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GLOBAL OIL SUPPLY: ARE WE RUNNING OUT? Experts to Analyze Saudi Arabia's Energy Future Matthew Simmons President, Simmons and Company International Mahmoud Abdul-Baqi Vice President, Exploration, Saudi Aramco Nansen Saleri Manager, Reservoir Management, Saudi Aramco February 24. 2004 Mr. Verrastro: Good morning and welcome. My name is Frank Verrastro. I'm the Director of the Energy Program here at CSIS. I'd like to thank you all for coming. We have an extremely important and topical discussion today and I won't bore you with the details of some of the infomercials for starting here, but I want to take a couple of minutes at the outset just to tell you how we see this program fitting in with our overall energy effort here. After going through war in the Middle East and having electricity crises, blackouts on both coasts. We're talking about LNG and national gas shortages. We've seen a ride up in gasoline prices. We decided we needed to reorient the program here so that we took at the same time both a strategic look at supply and then maybe a more forward-looking take on our energy futures. That's basically what we decided to do. We've developed a bifurcated approach where on the one hand we're looking at strategic energy and security of supply along with global geopolitics and at the same time we want to spend some time looking at things like environment and technology and energy futures. Many of you over the course of the past couple of months have attended sessions here dealing with Iraq, securitization of Iraqi oil or Iraq electricity. We co-sponsored with the Africa and Middle East programs here an effort looking at the reintegration of Libya and rogue states under Jon Alterman's Prodigal States Initiative. Our expectation is that in the future we're going to be looking at things like LNG, Russian oil supply and infrastructure and Chinese demand. But the session that we have here today seems to encompass almost all of the pieces we have in the program and that's why I think it's extremely

FUTURE OF GLOBAL OIL SUPPLY: SAUDI ARABIA - 2/24/04


important to use this as a kickoff event. We're going to be touching on this morning issues of security, of supply, and strategic initiatives. Obviously we'll talk about global geopolitics. At the same time you're going to hear a lot about technology. In the end, this is all going to develop our alternative energy futures and what we see as important. There are two things I need to say at the outset and before I turn this over to Bob Ebel. There are cards on your seat. The cards, we're asking you to write your questions. When you write your questions if you could direct them to a specific panelist, we're going to have two separate panels. We'll break after Matt Simmons' presentation. But if you'll identify on the card who you want the question addressed to, that would be helpful. Also if you're write legibly and neatly that would also be helpful since if we can't read it we can't ask it. In terms of the presentations, after the presentation this morning we will have printed copies of the materials available for you in the back. We will also post the presentations on our web site and the entire Saudi Aramco presentation will be on their web site on Wednesday morning. It's www.SaudiAramco.com. Without further ado I'll turn this program over to our Chairman, Bob Ebel, and he can introduce Matt Simmons. Thank you. Mr. Ebel: We're thinking of putting some more chairs in the back so that everybody can have a seat. On behalf of CSIS let me welcome you to this discussion of the future of Saudi oil production. Before we begin our program let me go over again how we're going to proceed. As Frank said, I will moderate the session by Matt Simmons. At the end of his remarks we will then seat the Saudi Aramco representative and that portion will be moderated by Frank Verrastro. Once the Saudi presentation has been concluded we'll bring Matt back up to the podium and we'll open the floor for questions. As Frank noted, you each have a card. Write legibly. The cards will come to me and I will make the decision as to what questions are passed forward to Frank. Please turn off all your cell phones now. Don't wait for the first ring. [Laughter] And just as important, the restrooms are out to your left and down the hall. We will take about a 15-minute coffee break after Matt



concludes and give us time to seat the Saudis. There goes one phone right now. Have we got them all off? Let me put a couple of questions to you. Whether the global oil supply can keep pace with growing world oil demand is being questioned in some circles. Some of you may have been present here last June 17th when we hosted a workshop entitled "Cresting the Petroleum Peak: When Supply Can No Longer Meet Demand." WE have a gentleman with a camera in the back who I co-hosted that session with. The idea was to provide an opportunity for those who were convinced that the world was indeed creating the petroleum peak to lay out their rationale, to lay out their arguments, so that we could make our own judgments as to the validity of their findings. We are following the same philosophy this morning as we look at the future of Saudi oil. We don't need to dwell on the importance of Saudi oil, either to the United States or to the world oil market, but I would emphasize at least in my own opinion that the importance of Saudi oil is based as much on its spare producing capacity as it is on its position as the world's leading exporter. Even more so in times of supply disruptions such as the military intervention in Iraq last year which took Iraqi oil off the market. Saudi Arabia advised the United States that its spare producing capacity which at present I would put at around two million barrels of oil a day, they were prepared to put that spare capacity to work to offset the loss of Iraqi oil, and therefore the United States did not need to take the step of tapping into our strategic petroleum reserve. They did and we didn't. Who might ever rival Saudi Arabia in terms of production, exports, and most importantly, spare capacity? Not Russia. Even though Russian oil production this year is on track to probably average nine million barrels of oil a day, giving that country worldwide leadership. The prospect must be considered that at some point in time Russia might replace Saudi Arabia as the leading oil exporter, but Russia is unlikely to ever deliberately develop spare producing capacity. Iraq could replace Saudi Arabia, at least in the minds of some of the Iraqis that I have worked with. In their minds a broad and successful exploration and development program plus raising the depletion rate, currently around one percent to four to five percent would do it, so they say. Taking Iraqi oil to as



much as 12 million barrels of oil a day. But when? Certainly not this decade, and not without foreign investment. Moreover, might Iraq ever financially justify the establishment of spare producing capacity? I find that outside the realm of reality. Nations are prisoners of geography and no one nation enjoys in full fashion all the fruits that geography can bestow. Some by accident of nature are rich in energy resources but find themselves lacking in other strengths. Some are dynamic in all the virtues we may respect, but poor in natural resources. This makes for a shrinking and increasingly interdependent world. At the same time it makes for conflicts among nations as each seeks to maximize its strengths and minimize its weaknesses while preserving and hopefully enhancing its stature among its peers. It is out of this conflict that the issues of the past and of the future emerge. Now let me turn to the theme of this morning's gathering, the future of Saudi oil production against the background of a somewhat worrisome thought that there is no substitute for Saudi oil. It's my pleasure to introduce the first speaker this morning, Matt Simmons. Matt is Chairman and Chief Executive Officer of Simmons and Company International, a specialized energy investment banking firm founded in 1974. This firm enjoys a leading role as one of the largest banking groups in the world. The firm assists its energy client companies in executing a wide range of financial transactions from mergers and acquisitions to private and public funding. I've had the pleasure of knowing Matt for some time and I congratulate him on bringing a focus to a subject that has not been known for its transparency. Matt, the floor is yours. [Applause] Mr. Simmons: Thank you, Bob. It's an honor to be here. This wouldn't actually be a particularly important subject to talk about if that heading was not true. But as Bob so eloquently said, I believe that over the course of the last 30 to 40 years maybe the greatest miracle on earth economically has been what Saudi Arabia has been able to do in supplying us oil.



There are only two rivals today that are even close to Saudi Arabia -- Russia and the United States. Saudi Arabia does their miracle with about 5,000 wells. Russia, 120,000 to 150,000 wells. The United States, 700,000 wells. So there's no one that rivals Saudi Arabia. Had that miracle not been so important then my next statement of this is the world's biggest energy question, also wouldn't be true. But since it is, it is true. I think the biggest energy question we have in the world today is can this great Saudi Arabian miracle continue to grow, because in everything we know about demand it has to grow. Secondly, if not, can it at least safely stay flat or is there any possibility that it could start to fade? If so, when? Let me also begin by telling you that I don't think anyone can basically do any analysis without having it affected by their biases and I'd like to basically just share with you a few of my biases. My first bias is I really do believe that the Saudi Arabian miracle was a miracle. My second bias is I think Saudi Arabia has been as stalwart steward of the global world markets for three years. My third bias, I think Saudi Aramco performs Best in Class reservoir practices. No one in the world has any better technical competence than Saudi Aramco. I also though think that oil and gas is the world's most precious resource and that everybody's long term planning plug factor for future growth is based on the bedrock assumption that Saudi Arabia's ability to increase its oil flow is perpetual, and if this premise is wrong the world is in for a nasty shock. My other bias is an effectively chronic energy worrier. Why? My entire career has actually been shaped by a series of bad energy surprises. About two weeks after the 1973 oil shock I decided to move from Beacon Hill in Boston to Houston to found our firm. In 1979 I witnessed full-hand the second oil shock. Then I spent, along with the rest of our firm, a decade trying to save the oil service industry through bankruptcies and reorganizations and so forth so that we'd still have a few companies around to drill rigs. Then I watched in '91 to 2003 us going into this unbelievably violent area of oil and gas volatility and downsizing after downsizing when we didn't actually need to do it.



Out of that came a very strong personal belief that energy is both beneficial and destructive. A one to three percent too much energy gets classified as glut, and even one percent too little creates an enormous crisis. I also think that the energy's data crystal ball today is actually badly flawed and that we actually could now be flying energy blind. So that just makes me a chronic energy worrier. Why should we worry about energy adequacy? If energy weren't the world's most precious resource, we shouldn't. But oil and energy is and oil and gas is at the top of the energy food chain. Neither are renewable. Both will some day peak. Renewable things do some day peak, and there is some chance that that might be in the past tense. Neither will ever run out but daily supply at some point will drop. Predicting the timing of this drop is either very hard, or unfortunately, impossible. But scoffing at the notion is today, in my opinion, frankly naive. Recent energy surprises have actually started cropping up too frequently. The U.S. and Canadian natural gas market peaked. We had about 150 to 200 of the best minds in North America put their hands on their heart in a publication we published in March 2000 saying don't worry about natural gas supply needing to go from 22 to 30pcf. We'd already peaked but nobody knew it. And we came back and did an awful report at the end of September this year showing the series of linked miracles that we need to do to keep North American demand flat until 2009 so we can have some growth again. Peaking turns out to be a hard thing for people to get their hands around. Almost all of the major oil and gas companies over the last five to seven years were supposed to aggressively grow their production by five to eight percent per year. There were a lot of worries in '96, '97 as to how on earth would we ever cope with all this growth? Their E&P cap doubled over this period of time and their daily production flattened out, some were in decline. Russia's recent oil turn-around was totally out of the blue. Not a single energy predictor forecasted that and not many people even quite understand how it happened. Then we finally started to see an interesting series of a rash of reserve write-downs. Not just one, but a series. Is this also the tip of an iceberg? I think it's time to really seriously reexamine our energy



