Chris Skebrowski Interviewed by Julian Darley on May 17, 2004
Q1: The first thing that I would like to ask you is there are a number of different assessments from what one might call Saudi skeptics, and I wonder if you could judge or give some opinion as to what you think is going on. I’m thinking particularly that Matt Simmons has offered a fairly stark view of Saudi Arabian production futures; Jean l’Horaire is slightly more sanguine; there are others who occupy positions, if you like, in between, as well as, of course, the Saudis who occupy no such position. I wonder if you could say something about that.
Certainly. The first thing to say is that the Saudi figures at least have the merit of being consistent. In other words, if you look at them in terms of the original-in-place plausible- recovery rate, their numbers all add up. It seems quite encouraging. Now there are two great sources of disquiet as to why this might not be quite as it seems. The first is the fact that prior to the so-called quota wars of the ‘80s, the Saudi reserves were pegged in the 150- to 170- billion-barrel mark, and then apparently arbitrarily they were revised to 260 [billion barrels] in the course of the so-called quota wars. Now at that date this was seen as paper barrels, as an invention to support their quotas within the OPEC production system. Over the intervening years there's been a tendency to say, well, perhaps they were right; perhaps the oil companies were assuming very low recovery rates; they've just put in more plausible recovery rates; and so there's been a sort of self-justifying description to it.
Now the thing that has, if you like, unnerved Matt Simmons is the way that the Saudis are now almost wholly dependent, in terms of their production, on these what are called maximum-reservoir-contact wells. These are huge, long horizontal wells, right at the top of the producing structure, which is one way of maintaining very high production levels, but equally would seem to be the sort of technology you would only use pretty late in the field’s life, and one that almost by its use implies that you’ve got fairly big problems and that it won’t be that long until the whole reservoir becomes quite unproductive, because the water level simply gets up to the producing well. So that's why there's disquiet about this. The Saudis historically have been very secretive, and there really hasn’t been a lot of information coming out. We do have as I say these inconsistencies between what the oil companies operating in Saudi Arabia thought they knew at the time, which, I mean it was only thirty years ago; the technology was pretty good; these were smart and competent people, so we’ve got to have a very good reason to think that they were spectacularly wrong, and I don't think we have very many.
Q2: Right, why do you think that some people amongst, I’ll call them the skeptics, still think that things are better than Matt is saying, even if they’re not as good as the Saudis are saying. Why do you think there is this difference of opinion?
Well in the absence of any reliable data or any data that can be usefully analyzed, it almost comes down to temperament. Some people are naturally more optimistic than others, and in the absence of anything to prove it one way or the other, some will say the Saudis are quite right; some will say Matt is quite right, and really there’s a big problem; some will tend to split the difference and say it’s in the middle somewhere.
Q3: Where are you on this?
I think I’m towards the lower side of the middle. The reason I say that is that I think we’ve sold ourselves on the miracles of technology and forgotten that as recently as the 1970s, which is when the big oil companies were still operating the whole Middle East Region, they really had the knowledge and the technologies to produce these fields well. No one sets out to produce an oil field badly. They were incorporating all the good tricks they knew at that time, and I am very doubtful that we’ve actually got many vastly new tricks that we’ve learned since that would radically alter the outcome.
Q4: How much do you think there is actually left in Ghawar that can be reasonably produced?
Interestingly, I was looking at Ghawar. There are basically three sort of widely-held estimates of Gawhar’s originally-in-place. A man called Robifer referred to it as having 190-billion barrels; then the oil companies operating there very often use the 170-billion-barrel number. And there’s a lower number of about 145, which you get on the basis of certain apparent depletions that we know about. So as they’ve taken 55-billion barrels out of the field, as the official Saudi figure, which rises to sort of 63 if you add in the condensate, and they claim that’s 48% of the reserved. Today the Saudis are saying there’s 115 -billion barrels left in there to produce. If you take the 145 figure, you find there’s about 20; if you take the 170 figure, you find there’s about 40; if you take the 190 figure, you find about 60. And you need to put the original oil in place up to 228 to get the figures the Saudis are claiming. So, that I think sort of illustrates just how difficult it is to give an answer to this without data that’s not available.
Q5: Are you of the opinion that there’s about 20 billion left?
