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http://www.financialsense.com/transcriptions/Simmons.html"JIM PUPLAVA: Joining me on the program is Matthew Simmons. He’s Chairman and Chief Executive Officer of Simmons & Company International, a Houston-based investment bank that specializes in the energy industry. Mr. Simmons serves on the boards of Brown-Forman Corporation, The Atlantic Council of The United States, he’s also a member of the National Petroleum Council and The Council of Foreign Relations. He has an MBA from Harvard University. And he’s here to discuss his new book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. Matt, I want to start out the discussion from the back of your book in Appendix B. Several years ago you did a study of the world’s major oil fields. What did you find? MATTHEW SIMMONS: It was really an incredible exercise of trying to collect the data no one had ever actually thought of doing before, and that’s, what are the top oil fields in the world – field by field. And the background for me doing this is that I’ve participated 2 years in a row in an energy supply workshop, conducted by the energy analysts of the CIA in Washington, where they got about 10 of the best oil experts together, and we’d spend a day doing a discussion of all the key countries, and how much oil capacity they had in place over the course of the coming 3 years. I sat there listening aghast at all of these experts with their laptops that kept looking at their supply models, and it’s how China will be producing 3,217,000 barrels/day this year, and 3,281,000 barrels/day. And I basically said: “how do you all even know that. What are the 3 or 4 top fields in China?” And no one had any answers. So I decided it would be interesting and educational to see if you could actually put together a list of the top 20 oil fields by name. And I thought somebody must have done this before, and the more I dug the more I realized that no one ever had. So I basically decided – arbitrarily – 100,000 barrels per day production was my cutoff of what constituted a giant oil field and all Fall of 2000, I believe this was, I basically took data from various areas and kept trying to hone in on the total list, and I decided once I got it done, I would circulate it widely to the 4 or 5 or 6 hundred people who really ought to know the areas a lot better, and that would flush out the real data. What I came up with was finding that there are about 120 oil fields in the world that still produced over 100,000 bpd, and that they collectively were 49% of the world’s oil supply. What I also found is that the top 14 fields that still produce over 500,000 bpd each, were 20% of the world’s oil supply, and on average they were 53 years old. The next thing I found was that in the Middle East you had basically, somewhere between 3-5 oil fields in each of the major Middle East oil producers that made up about 90% of their supply – and until I did that I had just assumed the Middle East had hundreds of oil fields – and all these oil fields were old. And then what I found was – because we made it clear that anyone who wanted a copy could get one, but the caveat was that if you have any better information, let me know – I probably shipped over a thousand of these copies out to people and I had about 5 responses of “here’s a field you missed, here’s a field you misspelled or here’s a field you said it was producing X, and I believe it’s probably producing Y.” Only about 5 responses, out of over a thousand people who got this. What I got from hundreds of people was “this is amazing, I’ve never thought about this before.” And these aren’t just sort of random people, these are people that are all passionate energy analysts. So that gave me the background, when I finally had my only trip I’ve ever taken to Saudi Arabia. I knew ahead of time that they had these 5 key fields that must still be producing 90% of their oil, and it was that knowledge and data that allowed me to just peer into presentations we were having, so that I came away saying, “you know I really wonder whether in fact we’re sitting on an illusion that Saudia Arabia has all this vast amount of producible oil.” And I also then had an idea of what issues I should start trying to research, and within months I had discovered this phenomenal database of technical papers at the Society of Petroleum Engineers, that I spent all Summer, two years ago in Maine, plowing through, and it was at the end of that exercise that I decided I was going to write a book. <5:24>
JIM: It’s incredible, because every energy supply model starts with the assumption that Saudi oil is plentiful. It’s inexpensive to produce and supply can expand to meet demand. I mean, whether you’re looking at the IEA or the USGS, that’s not necessarily the case.
MATT: Yes. What’s interesting is that we’ve based all of this assumption on no data. <5:46>
JIM: That is amazing!
MATT: I mean, it would be like someone assuming General Electric could basically grow by 30% per annum, and that by 20 years from now they’d have a company that was bigger than the economy of the United States, because they needed to do that to support their stock price, and no one ever saying, “Wait a sec, how could a single company ever grow beyond the economy of the United States.” But this is far more important in the unforeseen consequences: that we’ve effectively built a world economy on the illusion that Middle East oil would last forever at inexpensive cost. <6:22>
JIM: You know last year, Matt, the Saudi Oil Minister announced they could expand their oil reserves by 77% to 461 billion barrels. Is that a political statement, because their doesn’t seem to be – from looking at your data in terms of how their reserves were compiled – where do they get that number?
