Mar. 7, 2003, 1400 PST (FTW) -Journalist Julian Darley has a very good website, www.globalpublicmedia.com, featuring video interviews with notables such as Colin Campbell and Matthew Simmons. Matthew Simmons is the president of Simmons & Co. International, a company which specializes in
investment banking to the energy industry. The Campbell interview1 is a very informative chat at the petroleum geologist’s home in County Cork, Ireland. It is well worth perusal. The Matthew Simmons interview2 was recorded in an office of his business suite, and is also very informative—though it is disappointing to see a person so perceptive standing firmly behind George W. Bush. However, in his interview, Matthew Simmons made
two very big revelations.
In the first instance, Mr. Simmons was discussing his email correspondence with a senior assistant to former secretary of energy Bill Richardson. The senior assistant informed Mr. Simmons in 1999 that she was accompanying Secretary Richardson on a visit to every OPEC country. Mr. Simmons told her that if he was undertaking such a tour, he would ask each country what was their spare oil capacity. Upon returning to the United States, the senior assistant called Mr. Simmons and told him that she was quite shocked by the responses to this question. In country after country, she was told that they were already pumping at or near capacity. For practical purposes, OPEC has no spare capacity.
Several of my associates have suspected as much. But in this interview, Matthew Simmons verifies the fact that OPEC is already pumping at or very close to full capacity. This means that to meet growing demand, oil must be found somewhere else. And OPEC most probably cannot increase output to cover a crisis such as the Venezuelan strike, or the disruption of Iraqi oil production in the event of another Gulf War.
In fact, it was only a year after Secretary Richardson made his OPEC tour that world oil production appeared to peak, beginning the cycle of rising oil prices and tanking economies which we have been in since. Though Matthew Simmons did not spell it out, this is the clearest indication to date that we are at peak oil production.
The second revelation was more political than technical. Matthew Simmons states in this interview that he advised the Bush campaign and the subsequent Bush administration of the energy situation. This admission makes it very clear that George W. Bush and his administration knew about the approaching energy crisis before even stepping into the White House. Thus, as we have said at FTW, oil depletion has loomed in the background of every decision made by this administration and
every action undertaken.
In his recently released book, The Party’s Over3, Richard Heinberg backs up this assertion and goes on to say that the CIA has monitored the oil business for some time. Indeed, the CIA subscribes to the yearly report of oil analysts Petroconsultants, and so must have seen the 1995 report The World’s Oil Supply. This
publication, at a cost of $35,000 per copy, predicted that global oil production would peak in the first decade after the turn of the century.4
As we have stated before, Bush needed some catastrophe such as 9-11 to justify an endless war on multiple fronts. He needed it to provide cover for an oil grab. Of course, a superpower such as the United States always acts on a nexus of reasons and in pursuit of multiple goals, but greed for oil has been a major impetus behind pretty much everything this administration has done since taking office. Could oil really
lie behind Bush’s push to unseat Saddam Hussein? Perhaps we should rephrase this question: How could oil not lie behind Bush’s push for the conquest of Iraq?
Iraq
Even unnamed senior US defense officials are stating that the plan is to take the oil fields as quickly as possible, supposedly to protect them from Saddam.5 British troops will be used to seize the oil fields so as to thwart the appearance of a US oil grab. However, ExxonMobil is in the lead position for rehabilitating the Iraqi oil fields. Oil executives are quoted as saying there is a desperate need to find another 80 million barrels per day to meet growing oil demand.6 Might we add that this growing demand cannot be met elsewhere because of the abovementioned lack of spare capacity.
