World Marketplace
Fuel Fossils
Matthew Simmons with additional reporting by Daniel DelRe
08/01/2005

As the federal government lurches toward a national energy policy, the debate over if, how and where to drill for oil is quickly becoming futile. Politics cannot change the natural lifecycle of oil fields, which mature and deteriorate like a human body. The troubling reality is that many of the world’s primary sources of oil are drying up. The Alaskan oil field of Prudhoe Bay, for example, reached a peak level of production in 1979, only 12 years after starting operations. Since then, Prudhoe’s oil production has declined steadily from roughly 1.5 million barrels per day to 300,000, despite the intense use of gas injections to force remaining oil to the surface.

This scenario is playing out in parts of the world where the oil supply was once considered limitless. In their prime, the North Sea’s largest oil fields—EkoFisk, Brent, Forties, Statfjord, Gullfaks, Heidrun and Oseberg—each had a daily oil production exceeding 400,000 barrels. But they have all peaked and are now in decline. Forties and Brent, which peaked in the early 1980s, now struggle to produce 10 percent of their onetime maximum output.

Peak oil threatens everyone, not just the most highly industrialized societies that are most dependent on the petrochemical industry.
A Slippery Slope
The term “peak oil” describes the point at which an oil field reaches its maximum level of production. Once peak oil is reached, production in a given field may plateau for a period of years or it may begin an immediate, terminal decline. Prudhoe Bay, for example, maintained a peak production level for almost eight years. By contrast, the Slaughter field in Texas began a precipitous decline in production shortly after it peaked in 1973. Within seven years, its production had fallen by 38 percent, or 500,000 barrels per day.

The problem of peak oil becomes particularly clear when one considers that little more than 100 oil fields make up almost half of the world’s supply. Within this group, the top 14 fields account for 20 percent of the world’s oil supply, and on average, are more than 50 years old. Most of these fields are already in decline, and soon the rest will be. In simple terms, oil consumption is rising dramatically just as the energy industry’s ability to produce oil is peaking or even in decline, a situation that will inevitably have a detrimental impact on global economic growth.

Faced with declining production, energy analysts are gradually awakening to the reality that global demand will continue unabated. In the past five years alone, worldwide demand for oil increased at the same rate as in the previous two decades—12 percent. This demonstrates that efforts at conservation and fuel efficiency cannot suppress oil consumption. According to the International Energy Agency, average global consumption will reach 86 million barrels per day by the fourth quarter of 2005. Demand is expected to top 90 million barrels per day in 2006. The agency also forecasts a 13 percent demand growth throughout the second half of this decade, with demand growth slowing between 2010 and 2030.

Peak oil threatens everyone, not just the most highly industrialized societies that are most dependent on the petrochemical industry. In 2004, developing countries in Asia, Latin America, Europe and Africa nearly matched the developed world’s daily consumption of oil. These countries consumed, on average, 32.9 million barrels of oil per day, compared to 49.5 in the 30 developed countries of the Organization of Economic Cooperation and Development. Demand, it seems, is rising on all sides.

Unfortunately, without better data, energy analysts cannot forecast the likelihood of an oil field peaking. Consequently, energy industry leaders and policymakers will be unable to predict the sequence of oil supply shocks that will inevitably rattle across the globe.

Saudi Sclerosis
The oil fields of Saudi Arabia, historically the source of much of the West’s imported crude, exemplify the global dilemma of peak oil. In this desert kingdom, five fields account for almost 90 percent of national oil production, a fact that only darkens prospects for avoiding a worst-case peak oil scenario. The premier field at Ghawar peaked sometime between 1981 and 1982 at 5.8 million barrels per day and is currently down 16 percent from that level. Moreover, Ghawar relies on only 10 to 15 percent of its wells for nearly 80 percent of the oil it produces; the balance of its reserves consists of less viscous oil and is found in geologically complex terrain that makes drilling difficult. The other principal Saudi fields of Abqaiq, Berri and Safaniyah peaked years ago and are now producing between 50 and 60 percent of their maximum levels. The high-quality reserves at Abquaiq and Berri are almost entirely depleted, while the heavy oil that makes up Safaniyah’s chief reserves requires extensive refining.

Shaybah, the only other Saudi field where light crude is produced, yields only 500,000 barrels per day, almost 40 percent below its peak. Furthermore, extraction in this field is extremely difficult because the underlying earth is not very porous, and cracks and grooves hide the oil in pockets that are difficult to access despite today’s sophisticated drilling technology.

