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BEST-L  June 2008

BEST-L June 2008

Subject:

Global Oil-Supply Worries Fuel Debate in Saudi Arabia

From:

"Humphrey,Stephen R" <[log in to unmask]>

Reply-To:

Humphrey,Stephen R

Date:

Fri, 27 Jun 2008 14:23:03 -0400

Content-Type:

multipart/related

Parts/Attachments:

Parts/Attachments

text/plain (132 lines) , HC-GM255_alHuss_20080625131343.gif (132 lines) , HC-GM256_Saleri_20080625131028.gif (132 lines) , OB-BS503_Oilfue_20080626185523.jpg (132 lines) , P1-AM035A_OilFe_20080626200416.gif (132 lines)

It's encouraging that WSJ is starting to cover this--finally the mainstream press has joined the party!

http://online.wsj.com/article/SB121451556299908501.html?mod=mktw

In case you can't open, see the text below.

Dr. Stephen R. Humphrey, Director of Academic Programs,
School of Natural Resources and Environment,
Box 116455, 103 Black Hall, University of Florida
Gainesville, FL  32611-6455  USA
Tel. 352-392-9230, Fax 352-392-9748
http://snre.ufl.edu<http://snre.ufl.edu/>

Global Oil-Supply Worries
Fuel Debate in Saudi Arabia
Former Officials at Odds
Over 'Peak' Theory;
Crude Hits High
By NEIL KING JR.
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.

[http://s.wsj.net/public/resources/images/HC-GM255_alHuss_20080625131343.gif]

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.<http://online.wsj.com/article/SB121448811185207051.html?mod=Leader-US>)

[http://s.wsj.net/public/resources/images/HC-GM256_Saleri_20080625131028.gif]

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.

THE CAPACITY QUESTION

* The Debate: Industry experts are divided over whether global oil production has peaked.
* The Background: Pessimists say big new discoveries are unlikely; optimists say innovation and investment will yield more.
* The Saudi Factor: Last weekend, Saudi Arabia said it would move to boost production capacity.

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.

[http://s.wsj.net/public/resources/images/OB-BS503_Oilfue_20080626185523.jpg]
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."

[http://s.wsj.net/public/resources/images/P1-AM035A_OilFe_20080626200416.gif]

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."

Write to Neil King Jr. at [log in to unmask]<mailto:[log in to unmask]>

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