Even after seizing Iraq’s oil fields and quelling unrest throughout the country, the oil majors will find it very difficult to increase Iraqi oil production in the short term. They may even have to cut production from its current level, as Iraq has been using unsound methods to pump the amount of oil which they are currently generating. Before the 1991 Gulf War and the decade long Iraq-Iran War, Iraq was pumping an average of 3.5 million barrels per day (b/d). 7 In 2001, Iraq averaged 2.45 million b/d, and experts say their current sustainable production capacity could go no higher than 2.8-3.0 million b/d.8
Most of Iraq’s current oil production is centered around three large fields, the Kirkuk field in the north of Iraq (10+ billion barrels), the East Baghdad field in the central part of the country (11+ billion barrels), and the Rumailah fields in the south of Iraq (10+ billion barrels).9 There are two other very large fields in southern Iraq which are
basically untapped to date: the Majnoon field near the Iranian border (20+ billion barrels, possible as much as 30 billion barrels), and the West Kuma field closely associated with the Rumailah field (15+ billion barrels).10 Other notable fields are Nahr bin Umar (6+ billion barrels), Rattawi (3.1 billion barrels), Halfaya (2.5-4.6 billion
barrels), Zubair (4 billion barrels), Nassiriya (2-2.6 billion barrels), Suba-Luhais (2.2 billion barrels), Bai Hassan (2 billion barrels), Buzurgan (2 billion barrels), Khabboz (2 billion barrels), Abu Ghirab (1.5
billion barrels), Khormala (1.5 billion barrels), Tuba (1.5 billion barrels), Gharraf (1.0-1.1 billion barrels). All told, including a number of smaller fields not mentioned here, Iraq holds proven assets of 112 billion barrels of oil. The unexplored regions of the WesternDesert could add as much as another 100 billion barrels to this total. The area is known to contain oil-bearing Jurassic,
Triassic and Paleozoic formations, though they are buried much deeper than the eastern formations and so might provide more natural gas than oil.11
Much of Iraq’s oil industry was damaged during the 1991 Gulf War. Completely destroyed were the gathering centers and compression/degassing stations at Rumailah, storage facilities, and pumping stations along the Iraqi Strategic (North-South) Pipeline.12 Many sizable fields were damaged and have remained unrepaired. Sixty percent of Northern Oil
Company's facilities in northern and central Iraq were damaged during the Gulf War.13 Iraq’s oil export infrastructure was also severely damaged during both the Iraq-Iran War and the 1991 Gulf War. Pipelines, ports and pumping stations have all been affected. And Iraq’s two main Persian Gulf tanker terminals, Mina al-Bakr and Khor al-Amaya, were heavily damaged during the Gulf War. Damage to Mina al-Bakr appears to have been largely repaired over the past decade. Khor al-Amaya, on the other hand, was severely damaged during the Iraq-Iran War and then completely
destroyed during OperationDesert Storm.14
During the decade of sanctions following the 1991 Gulf War, Iraq tried to maintain production at existing fields despite an embargo on spare parts and oilfield equipment. Many of the reservoirs in production have been damaged through mismanagement and the use of questionable techniques in an effort to increase current production at the price of future production. In addition to the naturally occurring problem of water cut in Iraq’s
southern wells (the damaging intrusion of water into oil reservoirs), many fields have been damaged by the practice known as water flooding in order to boost current production. Iraq’s oil minister stated that in 2002 only 24 of 73 Iraqi oil fields were producing. Oil consulting firm Saybolt International has pointed out the risk of a 5% to 15% annual production decline at damaged Iraqi oil fields. A U.N. report in June 2001 said that Iraqi oil production capacity would
fall sharply unless technical and infrastructure problems were addressed. And U.N. Secretary General KofiAnnan has warned of a possible "major breakdown" in Iraq's oil industry if spare parts and equipment are not forthcoming. The United States has resisted any efforts for a long term solution to the problems, insisting on only short-term improvements to the oil industry. According to the head of the UN Iraq program, BenonSevan, the number of holds placed on contracts
for oil field equipment threatens the entire program with paralysis. Sevan stated in January 2002 that the United States placed over 80% of the holds, which affect nearly 2,000 contracts worth approximately $5 billion.15
Solving these problems will require major investment from a consortium of international oil companies. It will take at least a decade to double output, providing there is no further damage done. It will take at least $7 billion worth of investment to bring Iraq back to its 3.5 million b/d production level. Pushing past that level to 5.5 million b/d will require at least $20 billion of investment. Analysts say Iraq has the capacity to produce double that amount, albeit at an extraordinary cost over an extended period of time.16 Many
international companies have stepped up to offer the needed investment. Iraq has signed multi-billion dollar deals with companies from China, France and Russia. And in recent months Iraq has signed a number of deals with companies from Italy (Eni), Spain (Repsol YPF), Russia (Tatneft), France (TotalFinaElf), China, India, Turkey, and others.17 However, none of these deals can move forward until they are okayed by the U.N. Security Council.