MATT: They assume it! What’s really astonishing is that I had a suspicion 2 years ago, when I’d finished going through 150 of these technical papers, that I might well have done an exercise no one in the world had ever done before, and that’s piece together these individual study-area problems and put them together until you had basically done a forensic pathology of their oil system. And I wondered whether anyone in Saudi Arabia had ever actually done the same amount of research. And now it turns out, I was apparently the first person in the world to ever actually challenge the assumptions of the unlimited amount of their oil supplies. And it hit a nerve I would never ever have expected because I wasn’t a household name – I think I am today in Saudi Arabia – I was just an investment banker in Houston. It was the same sort of reaction if someone went to the Vatican and said, “I hate to tell you all this, but there really isn’t a God, and there isn’t a Pope.” And out of that came a massive public relations campaign by the senior management of Saudi Aramco, the state oil company, and the Petroleum Ministry that effectively has said, “we can produce 10 million or 12 million or 15 million barrels a day for 50 to 100 years. Our 260 billion barrels of proven reserves, there’s this conservative number we can easily add another 200 billion, and we can still add another 200 billion we have yet to discover”. And I actually think that they believe that, which is far more dangerous than “it’s just a political statement.” <8:18>
JIM: Now the thesis of your book is Saudi production is very near its peak...
MATT: I decided that this book was going to be so controversial that I really tried my darnedest to avoid a bunch of very specific conclusions that people could shoot holes in them: “how would you know that?” But I’ve had enough time now to reflect on everything I wrote about, and also feedback from lots of technical people that said, “you know what, what you triggered in the memory of what was going on in the 70s”, and etc, etc. I think it’s highly likely that they’ve actually exceeded sustainable peak production already. And I think at the current rates they are producing these old fields, each of the fields risks entering into a rapid production collapse.<9:03>
JIM: If this is indeed the case then, by assumption, we have to assume global peak is at hand then.
MATT: Absolutely. Once it’s clear that Saudi Arabia cannot sustain increases in its production on a sustained basis, then in my opinion, with a certainty of 99.9% the world has actually passed sustainable peak production. Because one of the reasons all of these supply models always have Saudi Arabia producing 25 million bpd by 2025 is that there isn’t another country on earth that has the potential to raise their production more than 1 or 2 million bpd at best. <9:41>
JIM: Why is it, do you think, there’s only been 2 groups that have been concerned with this: you have the oil company executives, because they are obviously looking around the globe and they’re not finding major elephants on a yearly basis; and then we’ve had environmentalists who have also been concerned about this. Those have been the main 2 groups, but aside from that, you have a third group, the economists, who basically just say, “as the prices of oil goes up the production goes up to meet it.”
MATT: Yes, and they say it with a passion and a vengeance. What I’ve also found so interesting is that the concept of peak oil which is finally getting some serious traction as a discussion item gets scorned by economists – energy economists. What they hear is the world is running out of oil, they don’t understand the concept of peak oil. And I continue to remind people that the difference between oil supply peaking and running out of oil is as profound as someone saying, “I’m getting a little bit hungry,” and someone saying, “I have about 2 more minutes to live before I starve to death.” And we will never run out of oil, in our lifetime, our children’s lifetime, our grandchildren’s lifetime. But by 2030 we could easily have a world that can only produce 10 or 15 or 20 million barrels per day, and the shortfall from what we thought we were going to produce is only a modest 100 million barrels per day. So this is really a major, major, major global issue. <11:10>
JIM: It’s not only a major issue, but if you look at Wall Street, the day you and I are speaking, oil is over $62/barrel and the standard response is – in fact, one of the questions given to one of the analysts this morning is “when is it coming down?”...
MATT: “Why is it so high and when is it coming down?” <11:31>
JIM: You gave an analogy in terms of how cheap oil is at $60/barrel, I wonder if you might share that with our listeners?
MATT: Sure. Because every time I get into a discussion now about the future of oil I always get asked, “well, where will oil prices be?” And my response is, “I don’t have any idea where they’re going to be, other than the fact I think on a secular move, we are still at a very, very cheap level of oil prices.” And that immediately gets a response, “Cheap?! Oil’s at $60 a barrel!” And one of the things I’ve observed is that people don’t really understand what a barrel is. They can kind of conceive what a barrel might look like. But when you put it in terms people can understand, I say “what $60 per barrel is, is 18 cents a pint.”
And then I get a response, “How did you do that?!”
“Well, you divide 60 by 42, to get a gallon of oil, and you divide a gallon by 8 to get a pint of oil, and that just happens to be 18 cents a pint.”
And then they say, “ Oh, that’s really cheap, isn’t it?”
And obviously it’s cheap. I don’t know what’s the next cheapest liquid we actually sell in any bulk is, that has any value. I suspect there are places around the United States where municipal water costs more than 18 cents a pint. And yet for some reason, we created a society that was built on a belief that oil prices in a normal range were some place in the $15-20 level. It turns out $15/barrel, which is the average price of oil – in 2004 dollars – it sold for, for the last 140 years, is less than 4 cents a pint. So we’ve basically used up the vast majority of the world’s high flow rate, high quality sweet oil at prices that were effectively so cheap, you basically couldn’t sustain an industry. And now we’re left with lots of oil. But it’s heavy, gunky, dirty, sour, contaminated with various things oil, it doesn’t come out of the ground very fast, is very energy intensive to get out of the ground and we’re going to pay a fortune for it. <13:42>
JIM: Why don’t you take us back, as we talk about this peak in oil in Saudi Arabia, to when oil was first discovered. Give us a little bit of background about Saudi Arabia, because up until 1930 there really wasn’t an issue in Saudi Arabia. How did they emerge as a global energy power?
MATT: First of all, just a real quick history of oil because I think it’s actually interesting to put into present context."
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