TThhee SSaauuddii AArraabbiiaann OOiill MMiirraaccllee The Center for Strategic & International Studies Washington, D.C. February 24, 2003 S & C IMMONS OMPANY Presented By: INTERNATIONAL Matthew R. Simmons TThhee WWoorrlldd’’ss BBiiggggeesstt EEnneerrggyy QQuueessttiioonnss Can this miracle continue to grow? (cid:132) Will it at least stay flat? (cid:132) Could it start to fade? (cid:132) If so, when? (cid:132) S & C IMMONS OMPANY INTERNATIONAL MMyy PPeerrssoonnaall BBiiaass SShhaappeedd TThhiiss RReesseeaarrcchh Saudi Arabia’s Oil Miracle: A great economic gift to the (cid:132) world. Saudi Arabia: A stalwart steward of global oil for three (cid:132) decades. Saudi ARAMCO: Performs “Best in Class” reservoir (cid:132) practices. Oil (and natural gas) is the world’s most precious (cid:132) resource. Everyone’s “plug” factor for future energy growth is (cid:132) Saudi Arabia’s ability to increase its oil flow. If this premise is wrong, the world is in for a “nasty (cid:132) shock”. S & C IMMONS OMPANY INTERNATIONAL MMoorree BBiiaass:: II AAmm AA CChhrroonniicc EEnneerrggyy WWoorrrriieerr My entire career has been shaped by bad energy (cid:132) surprises. – 1973: oil shock. – 1979: second oil shock. – 1982 - 1992: coping with a decade oil depression. – 1991 - 2003: violent oil and gas volatility. Energy is both beneficial and destructive. (cid:132) 1% to 3% too much is a glut. (cid:132) Even 1% too little is an enormous crisis. (cid:132) The world’s energy data and crystal ball is flawed. (cid:132) (cid:132) Could we now be “flying blind”? SIMMONS & COMPANY INTERNATIONAL WWhhyy WWee SShhoouulldd WWoorrrryy AAbboouutt EEnneerrggyy AAddeeqquuaaccyy Energy is world’s most precious resource. (cid:132) Oil (and natural gas) is top of the energy food chain. (cid:132) Neither are renewable. (cid:132) Both will (or have?) peaked. (cid:132) Neither will ever run out. (cid:132) But daily supply will drop. (cid:132) Predicting the timing is hard or impossible. (cid:132) Scoffing at the notion is naïve. (cid:132) S & C IMMONS OMPANY INTERNATIONAL RReecceenntt EEnneerrggyy SSuurrpprriisseess AArree TToooo FFrreeqquueenntt U.S./Canada natural gas peaked: Nobody noticed. (cid:132) All E&P companies were supposed to grow oil and (cid:132) gas production. Most were flat while E&P capex soared. (cid:132) Russia’s recent supply rebound was total surprise. (cid:132) Rest of non-OPEC supply was supposed to surge. (cid:132) Instead it flattened out. (cid:132) The North Sea peaked (unannounced). (cid:132) Rash of reserve write downs: Tip of an iceberg? (cid:132) S & C IMMONS OMPANY INTERNATIONAL IItt IIss TTiimmee TToo RRee--EExxaammiinnee OOuurr EEnneerrggyy ““HHoollee CCaarrddss”” For decades, world’s giant oilfields were still “young”. (cid:132) Now all super giant oilfields (cid:132) are extremely mature. 20% of world’s oil supply comes (cid:132) from 14 fields averaging almost 60 years since discovery. New giant oilfield discoveries ended in late 1960s/early 1970s. (cid:132) Oil demand is still gaining steam (IEA 2030 = 120 million b/d). (cid:132) Shut-in spare capacity is either tiny or gone. (cid:132) Observable oil inventories are now “just in time supply”. (cid:132) (cid:132) No recent energy surprise has been good news. SIMMONS & COMPANY INTERNATIONAL MMyy GGiiaanntt OOiillffiieelldd SSttuuddyy The Oil Pyramid Average Production 000Bbls/Day (% Of World Total) 9,000 36,200 4,000 + (53%) Other Fields 61 Fields Between 7,900 130,000 100,000 –200,000 B/D (12%) 29 Fields Between 6,400 200,000 –300,000 B/D 221,000 (9%) 12 Fields Between 4,100 342,000 (6%) 300,000 –500,000 B/D 13,900 14 Fields In Excess Of SIMMONS & COMPANY 993,000 (20%) 500,000 B/D INTERNATIONAL IInn EErraa OOff PPoooorr EEnneerrggyy DDaattaa:: OOPPEECC IIss TToottaall VVaaccuuuumm IEA and EIA data systems are proving to have many holes. (cid:132) Their predictive track record has been awful. (cid:132) In the land of the blind, reliable OPEC data is either (cid:132) untrusted or non-existent. Tanker traffic consultants now guess at OPEC output. (cid:132) In 2002, Saudi ARAMCO reported crude oil output of 6.79 (cid:132) million b/d. IEA’s outlook is 7.38 million b/d. Most media estimates were far higher. Reported OECD Saudi imports were flat from 2000 to 2002. (cid:132) Which report was right? How does anyone know? (cid:132) S & C IMMONS OMPANY INTERNATIONAL CCoonnvveennttiioonnaall WWiissddoomm AAssssuummeess MMiiddddllee EEaasstt OOiill IIss AAbbuunnddaanntt All long-term supply forecasts assume Middle (cid:132) East oil will meet any level of non-OPEC supply gap. Saudi Arabia is the ultimate “plug” for any unmet (cid:132) demand. IEA/EIA assume Saudi oil output will double over (cid:132) next 15 to 20 years. Most oil observers think future oil prices will fall (cid:132) (due to cheap and abundant Middle East oil). S & C IMMONS OMPANY INTERNATIONAL