Could all of this go toward explaining why it has become so urgent for the United States to make war on Iraq and take over control of Iraqi oil fields? For over a decade, the U.S. has blocked any reparations or new development of Iraqi oil resources. In 2001, reports finally came out announcing that without increased access to spare parts, repairs and new technology, Iraqi oil fields could be damaged permanently. Pressure is building in the U.N. to allow this remediation and modernization of Iraqi oil infrastructure. Iraq is awarding contracts to major oil companies from various countries, excluding U.S. and British companies. And all of this is being blocked largely by the U.S., while U.S. and British oil companies line up for a piece of the action in the aftermath of an Iraqi conquest.
Let’s see, are there any pieces of the picture which we are missing? Oh yes, the U.S. is studying international law to determine oil field rights in the event of a U.S. & British conquest of Iraq. And they believe that international law would give them considerable leeway in managing Iraq’s oil fields (for the benefit of the Iraqi people, of course).18
And now, to round out this picture, let’s look at Iraqi oil exports as compared to US imports. As of July 2002, Iraq was producing 1.99 million b/d (oil production was 2.45 million b/d in 2001). Of this, they export 1.5 million b/d, over one-third of that, 566,000 b/d to the U.S. This is down from 795,000 b/d (or 53%) in 2001. The route to the U.S. is very circuitous, as the oil is first purchased by companies from many countries, including Cyprus, Sudan, Pakistan, China, Vietnam, Egypt, Italy, Ukraine, and others and then is resold to U.S. importers, including ExxonMobil, Chevron, Citgo, BP, Marathon, Coastal, Valero, Koch, and Premcor.19
There is also an unknown amount of oil being smuggled out through Syria and other countries. It is difficult to say how much of this, if any, is making its way to the U.S.
Now let’s look at the U.S. side of this equation. The U.S. imported an average of 10.3 million b/d as of September 2002. Of this, Iraqi oil would only amount to 6% of U.S. imports (8% in 2001). However, the U.S. derives around 26% of its daily oil imports from the Middle East—that is 2.3 million b/d as of August 2002. So Iraqi oil accounts for about one-quarter of our Middle East imports. Comparing Iraqi imports to our top sources of imports, Saudi Arabia exports 1.49 million b/d to the U.S. (14% of total imports), Mexico exports 1.46 million b/d (also 14% of total U.S. imports), Canada exports 1.37 million b/d to the U.S. (13% of
the total), and Venezuela—prior to the oil strike—exported 1.14 million b/d (11% of the total).20 If this ranking of major oil imports was continued, Iraq would probably rank in the top ten. However, were the sanctions removed and the oil infrastructure repaired, Iraq would undoubtedly rival Saudi Arabia for the number one position; especially under a US military protectorate with US and British companies running the oil business. Beyond this, the conquest of Iraq—if successful—would allow us to add badly needed spare capacity to world oil production and it might stop the flight of oil countries from the petrodollar to the euro.
