BIKE: There is no plan B!

[rcbaker]

Business Week admits and then frankly discusses the possibility of 
peak oil below:

The following piece from BW was posted on the energyresources list. 
Note that whatever its true resources, the ruling power in the Saudi 
kingdom wants to keep firm Saudi national control of oil, go slow, 
and exclude foreign oil Corporations. 

Gee, is it maybe possible that maybe Bush should not have pissed off 
practically every Arab in the world by supporting Israel and invading Iraq? 

Lets see if TxDOT can manage to keep this pesky oil supply problem 
quiet -- at least until the Wall Street bond houses have certified the 
$180 billion in future new roads in Rick Perry's Trans-Texas Corridor
Plan as being sound investments as toll roads, and therefore safe bets 
as investment-grade municipal revenue bonds. 

(see the   "www.corridorwatch.org"  website )

Why would anyone want to ride a bike when we will have these 
billions of dollars worth of toll roads that need the revenues that 
only cars and trucks will pay? Ten years from now, Wall Street will 
need the money it loaned TxDOT for toll roads back, no matter 
what the cost of gasoline is then. And it will be your duty as a patriotic 
Texan to switch from a bike to driving a car enough to help keep the 
toll revenues coming in and prevent the bonds from defaulting, right?

-- Roger

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Saudi Arabia: There's plenty in the ground, but it won't be easy to 
get. The kingdom may need major new foreign investors. Will it dare 
open up? 

Saudi officials like to fly visitors across the Empty Quarter, the 
forbidding desert that occupies the eastern portion of the kingdom, 
to visit the Shaybah oil field. Nestled amid stunning sand dunes 
like a ship in a vast ochre ocean, Shaybah is a source of national 
pride for the Saudis -- akin to the Hoover Dam or the Apollo space 
missions for Americans. To outsiders, the message is: When it comes 
to oil, you can count on us. "We are the most reliable producer and 
supplier of crude in the whole world," says Mahmoud M. Abdul Baqi, 
exploration chief of Saudi Aramco, the giant state-owned company 
that produces most Saudi oil and gas and exerts powerful control 
over Saudi Arabia's economy.

Shaybah, which started producing in 1998, is an impressive piece of 
engineering. Developing the field was made possible by the use of 
multi-branched wells that were bored under the towering dunes from 
salt flats interspersed among the red hills. The new wells produce 
10 or more times the volume of a traditional vertical well, sharply 
reducing the number of holes needed and thus slashing costs. 
Shaybah's installations are built to withstand scorching 
temperatures of up to 50C. One hundred million cubic feet of sand 
were moved to construct a new town, complete with giant swimming 
pool, mosque, and library, to house the 700 or so workers operating 
the facilities.

But tours of Shaybah may no longer be enough to allay doubts about 
the shelf life of Saudi Arabia's oil fields and the reliability of 
its reserve estimates. Long-standing assumptions about Saudi oil are 
being questioned -- with some observers wondering if Aramco is too 
resistant to needed outside investment. The doubts come at a time 
when the kingdom is coping with a domestic Islamist insurgency and a 
changing relationship with the U.S. The uncertainty is rattling the 
markets just as oil prices are pushing $40 a barrel and reserves of 
oil companies, especially those of Royal Dutch/Shell Group (RD ), 
are being revised downward.

Since it's widely assumed that Saudi Arabia controls about a quarter 
of the world's oil, any doubts about whether the kingdom has the 
goods go to the heart of the global economic system. Will the Saudis 
be able to raise production as demand rises and traditional oil 
sources elsewhere decline? "We cannot afford to be wrong about the 
ability of key exporters to meet growing oil demand to make up for 
disruptions in supply," says Robert E. Ebel, director of the energy 
program at the Center for Strategic & International Studies (CSIS), 
a Washington think tank. "Too much is at stake politically and 
financially."

"There Is No Plan B"
The most vocal skeptic is Matthew R. Simmons, chairman of Simmons & 
Co. International, a well-known Houston-based investment bank 
specializing in energy. He made headlines in February by telling a 
CSIS audience that the Saudi "miracle" of almost effortless, cheap 
production was nearing an end. Drawing on technical papers published 
by the Society of Petroleum Engineers and a February, 2003, visit to 
Saudi oil fields, Simmons thinks the Ghawar Field, the world's 
largest, with production of 5 million bbl. per day, could be running 
dry. Other fields of similar vintage -- Ghawar was discovered in 
1948 -- such as Forties in Europe's North Sea or Alaska's Prudhoe 
Bay, have declined sharply from their peaks. "The entire world 
assumes Saudi Arabia can carry everyone's energy needs on its back 
cheaply," says Simmons. "If this turns out not to work, there is no 
Plan B."

