GLOBAL OIL-SUPPLY WORRIES FUEL DEBATE IN SAUDI ARABIA
Neil King Jr.
Wall Street Journal
June 27 2008
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. (Please see related article.)
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.
Bloomberg News /Landov Sadad Ibrahim al Husseini speaking at the Oil &
Money London conference in 2006.
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."
From: Emil Lazarian | Ararat NewsPress
