Posted on 01/27/2006 5:23:10 PM PST by LouAvul
DAVOS, Switzerland (FORTUNE) - Be afraid. Be very afraid.
That's the message from two of the world's most successful investors on the topic of high oil prices. One of them, Hermitage Capital's Bill Browder, has outlined six scenarios that could take oil up to a downright terrifying $262 a barrel.
The other, billionaire investor George Soros, wouldn't make any specific predictions about prices. But as a legendary commodities player, it's worth paying heed to the words of the man who once took on the Bank of England -- and won. "I'm very worried about the supply-demand balance, which is very tight," Soros says.
"U.S. power and influence has declined precipitously because of Iraq and the war on terror and that creates an incentive for anyone who wants to make trouble to go ahead and make it." As an example, Soros pointed to the regime in Iran, which is heading towards a confrontation with the West over its nuclear power program and doesn't show any signs of compromising. "Iran is on a collision course and I have a difficulty seeing how such a collision can be avoided," he says.
Another emboldened troublemaker is Russian president Vladimir Putin, Soros said, citing Putin's recent decision to briefly shut the supply of natural gas to Ukraine. The only bit of optimism Soros could offer was that the next 12 months would be most dangerous in terms of any price shocks, because beginning in 2007 he predicts new oil supplies will come online.
(Excerpt) Read more at money.cnn.com ...
Absolutely so, if we choose to embargo the oil destined for China before it leaves the gulf, they are in no position to stop us. They have to play ball or suffer the consequences.
Yep. And by extension we can ensure they will not go after Taiwan, Japan or the Spratleys or try to intervine in North Korea should we end up in a shooting war with them. If they do, we cut off the flow.
Another view of Simmons that debunks his scaremongering:
http://www.resourceinvestor.com/pebble.asp?relid=13709
Jim Jarrell, a petroleum engineer and president of Calgary based buy-side research firm, Ross Smith Energy Group, has put himself in the way of an onrushing consensus.
Jarrell recently issued a report mockingly entitled,
“Another Day in the Desert: A Response to the Book, Twilight in the Desert”. It’s a powerful critique of the petro pessimism presented by the book’s author, Matthew Simmons.
...
Jarrell tackles three central issues that Simmons used to support his claim that Saudi Arabia is not the last best hope of oil gluttons - Are Saudi oil reserves grossly overstated?; Can Saudi production rates collapse? Are the Saudis exploring enough or not enough?
Reserves
Simmons said he found reason to believe that Saudi Aramco has been overbooking its reserves, mostly because the firm uses a probabilistic methodology. Jarrell says that an apples-for-apples comparison shows little difference in how the Saudis and SEC compliant firms measure and report reserves.
In fact, Jarrell says Saudi Aramco’s use of reservoir simulation adds another layer of high value analysis which is not followed in North America.
Simmons is taken to task for neglecting to mention that half of Saudi Aramco’s proved reserves are in the most elite category – proved developed. Jarrell says the Saudis reclassify proved developed reserves to a lower category when fields are taken off line, which American companies never do. Similarly, Saudi Aramco never takes advantage of SEC guidelines allowing “enhanced recovery upside” calculations that can grow reserves.
“Aramco’s practice probably results in annual positive revisions to proved developed reserves because the fields likely deliver better than forecast performance,” writes Jarrell.
Jarrell lashes Simmons for declaring a 1979 government report on the threat of a water breakthrough in the Ghawar field as fulfilled prophecy. Not so, he says, citing evidence after 1979 which showed that water cut was arrested and reversed by 1999 thanks to new technologies.
Similarly, Jarrell mercilessly unpacks Simmons’s assertion that Saudi Arabia’s fields are being over-produced with the risk of irreversible damage. Jarrell says the evidence shows the opposite.
Thanks to the introduction and proliferation of multilateral wells, the Saudis have raised the productivity of their wells and reduced the risk and impact of water cut. Jarrell says Simmons referenced a technical paper detailing the positive impacts of multilateral wells, but used it to draw an opposite conclusion to the evidence it contained.
Jarrell notes that new technology has had a beneficial impact on decline rates, adding: “The production-weighted average decline in Saudi reservoirs over the recent past is about two percent according to Dr. Saleri. In other words, only 200,000 bopd need to be added to maintain 10 million barrels per day production.”
Rather than being opaque about its fields, Jarrell says Saudi Aramco’s “SPE paper trail represents to us an unprecedented effort to characterize and address reservoir performance using state of the art methodologies.”
Jarrell unravels a series of critical technical facts that Simmons used to buttress his argument. Jarrell overturns Simmons on point after pointing, reaching exactly the opposite conclusion on the most important assertion by statement – that Saudi Arabia cannot increase oil production from here on.