Simmons says the big problem is "no data" for the reserves of Saudi 
Arabia and other big Mideast producers. "No third-party inspector 
has examined the world's most important [energy] insurance policy 
for years." If the Saudis don't like the questions, he says, they 
should present "good, transparent data" to back up their claims. 
Simmons also suspects that most of the other big Saudi fields, 
including Abqaiq and Berri, could be past their peak. He thinks 
production has been sustained by technology -- chiefly a system 
known as water injection -- and that a sudden collapse in a field is 
possible. That occurred at Oman's Yidal field, to Shell's regret. He 
speculates that the Saudis may soon have to develop fields once 
deemed marginal, boosting capital costs.

If Simmons is right, the Saudis could soon be in deep trouble. Their 
relations with the U.S. are already strained thanks to the 
participation of so many Saudis in the September 11 attacks. If it 
turns out they have much less oil than they claim, "the role of the 
kingdom would be completely devalued strategically," says Roger 
Diwan, a senior analyst at consultant PFC Energy in Washington. With 
no alternative to oil in sight for decades, the U.S. and other 
consuming nations would increasingly need to look to other sources, 
such as Russia or Iraq.

Not surprisingly, the Saudis have reacted with shock and dismay to 
the skepticism. Some mutter darkly about conspiracies against their 
country. "What's the story? Why this sudden panic?" said Abdul Baqi 
in a meeting with BusinessWeek at Aramco's Dhahran headquarters in 
Saudi Arabia's Eastern Province.

Simmons' pronouncement is having one beneficial effect: The tight-
lipped Saudis are opening up, to a degree. Three top Aramco 
reservoir engineers and geologists offered BusinessWeek a scenario 
as optimistic as Simmons' is gloomy. Even though it has been 
producing oil for decades, they say, Saudi Arabia has depleted only 
28% of its proved reserves. Not only does it have 260 billion bbl. 
of proved reserves with a 90% probability of recovery, 100 billion 
more barrels of already discovered oil may be recoverable, 
especially as technology improves. As for Ghawar, the Saudis 
produced detailed data showing that pressure is steady and water 
content of the oil -- a sign of trouble if it's extensive -- is 
under control. "I think [Simmons' argument] is completely wrong -- 
based on flawed statistics and very poor engineering analysis," says 
Nansen G. Saleri, a longtime Chevron (CVX ) veteran who is now 
Aramco's chief of reservoir management.

The Saudis conclude that the kingdom could easily ramp up to 10 
million bbl. a day from its current 8.5 million and comfortably 
sustain that level through 2042. If demand is really strong, they 
insist, the kingdom could build up to 12 million bbl. a day by 2016 
and hold that level out of existing reserves until 2033.

But while few in the industry doubt the Saudis have huge quantities 
of oil, experts warn that even the Saudis won't know their 
capabilities until an actual ramp-up. "Even they won't know until 
they have tested," says Herman Franssen, president of International 
Energy Associates Inc., an energy consultant in Chevy Chase, Md. And 
the Saudis may face far greater challenges in developing their 
reserves and maintaining production than they would like to 
admit. "We think Saudi Arabia has huge reserves," says Fatih Birol, 
chief economist at International Energy Agency, a Paris-based 
intergovernmental group that monitors global energy supply. "We also 
recognize that these reserves may have geological surprises ranging 
from steep decline rates in some giant fields to water [problems]."

In addition, if older fields elsewhere in the world run dry, the 
Saudi fields may be called upon to perform heroically: Birol 
estimates that the Saudis would need to double current production 
capacity, to 20 million bbl. a day, by 2020. His agency figures that 
global demand for oil will grow from 80 million bbl. a day in 2004 
to 115 million by 2020. In this scenario, the Saudis would be 
supplying close to 30% of that increase.

The Saudis and some analysts are skeptical that demand will rise 
that much, even with behemoth China consuming as much as it can. One 
reason: Higher prices may curb the world's thirst. "Some of these 
long-term forecasts are way off the mark," says Saddad Husseini, who 
recently retired as Aramco's executive vice-president. "They show a 
minimal change in price and a huge increase in demand." But among 
outside analysts, there is lingering concern about whether the 
Saudis are moving fast enough to develop new sources of crude. "The 
issue is not whether there is enough oil but rather whether they 
have the willingness and the ability to develop it in a timely 
manner," says Edward L. Morse, a former U.S. official for global 
energy policy and now a senior adviser at Hetco, a New York-based 
energy trader.