hold cards. For decades the world's giant oil fields were still young and now all these super giant oil fields are extremely mature, but 20 percent of our daily world supply still comes from 14 fields whose average age is just about 60 years old. New giant oil fields being discovered really basically ended in the late '60s and early 1970s, but oil demand is still gaining steam. The IEA's 2030 outlook basically shows a need for 120 million barrels of oil by then, and in fact if you really dig into the details it's actually conservative. It still basically assumes most of the developing countries are just barely getting up the learning curve. Shut-in capacity which we used to have quite a lot of today is either tiny or gone if you do shut-in capacity the way we should and saying behind a well head valve that can safely and sustainably be delivered. Observable oil inventories. We used to have quite a lot of in the United States. We don't any more. We're on daily just-in-time supply. We got there by accident. So no recent energy surprise that's come up has actually been good news. They've just been a series of negative energy surprises. I did a giant oil field study about three years ago. I just got curious. After Ghawar and Bergen, who are the other top oil fields in terms of daily production? I was stunned to find that we had such a few number of fields anchoring our supply. I was stunned to see, too, how long it had been since we actually brought anything on. That kind of attuned me to how incredibly important the Saudi Arabian oil fields were and how old they were. In an era of poor energy data it turns out that OPEC is at the total vacuum of this data. The EIA and the IEA data systems as a whole turn out to have too many holes and they are both working to try to fix these holes, but both of these organizations' track record of predicting has been simply awful. But in the land of the blind reliable OPEC data is either untrusted or it's nonexistent. So out of this vacuum we created a group of tanker traffic consultants that basically peer into the distance and say this is what OPEC is producing and exporting. I find it interesting that in a very professionally done 2002 Saudi Aramco report they said that they produced 6.79 million barrels a day. The IEA at the same time says they produce 7.38. Most media estimates were far higher. From 2000 to 2002 the IEA reports that OEC Saudi, imports to the OECD were flat but there's a lot of inconsistencies between those. What are we all



supposed to do? Say well, somewhere in the middle there's maybe something right? Or it doesn't even matter? I think the world needs more. Conventional wisdom assumes that Middle East oil is abundant. Almost every long term forecast every done says okay, if demand's here, here's how we build it up and the rest basically is a plug figure. It will be from OPEC. But now that so many OPEC producers are starting to have trouble we kind of build those up and say well, the gap will be Saudi Arabia. The IEA and the EIA both basically assume that over the next 15 to 20 years Saudi Arabia's oil output will be able to double or more, and most oil observers think these futures will happen with prices continuing to fall because of an abundance of cheap and ever-abundant Middle East oil. Middle East oil is a little bit different, in my opinion, that what most Middle East oil observers think. First of all, it is extremely non-diversified. There's an interesting tight band -- I've called it a Golden Triangle of Energy. Dr. Bakhtiari in Tehran calls it the Energy Endowment Horseshoe, where virtually all of the great Middle East oil fields have been found that have been found to date. And then each of the key Middle East producers turns out to have two to five fields that basically make up 75 to 95 percent of their production. There's a theory I'm going to talk about in a minute, the King, the Queen and the Lord Theory of finding oil. And it certainly extends also to reservoirs, too. Saudi's oil is at the epitome of this asymmetrical energy distribution. There's Dr. Bakhtiari's endowment horseshoe. This basically is taking the five great oil fields of Saudi Arabia where the oil's been produced -- the north part of Ghawar, Abqaiq, Berri, Safaniya and Zuluf and put a boundary around them. I picked my home state of Utah to superimpose that, just to basically put in perspective what a tiny area that is. It's also interesting, it turns out to be 26,500 square miles. It's just slightly more than half the size of Virginia, so it's not a very large area. Why I ended up embarking on this Saudi Arabian energy project that has really consumed my last nine months started from these energy worries that have grown over the past decade. It also started from the fact that every time I basically started digging into data on how true all these energy theories that were floating around the last ten years, they turned out all to be myths. I also knew there was a total lack of reliable OPEC data,



but that's about the only area I'd never spent looking for data. It's the black hole of energy of the dark side of the moon. So I just basically, there I hope everything's right. Then a fabulous visit that nine of us had to Saudi Arabia last February where we could not have had a more courteous time and so forth. But while I was there I just basically kept coming away with questions. Given the physical capacity of the Abqaiq oil processing plant, where could shut-in capacity be hiding if it really is 2.5 million barrels a day. Why are there such a concentration of old fields? Why is there such an intense use of technology and exploration efforts going on today if in fact they have such abundance? And what does fuzzy logic imply? When I heard that it now takes fuzzy logic to make sure that we're maximizing. If all these things that I've ever heard, it shouldn't be very fuzzy. And it just seemed to me that the dots didn't seem to connect. I came back and a colleague gave me a single Journal of Petroleum Technology Magazine, August 2002, and it had a single article in it about a little study area at Ghawar. I've always had a great respect for the SPE. I've spoken at a lot of their conferences. I thought that's maybe where the best data in the world resides, but I had not the earthliest idea how valuable the SPE library would be. From that one article I ended up basically going on a data search and by the end of the data search I downloaded over 200 technical papers written almost entirely by Saudi Aramco technicians. I really applaud all of you for having done all this work. Not one single paper basically told a very interesting story. In fact most of the papers told a very complicated micro story. But basically the volumes grew in intensity and the description of the problems grew in intensity. The earliest paper I got was written in 1961 on the initial early water problems at Abqaiq. The last eight papers were delivered in Denver between August 5th and August 8th at the 2003 technical conference. This paper trail once again told a very different story than what I'd been told for so many years about Middle East oil and Saudi oil in general. I just basically thought out of interest I would reproduce the 1961 paper and one of the eight papers from 2003. I also will have afterwards the bibliography of all 200 ESB papers just in case any of you want to go load down. If you're a member the SPE it's $5 a copy to download. The world's greatest energy source. Analyzing the SPE data was complex and for me it was particularly complex because I am not a petroleum geologist and



I'm not a reservoir engineer. I do think I'm a serious and thoughtful analyst. After extensive reading of these key papers, and by extensive I mean making sure I read every single one of them twice, taking extensive notes. I then decided this is so important I basically was going to write a book. I sent a rough version of this book to a dozen senior technical experts. In my opinion they were some of the best technical experts in the world on issues like oil and water and so forth, and basically said please go through and make sure that there's nothing here that -- and I made a lot of mistakes about how I technically described things and I hope my final copy will be far better, and to all these people that really spent a lot of their time, I'd have to say thanks. It was a really valuable effort. The summary of my key concerns are that a small number of great but old oil fields have been this miracle. And that all five of these great fields have a litany of challenges today. It would appear as a result of that that the easy oil era in Saudi Arabia is either nearly over or over. It would appear that the ability to drill vertical wells in Saudi Arabia has now become obsolete, and that even extended reach horizontal wells are now being described as second generation wells, and that replacing those are maximum reservoir contact wells which symptoms sometimes the papers call bottle brush wells, that now anchor all future production. And in very simply terms, they basically hide from gas at the top and oil at the bottom and take the last easy oil out of these thinning oil columns. Technology just like this led to a stunning production collapse in Oman's Yibal field. That's the typical oil well from 1950 to 1990. This is the typical oil well in 2004. What they actually do is significantly increase daily production, but what they don't do is recreate more oil. There's an interesting theory that the French Petroleum Institute developed years ago after studying almost every significant basin of oil that if you're going to find oil in a significant basin you generally in about a five to eight year period of time end up finding the queen. Then after a period of two or three or four more years of extensive exploration you find the king. The king's usually quite a bit larger than the queen. Then over a decade or two you find eight to ten lords. After that, no matter how you search you're over, but there are still lots and lots and lots of peasants -- small oil fields.



Well if you look back on the history of the exploration of Saudi Arabia it's interesting. In 1940 they found Abqaiq, clearly one of the two queens. They probably would have found Ghawar in three or four years but they had a hiatus during World War II, so in 1948-49 they basically discovered the king of Saudi Arabia. The king of all kings in the world for oil. 1951, they found the second queen, Safaniya. And then finally between '45 and '67 they found the six other fields that basically really anchored the Saudi Arabia oil miracle ever since. There are lots of rock types in Saudi Arabia. There are over 300 recognized reservoirs. But it would appear that over 90 percent of Saudi Arabia's oil actually comes from only a sliver of its reservoir rocks. Arab D is clearly king, but with Arab D it's Zone 2B is the king of the king. Safaniya, Hanifa, Khafji and Shaybah, and excuse me for some of my pronunciations. I'm sure I'm probably butchering these words, are the queens and the lords. So even within the reservoir it's the same -- king, queens and lords. There are many other formations that can produce some oil but they all seem to lack permeability, porosity, an aquifer or all three to ever replicate what we've seen in the last 50 years. Saudi's great giant oil fields are old. These five great fields were discovered between 1940 and 1965. The big five from all reported data that you can dig out have produced about 90 percent plus of all Saudi Arabia's oil. All five fields use water drive to create these fabulous well head flows. Water injection in the on-shore fields has become the elixir that defied what we would call normal depletion. An oil field technology used aggressively and professionally over the last ten years kept the Saudi oil miracle alive, but the sweep of easy, conventional oil flow must be coming to an end. Ghawar was literally the king of all kings. The world's largest oil field. We've never found anything remotely close to a field like Ghawar. The wildcat discoveries between 1948 and '52 proved up reserves that were then estimated to be 170 billion barrels of oil in place and 60 billion barrels of recoverable reserves. That number, ironically, matches the last time that Aramco was producing field by field reserve data, 1975. Ghawar's oil has accounted for 55 to 60 percent of all the oil Saudi Arabia has ever produced, and its current reserves are still being reported as one-eighth of the worlds total proven. So if that's right and the BP estimate of the world is right, Ghawar still has 125 billion barrels of proven reserves left. If the '75 estimate is right, the Ghawar's recoverable reserves are now 90 percent over.