I think probably that would be my inclination, because if you got much higher figures, they wouldn’t necessarily be using the technology they are employing.
Q6: And what is the amount of water to the amount oil, or let me ask you another way - how much water is being pumped in per day, and how much oil is coming out.
Again there are no reliable figures _________barrels of water a day to get 5-million barrels of oil a day out. Now you don’t recover the entire amount, because it disappears into the structure. So that would imply that they’re already producing more water than oil, in other words, it’s gone past the 50/50. That seems to be confirmed by a presentation that was given by a Saudi production engineer during IP Week here in London, where on a graph he showed that they actually got up to about 1.3 barrels of water for every barrel of oil. It wasn’t quite clear whether that was part of the Ghawar field or the whole of Ghawar field.
Q7: And there are some difficulties in producing Ghawar, particularly the more productive areas in the North. How do you think that’s going to play out?
How do you mean?
Q8: Well it’s no longer an easy place to get oil out. There are some extra difficulties with some of the aspects of Ghawar. I am thinking of the tarmats and things like that.
Oh yes, I mean, all oil fields have their own peculiarities, and very few fields are entirely straightforward. What we know about Ghawar is that it’s a quite heavily faulted and cracked carbonate reservoir. Now the effect of this means that when you’re using techniques by pumping in water, that the water tends preferentially to come up these fissures or cracks, it’s very difficult to stop that, which means that the field almost naturally produces quite a high water-cut and will bypass those areas, if you’re not careful. We also know that it has this rather strange phenomena where, although it is a water-drive field or one side of the field is a sort of a degraded tarmat, which is obstructing the field, so the water injection program that was initiated by the big western companies when they were still there was to inject water peripherally around the edge of the field, which is what you would do, but where the tarmat is, they actually have to do it above the tarmat, whereas the rest of the field they would do it below that level.
Q9: And what’s the difficulty with that?
Well it sort of produces, if you like, a slightly lopsided field. It makes it that much more difficult to sweep the field evenly. I mean what you ideally would like to do with any field, is as the water comes out it neatly, so to speak, sweeps the oil out ahead of it. Now the more complex the field becomes the harder it is to achieve that.
Q10: Matt Simmons spoke about some aspects of accounting. He mentioned DVR and Gap accounting in regard to the way that oil companies, if you like, expense and account for their activities. Could you explain in a little more detail as far you understand it what the implications of that are?
The way Matt Simmons was putting it, I think, was reasonably straightforward. What he in effect is saying is that you actually have a financial incentive to declare as much reserve as you can as early as possible, because this simply makes it easier to expense the field.
Q11: Can you explain in more detail?
Well, if you like, a company has a value, which is defined by the assets it has, as well as the actual transactional activity performed. So, if you like, supposing you have ten buildings, and those buildings are valued highly. That will be more valuable, and the company will be more valuable than if the buildings had a much lower evaluation on them. Now in these terms the fields that an oil company has are equivalent to those buildings. If you can get not only a high value on them early, but you can get that value confirmed, so that it then gives you a borrowing base, just in the way that a public company borrows money against the value of its buildings, an oil company can borrow money against the value of its reserves, but it can only do that against proven reserves.
Q12: Matt was suggesting that the way you write things down and the amount that you estimate that you have has a big effect on how much you can assign to each barrel that you get out.
Something to do with this expensing and the way you can raise money and the amount you’ve got to spread it over. So if you’ve got a field that costs you a billion dollars to develop - if it has 1-billion barrels in it, the unit cost per barrel is one dollar, but if it has 2-billion barrels in it, then the unit cost is 50 cents. I think that’s really what he was saying.
Q13: And does that mean, therefore, that for every barrel that you can sell, it appears that you’re making a better profit?
Yes
Q14: So it improves you’re financial health by those means, and so that’s another encouragement to declare a larger amount in the field, because it appears, as far as the financial community is concerned, that you’ve got the better profit ratio, is that right?
Yes. At one level this is fairly obvious, because what you’re saying is that you must be a more valuable company if you’ve got a big field than if you’ve got a little field, and a big field is necessarily going to be more profitable than the little one.
Q15: Right, and given that one has got at this stage fixed cost of having done some exploration - then saying you’ve got more – It’s going to be a little difficult, is it not, to try and ere on the side of caution?