The numbers are huge. With new capacity costing $3,000 to $6,000 per 
daily barrel, the Saudis would have to spend somewhere around $6 
billion to $12 billion just to get to 12 million bbl. a day -- along 
with substantial costs to maintain production. Doubling output would 
require much broader investment, perhaps $150 billion, Birol 
estimates. He worries that because Saudi Arabia and other big 
Mideast producers, such as Iran, are largely closed to foreign 
investment, there may be financing constraints. "If the reserves are 
closed to [foreign direct investment], they may not be able to find 
the necessary funds," he says.

For now, with oil prices high, Aramco doesn't seem to be having any 
problem making the case for its budget to the Saudi government. But 
economists in the kingdom think that in coming years, with a growing 
population and demand for more schools, hospitals, and other public 
services, Aramco could find its spending curtailed. Its executives 
shrug off such concerns. Projects such as Shaybah have come in ahead 
of schedule and below cost.

Aramco executives also like to distinguish their organization from 
other national oil companies, arguing that Aramco retains the 
commercial ethos of its founding American partners -- not the 
sometimes lax attitude common at most state-run organizations. 
Certainly, Aramco personnel are an elite among Saudi industry. 
Engineers display an American-style, can-do approach to their jobs. 
Onsite, at least, they wear Western clothes -- not the cumbersome 
Saudi national uniform of white robes and checkered kaffiyehs. "I 
worked 18 years at Chevron, and I don't really see the difference," 
says Saleri. "In fact, as far as the ability to do things, we have 
tremendous empowerment."

Gingerly Pace
Yet Aramco is also different from an international oil company. It 
is managing gigantic fields with a long-term strategy rather than 
milking smaller ones for all they're worth, as majors often do. 
Shaybah is now producing about 550,000 bbl. a day -- even though 
Aramco execs say that with close to 16 billion bbl. of reserves, the 
field could easily be milked for 1 million bbl. a day. An oil major, 
under pressure to maximize returns on capital, would likely be 
pumping at much nearer that level. But Aramco is proceeding at a 
gingerly pace, preferring to more fully understand Shaybah's 
reservoirs before pushing them harder, even though the field's high-
quality crude brings a premium of a dollar or more per barrel over 
the heavier oil from other Saudi fields. "We drive slowly, not 
fast," says Saleri.

Aramco execs say they don't feel much urgency to add production 
capacity. They plan a hike of 1.4 million bbl. a day or so by 2009, 
but that might just make up for depletion in the years between. But 
Aramco execs may have another reason to downplay talk of a crisis: 
They don't want the government in Riyadh to invite oil majors in to 
develop the next generation of Saudi oil fields. Aramco isn't happy 
about the prospect of having foreign companies operating in the 
kingdom. They like having all of those reserves for themselves -- 
and would probably balk at the hard-charging style of an Exxon Mobil 
Corp. (XOM ) or a BP PLC (BP ).

Partly because of Aramco's opposition, a four-year, high-profile 
effort led by Crown Prince Abdullah to attract global companies to 
explore for gas to power electricity, petrochemical, and water 
projects worth tens of billions of dollars collapsed last year. It 
was replaced by much more modest wildcat exploration schemes. 
ExxonMobil and BP walked away, while Royal Dutch/Shell and Total 
(TOT ) agreed to an exploration deal. In March, several more global 
companies, including Russia's Lukoil (LUK ), Spain's Repsol YPF 
(REP ), and Italy's ENI (E ) signed gas-exploration deals.

One goal of the gas initiative, according to sources close to the 
project, was to break Aramco's domination of the Saudi oil-and-gas 
industry. But Crown Prince Abdullah and Foreign Minister Saud al 
Faisal underestimated the power of Aramco and Oil Minister Ali 
Naimi, a fierce advocate of the national company who was its first 
Saudi CEO. Naimi and his minions drove the majors crazy by 
restricting them to exploration acreage they considered marginal. At 
the signing ceremony on Mar. 7, Naimi hinted that it will be a long 
time before more foreign investors are let into the kingdom's oil-
and-gas industry. "It is necessary to slow down to know the results 
of this work," he said.

Still, Saudi Arabia is changing, and Naimi, who is 68, won't be in 
his job forever. Like the proverbial camel, international oil 
companies have their noses under the Saudi tent. As demand for oil 
rises, they hope they'll find a way in. 

By Stanley Reed
With Stephanie Anderson Forest in Dallas