Could Ghawar's best years be past tense? Ghawar still produces five million barrels a day. That's about two billion barrels a year. But its great regions -- Ain Dar, Shedgum and North Ulthamiyah were maybe 90 percent of its producible oil have every sign in the world of being almost depleted. A thick tarmac restricts much of the eastern flank. There is no proof of any report of producible oil in the sort of southern top-third Hawiyah. Haradh's pending 300 barrel a day project requires 500,000 barrels a day of water injection to work and these wells have nothing like the porosity and permeability from all the reports that the north end did. So this project is not risk-free. Could Ghawar's 1975 reserve estimates basically be correct? In '74 Aramco did seem to believe that Ghawar had 60 billion barrels of recoverable reserves and they came at that belief by having already drilled over 400 wells. The oil/water contact had been very carefully mapped. Exxon, Mobil, Chevron and Texaco's geoscientists were pretty skilled back then. There was no incentive for them to understate proven reserves by a factor of two to three. If they were in the ballpark, then Ghawar could soon become a Brent, a Prudhoe Bay, a Samatlar or a Yibal. Proven reserve data, whatever it is though, I would say is a very unreliable litmus test about how a future oil field will perform. Even though its carefully assessed remaining reserve estimates tell you almost nothing about what future performance will be. Estimates in even easy regions can also vary enormously. I attended a program here in Washington last April at the National Academy of Sciences and Tom Albran from the USGS told us about an interesting experience that the USGS had in 1995. They gook the Neuquen Basin in Argentina and they collected all of the data into a dataset so that everyone there could use any one of the seven conventionally used techniques. The Neuquen Basin's 61st in the world, 209 fields, very mature basin. The experts came away, and their conclusions were the remaining recoverable reserves are some place between 600 million and 17 billion in 1995. What we were also told last year is the argument going on between the USGS and Canada on Canada's natural gas reserves. Canada says the number's here, and we say the number's one-fifth that. So it turns out that proven reserves is still an art form. And third party reserve estimates very often prove internal estimates were wrong, just slightly over-optimistic. Saudi Arabia's natural reserves have to raise some questions about their oil reserves. Saudi's proven gas reserves are the fourth



largest in the world. The $25 billion gas initiative was a highly coveted prize among all western oil companies. This report comes from a book published a few weeks ago, The Arab Oil and Gas Directory, and I have no idea how valid this comment is but I just thought it was interesting. One of the major stumbling blocks in negotiations for the three projects concern volumes of gas reserves. Saudi Aramco estimated 30 billion cubic feet; consensus western company estimates totaled five to seven billion cubic feet. Then there's the issue of what I would call the fuzzy quality of OPEC proven reserve daily period. Here were the proven reserves basically in 1982. Here were the years that they all changed. And by 1990 they'd basically doubled. Then astonishingly over the next decade they slightly continue to increase while basically we produced about 60 billion barrels of oil. In the late '80s most people that looked at these numbers said oh, they're just paper barrels. By the early part of the 21st century I was hearing time and time again, you know, we actually think some of those numbers are really conservative. Do we know anything about the validity of those numbers? Is there any way without drilling wells that so many of those countries could have basically doubled their proven reserves? And even if the numbers are right does that tell us anything about the future predictability of daily production? Could Ghawar's declines, if they come, be offset by the other field growth? Unfortunately the queens and the lords are also mature. There are seven other fields that have produced oil but have produced it randomly and intermittently. Was this random intermittent production an economic issue? There's always something cheaper to produce. Or a physical issue? There's another 85 oil and gas fields that are found but untested. Untested because of no need yet or untested because they lack good reservoir characteristics. These are important questions. Abqaiq and Berri must be nearing an end. Together these great giant oil fields produced all of Saudi Arabia's extra light oil until Shaybah came on-stream. Abqaiq might have been one of the world’s most picture-perfect reservoirs. Both are now tapping from SPE reports unswept pockets of bypassed oil and attic oil. Abqaiq's oil output peaked in 1973 when it exceeded one million barrels a day. Berri's oil peaked in 1977 when it produced 900,000 barrels a day. From some of the recent reports on Berri, they don't quite say this but you can almost envision Berri ending up its life as



Brent is now doing, being produced out as a gas field. Both of these fields will have vast amounts of original oil left behind. There was an SPE paper written in the last couple of years that gave the three parameters and said it looks like basically reserves will be 21 percent which means that the oil left behind will be an enormously important source of future Middle East and Saudi Arabian oil. The northern complex is complex. Safaniya is the world's largest off-shore oil field and Saudi Arabia's second highest productive oil field. The field has seven potentially producible horizons about only one main sand has produced almost all of its oil. The northern end of Safaniya is far more productive than the southern part. Sand control issues, rising water cuts are constant struggles. Zuluf is the other great off-shore oil field. Its primary reservoir is the Khafji formation, but the field is described as facing a litany of complex technical issues. Marjan is the other one. It's a complex complex. H2S problems, pressure drop problems, this doesn't have any ring of an easy to produce, long life oil field the way that these others have been. The rest of Saudi Arabia has been intensively explored. I hear so many people that say if you ever needed any more oil in the Middle East you'd just have to do some exploration. Well, from the 1930s to the 1960s primary exploration for oil had been confined to the Eastern Province restricted areas. Post 1960s exploration beyond this restricted area from the reports that were published began to intensify and grow. Like the rest of the Middle East efforts, few significant finds were ever found outside that golden triangle that ever produced any oil. Was there ever a need to find any more? Or was there nothing more sizeable to find? And what is the real state of these other 85 discoveries? Shaybah became the last great giant oil field. Shaybah was discovered in 1967. Its reservoir complexity was almost as challenging as its location. Its gas cap at the top and it soil content at the bottom ended up making vertical wells economically impractical. Many Saudi observers assumed the field was only commercialized because of a fuzzy UAE border. Others though say that no, it was actually Saudi Aramco's next best field to come on stream. It is not a Ghawar, Abqaiq, Berri look-alike from any of the technical presentations written. Then the Hawiyah trend became the last great commercial success. In 1989 there was the first commercial oil discovered in



central Arabia. The discovery came after evaluating approximately 120 drilling and seismic structure penetrations. Intense exploration efforts covered a mere 51,700 miles. Hawiyah and several adjacent fields now combine to produce about 200,000 barrels a day of condensate, but bacteria and corrosive aquifer water have now damaged the wells and the reservoirs so the newest oil in the Middle East has signs from its latest technical papers of now getting old. The next generation of Saudi oil certainly seems to be harder to extract. Among many serious questions about Saudi's oil future, a handful of facts seem to me beyond doubt. Lots of bypassed pockets of oil remain, reservoirs above and below the prime producers can extract oil but with difficulty. New oil projects are going to be expensive and complex and not risk free. The need to start developing these small, unproduced fields should start soon, so wells drilled and E&P Capex will have to soar. The ‘batter box’ projects that are in line today are complicated projects. The next generation of oil production to replace planned declines certainly to me don't seem to be risk-free easy projects. Qatif, Abu Sa’Fah, Khurais, these are complicated old fields coming back to be rehabilitated versus some great new find. Each has its own set of challenges. If they work, great. If they do not work then the world has likely seen peak oil. I think we'll know the answer to this by 2006-2007. Has reservoir modeling finally become a crystal ball? By 1990 Aramco's reservoir modeling efforts from reading carefully the technical reporters were failing to predict accurate fluid behavior. So over the next decade every reported increment was deemed to, it now finally works. Powers finally created the first single model for Ghawar. This "innovation" 2002 made it possible to accurately simulate highly complex structures containing complicated fluids, but will this new model be correct? Only time will tell. Predictive modeling hasn't been and will never be any better than the quality than the quality of the assumptions turning out to be true or not. This just gives, out of a Saudi Aramco brochure, just an illustration of the complexities of these reservoirs. Has the historical reservoir production system within Saudi Aramco been flawed? Technology has emerged within the past decade to create a quantum leap in the ability to understand and predict the reservoir architectures and resulting flow patterns. But the



historical reservoir management philosophy, going back to the days of the '60s and '70s when Aramco was being managed by Chevron, Texaco, Mobil, and Exxon has always been driven by minimizing costs. This new knowledge clearly revealed a great deal more about the reservoirs than was assumed to be in the '60s and '70s. Had this knowledge been known in the '60s and '70s would the field's water injection system placements have changed? And eliminated some of the errors that because accidental? If not, once oil is bypassed it really is left behind. Could Saudi Arabia's oil future end up being driven by oil left behind? Water injection does finally sweep all easy oil out of the rocks. The thinning oil columns in all the great fields and oil produced from bypassed oil products that are described so frequently in these technical papers are dangerous flashing yellow lights. When you enter oil left behind, exploitation of small, undeveloped oil fields starts to become a new energy challenge and the volumes produced will change and the costs will change dramatically. It doesn't mean that the oil is gone, is just means we've gone into a new era. Here's an observation from an old time Aramco observer that I received last week. It was their drilling of some of the key wells in the '60s. He's been doing this modeling for ages and he said between 1990 and 2003 there have been more than 2000 horizontal wells drilled in Saudi Arabia. Only a few vertical wells still produce much oil. He estimates that in 2004 the oil rate per well will be 2010 barrels per day and therefore he did the extrapolation, to maintain flat production of eight million barrel a day it will take 46 rigs drilling 330 new wells. He then says by 2010 the oil rate per well will drop to 1,170 barrels per day so it will take 90 rigs drilling over 600 wells. Is he an alarmist or directionally correct? Could we even vaguely add so many rigs that fast? One more question. While I think most of these are facts, could basically all these energy worries be moot because of the role of new technology? The global E&P business, particularly in the United States, convinced itself hook, line and sinker over the last decade that technology changed the game. Technology was supposed to eliminate dry holes. It made reservoir appreciation the best way to find oil. It reduced F&D costs. These beliefs effectively became the energy mantra of the last decade and in my opinion most of this high tech thesis was simply hype. The various great technical revolutions did change the way that oil and gas is now developed -- 3D seismic, horizontal drilling, multilateral well completions, subsea production



techniques, etc., etc.. These were all the clients that we worked with. This was the revolution. For a decade industry executives believed these created easy supply growth and instead the technology revolution created monstrous decline rates and proven reserves write-offs I think is going to be a likely worldwide event as we go through backing out all of these reserve appreciations that were done on the back of technology. The oil field technology was a miracle drug but the miracle drug accelerated the extraction rate. It enabled the extraction of small pockets of hydrocarbon and at times they increased recoverable reserves by a tiny degree, but they rarely ever seemed to increase original oil in place. The added oil recovery through technology turned out to be the exception, not the rule. The two great exceptions in the North Sea were Norway's Troll Field where they found a thin oil column of about five feet that they would have missed had they not seen it ahead of time. And Ekofisk, because they were doing all the work to figure out how we'd pump it up, found two other layers behind that they might not have produced. These turn out to be the exception versus the rule. Most giant oil fields, original oil in place, and reserve and recoverable reserve estimates stayed static from 1974 through 2004, or if they changed they changed modestly, and many proved reserve additions failed to increase any daily output. Did technology find more oil at Prudhoe Bay? In 1974 proven reserve estimates at Prudhoe Bay were 10 billion barrels. Volumetric assessment. We were still four years away from producing. By 1986 the ultimate recovery was projected to be 10.2 billion barrels, so we added another 200 million barrels. In December 2002 the latest estimate is 13 billion barrels. So yes, we got 30 percent increase in reserve estimates. 10.8 is already produced, 2.2 is remaining, but Prudhoe Bay production did peak at 1,567,000 barrels a day in 1989 and if you take the satellite fields out it's 286,000 barrels today. So extending the life doesn't mean that you extend flat production. This is a lot of data on this slide. This is basically what we found and didn't find about Forties and Brent. We estimated recoverable reserves in 1985 of 329 for Forties and 241 for Brent. By 2003 we'd increased those by five percent and nine percent. One field came on production in 1975, Forties. Three years later it peaked. Its peak rate was 24.7 million tons. Its current production is 2.6, down 89 percent, and its production is



