Sean-Paul Kelley | San Antonio | June 3
The Agonist [1] - I received a lot of emails about getting the transcript finished. I just don't have the time this afternoon, but I will post the first third of the interview. Part 2 of Simmon's interview is here. [2] And part 3 is here. [3]
Here [4] is Mr. Simmons [5] book, if you are interested in peak oil issues and Saudi Arabia in particular. I enjoyed interviewing him and learned quite a bit.
More after the jump
Part 1: Matthew R. Simmons, June 2, 2005.
SPK: The first question is one I have to ask: I have read in some places that you have a relationship with the Bush family.
MRS: That is a widely misunderstood deal. And in fact I get embarrassed all the number of times I've been described as an energy strategists for the Bush family or a senior advisor to the Bush administration on energy. First of all I am a big, big supporter of President Bush. I have met him several times and I spent a lot of time in 2000 making sure that the Bush campaign strategy people were aware of the growing number of energy problems that we had cropping up so that this didn't catch them by surprise. And as a result of that I ended up providing a lot of the raw data that went into the comprehensive energy plan that was laid out by Governor Bush when he was running for President.
SPK: Were you involved in the Cheney Energy task force?
MRS: I didn't have any part of the Cheney Energy task force. All those people were cabinet secretaries. I'm not trying to duck any questions. I have to say I am a pretty non-partisan energy guy. When I started providing the data to the Bush campaign I was also warning the advisors to now Governor Richardson who was Secretary of Energy, of the same issues.
SPK: The reason I ask is that we're a liberal leaning weblog and I do not want to mischaracterize you.
MRS: I am glad that you asked that. I think the media has treated me very, very fairly. But that is my only gripe. Usually it never comes up and then they just publish that I am an energy advisor for President Bush. I advised him, but do not currently, and for quite some time, advise him.
SPK: You talk about Saudi Arabia and the conventional wisdom that it is still the world's lowest cost producer of oil; do you think that Saudi Arabia has the world's lowest cost oil production? If not, who does?
MRS: You know one of the problems is coming up with a proper definition of what you are including as your costs. For years they were undoubtedly the world's lowest cost oil producer because they had already paid for the fields. And the only costs they were counting were the operating costs to pull the oil out and they weren't charging anything for electricity or water, which is most of the cost.
It was a very artificial cost. Now, today they've announced that they are going to spend something like $50 billion between now and 2009 to try and create a million and half barrels a day of spare capacity.
And so, if they properly for charging for their water handling and their electricity they would be not the highest cost, but right up there. There isn't any real cheap, low cost oil left.
They will tell you their costs are $.40-.50 a barrel. Basically it's a fictitious number.
SPK: What do you estimate their costs are?
MRS: If you take the costs of things that have been totally written off, they really aren't real costs and figure out how much you want to charge for the water and electricity it could easily be between $10-20 a barrel.
SPK: There has been a lot of talk about Saudi Arabia's spare capacity, just how much do they have. Do you believe they have spare capacity and if so, what do you think it is?
MRS: If they have any spare capacity left it would have to be in Safaniya, which is the big offshore field. That's 28 gravity oil which is heavy oil, and there really isn't any spare refinery capacity left in the world for heavy oil. And if Safaniya actually could crank up by 1.5 mbds and at peak Safaniya could produce 1.2mbd, maybe 1.5mbd 20 years ago, so the whole definition, if you define spare capacity by the amount of readily available oil that is useable then I think the answer is categorically no, they have no spare capacity.
SPK: The criticism that you just laid out I have heard that from a friend who runs a hedge fund. Nice to hear it seconded.
MRS: They toss around with great frequency that they have 11mbd of capacity, that they are producing at some number, but I think it is highly questionable that they are producing 9.5mbd a day.
SPK: Now that I have not heard before.
MRS: I'll tell you why I say that.
SPK: Ok.
MRS: It's a world of sketchy data, there are only a few pieces of reliable data, really very solid data, and on the Oil Monthly Supply Report from the International Energy Agency almost all that data is just an estimate. The best table of data is the table 6 that shows the OECD Member countries, their crude oil by country of origin, and if you trace the amount of oil that has come in from Saudi Arabia and add it up, well, it doesn't add up.
SPK: Let me make clear the assumption underlying my next question: if the insurgency in Iraq ends how much oil do you think Iraq can bring online in spare capacity? That it's not already producing now, obviously they have some serious problems because the guerillas are blowing up pipelines left and right, etc, so what I am saying is: if the insurgency ends, what kind of oil can we expect from Iraq?
MRS: The most serious problems that the Iraq oil system has is the two old giant oil fields, Kirkuk and Rumelia, were basically around 80-85% of their sustainable oil production in the 80s and 90s and both of those fields have been terribly abused, over the last two years and they finally were able to, about six to nine weeks ago, to let two contracts to have the first serious reservoir studies done of those fields since the late 1970s. And my sense is that what the reservoir field studies will show, if they are done properly is that they basically destroyed those two fields.
And now the question shifts to, well, what about all these structures they have discovered that have basically never been developed? Well Saudi Arabia has 80 of those structures, but for some reason or another in the $50 billion plan of all these old fields they are trying to rebuild, not a single one of the 80 is being tackled.
So, I suspect that in Iraq they must be a little bit like Saudi Arabia's structures. You know, they are pushing these things so hard they had the money, and it really isn't that expensive to actually bring on a new field that you've already discovered.
Then there's the question about exploration in the Western Desert. They clearly haven't, but they've explored extensively in Syria and Jordan and in the Arabian Peninsula and they have never found anything.
If we were evaluating an IPO of an exploration project in the Western Desert Of Iraq I'd say, "until you found something you couldn't raise any money for it."