Interviewed after the Saudi - U.S. Meeting at CSIS
Q1: To start with, I'd like to get your reaction to what you've just heard. Were there any surprises there?
Yeah, I guess. There were several surprises, or at least just more enlightenment. I was really surprised at the passion at which they felt annoyed that someone had had the audacity to even raise the issue that they might not be able to do in the next seventy years what they've done for the last seventy years. And it came through in various different statements of like: “What an unbelievable insult that is.” And then I thought it was interesting that while they're basically saying, “Look, we are absolutely the most important oil producers on earth,” which is exactly what I am saying - the reason this is important is they are absolutely the most important oil producer on earth. “Our reserves are so unbelievably enormous that it's an insult for anyone to even raise the question, and no, we're not letting any third party come; we don’t need any third party to look.” Then I found it very interesting how, in the argument, and again, this is woven into so many of the different statements that were made, about how their proved reserves are basically conservative, because of this ‘unbelievable technology.’ But you know what is interesting is when their reserves started jumping. The top 23 fields that you're talking about were 108 billion [barrels] in 1975; by 1979 they had become 160 billion [barrels], and there was no technology. Then they stayed at 160 billion, moving up by maybe 2 or 3 billion, and then suddenly in ‘88 - between ‘87 and ’88 - with no drilling or no technology, they went to 260 [billion barrels]. All this technology you’re talking about came in the ‘90s. I think they now believe that that gradually increased because they kept finding more things, and I think, they really have forgotten. It would have been a lot more credible, in my opinion, had they said, “This is actually quite a strange story. In the ‘80s all the OPEC producers were doing this arms race, and we were all basically lying to each other about how many proved reserves we had. We picked a number, and it turned out, boy we were lucky. The technology developed in the 1990s turned out to confirm that that number was not only good, which surprised us, it was conservative.” That would have been far more credible than what I heard today. The being casual about - our water cut, basically, is only 33 to 38%; that's conservative - if you look at anybody managing water, when you get up to there, you're in the danger zone, because then you’re just about to shoot through, and go right on up to where its 70 or 80 percent, and the fact that they are not worried about that, instead, they're saying, ”Look how conservative we were in our water cut, compared to the others.” God, I wish they had actually - and I didn’t realize the CEO of Saudi Aramco is not a technical guy - I am not saying this is critical; I am not a technical guy either, but the fact that that they’re - all I've heard about 6 times now is the statement,” Our top two technical people came to Washington and totally, utterly proved we have no problem by utterly saying, ‘we have no problem.’”
If this were a car manufacturer or any kind of a metal supplier and you didn’t have an integrated supply, but you had four suppliers that were really your entire source of coil steel, and your most important supplier had furnished it for seventy years, but you said, “You know, I’m afraid that our car production might have to double.” I'll guarantee you that if you were doing any basic supply-chain management, you would actually have inspectors go and carefully look at their plants and say, “We don’t want a long term contract, but we are implicitly relying on you as our primary supplier of coil steel, and we want to test so that we know when our car limits come to here, we have to find someone else.” If they said, “That is so insulting to us. Go away.” I'd say, “ Well, now we know there’s a problem.” That's what I learned today.
Q2: Mr. Baqi, for instance, suggested that you had flawed methodology by looking at all these SPE [Society of Petroleum Engineers] reports, these 200 reports, he said, ”Look, what makes the news is not the airline or the 70,000 [people] a day that fly in America; it’s the ones that crash every x months. It’s the same with SPE reports; they only tell you about the few rare ones, so it’s a flawed methodology. Basically, everything is swimming along. Yes, there are a few challenges, basically,” so that's what they said. That's the methodology. How do your respond to that?
One of the key technical people I know in the world on all these complicated issues,
who began his career after getting his PhD. with Exxon Production Research – he’s worked for major-oil companies, he's credited with discovering the fields at the basin of the Gulf of Mexico. I asked him to very carefully edit my very rough manuscript before Christmas-time. In the middle of January, after a month, he sits down with me, and he says, “I need about 3 hours of your time, because a variety of your descriptions you’re not describing correctly.” Well, I was describing actually what I read in SPE papers. “What really is happening is blah, blah, blah.” And when he finished, he said, “ You know, I can’t tell you how much I enjoyed reading this, because what you have done, I’ve never seen done before. You have just done a forensic pathology of an oil system.” And I said, “What? I never heard that term before.” He said, “ Forensic pathology. It’s an autopsy.” He said, “When you do a forensic pathology of a body, you cant say, ‘Matt, when did you die,’ so you basically take apart every organ, sample all sorts of tissues, and finally, by connecting all the dots, you say it would appear that that body probably died between x and y, and the cause of death is obviously a heart stop, but the reason the heart stopped...(inaudible). What you've actually done is you’ve gone around the entire system by going through so many reports and by aging them over time.” He said, “You've actually seen the whole body, haven’t you?” And I said, “Yes.”