basically 95 percent of what was first estimated. The same on Brent. Giant oil fields and giant regions do peak, but few people have ever predicted ahead of time oil peaking. Peaking tends to generally be appreciated a decade or two after it happens, and many oil observers have then confused the word peak with running out of oil. But let me tell you the two things I am positive about. Giant oil fields do peak, and the world will never run out of oil. When giant oil fields peak, how fast do they fall? There's a litany of historic production data that illustrates that when they do peak most then enter into a fairly steady decline. The East Texas oil field is a classic case study of how long they can last. The East Texas oil field, the largest oil field ever found in the lower 48 is still in production. It produces 13,500 barrels a day of oil and over a million barrels a day of water. Will the Middle East oil fields defy this history? If not, how will the world respond? Here's what happened to the United States of America totally out of the blue. This isn't an oil field, this is the states of Texas, Louisiana, Mexico, Alabama and Mississippi. We peaked in 1970. We stayed flat through '73. And we basically fell by about 60 percent over the next ten years while the price of oil went up ten-fold and the oil wells completions went up almost five-fold. Here are four fields, the two best fields in Russia, Slaughter Field in Texas, Prudhoe Bay in Alaska. Here are four North Sea fields -- Brent, Forties, Oseberg, Falfax. The only commonality of these fields is once they start down, the slope tends to be very street. Could Oman's Yibal field be an ominous omen? [Laughter] Yibal was Oman's sole giant oil field. The field was heavily water injected. By 1990 vertical wells had become obsolete. So PDO, managed by Shell, introduced for the first time ever horizontal drilling to the Middle East. By 1997 they were so thrilled with the experience that these wells had done, that it reintroduced well head productivity they hadn't seen in years. When production basically hit a brand new record of 250,000 barrels a day they expanded the field capacity by 30 percent. By 2001 Yibal's production was under 90,000 barrels a day. Apparently today it's somewhere between 40,000 and 50,000 barrels a day. It caught everyone by surprise. So the worry about Saudi Arabia's energy miracle is a simple one. The entire world assumes that Saudi Arabia can carry



everyone's energy needs on its back cheaply. If this turns out not to work, unfortunately there is no Plan B. Global spare capacity is now all Saudi Arabia. No third party inspectors examined the world's most important insurance policy for years. Conventional wisdom basically says do not worry, trust me. If conventional wisdom is wrong, the world faces a giant energy crisis. Could water finally end up being the weakest link? Saudi Arabia's oil miracle happened through an exponential rise in water-drive aquifers and water injection reservoir management. Aquifers turn out to be as non-renewable as oil. Seawater injection can last forever to take its place but its limits are economically and technically challenging. And desalination for all the extra potable water will soon start creating the biggest new energy market and demand in the Middle East ever. Water is a scarce resource. So the questions on the future of Saudi's oil miracle are critically complex. If these worries are all wrong, then it's just like our preoccupation with nuclear wear. I'm glad we worried about it. Or maybe global future warming. But if these worries are only partly true but unanticipated, the results are awful. Predicting the future of global energy now takes a series of fuzzy logic and predicting just Saudi Arabia's oil future is also fuzzy. Can oil output double? Can it safely stay flat? May all key fields soon enter rapid decline? And without any data, nobody really knows. The crux issue at the end of the day is what is a sound energy policy? Is the mission of an energy producer, be it Shell, Exxon or Saudi Aramco to merely maximize its ultimate recovery of hydrocarbon net present value? Or is the real mission to maximize the sustainable production of hydrocarbon for as long as possible until a new energy source is ready to take its place? How long could Middle East conventional oil last if the output was actually reduced? Does the world need an energy bridge? I'll tell you one thing the world does need. The world needs now true energy transparency. It's easy to assume trust me will work, but it's also very dangerous for the world to fly so blind. And at a minimum a new era of true energy transparency is needed. I think it's time for the IEA and the EIA to roll up their sleeves and create some way for afar better demand data and cost data for energy, and far better decline data for non-OPEC oil.



And on the OPEC side, and particularly Saudi Arabia, I think it's long overdue for timely field by field production and well by well data produced in a very transparent fashion. Details on budgets, third party engineering reports, and the financial system. I think it's far time to get wild price volatility under control and to start creating a realistic eco-model of exactly how much oil and gas needs to be priced for based not on a gut feel or a hope, but how much it's going to cost. If we do embark on true energy reform the world will be better off. A new era of energy transparency can possibly ward off a nasty series of energy surprises. Future energy prices must stabilize and will probably need to rise. If we begin creating a new form of energy to replace some portion of oil and gas use it needs to start today because it will not happen in a short period of time. Getting to this new era could take a surprising long time and it actually might not even work, but the time to begin is today. Thank you. [Applause] [Break Taken] Mr. Verrastro: I commend Matt for asking some very serious questions that need to be addressed. I suspect our next panel will take on some of those questions and give you an explanation. They'll also give you a decidedly different perspective on how Saudi Arabia is producing and where we're going in the next 50 years. I'm delighted this morning to have with us two senior executives from Saudi Aramco. Mahmoud Abdul-Baqi is Vice President of Exploration, and to his left is Dr. Nansen Saleri who is Manager of Reservoir Engineering. Mr. Abdul-Baqi has been responsible for overseeing exploration for oil and gas activity and the geoscience of the world's largest reservoirs. He's been with the company for over 30 years and during that span has held positions as Chief Exploration Geologist and Chief Reservoir Engineer. He was elected to his current position in 1991. He has a degree in geology as well as completing the Executive Management Program at Georgetown University Law Center and the Enterprise Management



Program at Columbia University. He's a Founding Member of the Dhahran Geoscience Society, an Honorary Member of the American Association of Petroleum Geologists, the Society of Petroleum Engineers and the Society of Exploration Geophysicists. He's a Past President of the AAPG for the Middle East region and serves as a member of both the Saudi Aramco Executive Advisory Committee and on the Board of Directors of the Arabian Drilling Company. Dr. Nansen Saleri, Manager of Reservoir Management at Saudi Aramco where his primary responsibilities are to oversee the company's reservoir management activities for oil, gas and condensates reserves, and for fulfilling its production in maximum sustained capability commitments. In his 12 years with the company Nansen has either chaired or co-chaired a number of key strategic program initiatives including the Gas Development Strategy Task Force, the Drilling Reengineering effort, the Best In Class Strategic Imperative in Well Optimization, and spearheaded the company's efforts in maximum reservoir contact and next generation wells, some of which you'll hear about today. Prior to joining Saudi Aramco Dr. Saleri spent some 18 years with Chevron where he served as Manager of Reservoir Engineering and as Principal Instructor for Chevron's Reservoir Management Schools. He holds his Master of Science and PhD degrees in Chemical Engineering from the University of Virginia. He serves on the Advisory Board of Petroleum Engineering at the University of Houston. He's authored a variety of technical papers, has been an SPE Distinguished Lecturer, and is a frequent presenter and keynoter at technical conferences throughout the world. Gentlemen, welcome. Before turning over the podium to Mr. Abdul-Baqi two clarifying notes. Please understand these speakers are executives of Saudi Aramco, the company. They do not represent the Ministry or the government of Saudi Arabia so when you frame your questions, keep that in mind. Also note, and I was reminded of this, when you address your questions please identify to whom you want the question addressed to. Otherwise we'll address it to the panel. Mr. Abdul-Baqi. Mr. Abdul-Baqi: Thank you, Frank. Good morning. I'd like to start by thanking CSIS for inviting us. I'd like to also welcome everybody here.



Just one quick clarification, the presentation will be on the Aramco web site as was mentioned Wednesday morning Washington time. There is a little bit of a time difference between Dhahran time and Washington time. When you go to the web side, Saudi Aramco is one word, not two words as on this slide here. What we are going to address in our presentation today are three main principles or themes. We're going to talk about the volume and the reliability of the Saudi Aramco reserves. We're going to address the sustainability of the crude oil production at Dhahran, and potentially higher levels in the future. And then we are going to address the issue, of course, that seems to be on everybody's mind. This is how we are going to do this. I'm going to start with just a couple of slides on the global outlook just to set the stage, make sure we're all together. Then I'll give you an overview of Saudi Aramco's upstream operations. Then I'll focus on exploration which is my area of expertise. At that point I will turn it over to Dr. Saleri. He will discuss reserves and how we manage them, and then review several 50-year outlook scenarios, and then conclude with a synopsis. This chart shows a projection, source from OPEC, for world oil demand. We're not hung up on the numbers. I know there are other forecasts that can be a little bit higher, a little bit lower. The only thing we want to agree on here before we move on is that the world needs a lot more oil in the future. The question I want to pose is where is that oil going to come from? This map from British Petroleum Annual Statistical Review shows that at year-end 2002 the conventional oil reserves of the world were slightly more than one thousand billion barrels of oil. Two-thirds of it are in the Middle East. So again, it's safe to assume that the Middle East is going to play a key role in meeting this demand that we were talking about. What makes it even more interesting is that in spite of having two-thirds of the reserves, the production is only one-third. So that positions the Middle East in a better position than any other area in the world. Moving on from the Middle East to Saudi Arabia and then Saudi Aramco. It's expected with the central role for the Middle East that