Collapse
Simmons’s most provocative charge in Twilight was that all Saudia’s oil fields – the primary resources for global oil consumption – face imminent collapse through over-production.
Jarrell notes that the collapse of fields can be tied to a lack of knowledge about the reservoir; and most failures occur shortly after production commences. When a company is heavily dependent on just a few wells and experiences a field failure, the impact is amplified.
In the case of Saudi Arabia’s fields, there are hundreds of wells with decades of operating history. That lends itself to excellent reservoir control and accurate forecasting to maximize recovery from a field.
Jarrell highlights a number of errors, concluding: “we think none of the Saudi reservoirs is on the brink of collapse; on the contrary, they appear to enjoy a gradual and well-managed depletion.”
Exploration
Simmons wrote in Twilight that the Saudis had suffered appalling returns on their exploration efforts with the implication that what you see is what you get.
According to Saudi data, only 69 exploration wells have been drilled by in the country in the last decade. That is hardly a strenuous exploration effort and Jarrell attributes it to a lack of incentives with excess capacity and plenty of reserves banked.
“Why would they pour money into drilling new discoveries, when only 23 developed reservoirs out of 80 defined discoveries have provided them with adequate production capacity to meet market needs for more than 50 years? And even if, for argument’s sake, Saudi proved reserves are only half Aramco’s estimate, replacement at the current production rate would only be 2.6% - hardly a challenge,” Jarrell penned.
Jarrell notes that the Saudi’s have provided a comprehensive review of their production and exploration potential in the form of a presentation delivered to the Center for Strategic and International Studies on Feb. 24, 2004. Look for the presentation of Dr. Nansen Saleri, Manager of Reservoir Management for Saudi Aramco.
Peak Oil then?
Saudi Aramco says it can sustain production of 10-12 million barrels per day, and possibly 15 million bopd “well beyond 2054”.
That is presently in the range of 12% of current global demand. Saudia Arabia’s market share would fall by one point in 2020 if present production is sustained and world demand rises to forecast levels of 112-5 million bopd.
Since any reply I make would depend on sources you distrust, there is not point arguing. I take the authorities over the peak oil advocates who have been proven wrong based on their past history.
RE Kuwait, no arugment there. I would just point out that it is relatively unimportant if Kuwait's proven reserves are books at 100 years or 50 year of production, since as I've mentioned proven reserves have been up until now replenished by new finds and new technology over time. e.g. Saudi's proven reserves are today higher than ever. Their 'oil in place' resources are about 900 billion estimated, after having pumped 100 billion. When the Saudis pump another 100 billion, in about 25 years, their proven reserves will probably BE HIGHER THAN THEY ARE TODAY!
So, the meaningful news of a field's decline and reserves is realistic view of production rates going. The announcement doesnt closes off an avenue to production increases, a concern but not one that means the end of the field. They are still talking about pumping it at 1.7 mbd for another 40 years, about where they've been in recent years.
"Washington, DC- House Resources Committee Chairman Richard W. Pombo (R-CA) commended the Administration’s decision yesterday to open nearly 400,000 acres in the National Petroleum Reserve-Alaska (NPRA) for oil leasing and development. But Pombo also pointed out that production in just 2,000 acres of the Arctic National Wildlife Refuge (ANWR) would produce more than five times the amount of oil. "
Pombo is right.
Opposing ANWR is the nuttiest position one could possibly take in an era when oil exploration can be environmentally sound and oil is so pricey.
"original Constitutionalist"
The Constitution has been amendend to support an income tax.
How would a drop in demand for oil cause prices to go up for OPEC while at the same time we subsidize the rest of the world?
If the US taxed oil prices would go up. OPEC just does a cut off and world price goes up. The only way to stick it to the mulahs is to produce the marginal domestic barrel that breaks the back of the market. If you understood margins you would realize that does not mean replace.
Excerpts:
More than half of Saudi Arabia's oil comes from one giant field, Ghawar, the largest ever discovered, and the health of this field is now in serious doubt, after decades of water injection to maintain pressure.
Simmons noted that "in an era of poor energy data, OPEC is a total vacuum," but his latest work on Saudi Arabia does come at a time, when despite more than two decades of official secrecy, questions are being asked about Middle East capacity and reserves,especially since the surprise OPEC cut in production in February 2004.
ASPO has recently analysed the extraordinary OPEC reserve revisions of the 1980s,which saw volumes leap from 353.6 billion barrels in 1982 to 643.5 billion in 1990 despite no new large discoveries. Two different ASPO studies conclude that reservesare somewhere between 100 and 300 billion barrels smaller than officially claimed.Evidence from widespread and dramatic falls in well productivity suggests that reserves may now be about what they were stated to be in 1982.