Particularly as all the people involved in this are the possessors of share options, and therefore have a further interest to take the most favorable view of things.
Q16: You have some opinions about share options and the way they’re driving the reporting and so forth and perhaps decision-making - can you say more about that?
Certainly. I mean This obviously is a personal opinion, but my opinion is that they are in fact a fairly malign invention, because they appear to be a cheap and effective way to align the interests of the owners of the companies and the managers of the companies. Well the first question is whether there ever is a genuine alignment between these two groups, and I would suggest there probably isn’t.
And secondly, I think, another reason that has made this a less than wholly successful enterprise is simply that you have a lack of clarity between what I would call bonus payments and the incentive payments, and actually both only become clear if you do them in cash, put them on the books in the normal way, and record them in the normal way. And one of the things about share options is you’re allowed to put the costs on your books in a way that is not part of the main account, _________sort of qualification to them, which has made it seem attractive, without really bringing home to the shareholders the cost of these options.
Q17: Do you see any sign of this changing?
Given that there’s a whole group that has profited marvelously from it and has very little incentive to put it straight, no, not really.
Q18: This in a certain way seems to lead to recent difficulties that Shell has been in. Do you have any comments and elucidations about what’s happening at Shell?
I think I will hesitate very much because, I mean, because there are all sorts of legal maneuvers around Shell. I think all we can say is that they seem to have gotten themselves into a state where it became attractive to take an unreasonably favorable view of their reserve position, and again, I am using words carefully, it appears that they weren’t actually following the not-always-wholly-clear requirements of the SEC.
Q19: Do you see that the DCI is going to be mounting its own investigations into Shell?
Yes, indeed, but then we do seem to have a bandwagon rolling, and one of things about bandwagons is that people tend to climb aboard.
Q20: It’s perhaps that the DCI doesn’t want to seem to be slacking while the SEC is going after Shell?
I’m sure there’s an element of that, but I think for far too many years, in effect, all the companies have been allowed to declare their reserves in a fairly unqualified way with no very clear rules as to what they could and couldn’t include. This suits them quite well, and certainly at earlier dates when it genuinely was pretty difficult to estimate these things may have been acceptable, but I think we’ve now got to the point where if we require people to prove that their accounts are straightforward, and we employ lots of auditors, and we’ve__________ do basically believe that’s the route, it seems pretty strange that the key determinant of the value of an oil company - its reserves - is still subject to this complete mélange of rules, lack of rules, declare what you want, do it how you want.
Q21: Do you think Shell’s difficulties are likely to be followed by the other super majors; we’ve already seen El Paso has seen some fairly significant reserve write-downs. Do you think this is going to spread, or a deeper rot, as it were?
I think it’s extremely difficult to tell. We have the current SEC regulations and there’s talk of those needing to be updated in various ways. I think we have two separate ideas. One is conformity with the rules as specified, and the second is the idea of providing enough information to really give clarity to the situation. And I think some of the companies have undoubtedly been better at complying with the SEC regulations, but that doesn’t mean that we have available data that really gives us a handle on what’s going on. This is very much Matt Simmon’s point that if we are to really learn what’s going on, we need more data to be made available.
Q22: Do you think these investigation by the SEC and the Department of Trade and Industry in Britain are likely to help that process of more revealing and more transparency?
I think it’s difficult to come to any other conclusion than there will be rather more reserves disclosure. Whether it will end up being as clear as some analysts would like, I’d be rather doubtful, because life doesn’t work quite like that. But I mean quite a big step in this direction was made by Woodside Petroleum in Australia, who now declare their reserves down to sometimes individual fields, sometimes groups of one or two, three fields put together, and you know, a fair degree of clarity, probably more than any other company is revealing at the moment. So I think the companies will perhaps end up competing with each other to be a bit clearer about what they’ve got, led no doubt by the ones in the strongest position.
Q23: Right. Would that be Exxon-Mobil?
Very possibly, very possibly. I mean as far as we can determine Exxon-Mobil has always taken an extremely conservative view, and has always, as far as we know, scrupulously adhered to the SEC regulations, so maybe they’re in a quite strong position, but again we don’t have enough information out there to say definitely yes or no.