Saudi Arabia will play the major role. Not only because Saudi Arabia has the biggest reserves base among all of the countries of the Middle East which accounts to about one quarter of the whole world, but also because Saudi Arabia has an operating oil company that has a proven track record over 70 years of delivering, of overcoming any operational, any technological, any organizational, or any financial challenges. The track record is there. I'm not going to go through the history. But just quickly I want to say that the history starts in 1933 when the Kingdom signed the first concession agreement with So-Cal at the time, Chevron now. When the industry realized that they are dealing with the world's largest reservoirs and largest fields, Exxon, Mobil, Texaco all bought in. That's how the history started. Now Saudi Aramco in 1982, in the early '80s, started a center called the Exploration and Petroleum Engineering Center. We call it EXPEC for short. This center is one of the largest in the oil industry addressing the exploration and petroleum engineering technology and operations. The center is supported by a computer system that processes and stores about four times as much data as NASA does, and it is very well justified because we are dealing with the largest reservoirs on earth. The center is manned by the best that the country, Saudi Arabia, talent has to offer. Yet on the other hand the company employs people from 52 different nationalities. The fact that I am from Saudi Arabia and my partner in this presentation is from Texas is an example of us hunting for talent all over the world. This success story is not something that came by chance. It's a strategic commitment by the company to five different principles. The most important of them is an excellent sustained performance over the years. We are maximizing hydrocarbon recovery, but taking into consideration the life cycle economics. Our reservoir management practices, I will not be shy, they are the best in the industry. Dr. Saleri will expand on that. Mr. Ebel: Thank you, Mahmoud. This was a paid advertisement. [Laughter] Mr. Abdul-Baqi: Of course I have to say at the end that our excellent safety and environmental record is just the fifth principle that we are talking about here. Let's look at our current operations. Our operation is large and diversified. It includes production from mature on-shore giant fields, but it also includes production from very remote



new developments. It does include off-shore production and deep gas production. The company has a policy of maintaining a healthy cushion between its current production and its maximum sustained capacity. This cushion has served us in the past extremely well and continues to serve us extremely well in the future. I don't want to go back all the way to the first Gulf War and remind everybody what did happen when the supply was disrupted. I'll just refer to the most recent few months where this healthy cushion is what stabilized the market -- when disruptions happened in Nigeria, when disruptions happened in Venezuela and when disruptions happened in Iraq. The company policy also addressed replacing on an annual basis all of its oil production which is estimated at about three billion barrels per year. On the gas side, though, because we're not number one, we're number four, we are not only replacing our production but we're also adding an average of about five trillion cubic feet of gas per day to our reserves based to improve our standing. Let's talk about maturity and exploration business. I've been in that business for 33 years. When we talk about a mature area we basically talk about the number of exploratory wells that were drilled in that area to find oil or gas. Let's concentrate on oil. There are many ways. We can do seismic, we can do studies, but eventually oil is not discovered until that bit meets the reservoir and the oil comes to the surface. This map here shows all of the exploratory wells that were drilled by our company since 1933 in Saudi Arabia. You can notice that the wells are really clustered around the oil and the gas fields and there are large areas that are relatively unexplored. This area here, a significant part of the Rub' Al-Khali Basin known to you as the Empty Quarter -- I'm sure anybody who has read about the Middle East -- a large part of it is relatively, we haven't drilled in it yet. In the basins of the northern area along the border with Iraq, one of the areas that is now being advertised as lucrative by many international oil companies. Again, very, well, I don't know how to describe it. Ten wells? In an area so large if you put the state of California on its side you can fit it in that area here. So conclusion I want to come up with from here is that we have a lot of acreage to explore and a potential to find a lot more oil and gas, in addition to our current position which is



number one in the world. This is not only our opinion but the opinion of many respected entities around the world. The United States Geological Survey published the results of work that they have done in the year 2000 about the undiscovered recoverable -- I want you to note the word recoverable -- oil resources in the world. They place us as the number one country. By the way the volumes that they are talking about is to be found by the year -- this is not ultimate, by the year 2025. The mean numbers that are shown here -- 87 for Saudi Arabia. Mean is a statistical term. The statistical or probabilistic range that goes with that mean goes all the way down from 29 to 161. But this is for the future. This uncertainty is for the future and it should be uncertain. This is not for the current reserves. Although I'm talking only about oil, I thought of throwing this, it's interesting to throw in this about gas because that same study by the United States Geological Survey places us second only to Russia in gas potential. So not only we have the number one position in oil in the world, but we also are well positioned to meet future gas demands when that scenario would be on the table. I'll just flash these quickly to remind everybody of this. Now we come to our current oil initially in place. Let me redefine the term for the benefit of people. The Society of Petroleum Engineers, a very well respected society, defines the oil initially in place as the volume or the amount of oil that is present in the subsurface, underground. We're not talking about oil that comes to the surface. In the last 20 years, as this graph shows, there has been a significant growth of oil initially in place in our area, approximately 100 billion barrels of oil. Currently we have 700 billion barrels of oil in place. Keep that number in mind because we're going to look at it one more time here. Here it is, the 700 of discovered oil initially in place. Now we looked at what the USGS were projecting. Our studies indicates that a combination of undiscovered resources -- this is exploration in new areas -- plus the growth of oil in place that we have already discovered. If we combine these two together we're going to add 200 billion barrels by the year 2025, giving us a total of 900 billion barrels of oil at that time.



At what cost? It's good to have the oil, it's good to have the potential to add to the oil, but you can deliver it at a reasonable cost or not? This is a very important question. This graph shows year end 2002 average finding and development costs from facts and figures published by British Petroleum on their major competitors. The bars here, the bar chart, shows five major oil and gas companies. Their cost of finding in red and developing in blue, compared to Saudi Aramco's costs. Not only we are positioned better than anybody else to deliver that oil that we have and the oil that we are going to have, but we can do it at a very reasonable cost which makes it extremely feasible. We heard a lot about success rates and what happened in the last ten years and all of that. Well, here are the numbers. In the last ten years we drilled a total of 64 exploratory wells with a success rate of 52 percent. People that are in the business will agree with me that's very high by industry standards. This applies not only to gas, not only to oil, we were equally successful in doing both the oil and the gas. The message I want to leave with you before I ask my colleague to continue the discussion. We have plenty of oil, number one in the world. We have the potential to add more oil than anybody else. We can do that at extremely successfully at a very reasonable cost. Our track record shows that we delivered for 70 years and we're going to continue delivering for another 70 years at least. With that I would like to ask Dr. Saleri to come to the podium and continue the discussion of reserves and reservoir management. [Applause] Dr. Saleri: Thank you, Mahmoud. Great introduction. I thought a very good way of starting would be just to go over definitions so that everybody has a common language, common frequency, and that there is no misunderstanding. By the way, because of the nature of the talk which is very technical, in case I use a term in my presentation over the next 20-25 minutes that completely goes over your head, just raise your hand and I will ignore you. [Laughter] No. Of course not. Of course not. In case there is a point like that we will address it right



then, not in the context of a discussion but just in the context of an explanation. Now the term reserves means so many things to so many people. That's why it's very very important that we all reach a common understanding about some of those terms that are being used. Mr. Abdul-Baqi very competently explained the most important one which is the oil initially in place. That's the tank that we're talking about. How much oil do we have in the subsurface? And all the definitions that we're talking about are the standard definitions used by the three leading organization which is the Society of Petroleum Engineers; the World Petroleum Congress; and AAPG which is the American Association of Petroleum Geologists. As I said, the most critical one is reserves because we have to understand what we mean by reserves. In plain English it's oil that can be recovered commercially with current technologies. There the key word is commercially and current technologies. Of course there is another embedded assumption in that term, and that is with the current cost structures. Of course the industry typically uses three common terms. One is proved, the other is probable, and the third one is possible. The one that's common to everybody and that's the one that's reported, that's the basis of the one thousand billion barrels that Mr. Abdul-Baqi talked about is the proved one which is associated with a 90 percent probability or 90 percent certainty. Then at the other end of the spectrum is the contingent resources, anything that has an associated probability of less than ten percent, then it's categorized as contingent. Now I'm going to focus on proved reserves and there is a message here that I want to convey. That message is that overall Saudi Aramco in arriving at its reserves of 261 billion barrels -- Yes, sir? Question: [inaudible] Dr. Saleri: Okay, that's more of a commentary. We will comment on that. But the reserves, in case there is any misunderstanding, reserves is the part of the oil that you can commercially recover. So imagine a tank of one thousand barrels.



With the current technologies if you only recover 600 then your recovery is 60 percent so your reserves that you book is 600 barrels. So that's the definition of what we consider in the industry as proved reserves. The company as part of its practices in determining its 261 billion barrels follows all the SPE and WPC standards with a very conservative interpretation, and that's something that I would like to underscore. What do I mean by that? Specifically there is one item which is shown in yellow over there, on the screen, and that is the enhanced oil recovery methods. Commonly, most of the companies apply enhanced oil recovery methods and project their impact in the ultimate recovery of oil. It's part of their reserves. Saudi Aramco neither in its proved reserves nor in its probable reserves takes any credit for any present or future EOR, and that's a significant distinction. That again is a reflection of the company's very conservative approach to managing its reserves. I will dwell on this theme, because it's a very central one, throughout the presentation. I think it would be helpful to talk about the life cycle of a field and how it relates to some of those things -- oil in place and reserves, probably or possible, all of these things. I think this chart is very very helpful. What I am showing for a typical field is a production rate profile, production versus time. It could be anywhere from 20 years to typically in the case of Saudi Aramco fields, we usually talk about 75 to 100 years plus. We have many fields that are already in production for more than half a century, and I will show some examples of that. There are two parts to it. The first part is the exploration where you use different techniques and you drill well, you explore and you discover oil. Then you enter the development and production mode. You get the production at a certain level which is known as the plateau, and then you go through an economic, finally bring it down to an economic rate and that's where you end, the end of the field. What's under that curve which is shown by the green area is your reserves, what is recovered from underground. There are a few things that happen, particularly with the philosophy that Saudi Aramco applies which is a very go-slow type of a process where we extend the lifeline of a field to something like 50, 60, 100 years. When time works in a certain fashion it's



certainly very beneficial from a reserves point of view because as time goes on new technologies come in and our overall understanding about what's in the subsurface enhances significantly which has a very important consequence. In fact it has two primary consequences that we need to appreciate. What are these consequences? There are two. First, what I just said that the certainty of reserves estimates improves with the production life. The more you produce the more you understand. Your confidence level. What was originally considered as possible, low probability, then becomes probably, higher probability. Eventually you go from probable to proved category. What we were carrying, for instance, our oldest field Abqaiq back in the 1970s was already produced about ten years ago. We were carrying 11 billion barrels and we've already produced two billion more in Abqaiq. So that shows you what happens over a period of time as you're producing the field. The other thing that happens which is associated with this time line is the fact that new technologies come in, especially advances in IT technologies, seismic, diagnostic technologies, all of those things come in and they certainly add to the recoveries at hand. I think this is a very important point to keep in mind. I think this is probably a very very central pie chart and it warrants a few seconds of discussion. Essentially what I am showing you is the tank. How big is the tank? As we know it as of January 1, 2004. This is the oil initially in place with all the best technologies that the company has, with all its best knowledge at this time is 700 billion barrels. How does that distribute itself into different categories? Let's go over them one by one. We have historically produced 99 billion barrels to date. That's only 14 percent. That's only 14 percent of the total tank, and we're not even talking about the expansion of the tank. Remember what Mr. Abdul-Baqi said. We're projecting it to grow from 700 to 900. So I'm not talking about the expansion. I'm talking about the tank the way we know it. Where do we stand? We've only produced 14 percent. The reserves that we're talking about as proved reserves today, the 260 billion barrels that Saudi Aramco reports, is the other shade of green. That's the 37 percent. Yet we have at least another 100 billion barrels that we feel very very confident will be recovered with current technologies and upcoming technologies in the years ahead. That's the possible and probable. Because of the EOR component, because of the new technology component. The