That's what made Dr Saleri and Dr Baqi, when I heard that at the lunch we had afterward, is how sad it is that I wasted 9 months of my time. Cause these reports are really just - I said, if they had read the reports, they would never have said that, because the reports. Really, there was only one section of the Dhawar? that there were hardly any reports on. Basically every report is only a little problem, but when you start coloring in the map: Ok, I've done Ghawar; I've done Abqaiq; I've done Berri; I’ve done Zuluf; I’ve done Safaniyah. Remember those 5 - that's all you need to know about - but I've done Qatif; I know a lot more about Qatif - Say! That's one of the great fields ever - it was not! It’s a field discovered in 1945. By 1977, when they were really worried about overproducing Ghawar, Qatif is so important to them its peak production was, remember back then they were recording field by field production statistics, its peak production, off the top of my head, never got above 120,000 b/d, and I need to check that number. It was in that range. By ‘77, it was such a sorry field that it was converted over to being a storage cavern for excess refinery production at Ross Deniro. So that's [Qatif] their next ‘on target’ to get 500,000 b/d; I said, man alive, if that's the next best thing they have, it tells you an awful lot about all these 64 fields that have never produced. So again, I just wonder how, in a system where you’re so bottled up in information and so compartmentalized, I basically am the only person there that’s read what 600 people there wrote about. If I had read 5 papers or 40 papers, I think that’s a very valid comment, but you know, I passed out my bibliography of actually 277 or 217[SPE reports]; I can’t even remember. You know, just read the last 8 that were delivered last October in Denver at the SPC2003.
One of the other interesting things about these papers is all through the ‘90s there are papers about –wow, we finally have figured out why our reservoir modeling simulation hasn’t worked, because of this brand new way we’re using technology. And then a year later - wow, we finally figured out why - so when you go a decade with all these new improvements being dismissed the next year as this new thing is going to correct all of our modeling work. They've had a tremendously hard time figuring out that their models aren’t quite working. But what they’re bragging about is that we now have these visualizations, so we can see perfectly what is going on, and that isn’t right.
Q3: So there seems to be two ways to look at the technology. One is the actual way, in which they develop these MRCs, maximum reservoir contact wells, and then you've got…
Yeah, and they’re no different, they’re no different than what all the Western-oil companies have used. They're no different than what the Yibal they're now so dismissive about, “well, that was just terrible well placement.”
Q4: I asked Mr. Baqi, is it unfair or why is it unfair to compare Ghawar, let's say, with Yibal, and of course he said you just can’t compare them. And one of the things is that, “Well, we manage our wells so well.”
Yeah, and Shell doesn’t? Its easy to criticize Shell today, because of what's happened to their proved reserves, but I don’t think in the nineties you could find a single soul that would say, “Oh, they're a bunch of goofball-field hens; they were the Gold Standard. That also worries me a little bit to see them being so dismissive of PDL. Now if the PDL
were just being run by the Armanis, I think you could say, “ Oh, the Armanis don’t know anything.” No, this was some of the best field people that existed within the Shell Group. It caught Shell by surprise - totally. Now they didn’t cover up their surprise; that was part of the reserve scandal. But the fact that they didn’t know this was going to happen, that the field went into a free fall.
Q5: So from having read so many reports, and you've also done some studies of Yibal, do you think there are geological dissimilarities or are there some similarities there, too?
Every reservoir is different, which also makes the use of analogue so strange, but, well I’m not going to do appraisal wells -- I've got a good analogue means a comparable, since all the people know every reservoir is different. Yibal is exactly the same formation as Sheiba. It is a different reservoir type than the three great carbonate fields: Ghawar, Abqaiq and Berri.