The 'Big Five' (Ghawar, Safaniyah,Hanifa, Khafji and Shuaiba) giant oil fields, all found by the mid 1960s, produced 90% of all Saudi oil in the last half century, but now, Simmons said, they were only being kept going by massive water injection, so that the "sweep of easy conventional oil flow is ending."
This may be most alarmingly true for Ghawar. According to Saudi Aramco, Ghawar s only 48% depleted, though they do admit that the northern and most productive region is 60% down.
Another key cause for Simmons' concern is the increasing use of MRC wells (Maximum Reservoir Contact) or "bottle brush" wells, which he says "now anchor future oil production". These wells send out many offshoots into the reservoir: "in simple terms, they hide from top side gas and bottom end water". They can certainly produce oil more quickly, especially from "the last thinning columns of easy oil", but hey rarely increase the total yield, and invariably hasten decline and increase its rate.
This is the same technology that led to the infamous production collapse of Oman's Yibal field, which "after 30 years of water injection pressure maintenance, embraced horizontal drills in 1990, then peaked in 1997 [at 225,000 b/d] and saw production fall by 65% by 2001. The collapse was a total surprise". In 2004, production has fallen by nother 50%. Yibal constituted almost a quarter of Oman's production in 1997.
I saw the article in something titled "Geopolitics of Oil." One of the editors [surprise surprise] was Michael Lynch.
Jarrell tackles three central issues that Simmons used to support his claim that Saudi Arabia is not the last best hope of oil gluttons - Are Saudi oil reserves grossly overstated?; Can Saudi production rates collapse? Are the Saudis exploring enough or not enough?
Reserves
Simmons said he found reason to believe that Saudi Aramco has been overbooking its reserves, mostly because the firm uses a probabilistic methodology. Jarrell says that an apples-for-apples comparison shows little difference in how the Saudis and SEC compliant firms measure and report reserves."
I have not read the book Twilight in the Desert. The way I read the presentations on the Simmons & Company website, his main issue is that most of the reserves the Saudis claim were drilled and defined back when Saudi Aramco was run by foreign oil companies. The reserve increases that occurred during the quota wars were not based on finding vast new reservoirs.
Jarrell bases this statement about just how conservative the Saudi methods are on a presentation made by the Saudis. Once again if you want to believe -- you can.
"In fact, Jarrell says Saudi Aramco’s use of reservoir simulation adds another layer of high value analysis which is not followed in North America".
Huh? The point is not whether the Saudis know how thin the oil column at Ghawar [just and example -- a couple of other Saudi super giants are probably more depleted than Ghawar. The point is that we don't know, and given a well defined oil water contact, when an MRC well waters out the water cut can get very high very fast.
Simmons is taken to task for neglecting to mention that half of Saudi Aramco’s proved reserves are in the most elite category – proved developed.
Yes in Ghawar and five or six other aging super giant fields that all presumably got quota war reserves added.
"Jarrell says the Saudis reclassify proved developed reserves to a lower category when fields are taken off line, which American companies never do."
Probably correct.
"Saudi Aramco never takes advantage of SEC guidelines allowing “enhanced recovery upside” calculations that can grow reserves.
Also probably true, but not really meaningful. MRC wells and massive water injection to maintain reservoir pressure in light and medium oil high permiability high porosity reservoirs is about as good as it gets. Once the reservoir waters out, there are some high spots that can still be drilled. In addition, high volume pumps can be installed to produce vast quantities of fluid with water cuts ranging from a few percent to a fraction of a percent [not as bad as it sounds in that a lot of oil & money can still be made -- but the total production from the field drops off dramatically.] This is what Simmons sees as the ultimate fate of Ghawar. How soon? He does not know, but he does not believe the world knows.
BTW for the sake of intellectual honesty, some or all of the Saudi super giant may be "stacked pays." If that is the case, new virgin formations are there to be produced. However, I have never seen anyone assert that these other potential zones have characteristics anything like the sweet spot in the Arab D.
“Aramco’s practice probably results in annual positive revisions to proved developed reserves because the fields likely deliver better than forecast performance,” writes Jarrell.
"Probably"? Why not admit that he does not know how proved developed reserves keep growing.
"Jarrell lashes Simmons for declaring a 1979 government report on the threat of a water breakthrough in the Ghawar field as fulfilled prophecy. Not so, he says, citing evidence after 1979 which showed that water cut was arrested and reversed by 1999 thanks to new technologies."