company feels very very comfortable about this. So that's another 100 billion. Then when you look at the contingent resources, that represents a vast opportunity of about 240 billion barrels which is a tremendous opportunity for new upcoming unfolding generation of new technology. So that's not even in the planning stages right now. Add to it the expansion component that Mr. Abdul-Baqi talked, that we're going to go from 700 to actually 900 billion barrels in oil initially in place because of future discoveries and developmental work. It's very very obvious where we stand reserves wise. We believe very comfortably that we're looking very conservatively -- again this is the company's approach, very conservatively, upwards of 150 billion barrels -- 150 billion barrels over and above the 260 billion barrels that we carry as proved reserves right now. That's 60 percent more. And that's the underlying message we want to convey. Now there are a number of metrics that the industry uses, including ourselves, when we look at reserves as far as the integrity, the quality, and the viability of the reserves. One of the most relevant ones is what is the extent of proved reserves depletion? We have actually 23 active fields right now out of a reservoir portfolio of over 80 fields. I'm only showing some of the key ones and I'm covering the whole spectrum -- from the youngest one which is Shaybah with five percent of reserves depletion -- that means we have already produced five percent of what we considered proved reserves; and the most mature one, Abqaiq. We've already produced 73 percent. And look at the average age of the portfolio. It's 28 percent, which is fantastic by industry standards. There is no other company that even comes close to reserves depletion state of 28 percent, and this is with the 260 billion barrels. It's not with the additional potential that we're talking about in the future. Again, look at Ghawar as a total. It's only at 48 percent. Parts of Ghawar are completely undeveloped. Haradh which is more than three times the size of Prudhoe Bay, it's over three times the size of Prudhoe Bay, it's only ten percent developed. So these are very very important statistics. I know I'm overloading you with some numbers, yet it goes to the essence of the source of the issues that are being discussed. Another one that's often looked at is what percentage of your reserves, the booked reserves again, is developed. That's



used as a metric. In our case it's roughly 50 percent. It's 131 billion barrels to be exact. Again even in this one the company takes a very conservative outlook on those things. We have two giant fields -- Manifa and Khurais. These have combined reserves of 41 billion barrels -- 41 billion barrels. Now both of these fields have put on production in the past. They have produced for years. Currently they are shut in because of low demand. The company in its overall business logic does not see the current need for putting them on production. But the point here, as far as this particular slide is that that 41 billion barrels is not considered as developed under our statistics. So we take a very very conservative outlook on that again. Now that I gave you a general number on reserves so we all feel comfortable with the overall architecture we're talking about, the size of the tank, while we're thinking about the future let's address something very very fundamental which is what makes Saudi Aramco so special? Are there distinguishing characteristics? Are there distinguishing principles that set Saudi Aramco away from the rest of the pack? The answer is absolutely positively yes. We are different. We have managed our fields differently and we will manage our fields differently. So any analogies with other fields, with other operators are not necessarily applicable to Saudi Aramco. I'm going to develop on this theme because it's this very theme that drives our plans for the future. Because if we don't understand the past we may not fully appreciate the plans forward. Now Mr. Abdul-Baqi already talked about the overriding principles of the company and there's a corollary when it comes to reservoir management because that's the heart and soul of the company's operation. With a bit of exaggeration I would say this is like the Bill of Rights of the reservoirs. Okay? It's intended to be. It's the constitution. It's the principles that govern the management and production and depletion of the reservoirs. Number one, at the very top, it's maximizing hydrocarbon recovery. We intend to maximize the hydrocarbon recovery. Number two is reservoir monitoring. We realize that to maximize hydrocarbon recovery you have to emphasize reservoir monitoring, particularly surveillance techniques with state of the art technologies. Number three is a very important one, again that sets us



separate from the rest of the crowd. That is low depletion rates. We produce our reservoirs at very low depletion rates by industry standards. Number four, we put a significant emphasis on advanced diagnostics. What do I mean by advanced diagnostics? What we mean by advanced diagnostics is intensive computational efforts on modeling so that we understand precisely what's going on 10,000 feet underground, in every foot of the reservoir. That's what we mean. That's why technologies such as seismic, technologies such as reservoir simulation, coupled with the second bullet which is reservoir monitoring. Surveillance is critical so that we achieve the maximum hydrocarbon recovery. Finally, as a philosophy we apply cutting edge technologies all across. That translates into a continual improvement, into a learning reservoir management model. Now I mentioned depletion rates, and I think this is something that everybody relates to. We know some of the fields like Prudhoe Bay, Yibal, I'm glad Yibal was mentioned because it's right there, East Texas, Ekofisk, Forties, Brent. All of you have heard these terms. Look at the typical annual depletion rates. Historical maximums, okay? You would see typically numbers ranging anywhere from four to ten percent. What you would see on the Aramco side is rates like one percent in the case of Abusofa, Shaybah is like that, to the maximum ever. These are not averages. This is the maximum ever annual depletion rate that the company has ever recorded in its 70-year history and that's 4.1. Our typical depletion rate is about two percent. Now you're going to say so what? What's going on? If you produce things slowly you expand the life cycle. And when you expand the life cycle you get the benefits of new technologies. Much better diagnostics, much better way of managing the reservoirs, much better way of navigating against any uncertainties, any surprises. And it has a significant direct business impact. Now we're talking about diagnostics, and all companies have very superior diagnostics. We're not questioning that at all. But we're also proud of the diagnostics capabilities, particularly in the seismic area, that's giving us a definite edge in better understanding. Just like the Hubble telescope gives us a much better resolution, high resolution pictures of the entire universe, far, far out. It's the same thing with seismic. It gives us a much better, higher resolution picture of the belly of the earth which is where the reservoirs are.



What I'm showing you is one of the recent developments that the company pioneered, in fact there's a U.S. patent pending on it and several publications. If you compare the picture on the left with the picture on the right it's clear that the features, particularly the subsurface channels associated with the characteristics of the reservoirs are much more detectable on the right relative to the picture on the left. Now the other thing that again is coming into play is the impact that IT technologies, and particularly the chip, the intel revolution is having on the entire industry and specifically on Saudi Aramco. It had a profound effect on the industry. The effect has been particularly emphasized and amplified in areas where we had a much better understanding of what's going on. We today operate 48 drilling rigs. These are big, big rigs. Each one of our rigs has the capability of real live communication with our scientists back in Dhahran. It's very similar to NASA's mission control rooms. The concept is very very similar. Just like NASA is manning its rovers on planet Mars very very successfully with the twins, Spirit and Opportunity, that's exactly what we do. We have communication with the rigs, with the drilling bit which is drilling 10, 15, 20,000 feet underground hundreds and hundreds of miles away, and we have the ability to see things within a one foot resolution in real time, 24 hours a day. That gives us a significant capability. The picture that I'm showing here, in cast it's not clear, is a horizontal well, this is from the gas program, which is drilled about 13,000 feet and the well itself is a horizontal well. It's 2,000 foot long. It's placed in a 30-foot segment. It's been a very very successful well. I'm not showing this as Star Wars example. This is the norm. Every well that we drill has this type of capability and it is making a difference in our production capabilities. I'll quickly show you some field examples so that you have a better appreciation of where we're coming from. Shaybah is our second youngest field. It's been on production now for five and a half years and it's a very good example to talk about. It started production July, 1, 1998 with a production of 500,000 barrels. It's still producing 500,000 barrels. It's exactly in line with peak production forecasts and it's no surprise. It's because of the very deliberate diagnostics work that preceded the planning. We also estimate on the basis of all the modeling studies



that we have done, consistent with the field performance data, a production plateau of about 50 years. That's five-zero. I would say with all confidence that's a very conservative estimate. We would be disappointed if we don't get a plateau period of 65 to 70 years. If there is a demand by the global energy market for Saudi Aramco to increase its production we certainly have the capability of going to a higher depletion rate. Right now it's one percent. We can go to two percent, so we can increase the production from 500,000 to one million barrels per day. That's roughly the production of the whole state of Texas. We believe we can sustain it at least 25 years if not more. A few interesting things. Shaybah was the first field in the history of the company that was exclusively developed by horizontal wells. That was in the late 1990s. At that time horizontal drilling had just become popular, particularly in Saudi Arabia. The extent of the technology was just drilling single horizontals. Imagine a pipe about this diameter extending about one kilometer. From here maybe to the White House. I don't know the exact space, but imagine a hole going that far. That would be our typical completion for producing Shaybah. Today we have evolved and improved on those technologies with the next generation wells known as the maximum reservoir contact wells, and that's what I am showing here. Where you have multiple branches, it's not only a single hole. If you have a lot of branches coming out so you have a lot more contact with the reservoirs and you have much much better diagnostics as far as the subsurface. What does all that mean? I know this is Star Wars, this is great stuff. But does it make a difference or it's just good party talk? Well, I talk a lot about parties about this, it's true, because I've been involved with it. But it's a lot more than party talk. The bottom line is this. In 1996, and this is a very tough reservoir. We were producing 3,000 barrels per day. Today actually we're producing 12,000 barrels from these wells. We can produce 25,000, 30,000 barrels if we want to. We don't, because of very strict reservoir management guidelines. More importantly, people would say so what? You're producing more, but does that really change your bottom line? You bet it does because the unit development costs on a per barrel basis between this well and this well is three times lower for the MRC wells, and this is not a technology that's only applicable to



Shaybah. We're applying it all over. And of course it has to be applied very very carefully. All of a sudden if you look from the satellite, if we had the ability of taking pictures, this is the top view of the reservoirs. This is how wells would look. These are actual wells. These are not wells from the future that we're drilling. These wells are already on production with tested performances. You can see the rates for yourself -- 10,000, 12,000, 12,000, different fields. We've drilled them in Ghawar. Some of the ones that we drill in Ghawar we can produce 40,000, 50,000 barrels per day very comfortable. We choose not to because of our reservoir management guidelines. The point I'm making here is that we're living in a completely different world because of the technological breakthroughs that are coming in. Just compare with what we had only about 20 years ago. In 1980s look from the sky by satellite. This is how a well would look, a vertical well, just going down. In the 1990s it's a horizontal well, one kilometer. Now compare that, it's the same scale, with the complexity of the structures and the different geometries. Now superimpose on it all the new technologies especially the intelligent well technologies that are coming in which are giving us the ability to control the production in the subsurface. Then you appreciate why we're so confident about the future. Now let's talk about Ghawar. It's so topical in the industry. Everybody talks about Ghawar. It's the super giant. The title is the biggest misnomer in the history of the industry. Calling Ghawar a field because Ghawar is actually a combination of so many super-giant fields. Some of them are shown. It's Fazran, Ain Dar, Shedgum, North Ulthamiyah, South Ulthamiyah, Hawiyah, Haradh. It's a huge giant. A few statistics. Obviously it's the largest in the world. It was discovered '48. It's been on-stream since 1951 -- more than half a century. And a very comprehensive water injection program was started. The size itself, it's about 174 miles by 16 miles. Just to give you an idea, that's farther than from here to Philadelphia. We talk about Ghawar, what's going on with water cuts and pressures and maintenance problems. Well let us look at it. Let's