The relevancy though is what happened at Yibal was that by 1990 they couldn't drill vertical wells anymore, because the vertical wells would water up within months, because the oil column was now so thin that you just couldn’t put a vertical well down low enough. It was either at the top of the reservoir or - and so they went to - it was the first field in the Middle East that embraced the use of horizontal drilling, and they thought that was terrific for the first 2 or 3 years until all of a sudden this long horizontal extension channeled up as opposed to coned up. Coning is just when it gets the ____. Channeling is when it gets the whole extension. So they then went to the first generation of these extensions coming out, so that you can kind of hide from the problem of channeling, and for about 3 years, they thought they had licked it when they got the well productivity back up to 8 to 10 thousand barrels a day, but what they were doing without realizing it is just shrinking the oil column till it was gone, and once it’s gone the production drops, the gas all comes out, the water co-mingles and you have the unbelievable story of Yibal.
Now I don’t think that there's any difference in that risk happening in any of those carbonate fields or so, I think they're right when they say- no- totally different reservoir - but they’re wrong about these will be totally immune from ever finally finding [inaudible]. Because what’s interesting too is the false comfort that they're getting that they stopped the climb of the water cut. Well they stopped that climb when they obsoleted more vertical wells, and apparently, from what I heard, have shut in the vertical producers, so, my worry is that they’re living on, in my opinion, borrowed time, until all of a sudden all those wells start watering up, and then they're basically into tertiary recovery. The problem of tertiary recovery is that you get very high volumes of fluid out of a wellbore and almost all of it is water.
Q6: Can you say what tertiary recovery is?
You have three forms of recovery. Primary recovery is when you’re using the natural pressure within a field to get it up, and secondary is when you lose the natural pressure, so you do a water flood or a steam injection, and they basically go back and sweep what you left behind. What made the reservoir production technique at Saudi Aramco relatively unique when they started, but it kind of pioneered what was done in the North Sea, is that they began fairly soon after production started, they began water injection, not to do a water flood per se, that was kind of a side benefit, but to continually keep that water pressure rising so that you maintain constant reservoir pressure, so its like a plunger. So what they’re doing is primary and secondary at the same time, so when that is over, there isn’t any secondary to do because then were done.
Tertiary is the really complicated stuff. Ok, now the sweep is all over, and you’ve got all this oil left behind, and typically in these kind of reservoirs you only get out 25 to 35 %, so when they’re saying, “Gosh, you know we only recovered 28%,” and then say, “Oh, everyone gets 60%,” - No, that's totally wrong; that’s totally wrong. And I shouldn’t know more about this stuff than they do. I didn’t know any of this stuff, and a year ago when I started reading these papers, but I do luckily have access to some of the best experts in the world, including some people who have recently retired from Aramco. When I waded into this area, I really didn’t want to make a fool of myself and say, “Oh my gosh, I didn’t realize that.” What I'm hearing is they need the same lesson I got, and I don’t want to be - I think they're very lovely people, and I think the Saudi - U.S. relationship couldn’t be more important, but it’s because it is so important, it makes you say, “ Look, we need more disclosure.” I think the disclosure would help them understand their own problems.
Q7: Speaking of disclosure, when I asked Mr. Baqi about reserves and suggested that there were some problems, and I was talking about the oil field mega-projects around the world as well, and I wasn’t sure how familiar he was with the work of Stevoski, he said what you don’t know, you don’t have access to the data I have. Saudi Arabia is bringing on lots of mega-projects, and so forth, and so basically, his answer to me, finally, was you don’t need to worry, because we have secret data, if you’d like, so that’s not disclosure. If you heard that, how do you respond?
I’d say I read the SPE papers about the big projects they have coming up, and they’re very crappy projects. Unless you believe that they describe – you see this is the case where they describe the whole Kata field or the problems of Krias – they’re not talking about a specific area; they’re talking about the problems of Krias, and well, maybe they’re just joking. But no, you don’t go to a SPC conference amongst your peers and joke.
Q8: When your clients or people with interest in these matters say to you, “Look, what can you advise us to do. We’ve heard what the Saudis have said; now we’ve heard a second round of ‘we have enormous reserves.’” What do you tell people? I’m not asking you for privileged client’s contact, but what kinds of things do you say to people in response to this?
