[Marxism] Saudi oilmen debate peak oil

Marvin Gandall marvgandall at videotron.ca
Tue Jul 8 19:50:04 MDT 2008


Here's an interesting recent piece from the Wall Street Journal on the
supply debate raging at the top of the industry, as seen through the
conflicting outlooks of two former oil executives from the world's largest
oil
company, state-owned Saudi Aramco. Traders are betting on the assessment of
Husseini and others that the "the world faces a brute reality of depleting
resources and ever rising prices." Saleri rejects peak oil theory, saying
demand-driven investment and technological innovation will catch up with and
overtake the shortage of supply.
===================================
Global Oil-Supply Worries
Fuel Debate in Saudi Arabia
Former Officials at Odds
Over 'Peak' Theory;
Crude Hits High
By NEIL KING JR.
Wall Street Journal
June 27, 2008; Page A1

Sadad al-Husseini and Nansen Saleri raced up the ranks at Saudi Aramco, the
world's most powerful oil company, working together for years to squeeze
more crude from Saudi Arabia's massive fields. Today, the two men have
staked out opposite sides of a momentous industry debate.

Mr. Husseini, Aramco's second-in-command until 2004, says the world faces a
brute reality of depleting resources and ever rising prices. Mr. Saleri,
until recently the company's oil-reservoir manager, insists that with enough
ingenuity and investment, plenty more oil can be found.

With oil prices having doubled over the past year, political leaders, Wall
Street investors, commuters, airlines and car makers are all scrambling to
divine where prices will head next. The disparity of opinion between two of
the most knowledgeable men in the industry shows how much fog hangs over the
most basic question of all -- whether oil can be unearthed any faster than
it currently is.

At the moment, Mr. Husseini's pessimistic view is clearly ascendant. Even
before this year's surge in oil prices, there were gloomy industry
predictions that world oil output would soon hit a ceiling. U.S. benchmark
crude hit a record high on Thursday, propelled by Libyan threats of possible
supply cuts, closing at $139.64 a barrel, up more than threefold since 2004.

But Mr. Saleri isn't alone in dismissing the gloom as misplaced. Optimists,
from Exxon Mobil Corp. to the U.S. Energy Department, argue that high prices
propel companies to innovate and invest more. As supplies rebound, prices
will fall from today's levels.

Saudi Arabia itself, producer of 12% of the world's oil, has vacillated for
years over whether to try to extract oil faster than it already is. Last
weekend, urged on by Saudi King Abdullah, it appeared to move into Mr.
Saleri's camp. Fearful that supply jitters were damaging the world economy,
the kingdom said it was ready to invest tens of billions of dollars to boost
its capacity to unprecedented levels -- to 15 million barrels a day over the
next decade, from just over 11 million now.

Opinions within the region on the health of the Persian Gulf's remaining
petroleum riches vary more widely than many realize. Messrs. Husseini and
Saleri disagree over whether the new Saudi production target is either
feasible or wise -- echoing a debate that has swirled behind the scenes at
Aramco for years.

That the two men worked side by side at the company that controls
one-quarter of the world's proven oil reserves makes their divergent
outlooks all the more striking.

Mr. Husseini, now an independent consultant, has jetted around the world
spreading his views, including recently over dinner with George Soros and a
clutch of other top financiers. Mr. Saleri has lectured, written opinion
pieces and buttonholed top oil officials from Latin America to Kuwait.

Mr. Husseini, 61 years old, lives across the street from the Saudi oil
minister, Ali Naimi, in a leafy neighborhood of Dhahran, the Aramco company
town on Saudi Arabia's east coast. The suave but sharply opinionated
petroleum geologist says most of the big oil repositories have been found,
and no amount of gadgetry will restore bubbly youth to aging fields from
Indonesia to the Gulf of Mexico. War, politics and soaring costs, he adds,
are slowing development in many of the most promising regions.

"The fact is, we have to work harder and harder to get the oil we need," he
says. Those who contend otherwise, he insists, "claim to have some magic
potion, like voodoo, that doesn't exist."