see what's going on. I'm going to point to the oil production here. In case you don't see it, particularly people in the back, it's from 1951 to year-end 2003. This is for Ain Dar/Shedgum, which is the most mature part of Ghawar. I'm going to show you the reserve statistics on that. First, look at the oil production shown by the green line. As you can see it goes through a trough here and this is because of low demand period. Then it goes up. Currently it's producing very very comfortably at two million barrels per day. Again, as a matter of reference it's twice the production of the state of Texas. Now let us look at the pressure. If you notice the reservoir pressures are steady. Again, it's not an accident. It didn't happen just by chance. It's the deliberate product of very strict reservoir management policies and strategies. Pressures are monitored and managed very very carefully. Let us look at the water. What's happening with water? What's happening with water is that water production is extremely stable over the last five years. The total water cut is 36 percent. For those who don't know what water cut means, it's percentage of the total fluid that comes through the surface which is water. Water comes with oil. The more water you product the heavier it becomes and it becomes relatively more expensive. But again, to put you in perspective at this state of maturity that I'm going to show, producing 36 percent water cut is phenomenal by industry standards. Most of the IOCs produce at much much higher water cuts. 70 percent, 80 percent, 90 percent. Russia, we were talking about Russia, produces over 80 percent water cut. So here is Ain Dar/Shedgum producing at 36 percent water cut after 50 years. What does it mean as far as resource depletion? Let us look at the numbers closely. We have right now as of year-end 2003, the tank itself is about 68 billion barrels. The proved reserves is 41 billion barrels, which is 60 percent of the oil in place. And we are here. We are at this point. Now if we go back in history about 20 years ago, our estimates were that we were only going to produce 40 percent from Ain Dar/Shedgum. Our reserves were this much. So if we go by what we knew or what we chose to carry as reserves because of our very conservative approaches, we said this is the total reserves here. So when you come to this point the field is shut in and your



production is zero. Well, compare that with the reality. The reality is you're producing two million barrels and probably going to be producing two million barrels for a few more decades at very modest water cuts. So obviously your reserves are much much higher than 40 percent. That's the explanation for the type of reserves we're carrying which again are very conservative on the basis of actual field performance. Now where are we heading with it? We feel very comfortable that we will be in excess of 75 percent recovery. So we're looking at another 10 billion barrels very very comfortably, and probably a portion of the contingent resources because of the future technologies and EOR capabilities that are coming on. Now let's look at Ghawar total. Are we only showing you one part, Ain Dar/Shedgum? No, let us look at the whole thing. Ghawar as a whole the last ten years. What do we see? What we see is very comfortably five million barrels being on production and the few dips that you see it's because of low demand. Again, what do we see with the water cut? It was rising very gently, very very gentle by industry standards, and since 1999 actually has taken a dip. The reason is because of the new technologies, innovations, reservoir management practices we have actually reversed the trend and we feel very comfortable for the next ten years we will be able to continue that trend. I'm not saying this only for Ghawar. We say this with confidence for the whole company. In fact for the year we just ended, 2003, for the fourth year in a row the company reduced its water cut levels. I don't know of any other company in the industry that has done that. The total company aggregate water cut for Saudi Aramco was less than 27 percent for year 2003. It's the fourth year in a row. Okay, let's take a peek now at the future because I showed you mostly about the past. Haradh is the southern-most portion of Ghawar. Supposedly it has the toughest qualities so it's a very good case example to look at what we expect from Haradh. This is roughly equivalent in reserves to Prudhoe Bay. What I'm showing you is an aerial map and you may be curious about the shapes of these structures. What they are, they're the new generation wells that we know, we refer to as MRCs, maximum reservoir contact wells with quadlaterals. Each well comes with four laterals. So it's a completely different next generation design, and it's more than that. It also comes with intelligent



wells. So each one of the branches that you are looking at here has remote control from the surface, from our offices where we can activate, open things and close things. So in a way we have full control on what the well is going to do without any intervention at all. And I'm not talking about the future vision. We already have these wells. Now what does all that mean? What it means is this field is going to come on in mid July 2006 with a production rate of 300,000 barrels per day. What is the plateau we're expecting? Thirty years. We would be disappointed with 30 years. We definitely will shoot for a lot more than 30 years. What type of depletion rates we're talking about? 1.7 percent. When you forecast over to the future which is 2036, I may not be around. Most of you will be probably. At 30 years the plateau, we're still producing at 30,000. What is the type of water cut we're looking at in year 2036? It's about 22 percent water cut. Why am I so confident? I'm so confident because we've already done so. This is not something new. We've already done it in Abqaiq. We're doing all across the fields. We have our track record. We understand our reservoirs, we have our models. Now the oncoming power of the new generation wells, especially the intelligent wells, the intel revolution has reached the subsurface. I know this is what everybody has been waiting for so I would like to now look at instead of the next 30 years, let us look at the next 50 years. Let us look at the next 50 years for Saudi Aramco. What I would like to highlight right now is that this is not a plan by any means. We would like to share some scenarios with you, some possibilities, what if. What if there is truly a demand? What would happen? The first one is the current company plan which is to maintain its capacity at 10 million barrels a day. What we see is that we can comfortably meet a 50 year plateau very very comfortably, and all we would need on top of the 260 billion barrels of proved reserves we have is 15 billion barrels additional which corresponds roughly to 15 percent of probable and possible reserves. As a footnote, the current company business plan for year 2005-2009 is precisely that, is reserves replacement of 15 billion barrels. We never fail our business plan. So if we just go with our business plan, 2054, here we come. Now let us elevate the bar. Where do we go with it?



We thought just as a matter of evaluation, 12 million would be a good number. Here is 12 million. Again, it's just a scenario. If we ramp up by year 2014 to a production of 12 million, again, we believe we can sustain it very comfortably for 50 years and beyond. We believe anything beyond 2054 is really going into the open speculative stage, so we thought even for what if game scenarios 50 years would be sufficient. We looked at the reserves replacement requirements and again what we see is very very achievable. It's only 35 billion barrels which is 34 percent of probably and possible reserves. And please remember, this doesn't include any of the 150 billion barrels that I was mentioning. Now we also look at the 12 million case, again, and again what we found out, you can do it basically after a similar ramp-up period, you can go up to 15 million and maintain it up to 2054. The only qualifier there would be that you would need 70 billion barrels of reserves replacement which again we feel is very very achievable. Of course all of these scenarios, whether they're going to become the business plan or not it all depends on the world market conditions. It has to be commensurate with the global energy situation. Again the question that comes, just like Mr. Abdul-Baqi mentioned, what about costs? Let's look at the past and then I will comment on the future. When we look at our production costs vis-à-vis our competitors, and this is from the BPs report. We see that we have a significant cost advantage. What we're comparing here, so that we're all on the same page, we're looking at the direct production costs, so this is the direct EMP costs of the company which in our opinion is the right metric to compare against the other competitors. That's roughly 70 cents versus the four to five dollar range that we're seeing. Even if you say no, don't give me your EMP costs, give me your total costs, the costs still are under $2, $1.80. That wouldn't be the right comparison. We believe this is the right comparison, the 70 cents. So this is where we are and we've been very very stable throughout. That's because a very deliberate portfolio management, reserves management, reservoir management policies



and procedures. And we believe the future will be very very similar. Of course we may eventually see some rises in costs. That's undeniable. But given the benefits that we're acquiring from the new technologies, particularly the intelligent wells and the new diagnostic capabilities and the very strong reliance on surveillance, we don't believe there would be an abrupt change and all of a sudden we're going to follow an exponential increase in costs at all. The worst case scenario would be a very moderate increase in costs 10-15 years down the line. Again, continuing with the same theme and I'm just about done with the presentation. What do we see with the future? Because what we see in the future is the reason, is the justification for our vision for the future. Number one, what we see is real time reservoir management, just like I mentioned with respect to geosteering, geonavigation, and all the new capabilities that are coming on which is giving us the ability to follow our reservoirs with tremendous type of accuracy, remotely yet in real time. It's making a big difference. Intelligent wells. That has become the norm. A hundred million cell models. It may not mean much to you because what is a cell? It's very much like the picsile in digital cameras. It relates to resolution. So the more cells you have the more resolution more accuracy. Typically, again, the standard in the industry is something like 300,000 cells today. Our standard is three to four million cell models. For Ghawar we have a ten million cell model. Actually for Ghawar we have dozens of million cell models. But yet we're looking at very soon the capability of having hundred million cell models. Best in Class practices. Again, very much consistent with the emphasis on reservoir management. What does all that mean? The two things that we talked about over and over again. Lower unit development costs. Both development and operating costs. And definitely much higher recoveries. When I say about 150 billion barrels, it's all because of these initiatives. As a synopsis, these are the main thoughts that myself and Mr. Abdul-Baqi want to leave you with.



First and foremost I think it's important to realize that the company's reserves are very conservative and have significant upward potential. I mention a number, again very conservatively, is a future recoverable resource of about 150 billion barrels and most likely it's going to go up. That's over and above the current proved reserves, remaining reserves of 260 billion barrels. Second, the company has the capacity and the commitment to continue as a reliable and cost effective global oil supplier. The capacity and commitment are the two key words and we feel very very comfortable that we will be a reliable supplier and we will be a cost effective supplier because of all the initiatives that I already mentioned. Finally, the third one that we just discussed. Sustained production levels of 10, 12, and 15 million barrels per day well beyond 2054 are very achievable. We do not see a major challenge associated with them. Of course it would require the appropriate resource commitments, exploration efforts, EOR and technology applications. We believe all of those things are there. With that, I conclude my presentation. Thank you very much. [Applause] Mr. Ebel: Come on up, Matt. It's about 25 of 12:00 on Tuesday. I've accumulated enough questions to carry us through to about 3:30 on Wednesday afternoon. Unfortunately there's another event scheduled in this room this afternoon and we have to be out of here around 12:00 o'clock so we have 25 minutes for questions. Don't be disappointed if your particular question was not addressed by the panel. Maybe we should do this again and give you another chance. But I've passed on to Frank what I think are questions that would be of interest to everybody in the room, so here we go. Thank you. Mr. Verrastro: Thanks, Bob. The first question is an easy one for Matt. It's what's the title of your upcoming book and when do you expect it to be published? And who will play you in the movie? [Laughter] Mr. Simmons: I actually have a title on it called right now "Saudi Arabian Oil." I've held a contest in my office. I have about 98 names. Some are too flippant. I want to get a publisher first. I don't have any idea. I'd think two, three or four



