St. LOUIS (ResourceInvestor.com) -- 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.
The book has played a signature role in propelling Peak Oil issues out of hobbyist discussion groups and onto Fortune 500 boardroom agendas. That’s because Simmons is widely acclaimed as an expert with deep experience in the industry. With high oil prices currently lending inferential support to Peak Oil pundits, it has achieved remarkable consentience in the investment community.
Jarrell’s acid-washing of Twilight in the Desert does not confront the Peak Oil hypothesis directly. Even so, his analysis of Saudi oil reserves being more plentiful and of adequate quality very clearly undermines some mainstays of Peak Oil.
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. It’s all square if 15 million bopd is achieved by the Saudis
Peak Oil is not entirely discounted, but it is softened in terms of the time frame required to wean the world onto an alternative primary energy source.
Or is it? Many investors are betting on a radical and growing supply shortfall as illustrated in the chart below which is reproduced from a model developed by Titan Oil Recovery. It seems rather aggressive and linear – stepping progressively into a 30% deficit 15 years from now won’t happen without an adjustment in price or supply. Either way, the gap will revert to something less extreme.
Nevertheless, this modeling is pervasive and dominates the current investment consensus.