Well, I’ll tell you, a big campaign I'm on right now has nothing to do with our firm. This is me trying to be useful to the global energy system. I think that shell oil companies proved reserve scandal was scandalous, but what was really scandalous was how little data we had for too long on what even the term meant by ‘proved reserves.’ That was a terrible description that the SEC created in 1937. The only thing you ever have proved about reserves, because proved has a connotation, as we totally know, is when you cap the last well. And say, ok, how much did we basically recover? We think we know the original amount. In the meantime, it’s a very complicated series of guesstimates you’re doing, and I think over time people just started just relaxing, because we didn’t have any problems. It would be like finally letting our guard down in 1980, and saying all this money we’ve spent on thermonuclear war - give me a break - we’ve been 30 years and we’ve never had one. Now that would be unacceptable. Out of this has come a glaring realization that we have an enormous gap in our data for all the public companies. And there will be more Shells, maybe not covering stuff up, but there will be more companies that find - oh, my gosh, we really went over the limit of jumping the gun on what we thought was maybe kind of quasi-proved status. And now that we have a little bit more data by doing some wells - this isn’t even commercial. And sooner or later I’m convinced the oil and gas industry needs to jump in head of a moving train, or get run over by a train, and that would be terrible. And begin a system of disclosure in addition to what we now have - that is so unbelievably simple, and it might cost a company $50,000 to do it, if they basically, for some reason, had lost their records. And what it is is the responsibility of singling out all your key production units. It’s ideal if you end up having like 6 fields that are 60-70% of your production, which there are quite a few companies that have, if you end up having in the Gulf of Mexico, say, working interest in 55 different fields, and just lump them all together as a - call it Gulf of Mexico ____. But then those production units and everything you can’t figure out how to lump, just call it miscellaneous. No one’s ever going to want to list 50% of their company as miscellaneous. Those key units we need to know key data about, and the key data are thirteen points –thirteen points. And they're dead simple. The first five points are the last 5-years production for the field. The second five points are the average wells that were in production each year. Once you have that, for the first time ever, you can start doing well-production rates and see decline rates.
The other three: the current estimates of original hydrocarbon in place; the current estimate of ultimate recoverable reserves; and the current cumulative production. With those 13 pieces of data analysts finally have something to analyze, and it would take half a day with that data, and then you have a third party certify it, that this is not a second set of books. Because they're all estimates, you don’t need a third party to do the data. You just need a - say - No, no, I checked, and this really was the production; this really was the wells; and this really was their current estimates. With that data, it would take analysts a half a day to take the 5 or 6 key fields in Saudi Arabia, and say there's either no problem, or [inaudible]. It would take a half a day to go through Exxon- Mobile, Chevron-Texaco Shell, and BP and start rating their fields, and say – wow, one of these companies has a three-times-better portfolio than the other.
Right now, what we have the equivalent of is - if General Electric, kind of a complicated company to understand, tomorrow morning announced that for efficiency they were no longer ever bringing in a 3rd party CPA; that they know their numbers infinitely better;
and for business competitive reasons, they were no longer doing any business segment disclosure, and so from here on out - trust us - our revenues are 150 billion dollars - trust us - our earnings are 30 billion -within a day the market value of General Electric would be down 50%, because, sheese, what do you mean, ‘trust me?’ We have never done that. We need the data.” And this [fossil-fuel data] is a lot more important data than knowing whether GE is making up their numbers or not, and I've just used them as an example of a very complicated company - it would be a disaster - and they do have the sophistication to not need a third party CPA but for a seal of good housekeeping.
Anyone that says they can’t do that is - it’s the first question - those 13 points are the first question that if you went into a bank that knows about reserve lending, and said, look, I 'd really like to borrow against my assets - Ok, let me ask you these 13 things.
It’s the first thing if you want to sell someone a field - Oh, Ok - to figure out whether I even want to look at it, let me see these 13 things. Bring in DeGolyer-McNaughton or Rider-Scott and say, I’d like to actually do an independent evaluation of reserves – it’s the first piece of data they ask for. Why should the steel company who is betting their future on the supplier of coil-steel not have access to the same data the that coil steel would basically have to give their bank, and when someone says, “Gosh, the problem is I don’t have the data,” then you say, “ Oh my gosh, you mean you’re telling me you don’t know what was originally there, or what could be recovered, but you know with a 90% certainty-what your proved reserves are? Then you really are the Wizard of Oz, aren’t you?”
Q9: What signs do you think there might be to show that Saudi Arabia is following the kind of path that you think they might follow as opposed to what they say?
Disclosure. Just disclosure. That would be so simple for them to do, rather than to bring planeloads of people over to just tell us for 18 times the enormity of their reserves. They'd be better off for it. They’d manage the company better, if they had this data.