Q24: Of course Shell was regarded as one of the most conservative corporations in regard to this - a corporation of great probity, but perhaps one can’t be quite sure.
Well, exactly. I mean that in many senses is why it created such a shock in the market place, because here was a company that basically would have been the last company to be saving close to the wind, so to speak.
Q25: Do you think they were, perhaps, became encouraged to do that because they had such a great reputation?
I think I won’t speculate on that; it’s certainly a possibility that because they had a great reputation that they could, in effect, trade through a difficulty without revealing it to the world at large. Companies by inclination would rather not parade their problems in public.
Q26: Of course, it does tend to put in mind of perhaps companies like Anderson.
Yes indeed, again Anderson was a company that historically had a reputation for the utmost probity, and finally destroyed that in a rather dramatic fashion and the company.
Q27: You’ve written that there’s not enough recognition of global decline rates in oil production. And you’ve also suggested that the amount of growth in new production must actually be even higher than the amount of depletion plus growth in consumption. Can you explain why that is?
Yes, certainly. You have 4-oil fields, and they’re all producing more and have an ability to expand, then that is your base. But if one of them is sort of going backwards and is actually declining, then to meet your new demand, all the expansion has got to come from the remaining three, because the first one is declining. Not only has it got to come from those three, but it has got to offset the decline in the first one, you know, just to get you back to the baseline. Now you just multiply that idea out to the world, and you find that roughly 21% of world production is already in decline. And so that’s getting close to this sort of 1 in 4 bit.
Q28: So in terms of actual numbers, what is the world depletion rate, and what is the kind of figure that the expanding part of world production has actually got to make in terms of growth in new production?
Well, just at the moment the IA keeps revising up the world demand, the reason being that both China and to a lesser extent India are really booming and enjoying in more and more imports from around the world, because their own productions are fairly flat, if not slightly over the top. Well the best estimate I think that we can use at the moment is the field decline rates average out at about 4%, so if we then apply this to the 21% of world production that is actually already in decline, that produces a decline of about 800,000 barrels a day. Now the rest of the bits that are expanding have got to pick up this bit as well as the demand that they’re trying to meet.
Q29: That’s about 800,000 a day per year that’s declining, not that we’re declining at 800,000 a day per day, as it were, I just wanted to make that clear for anyone listening.
Yes, so in effect, we’re losing a million million barrels a day from the areas in decline, so we got to make that up with the others and then meet any demand that the market requires.
Q30: And so that means that the actual growth rate of the new production areas needs to be more like just over 4%, is that right?
Yes, in fact as I say, the demand this year is being revised up, so that would revise that number on up, and this of course becomes ever more challenging. I mean meeting a 2 ½ % demand growth may not be too hard. Meeting 4% might be that much harder, and of course the other thing is that the situation is dynamic. More countries are getting to the point where either they can no longer expand or they’re actually starting to decline. So the 21% I talked of is actually going to be a bigger number next year, and the year after a bigger number, as new countries move into decline.
Q31: That seems to lead naturally to the idea of the oil field mega-projects, which you’ve surveyed, I think for a number of years now, and your most recent report on the oil field mega-projects was at least showing there are some problems up ahead. Can you say a bit about how those problems will manifest, and how many years we can actually go on increasing the amount of oil production that you think is likely from this survey?
Well, I would be a very rich man if I could tell you an exact date for when this turning point occurs. What I can tell you, however, is that over the next 3 years, we have a very considerable number of projects coming to fruition. These are things found between 6 and 10 years ago, because that’s approximately the sort of the investment cycle from first discovery to first oil, and these are all the developments in Angola, some Brazilian ones, some Gulf of Mexico ones, some of the ones in the Caspian and Kazakhstan, so it all looks very rosy in the short term, which is why even now financial analysts keep talking about the risk of short term price weakness. The price is actually going down. Now, in fact this hump of projects is starting to get smoothed down, because projects slip, and there’s been quite a lot of project slippage, just in the period from when I first did this tabulation in January to my most recent look at it that I’ve just done, so that’s pushing the hump down a bit. But the basic pattern that you’ve got a lot of projects for the next three years, and then really rather few thereafter remains. Now if we take this six-year view of discovery to first oil, we are half way to 2004, so we should be knowing about projects for 2009, 2010, maybe even 2011, but there’s a notable absence of announcements of new projects. Also what I try to do is tabulate the major discoveries that we have that could potentially turn into the biggest projects, because the biggest projects very much determine the overall outcome. And what we find is we’ve now got to the point where the only big undeveloped projects are either in Russia or in the Middle East; there’s virtually nothing outside that, which then gives you a certain geopolitical strategic problem, possibly. The Middle East is by and large closed to the oil companies. Russia in fact is going rather more nationalist at the moment, certainly looking as though the hopes of getting free access to the Russian reserves is somewhat reduced. At the moment the Russians are expanding production quite rapidly, but we can’t, so to speak, bank on that. And they could adopt a different policy at any point. So, I think those are the sort of concerns you might have looking at the situation at the moment.