Other Oil News
Venezuela is still recovering from the oil strike. The EIA now states that Venezuelan oil production gradually rose to 1.2 million b/d in February.21 The EIA’s current short-term energy outlook assumes that the Venezuelan oil crisis will be over by March.22 However, they warn that Venezuelan supplies will not approach pre-crisis levels for another several months. Furthermore, it is possible that around 700,000 b/d of production may be permanently lost due to the strike.23 The EIA warns that OPEC efforts to increase output to make up for lower Venezuelan exports has reduced global spare capacity to only 2 million b/d—this spare capacity coming almost entirely from Saudi Arabia. There is very little room remaining to make up for unexpected supply drops or demand increases.24
On top of this, Nigeria’s white collar union began an oil export strike on Saturday, February 15th. Nigeria is the seventh largest oil exporter in the world. Royal Dutch/Shell, the country’s biggest producer, pumps an average 900,000 b/d. The oil companies expect to replace strikers with senior staff, and point out that previous strikes had little impact on exports. However, fear of the strike caused oil prices to temporarily jump by 16 cents per barrel.25 It is
evident that the market is now so tight and the world economy so gun-shy that it is to be wondered how the world will survive an invasion of Iraq.
On top of all this, there was a small item in the Australian newspaper The Courier Mail stating that leftist rebels in Colombia have blown up a large section of that country’s most important pipeline. Operated by Occidental Petroleum, the pipeline carried 105,000 b/d.26Little more is to be found about this story on the various news wires. The Bush administration has been bolstering military aid to Colombia, including increasing numbers of advisors. They have impressed upon the Colombian military that it is of primary importance to protect the oil pipelines, and they have labeled the rebels as international terrorists. What response there will be on the part of the U.S. to this latest strike at U.S. oil interests is hard to say.
Finally, in the EIA weekly petroleum updates, we find that for the week ending February 7th, crude oil imports declined by another 1.2 million barrels from the previous week. U.S. commercial crude inventories for that week sank to 269.8 million barrels, just crossing the Lower Operational Inventory Level (LOIL). This is the lowest inventory level since October 1975. However, in the week ending February 14th, crude oil imports rose to nearly 8.8 million b/d, the largest weekly average since December 20th. U.S. commercial crude inventories increased by 3.1 million barrels to 272.9 million barrels. This was back above the LOIL, but still 50.4 million barrels below the level of a year ago.27
Natural Gas
The picture for natural gas (NG) is even worse. As of February 14th, NG storage stood at 1,168 billion cubic feet (Bcf), down by 203 Bcf from the week previous. This was 868 Bcf less that a year ago and 436 Bcf below the 5-year average of 1,604 Bcf.28 In an article in The Oklahoman, Tony Say, president of gas marketing company Clearwater Enterprises said he expects NG reserves to reach an all-time
low of 600 Bcf by the end of the season. Bruce Bell, Chairman of the Mid-Continent Oil & Gas Association’s Oklahoma Division, warned that once you get down to 700 Bcf there are serious doubts as to how much gas can be withdrawn. The nation's gas reserves are stored in underground caverns, where there must be a certain amount of gas to create enough pressure to force the reserves out.29
Raymond James & Associates, in a recent report on natural gas, points out that NG production will continue to fall by 1.0 -1.5% per quarter for the foreseeable future. They warn that even if production returned to the feverish pitch of 2001, it would take three to six months before the new production would begin to slow down the natural declines in existing wells.30 Yet the NG rig total has hovered
between 800 and 900 for the past year; at least 100 less than the number needed to meet national demand, according to Bruce Bell. Despite rising NG prices for the last couple months, work has begun on only 15 new wells.31
And according the Lehman Brothers, Canadian gas production is continuing to fall by as much as 4%. And this drop will coincide with a 500 million cubic feet per day decrease in NG exports to the U.S. Canadian NG demand rose in 2002 by 2 to 3% from the previous year. Net exports to the U.S. are expected to fall by 5% in 2003.32
Based on all of this data, the NG crunch of this year could lead to an NG crisis a year from now.