In addition to declining production levels, evidence of peak oil is found in the growing amount of water being extracted with the petroleum from Saudi fields. As petroleum engineers extract oil from underground reservoirs, they pump water back into them to maintain pressure that pushes oil to the surface. Naturally, the water mixes with oil, and some is extracted. In many of the Saudi fields, the proportion of water in the oil is increasing, a phenomenon akin to the hardening of arteries in an aging human body.

Prudhoe’s oil production has declined steadily from roughly 1.5 million barrels per day to 300,000.
Improvements in technology have kept these problems at bay for most of the past two decades. Three-dimensional seismic imaging, horizontal drilling techniques and computer reservoir models—all of which make oil easier to find and extract—lulled oil executives, engineers and policymakers into thinking that supply would be virtually limitless and easily accessed. In their defense, seemingly compelling evidence surfaced to justify their faith in technology. Engineers at Royal Dutch Petroleum were able to increase production at Oman’s Yibal field from a sputtering 1,500 to 2,000 barrels per day to more than 10,000 by using a horizontal drilling technique. Awed by this success, the Royal Dutch engineers persuaded the Omani government to allow them to roll out this technology through most of the country’s fields. Production at Yibal skyrocketed, reaching a peak of 250,000 barrels per day in 1997, fostering the illusion that technology could resuscitate aging oil fields. Within years, however, production began falling, and, according to the International Energy Agency’s estimates in April, is now only 30,000 barrels per day, only 12 percent of the peak reached eight years ago. Technology, it seems, is not the panacea that oil executives had imagined.

Adding to this problem, the collapse of oil prices in the early 1980s motivated field managers to ramp up production in order to provide the investment returns that originally justified development. They drilled new wells and blasted them with water and gas to boost well pressure. With production going gangbusters—nearly 2.5 times a safe level in some cases—reservoir pressures quickly fell, making it difficult to extract quality oil. Without sufficient pressure, most of the fluid pumped from underground is brine and sediment.

The majority of oil fields currently under development produce only 20,000 barrels per day on average, versus several hundred thousand from the giant fields upon which the world currently depends. If this trend toward smaller fields persists, energy companies will need to discover and develop more than 3,000 new fields by 2010 to maintain production levels.

Switching to alternative energy sources or more efficient uses of gasoline can delay the arrival of peak oil, but only if undertaken on a grand scale. For example, 1 million cars getting 80 miles per gallon would reduce consumption by only 45,000 barrels of oil per day, or .5 percent of the daily global demand for oil.

As an alternative fuel, natural gas holds some promise, but also offers significant obstacles. Transporting gas to the United States from abroad becomes economically feasible only when the gas is liquefied to squeeze a greater amount of energy into shipping tanks. This process, however, involves the additional steps of liquefying the gas and then “regasifying” it at its destination, making the supply chain for natural gas more complex and expensive than that of oil.

Fuel for Thought
As the peak oil phenomenon unfolds, it may change the way we currently arrange global supply chains. Today, too many components of goods are manufactured in various plants around the world, then flown or shipped to assembly plants close to their consumer base. As 70 percent of global oil use accounts for transportation of people and goods, assembling products and creating jobs closer to consumer markets can reduce oil consumption. Transporting goods by rail would also require only 20 percent of the oil used by shipping fleets composed of trucks and planes.

Consequently, the immediate economic impact of peak oil will weigh most heavily on the poorer countries of the world. As more and more oil fields peak and decline, fuel prices will begin a permanent, irreversible rise. Global corporations will reorder their supply chains to minimize shipping costs. Low-wage countries will lose jobs as manufacturing centers are relocated closer to wealthy consumer markets. This will cause unemployment in areas of Asia and Latin America.

In parallel, cost-of-living increases associated with rising energy costs will have an outsized impact on poorer nations as unemployment levels increase. In combination, these changes will spur greater migration to wealthier countries in the West and parts of Asia, resulting in political and economic stress. Businesses in these countries will also focus more on domestic markets, potentially leading to a breakdown of today’s global network of investors, producers and consumers.

Preventing events like these will require heroic conservation efforts, along with unprecedented development of smaller fields, alternative fuels and improved methods of transportation. As of yet, no world leader has proposed a strategic plan to guide the world along this path or to dispel the deeply embedded mentality that oil is plentiful and will be for years to come.

Matthew Simmons is CEO of Simmons and Co., a Houston-based investment bank serving the energy industry, and author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.