Mr. Saleri, who is a year younger, shrugs off his former boss's pessimism. A
self-described "technology nut" who resigned as Aramco's top reservoir
manager last fall to set up his own consulting shop in Houston, Mr. Saleri
has become a vociferous opponent of the "peak oil" view, which holds that
global oil production is about to enter a permanent slump due to shrinking
resources and limited investment.

"We have consumed only one trillion of the 14 or 15 trillion barrels of oil
that are out there," says Mr. Saleri, citing a personal estimate for all
types of oil that is far higher than most. "For the next 40, 50 or 60 years,
I see no problem at all."

Aramco Outsiders

Both men started their careers at Aramco as outsiders. Mr. Husseini's family
moved to Saudi Arabia from Syria in 1961, when he was 14. The royal family
had invited his father to help establish the Saudi National Guard under the
command of Prince Abdullah, who is now the Saudi king. Prince Abdullah
became a guardian of sorts to the six Husseini children after their father
died in a car wreck in 1968.

After graduating from Brown University, Mr. Husseini took a job with Aramco,
which was then in American hands. By 1980, when the Saudi government took
over the company, the young geologist was rising fast. "Sadad was one of the
best engineers I worked with anywhere in the world," says Edward Price,
Aramco's president at the time.

Mr. Saleri's route to Aramco was more circuitous. Born to a prominent
Armenian family in Istanbul, he studied in the U.S., then joined Standard
Oil of California, now Chevron Corp. His job was to take all the known data
on an oil field -- well-flow rates, geological core samples, seismic
charts -- and predict how the reservoir would behave under different
production scenarios. "I basically sat in a dark room and crunched data," he
says.

In 1978, Chevron sent him to Saudi Arabia for a seven-year stint as a
consultant to Aramco, where he met Mr. Husseini. The oil world was about to
experience a price spike that began with the Iranian revolution. For three
years, starting in 1979, Aramco pushed its oil production to nearly 10
million barrels a day -- still its all-time record.

What happened next bears directly on Mr. Husseini's current view. The effort
to draw out so much more oil, he says, nearly crippled the kingdom's
mightiest fields. The pressure in many of them plummeted. Water seeped into
oil zones.

"They were going hellbent for leather to take care of world demand," he
says. "And then we spent the next seven or eight years cleaning up the
mess."

After Aramco began cutting back on output in 1981, Mr. Husseini worked to
mend its huge reservoirs -- and to understand them better. In 1992, he
persuaded Mr. Saleri to join Aramco full-time to help create
computer-simulation models of all Saudi oil fields. The two men worked side
by side on some of Aramco's most ambitious projects, including the
development of a vast oil field called Shaybah, deep in the country's remote
and forbidding Empty Quarter.

It was at Shaybah that Mr. Saleri had what he calls his "big eureka moment."
Aramco had developed the field using hundreds of wells that went down, then
snaked horizontally. But when Shaybah came on stream in 1998, its production
fell short of the planned 500,000 barrels a day.

Mr. Saleri led an aggressive campaign to drill a new batch of
extraordinarily long wells, many with multiple branches shooting off in all
directions. Shaybah's production shot up. "That was a true engineering
breakthrough," says Rick Chimblo, Aramco's chief geophysicist at the time.

That success helps explain why Mr. Saleri is now such an optimist. "Shaybah
brought me fame," says Mr. Saleri. "And it made me realize how the old rules
no longer applied."

Mr. Husseini applauded Mr. Saleri's accomplishment. But soon, the two
executives were disagreeing on key forecasts. In 2001, Aramco was looking to
open the kingdom's vast Empty Quarter to foreign natural-gas exploration.
Mr. Husseini estimated that the area contained at most about 30 trillion
cubic feet of gas -- not large by Saudi standards. Mr. Saleri predicted the
area would yield 10 times that much. So far, drilling in the area has found
no commercial quantities of gas.

At around that time, rising oil demand revived discussion within Aramco over
when and how to boost the kingdom's production capacity, then just over 10
million barrels a day. Then, as now, Messrs. Husseini and Saleri had sharply
different views on the issue.