Water cut increases were addressed by new technology. A.k.a. Maximum Reservoir Contact wells. Simmons points repeatedly to MRCs as a risk factor for steep delines somewhere down the time line. Far from constituting a rebuttal this is one of Simmons key points.
Similarly, Jarrell mercilessly unpacks Simmons’s assertion that Saudi Arabia’s fields are being over-produced with the risk of irreversible damage. Jarrell says the evidence shows the opposite.
Thanks to the introduction and proliferation of multilateral wells, the Saudis have raised the productivity of their wells and reduced the risk and impact of water cut. Jarrell says Simmons referenced a technical paper detailing the positive impacts of multilateral wells, but used it to draw an opposite conclusion to the evidence it contained.
The Saudis have raised the productivity of their wells and probably raised the ultimate recover somewhat. As to the risk, when these wells water out there is little secondary recovery. In the primary production zones, there is only the process of trading electricity for oil through the use of high volume [usually submersible] pumps. As previously noted, these field may also have stacked pays that would provide some production but at greatly reduced rates.
Jarrell notes that new technology has had a beneficial impact on decline rates, adding: “The production-weighted average decline in Saudi reservoirs over the recent past is about two percent according to Dr. Saleri. In other words, only 200,000 bopd need to be added to maintain 10 million barrels per day production.”
True in wonderful reservoirs such as Ghawar ... until the oil water contact rises to the level of the laterals in the MRC wells. At that point you won't even see it comming --- see my comments above.
"Rather than being opaque about its fields, Jarrell says Saudi Aramco’s “SPE paper trail represents to us an unprecedented effort to characterize and address reservoir performance using state of the art methodologies.”
"Jarrell unravels a series of critical technical facts that Simmons used to buttress his argument. Jarrell overturns Simmons on point after pointing, reaching exactly the opposite conclusion on the most important assertion by statement – that Saudi Arabia cannot increase oil production from here on.
Refer to my tag line.
Collapse
Simmons’s most provocative charge in Twilight was that all Saudia’s oil fields – the primary resources for global oil consumption – face imminent collapse through over-production.
Jarrell notes that the collapse of fields can be tied to a lack of knowledge about the reservoir; and most failures occur shortly after production commences. When a company is heavily dependent on just a few wells and experiences a field failure, the impact is amplified.
Take a look at what is happening in the North Sea. None of those western oil companies understood those reservoirs did they? The economics of depletion and production are different in high cost / offshore areas. That does not preclude a collapse in Ghawar. BTW, from my perspective a "collapse" might be 50 percent over 5 years in a field which had previously been almost flat and where the experts such as Jarrell had been predicting that it would somehow remain flat for a very long time. BTW, if the oil columns are thick enough he may be right. On the other hand if the oil columns were that thick then why were water cuts getting out of hand prior to the switch over to MRC wells?
"In the case of Saudi Arabia’s fields, there are hundreds of wells with decades of operating history. That lends itself to excellent reservoir control and accurate forecasting to maximize recovery from a field.
True. The lessons learned were that MRC wells were needed to keep the rising oil water contact from coning water. Many of the hundreds of wells cited are now injection wells having fully watered out. Some of the others have been abandoned in favor of MRCs to keep the oil water contact flat and the water cut down. Once again, that is the magic technology behind the reversal in the once rising water cut.
Jarrell highlights a number of errors, concluding: “we think none of the Saudi reservoirs is on the brink of collapse; on the contrary, they appear to enjoy a gradual and well-managed depletion.”
Jarrell misses the point perhaps intentionally [because he is being paid to.] Simmons weak point is that he does not know. He admits it. He challenges those with an opposing theory to admit that they don't know or show the data. How thin is the oil column in Ghawar?
Exploration
Simmons wrote in Twilight that the Saudis had suffered appalling returns on their exploration efforts with the implication that what you see is what you get.
According to Saudi data, only 69 exploration wells have been drilled by in the country in the last decade. That is hardly a strenuous exploration effort and Jarrell attributes it to a lack of incentives with excess capacity and plenty of reserves banked.
Jarrell can attribute it to anything he wants. Saudi Arabia has not found an elephant in a long time. They have explored offshore. Probably not where you go if there are massive structures onshore that you have not drilled.
"“Why would they pour money into drilling new discoveries, when only 23 developed reservoirs out of 80 defined discoveries have provided them with adequate production capacity to meet market needs for more than 50 years? And even if, for argument’s sake, Saudi proved reserves are only half Aramco’s estimate, replacement at the current production rate would only be 2.6% - hardly a challenge,” Jarrell penned.
"Adequate production capacity to meet market needs for more than 50 years?" Where did he come up with this whopper. If you take that as a given, then "yes" Simmons theory is wrong.
