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.

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 wont 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 doesnt account for the decline in the existing production base. The annual rate of decline of existing fieldsthere arent good data on thisis around 5 percent. If we take that into account, even adding 16.4 million bpd by 2010 doesnt 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 cant 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 theres a strong possibility that 10 years from now, well be producing 75 million bpd, down from about 85 million bpd today. That doesnt mean that weve run out. But it is a cataclysmic event unless we gear up and understand what its 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 50,000 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, anditis down to around 40,000 bpd. When I talk about production collapse, Im not talking about a drop of 5 or 10 percent.

FP: Youve 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: Theyve 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 theyve been a reliable supplier of oil for 70 years. My view is that its 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, youd use between 3 to 10 times less energy. If you put them on a marine vessel, its 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 its better to have a lot of people working at the same site, even though its 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: Its 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 doesnt solve the larger problem, but its 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, Kashagan,is so unattractive that three of the major players have bailed on it. Its 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 north of$40 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 dont know the depletion rate of Angolas old base of production, which is about 900,000 bpd, theres a chance that all of Angolas 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, thats an honest answer. The countries that havent yet built a society that needs an exponential amount of oil are in the best shape. Around 30 years ago, around half the world didnt really use oil. And now look, cities like Hanoi have millions of motorcycles they didnt have five years ago. Weve 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 Ive 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? Its so painful that you go into denial that theyre getting really old.

Correction: This pieceoriginally hadthe Brent Field’s oiloutputat around 30,000 bpd,Oman’s Yibal fieldat 80,000 bpd in 2003, andthecost estimateon the Kashaganprojectat $60 billion.

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).

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