Q32: Why are the oil field mega - projects so important and perhaps you could say about how much percentage of the world oil they actually provide
In terms of mega-projects, the reason that I tabulated these and these are most important is because, the nature of the oil business is that you don’t actually go out and look for small oil fields. You always go out and look for big ones. Big ones in effect fund all the infrastructure, particularly offshore, and only when the infrastructure is in place, do you have any chance of feeding in the smaller reservoirs or the smaller accumulations. If you only have the smaller ones, you probably wouldn’t be able to do anything with them, so in a very important sense the biggest projects simply define the business, and also they contribute the bulk of the reserves, the bulk of the production. Estimates vary but the bigger fields, and I am talking about the ones with production of 100,000 barrels a day or more, probably account for about 80% of global production, so the little twigs, if you like, don’t do much for the bonfire; there may be lots of them, but you can get the size of the bonfire by defining the bigger projects
Q33: And what you’re leading to is the fact the twigs can’t really make the building - you need some big tree trunks as they were otherwise you’ll have no building on which to adorn with the twigs, as it were.
Well I think I can give an even simpler analogy, if you’re trying to run a bonfire or trying to heat your house with logs, you know perfectly well that what you want is nice big chunky logs that burn slowly, and give off a lot of heat, and that really you can’t keep the fire going for very long if all you’ve got left is a basket of little twigs.
Q34: Right, you have to run pretty quickly with that basket to and fro.
That’s right. You have to have an awful lot of twigs, and it’s awfully hard work and back to industrial terms, what it means is that it starts becoming very expensive. The big fields are the profitable ones for the companies; the big fields are the ones that ensure a reliable supply for the consumers.
Q35: And is that the reason why it’s so important to have these big fields now more than ever is because so many of them are in very difficult conditions. Many so-called unconventional where it’s very expensive, costing many millions of dollars to dwell a well deep in the ocean, for instance, whereby if it were on land in the middle of Texas you could easily drop a well for a million dollars, and the infrastructure would be there, and even if it weren’t, it’s just a pipeline or a tanker on land, so it’s putting up the infrastructure costs greatly in proportion to what we used to see, and therefore compounding the need for big fields, is that fair?
Absolutely, I mean basically the more difficult the conditions get environmentally, the bigger the field has got to be to be worth doing something about, so as you correctly said, in West Texas, you can drill a well not for a million dollars, as you suggested, but for 100,000 dollars, you can probably get lots of contractors to help you, you can probably buy second-hand equipment, and hook into existing infrastructure, and you can, you know, make yourself a useful amount of money with quite small production flows. As you move away from such a benign economic environment, everything progressively gets worse. If you’re going to drill up in Siberia, the cost would be much higher the environmental conditions much more difficult. Everything becomes more expensive, and you’re going to need something bigger and chunkier to make it worthwhile. If you start drilling in 6,000 feet of water, you’ve got a truly astronomical problem in that you now need a really quite big field to make it worth your while at all. If you can get some infrastructure out there, maybe you can contemplate some slightly smaller fields, but you’ve got a very high-cost environment; you’ve got a very high-operating cost for the whole system, and you can’t just sort of go down to the last few barrels in the way that you can in an easy environment like Texas.
Q36: Does this in any way increase the likelihood that some of the unconventional oil that’s been identified either as probable or proven may not actually be producible, because it’s in too small reservoirs?