The comment "replacement at the current production rate would only be 2.6% - hardly a challenge" ignores the steps that are being taken to maintain that sort of a decline rate. Once again MRC wells and massive water injection. BTW, the Saudis are scrambling for addition rigs to drill these wells that they supposedly do not need. Jarrell is insulting the readers intelligence with that comment.
Jarrell notes that the Saudi’s have provided a comprehensive review of their production and exploration potential in the form of a presentation delivered to the Center for Strategic and International Studies on Feb. 24, 2004. Look for the presentation of Dr. Nansen Saleri, Manager of Reservoir Management for Saudi Aramco.
I haven't seen it. Simmons has. Simmons may be wrong. The Saudis may be feeding the world a line.
Peak Oil then?
Saudi Aramco says it can sustain production of 10-12 million barrels per day, and possibly 15 million bopd “well beyond 2054”.
That is presently in the range of 12% of current global demand. Saudia Arabia’s market share would fall by one point in 2020 if present production is sustained and world demand rises to forecast levels of 112-5 million bopd.
Yikes. Saudi Arabia is every optimist's plug producer. For production to rise over the long run Saudi production will need to rise. 10 to 15 barrels per day out of Saudi Arabia will not cut it.
I am not familiar with Jarrell, but if Lynch thought that this was a rebuttal of Simmons, he must be getting a little desperate.
For the record we should:
(i) drill ANWR offshore California, Florida Atlantic Coast other prospective domestic locations; (ii) build nukes; (iii) hold our noses and promote coal and where appropriate shale oil production; and (iv) finally and perhaps most importantly stop taking the word of bureaucrats [especially Arab bureaucrats] about oil supplies at face value.
I find the prospect of $262 a barrel oil somewhat ludicrous in any case. Even if the world production were cut to 1/4, the price would not rise 4x. It might spike that high, but the collapse of economies around the world would cut demand so the price would rise to maybe 2x, that is, $130. That is as far as it would go longterm since the alternatives would be brought online as quickly as possible, 5-7 years, and the price of oil would then be held to $130 by lack of demand for expensive oil. Also, the possibility of general war would kick in at that point and there would be next to zero civilian oil demand. All oil aside from necessary civilian use would go to the military.
Yes you do take the "authorities" words at face value. "Yes" peak oil advocates have been wrong, but you seem to keep ignoring their hits [U.S. ex North Slope - domestic natural gas; North Sea although the jury is still out on that one] and the the misses of such organizations as the USGS and CERA.
"RE Kuwait, no argument there. I would just point out that it is relatively unimportant if Kuwait's proven reserves are books at 100 years or 50 year of production."
Kuwait missing reserves by 50 percent is unimportant!!! Yikes. As I noted in another post on this thread, we knew a lot more about the state of Burgan than Ghawar ... and now we know still more about Burgan.
Agreed in principle, although where the equilibrium point based on demand destruction might be I would not venture a guess. Too bad this thread got revved up initially based on the comments of that goof ball Soros.
Refinery capacity would cease to be the talking point it is now when demand is halved. Most homes here use heating oil as primary building heat, and even at present prices you can hear the screams of anguish for half a mile when the oil truck comes up the driveway. Heating oil use would be difficult to reduce, but recreational driving and multiple trips each day could be curtailed considerably.
And I think that was a mistake, in that this allowed the federal govt to expand beyond it's originally-envisioned bounds.
Around 1913, three things happened: the 16th Amendment was passed (allowing an income tax, and allowing the federal government an unbounded source of revenue), the 17th Amendment was also passed (direct election of senators eliminated the last real check on federal expansion. Previously, senators were appointed by state legislatures, and had the job of ensuring that the federal government did not infringe on state powers), and the Federal Reserve was created (giving us our Federal Reserve Notes, backed by nothing)
The following year, WWI started, the US entered the war, and the expansion of the federal government proceded
How in the world can I argue with that!?!??!
The break-even point for getting oil from tar sand is estimated around $30/bbl, oil shale is $40/bbl. Coal can be converted to gasoline as well. Why don't we see it happening more? Because for all of these, the big cost is up-front capital cost, and investors are not going to put up the money unless they are sure that oil prices will stay stably above $40/bbl. And we know that OPEC will crash the price of oil (bankrupting the operations) as soon as it sees investment occuring heavily.
So a variable tariff that sets a floor of $40/bbl would allow investors to predict a demand for oil substitutes at a price point that makes investment worthwhile
I remember doing some calculations a month ago, where it seemed like at current heating oil prices it was more cost effective to get a few electric heaters to supplement the main home heater
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