Recalling his experience in Shaybah, Mr. Saleri argued that the kingdom
could hit 15 million barrels a day and hold that level for decades. Mr.
Husseini, remembering the missteps of the late 1970s, pushed for what he
calls "a realistic, gradual approach." Fifteen million barrels a day would
be sustainable only briefly, he said, and then only with huge effort and
expense.

"My view is that you produce a field for the longest period of time at the
least capital cost," says Mr. Husseini. "Nansen comes from the
international-company school of thought, which is to get the maximum amount
of oil you can in the shortest time."

International Pressure

In recent months, Saudi leaders appeared to have adopted Mr. Husseini's
view. Local reports quoted King Abdullah saying that some new discoveries
should stay in the ground. "With grace from God, our children need it," he
said. Mr. Naimi, the oil minister, announced that Aramco saw no need to go
beyond 12.5 million barrels a day next year.

But on Sunday, under heavy international pressure, the kingdom revived its
earlier promise to push for the far higher target of 15 million barrels a
day.

Mr. Husseini, once viewed as a shoo-in to be Aramco's top executive, left
Aramco in March 2004 after clashing with other senior managers over
production targets and other matters, others at the company say. Mr.
Husseini declines to explain why he left, saying only: "I'd done all I could
to support all our collective objectives without having to do anything I
would feel embarrassed about."

Months later, he issued his first gloomy take on the world's oil. Forces
ranging from resource nationalism to depletion rates in the biggest fields,
he wrote in Oil and Gas Journal, meant that oil prices will "continue to
escalate through the end of the decade."

By fall he was warning that consumers shouldn't expect any big Saudi
production increases over the next decade. His statements earned him several
sharp rebukes from the Saudi Oil Ministry, though Mr. Husseini insists that
his relations with the country's top oil officials remain warm.

Mr. Husseini says he often bumps into Mr. Naimi, the Saudi oil minister, in
their Dhahran neighborhood or at parties. "We are great friends. I see him
all the time," he says. Mr. Naimi declined to comment.

By last fall, anxiety was growing within the industry and on Wall Street
over whether long-term supplies could keep pace with the rising world
demand. Mr. Husseini stoked those fears at a London conference in October.
The major oil-producing nations were inflating their oil reserves by as much
as 300 billion barrels, about one-quarter of the world's proven reserves, he
said, while the giant fields of the Persian Gulf region are 41% depleted.

Mr. Saleri, who left Aramco in September, doesn't share those worries. He
has hired a half dozen former Aramco and Chevron officials and opened a
business in Houston. His company, Quantum Reservoir Impact, says it has the
reservoir-modeling and management know-how to revive declining oil fields.
Mr. Saleri is now shopping his services to big national oil companies in
Latin America and the Middle East, though he has yet to sign any contracts.

Peak-Oil Dispute

In a Wall Street Journal opinion piece in March, he dismissed the peak-oil
theory. "The world has plenty of oil," he wrote.

Three weeks later, Mr. Husseini flew to New York at the invitation of a
clutch of high-powered financiers, including Mr. Soros, Leucadia National
Corp. Chairman Ian M. Cumming and Aubrey McClendon, the chief executive of
natural-gas company Chesapeake Energy Corp.

The group of about 20 met for dinner in the 21 Club's wine cellar. Mr.
Husseini declines to comment on the session. One guest says he spoke mainly
about the geopolitical thunderclouds hovering over the oil market,
especially the U.S. and Israeli standoff with Iran.

In a longer presentation the following morning, he argued that the world
will have to work hard just to keep its oil production where it is.
Conservation, not new oil discoveries, will be "the primary source of
overall energy availability" going forward, he said.

He delivered the same message to oil magnate T. Boone Pickens over lunch in
Chicago. "It was just two oil guys talking," says Mr. Pickens, adding that
Mr. Husseini's views dovetail with his own.

Messrs. Husseini and Saleri remain collegial, though they haven't spoken for
months. Both see the other's views as largely a matter of personal
disposition.

"Sadad by nature sees the dark clouds overhead," says Mr. Saleri. "He's a
pessimist."

His former boss laughs at the description. "The problem with Nansen," he
says, "is that he loves his theories, even when they run up against
reality."







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