Q10: So this isn’t disclosure.
No, this isn’t disclosure; this is “trust me.”
Q11: Because when I asked you last time two months ago, you thought this was a great step forward on February the 24th - more than they’d said in 20 or 30 years.
It was, and they said a tiny few more things here, but as I told Dr. Saleri and Mr. Baqi in February “I really appreciate what you’ve done. You’ve started a new era, but you started at 1% - we’re going to go the whole nine yards, before this is through, and it will be the best thing that ever happened to Saudi Arabia.
Q12: Absent that, what signals, what accidental puffs of smoke coming out would say to you, oh, they are going down the course I thought they would go?
Unfortunately, since you used the puff of smoke - When you look down the street, and you say, “God is that my house up in flames and by six fire trucks?” And by then it's actually too late, so that’s one of problems in this whole issue. If you don’t have any data, you don’t have any way of knowing, because you can’t see the peaking happen. You can’t see the fact that - yeah, if I could just actually go down in that reservoir and spend a few days - we can’t do that, and 3-D Seismic doesn’t get you there. Find anybody that knows what they’re talking about, and they’ll be the first to tell you that we have a generation today of geologists that - my friend in Houston, Tom Hamilton, who is one of the best people in the world, calls them Nintendo geologists. He said you know for last decade they’ve just sat at workstations and simulation models, and he’s talking about guys in Houston.
Q13: Do you think they really have got 2-million barrels a day spare capacity now?
No. no.
Q14: How much do you think they've got?
I don’t know, since they don’t tell us which fields. If you look in IEA [International Energy Agency] Oil Monthly Report, there’s a very important table in there that no one ever seems to look at. And I keep asking is there any reason to think that’s bum data. It's the OECD imports by country of origin. And remember, if you’re exporting oil and you’re Saudi Arabia, there's only really basically one big country and then another smaller that actually needs their imported oil other than the OECD, now that you have Korea in the OECD and these other countries, and that's China. You can see in this table the imports from Saudi Arabia into the OECD for the last, in fact, now its 2002, 2003, and the 1st quarter of 2004, but you can go back and take it from 2000 until now, and it’s basically been back and forth between 2- or 3-hundred-thousand b/d per quarter, other than the second quarter of 2003, where it went up to 700,000 b/d. So they’re saying we actually turned our production on 2-million b/d, and they maybe did it for a week, but they didn’t do it for a quarter, unless they boycotted the OECD.
Q15: Because they can’t [inaudible] 2 million.
And there's no other place they could put it. I think probably what they did is empty their stock tanks. They have 70-million barrels of spare tank capacity, and they’d be stupid not to kind of keep that filled out. And I think they probably, apparently, they have 10-15 million barrels of third-party storage that they've leased in the Atlantic basin, some in the Caribbean, some in Rotterdam, some apparently up in Come-By-Chance. They shouldn’t be telling us that’s their spare productive capacity. That table might be wrong, but I trust that table, frankly, an awful lot more than I trusted what we heard today.
Q16: Do you have any colleagues of yours in the U.S., geologists and so forth, who say,
“ Matt, I think you’re flat wrong”?
You know first of all you - geologists are always optimistic - I have a lot of friends who say, “I cant really tell you I honestly believe you’re right,” or “I have to tell you those guys sound really credible; they really sound like they know what they’re talking about.” But equally, more important, I have a score of people who said, “God, that was embarrassing to see what they said.” A real senior guy, who will remain nameless, who said through two mutual friends - I was hoping he was going to be here today, but he wasn't – said “Tell Matt that my one critique about his presentation was that he really screwed up in praising them for their technical competence - not those guys,” so I just thought that was interesting - retired Saudi Aramco people.
Q17: :Are talking to you and saying basically, you’re not wrong?
No, no. “Hang in there; don't let these guys kow-tow you. Yes, this is really important stuff.”
Q18: Do you think Saudi Arabia is doing any kind of social and economic planning against the day when they…
No, no, no. I don't think this is an act at all; I think this is really what they passionately believe, and I feel sad that – but you know, they’re a very secretive society; they always have been. My experience of working with corporations is that secretive corporations tend to, unfortunately, generally hide the most important things from themselves. Very highly visible corporations tend to, basically, they will see their problems first.
Q19 :Shell being perhaps an example on the other side.
Umm Hmm.
Transcribed by Rita Wiltsie
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