Re: Saudi Oil: Far from Twilight

Damn. Now there is an idea. We should have been using statistical
analysis and stat modelling. There goes the old slide rule.

I also wonder what the Saudi's were thinking when their water to oil
ratio kept increasing and is still increasing. Probably should have
used stat models to figure that one out.




Eric Gisin wrote:
By Michael Lynch



Saudi Oil: Far from Twilight

With the recent problems in the oil market, renewed attention has been focused on the theories of
M. King Hubbert and a new generation of oil supply modelers, who believe that geological resources
are scarce and a peak in global oil production is near. In fact, these analysts - usually
geologists - are unfamiliar with statistical modeling and don't recognize that they are engaged in
curve fitting, not scientific analysis. The repeated failures of their predictions and their
refusal to address substantive criticisms of their theories and methods are damning indictments of
their claim to be scientific.

The most recent controversy over Saudi oil has focused on assertions that the Saudis are
experiencing insurmountable problems in their oil fields, that their reserves are overstated, and
that their production is near a peak. A debate two years ago between Matthew Simmons and Nansen
Saleri at the Center for Strategic and International Studies failed to quiet the alarmist voices,
although again, the alarmists did not address the substantive issues that were raised. Colin
Campbell, for his part, subsequently used some of the data provided by Saleri and ignored others
(such as oil in place) and massaged some of the numbers to conclude that Saudi proved reserves data
are actually original reserves - that is, the combination of cumulative production and proved
reserves. His evidence for this: the resulting numbers were approximately similar.


One red herring comes from the opposite side of the equation: the global need for Saudi (and OPEC
and Arabian Gulf) oil. Most recent official forecasts project that sometime in the next
quarter-century, the world will require as much as 20 to 25 million barrels per day from Saudi
Arabia to meet global demand. Even though that would only represent a reserves-to-production ratio
of 30 to 1 - still triple the U.S. level - numerous analysts have suggested such expectations are
absurd and physically impossible.


Again, this demonstrates the alarmists' relative ignorance of the history of oil market
forecasting. Since the Iranian Oil Crisis in 1979, nearly every forecast has predicted a near-term
peak in non-OPEC supplies, and soaring OPEC production and market share, with Saudi Arabia the
primary contributor. However, not only has OPEC production just regained its 1979 level, but its
market share has been flat, if not declining, for a decade, since its post-1986 recovery.


This repetition of failed expectations reflects much of the nature of this debate: the alarmists
are not expert in statistical analysis, forecasting oil supply, or resource economics. They are
prone to errors of omission and especially prone to weak (or non-existent) analysis, most typically
offering facts out of context as proof of their assertions.


For instance, much of the alarmist commentary consists of the vague remarks and rumors about the
Saudi oil fields being dogs, their massive equipment purchases and so forth, which should not be
given much credence. The overwhelming desire of the world oil industry to gain access to
exploration acreage in Saudi Arabia should be ample evidence of how the country's resources are
perceived by knowledgeable industry insiders.


Simmons, author of Twilight in the Desert, is particularly talented at ignoring contradictory data.
He argues in one place that the 1976 Aramco estimate of 110 billion barrels of initial proved
reserves should be treated as credible, suggesting "game over" since production to date is about
half of that, and he believes that in three decades, the industry has not been able to increase the
recovery factor. And elsewhere, he notes that peak production for a field occurs at the half-way
point, by which measure Ghawar - using the 1976 estimates - should have peaked decades ago.
Similarly, he refers to U.S. government studies of the Saudi resources as being "secret," and then
says they were located in various libraries.


Some of Simmons' arguments have already proven fallacious, such as the suggestion in early 2004
that there didn't seem to be any significant amount of surplus capacity (in fact, production has
since grown by about 1.5 million barrels per day), or that other non-producing fields had too many
problems to be brought on line. Just as some Hubbert modelers interpret the drop in discoveries
and/or production in OPEC countries as evidence of scarcity, rather than attempts to stabilize the
market, they see the Saudi failure to produce all the oil in the ground as a sign that the fields
couldn't be produced, or at least, not without great difficulty. In fact, M. A. Adelman used the
investment plans of the Saudis to estimate that the average cost of adding five new fields would be
about $3 per barrel.

http://www.energytribune.com/articles.cfm?aid=184

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