I think my answer would be yes, the more common answer is that technology will ride to the rescue in some shape or form, but I think you have got to, in fact, be fairly clear- minded about what technology can and can’t do. An awful lot of technology that we’ve recently seen coming into the oil field is actually about producing early or producing faster and making the operation more profitable than it would otherwise be. It’s not actually increasing the amount of oil either produced or the oil that was there. So, yes technology opens up certain areas. Yes, it does allow you to do some things you couldn’t do before, but I think you need to be fairly clear-sighted and not as, I think, too many people tend to believe that the panacea will solve the problem.
Q37: To wrap up with, although we’ve discussed Shell, can you say something about the situation with petroleum, oil and natural gas, in Britain, because there’s some realization that Britain is no longer going to be a massive exporter of hydrocarbons in the near future.
Yes, certainly the British experience is quite straightforward really. The North Sea gas fields opened up in the late ‘60s; North [Sea] oil fields opened up in the early ‘70s. Because the ‘70s corresponded to the oil crisis, it was made very much a priority to develop as fast as possible, and the world prices were very high at the time, so we had the incentive to do so. So you’ve got a very comprehensive and very rapid development of the resource, and all the latest technology was obviously applied from the beginning, and people sought to maximize the recovery of the resource with all the technology available. But as inevitably happens, both have now peaked. The oil production actually peaked in November 1999, more or less in line with the sort of analysis that people put on peak oil. We got what was a fairly conventional pattern, and people were very reluctant to believe that it had peaked, and for the next two years there was rather a convoluted denial. There’s now acceptance that it is trailing downward. There are now reasonably reliable predictions, being sort of a little over half of its peak by 2010, so it’s going down really quite rapidly. The UK will become a net-oil importer from about 2007. On the gas side the peak was about 2001; it’s starting to go down now. There are active plans for the UK to become a significant gas importer by about 2005. Exxon has plans to bring in LNG from Qatar. Norwegian field Ormen Lange is being developed and linked in part by the U.K. There are plans to build more and connect us to the continent and this will bring in quite significant volumes of Russian gas. So, a classic world province was opened up; it was intensively surveyed and developed. It’s now reached its peak, gone over its peak with all the consequences that will have for the countries involved. Now I’ve been talking solely about the UK, but the Norwegian oil production probably peaked in 2001 or 2002. It’s a few years behind the UK side. Neither side has any really big fields to come on; there’s one or two medium-size ones that will be put into production, but no chance of seriously altering the decline profile. Norwegian gas is still expanding and will probably expand for the rest of this decade, partly because it wasn’t put into production with quite the enthusiasm as the oil was, and partly because the resource seems to be really quite large.
Q38: And what about the Barents Sea? There are suggestions that there’s a huge amount of oil and gas to be found and produced from the Barents Sea.?
Yes, very much exploration has been done in the Barents Sea. The Norwegians having initially been rather reluctant for environmental reasons have now agreed to open the area up to drilling. The Russians have got some gas finds up in the Barents Sea. There’s one very large one to develop later in the decade. If you talk to geologists, they tend to say the Barents Sea is more likely to be gas prone than oil prone. There have been some oil finds at what you might call the northern bit of the North Sea or southern bit of the Barents Sea. I think it’s fairly early in the exploration to come to any definitive conclusion.
Q39: Is there much infrastructure up there to bring it to market?
Virtually none. It’s not the easiest environmental conditions, so that the costs will be high, and you’re getting into regions that have things like ice flows; they can be coped with, but again they simply raise the cost of working in that environment.
Q40: Do you have any last comments about things that have crossed your mind in the last week or so in any of these areas?
Well I think the thing that is becoming quite clear is that the oil and gas industry is so important to the way we live and the welfare of the Western world that we cannot realistically go on simply allowing the oil companies and the producing companies just to tell us what we’ve got. I mean remembering that we do things like satellite surveys of food production around the world in order to keep tabs on the sort of pressures these may involve. You know, we monitor whether the Russian grain crop is large or small or whether the Chinese one is working or not working. I think we’ve got to at a political level take a lot more interest in our future oil and gas supplies, because I believe we have a problem. Others believe we have less of a problem. But until we actually actively go out and find out, we don’t know what we’re up against, what we should be doing, what we should be planning for, and the nature of many problems in life is that until you recognize you have them, there’s no chance of doing anything about them.
Q41: Thank you very much.
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