological modeling which is now common practice in Saudi Arabia.

Perhaps more important, the Saudis refuted several of his interpretations (similar to arguments I have made in the past). The Saudis do not produce many of their fields because they have abundant producing capacity without them for example. Also, Saudi Arabia is not intensively explored and has large areas with petroleum potential that are virtually undrilled. (Matt responded that he was referring to aerial magnetic surveys.) it was also pointed out that Matt’s reference to 1975 field reserve estimates were not relevant: the fields he referred to had already produced more than was estimated as proved reserves in the 1970s, reflecting reserve growth from better reservoir modeling, more drilling, and the use of advanced technology. (Indeed, in responding to a remark about the so-called ‘spurious reserve additions’ in the 1980s, when many OPEC members raised their reported reserve levels without explanation, they responded that they had gone years without revising them even as their own expectations of recovery increased, and had merely decided the time was right to report them more accurately.)

The argument that capital expenditures would be a constraint was countered by noting that costs are, by the most liberal estimate, under two dollars a barrel and more accurately about $.50 a barrel. The Saudi’s admitted to the use of water flooding in their fields but pointed out that the water cut after four decades at Ghawar was below 40%, had been stable for five years, and was far below what Western companies often produce in their fields. The New York Times Article The article in February 24 New York Times is a fascinating and sweeping review of water are referred to as the tired Saudi oil fields.

The only problem is, most of the article focuses on the need for more Saudi oil and a variety of General comments about the difficulties of extracting that oil. These include:

It is becoming more expensive to extract Saudi oil;
A former Aramco executive stated that the world should not expect more than 12 million barrels a day from the Saudis for a future years; and Ghawar was pushed too hard in the past;
An IEA official worries that the Saudis cannot add capacity without foreign investment;
Foreign investment faces opposition inside Saudi Arabia;
The natural gas deal offered to foreign investors collapsed last year;
Oilfield development requires years of planning and work;
Saudis are unsure about guaranteeing long-run world oil supply;
A Saudi states that raising production to 12 million barrels a day would wreak havoc within a decade by causing damage to the oil fields;
A Saudi leading geologists says there are natural declines in global capacity; outsiders for year his retirement would hinder Saudi efforts to attract foreign message;
Ghawar is becoming costly to maintain, with an 8 percent decline rate and decline requires several hundred thousand barrels of new capacity every year;
Some are questioning the ability of the Company to produce 800,000 barrels a day from the fields Qatif and Abu Safah, saying the goals are unrealistic and that costs are higher than anticipated, including difficulties with hydrogen sulfide, making development “particularly challenging”.
The use of submersible pumps at Abu Safah is ill advised.
The Saudis naturally did not address these issues at the seminar, not having seen the article much in advance, but complained privately about the reporter’s heavy reliance on an anonymous Saudi sources and Ed Price, who had retired 15 years earlier. Apparently, the reference to problems with the waterflood at Ghawar referred to difficulties in the 1980s, which the Saudis feel they have long since overcome.

Many of the other comments appear to be either taken out of context or not really relevant to the issue of Saudi field productivity. It is hardly noteworthy if the Saudi official warned that the world should not necessarily rely on Saudi Arabia to guarantee its long-term oil supply needs. Also, complaints about the difficulties of raising production are obviously not to be taken too seriously, since they are completely non-quantitative. When they say the fields are particularly challenging or expensive to develop they are almost certainly making references to their aggregate capital needs, which can be hundreds of millions of dollars, given the scale of these developments.

And again, the comments about the need for foreign investment is simply an old canard. The salaries have operated their fields for quarter of the century without needing new investment, given that their costs are a tiny fraction of the price they receive for the oil. Any concerns expressed about inadequate capital usually relate to oil company executives complaining about the governments allocation of funds to them. The Saudis did not pursue an opening of their oil fields because they did not need either capital or technology from outside. The offering of natural gas projects occurred primarily because the Saudis were looking for investment in a lower return sector of its industry (especially where electric power generation was included, given low electricity prices). That the US majors did not reach agreement with the Saudis reflected the poor rates of return offered, not the lack of gas reserves.

The reference to “submersible pumps” is an odd one, and appears to be a case where the reporter is mixing factors. The Soviets did not, to my knowledge, have submersible pumps and their field problems reflected excessive waterflooding. Submersible pumps can be an answer to a high water cut, reflecting an existing problem rather than the source of it. And the industry widely regards them as a valuable technology for raising recovery rates, not the source of technical difficulties.

Conclusions
There literally seems to be no evidence that the Saudi oil fields are facing any unusual challenges or that Saudi production will be constrained in the future by anything other than policy. All of the concerns appear to be instances where the most pessimistic interpretation has been chosen, such as fields not operating because of technical difficulties rather than weak demand. The use of vague language (“tired” fields, “challenges”) rather than specifics about efforts and costs indicate that this is one more instance of Malthusian bias.

Critic

An article by Mike Lynch:
http://www.aramcoexpats.com/ArticleDetail.asp?article=701

In this article Mike quotes Matt Simmons:
“Saudi Arabia is now intensively explored;”

To which Lynch counters:
“Also, Saudi Arabia is not intensively explored and has large
areas with petroleum potential that are virtually undrilled.”

Undrilled, yes, unexplored, definitely not! And the parts that
are undrilled are undrilled because intensive exploration has
shown that no oil exist in those parts. The exploration of Saudi
Arabia began in the 1930s and has been intensively
explored….over and over again since that time. Not one square
inch of Saudi Arabia is unexplored. In fact, other than the
lower 48 States it is probably the most intensively explored
patch of land on the planet.

I will never believe Mike Lynch again because he just makes up
his own facts.

Ron Patterson