months, that won't be the title. [Laughter] Mr. Verrastro: For Mr. Abdul-Baqi. When Saudi Arabia cuts production how is it decided what fields are reduced? When are cuts being made as far as grades? Mr. Abdul-Baqi: That's very simple. That's what the market wants. The market, we produce five grade crude. We didn't go into that in the presentation. We didn't want to overload you with additional information. We have Arabian Light which is our main production, our workhorse; we have two grades higher than that, Arabian Extra Light and Arabian Super Light; we have two grades lower than that which are Arabian Medium and Arabian Heavy. Where we cut, where we add -- By the way, which reservoir, which field. After we know exactly what the market wants we have the ability to respond to the market demand and then we go into our specialists who are monitoring all of these fields and we ask them what do you want to do? This is what every company does. It's just routine business, day in and day out. Market goes up, market goes down. Dr. Saleri: Basically that's the process. What I would impose on it is the fact that for every field, for every reservoir, for every grade we do have a plan for the year and for the decade. So we always operate through the plan. Nothing is done arbitrarily. It's consistent with our reservoir management practices. And we don't let market conditions override the reservoir management priorities. So within the guidelines, within the bill of rights that I talked about, we try to satisfy as much as we can the company's requirements. Mr. Verrastro: The next question is for Dr. Saleri, and you talked about this in your presentation but it says please elaborate further on the difference between current oil in place, the 700 billion, and your projection of 900 billion barrels. Is this attributable to expected success and exploration? Mr. Abdul-Baqi: I have to be fair. It's my projection. It's not his projection. I showed the slide of the 700 plus the 200 equals 900. This is attributable, as I said, to a combination of two factors. Another question was asked from the first row, how does the tank expand? We showed the map that shows a huge amount of acreage that is relatively unexplored. You go into these areas,



and we are going to find new oil and gas fields in those areas. So this is how the tank expands. The second part is how does the recovery factor affect that? How much you are getting out of that tank. If you combine both factors, conservative estimate is about 200 billion barrels for a total of 900 billion barrels. I say conservative estimate because only one category of those were estimated by the USGS to be 87 median with an upward potential of 161. Dr. Saleri: Let me add something with Mahmoud's permission. There is another way how the tank expands. We always take a very conservative view of how big the tank is. If you look at Shaybah, ten years ago we had a certain estimate of the tank. As we drilled more -- the field is already discovered, okay? As you drill more you delineate, you actually, you find out that the tank limits are bigger. So even without putting anything on production, not worrying about new technologies, just because you're drilling more wells, you're getting a much better understanding about geometric configuration of the wells, the tank expanse. This is very very common especially because we take a very conservative way of interpreting the oil in place originally. Mr. Verrastro: The next question is for both Nansen and Mr. Simmons. It says to what extent has new technology accelerated the ability to bring significant new production on line in the event of an unanticipated shortfall, so how fast can technology assist you? Dr. Saleri: I think incredibly, it has an incredible impact. I showed you some examples from Shaybah. These are real examples. All of a sudden instead of drilling 2000 barrel wells, in fact if I go back to 1980s technology to 300 barrel wells, vertical wells in Shaybah would have only produced 300 barrels. All of a sudden today comfortably you can produce 12,000 barrels from a well. So there is a huge acceleration. I can make analogies to Ghawar and other fields where it's not an incremental increase. It's quadrupled at the very least our ability to react to situations. Typically we can produce something on line if we want to of the order of 500 to one million barrels in a year or two, and that's a direct result of the new technologies. Question: How long does it take to drill a horizontal well at Shaybah?



Dr. Saleri: A normal horizontal well would be about 21 days. The complex generation with all the new intelligent capabilities, you're talking about 40 to 50 days. Mr. Simmons: First of all, I've been an unbelievably strong believer in horizontal drilling and multiple level well completion. Probably two of the most important projects we did in the '80s was be the advisor of merging Eastman and Christianson that were really the two leaders working on this, and then in 1989 I remember having to sit down and have a long conversation with Jim Woods at Baker Hughes to convince him that they really were crazy if they didn't buy this operation when we represented the sale. What horizontal drilling has been able to do is exactly these numbers without any question at all. What it didn't do is basically extend the pool that it was being drawn out of. What it also did through the '90s was mislead one company after another into thinking they could sustain recovery rates, building in six percent production increases, and sadly fall flat on their face when they finally -- So this is what worries me. It's not that I don't understand horizontal drilling. I think the industry -- and I'm talking now just about the companies in the West. But pretty smart companies almost across the board misread the use of technology and thought that it created simply the eternal fountain of youth versus the end of the easy cup. Mr. Verrastro: This question is directed to Dr. Saleri. It says Mr. Simmons -- so you'll have a chance to comment -- seems to be saying that technology is not the solution but the problem. Can Dr. Saleri comment and specifically talk about the Oman oil field mentioned in your presentation. First of all, is technology the problem, not the solution? Mr. Simmons: Bill White, when he was the Chief Operating Officer of the Department of Energy was at the National Ocean Industries Program and we were talking about this. Bill actually said, and I think this was so [inaudible], about 1994, he said I worry that what we have now created is a foot race between technology and decline rates. I actually think that was probably one of the first people that started to see really what was going on in technology. So I think my slide, technology was a miracle drug but what it basically didn't do is create a fountain of youth for hydrocarbon. That's my strong opinion.



Dr. Saleri: With all due respect I completely disagree. I think technology when appropriately used is significantly beneficial and we've seen time and time again in our fields how it's changing the game. It has become a true game changer. Now if we do not apply it properly of course it could work against you. In many of the cases, and Yibal is a very good example because I am personally very familiar with the situation in Yibal where they chose to apply the MRC type of technologies, the multilateral technologies, without understanding fully the reservoir architecture. It's a significant consequence of poor diagnostics. That's why I think it's very important to understand that technology alone, cutting edge technologies by themselves of course are not the solution. The solution is it must be coupled with superior diagnostics, and even over and above that with the concept of independent surveillance and monitoring. If you don't have these three fundamental pillars of reservoir management technology itself is not going to do the job. Our success stories, they're not coincidental. It's the product of a very deliberate application of technology in conjunction with those two other pillars that I mentioned. Mr. Verrastro: The next question is for Matt. Your presentation focused on production from existing fields. What about Saudi Aramco's exploration efforts? Does the potential for new discoveries ease your mind? Mr. Simmons: Again, the map is the map. What I had heard for so many years was there had never been any exploration, not from people in Aramco, this was just kind of conventional wisdom. What I read was the intensity of using both aeromagnetic survey and seismic survey and drilling penetrations throughout big chunk, not every single chunk. Again, what surprised me is the conventional wisdom that so many people said that had never been done. It was a surprise when you read about the commercial gas field in the very northwest. Presence, non-commercial. All the activity in Central Arabia that were surprising. They've just finished the world's most advanced aerial magnetic survey ever done. But then I step back and say look at that endowment triangle or what I call the golden triangle. For some odd reason we haven't really found, past the 1960s, anything outside that area any place in the Middle East. Was it bad luck or was it what happened in the United States when for years we thought we knew we had the giant fields on the California coast, we knew we had West Texas. A lot of people thought there must be stuff in



between if we'd just drill for it. There wasn't. So I don't think until we finally find some fields that really -- The problem is the asymmetric distribution. If one of these five fields does go into steep production decline you have to have so many smaller fields coming on so fast to not have a jolt which is one of the reasons that I basically ended up saying I think there is nothing that Saudi Aramco can do to better satisfy the world we won't ever have any problem starting producing monthly field by field production statistics just like you get in the North Sea so that we can all start saying boy, because they are as good as you get. So if there's a mistake it's not their mistake. Mr. Abdul-Baqi: I just want to make a small clarification. Aeromags, that's short for aeromagnetics, that's magnetics from the airplane. Aeromag surveys are not the tool to find oil or gas fields. Aeromag surveys gives you a general look at the very deep structure in the air and all that to guide you towards where do you go with your seismic tool which is much more expensive and concentrate on those areas. But even after seismic tells you the potential places of where to drill, as I said during my presentation, the proof of the pudding is when that well goes down. Do the fact that we run the biggest aeromag survey in the world or the most sophisticated aeromag survey in the world does not mean that we know now what is the potential of the Arabian Peninsula. I agree with you, the map is the map, and we showed the map. We showed the areas that are relatively unexplored. We know we're going to do this work in the future. We know it's going to turn out additional oil and gas fields. So again, I repeat, not only now we are number one in the world, but we have the potential to add more than anybody else. Mr. Verrastro: Dr. Saleri, can you explain the reasons for large increases in reserves announced by Saudi Aramco in the late 1980s? Dr. Saleri: I think it's an excellent question and I often get asked this question on different occasions, especially in SB meetings. It has a very simple, straight forward answer. It was a way overdue revision that was done at that time because of the extreme conservative nature of the reserves of the company. The company had taken a very very conservative view of its reserves at the time. Finally it realized there was no need to be that conservative on the basis of all the production data like I explained, and all the new evidence coming because of the new technologies, it revised them. I can give some very real life



examples. Abqaiq, our most mature field. It's been in production for 60 years. It's producing 400,000 barrels a day. If we go with the reserves that we had at that time, Abqaiq was finished ten years ago. We've already produced two billion barrels more than what the reserves were at the time. And we're not finished with Abqaiq. We're producing 400,000 and probably we're going to produce at a rate of something like 200,000 20 years from now. So we have a lot more oil to recover. The point I'm trying to make is we've already way exceeded those reserves and it proves the conservative nature of it. I would say the same thing for another field, Safaniya. If you look at the reserve figures we've already produced one billion barrels more as of now than the reserves that we were carrying at the time. Ain Dar/Shedgum, I showed you the actual history. We've already equaled, almost equaled what we carried as reserve. That's what the company did and will continue to do. As new technologies come we get more confidence in our reserves. Of course we're going to increase our recovery factors. Eventually I think we're going to have recovery factors like 75 or 80 percent. Mr. Verrastro: The next question is for Matt. When do you predict that Saudi Arabia will peak? That's in Chapter 3. [Laughter] Dr. Saleri: I want to know, too. [Laughter] And I want to know the source. [Laughter] Mr. Simmons: I guess I would ask a different question. The question is when Saudi Arabia, Saudi Aramco in 1981 produced briefly well over ten million barrels a day and averaged ten million barrels a day for the year, was that a safe, sustainable rate of production or a rate of production that they basically shouldn't have been doing because it introduce more aggressive water cut. So I think as we start talking about individual peaking you need to basically keep in mind it's a different issue if you're trying to basically pull all your oil out as fast as possible versus saying we need to figure out a rate that can be produced for as long as possible. If I had to bet, I would bet that rate should be about what they're producing now and if the market



pushed them into a need to produce more it's a disaster for the world long term and a disaster short term for Saudi Arabia because it brings forward all these awful water problems that all these technical SBE papers were very specific in talking about. So it's a tricky question. Peaking for whom and peaking for what occasion? Mr. Verrastro: This is for Mahmoud, I'd expect, and this may be our last question. You see to be confident about achieving higher rates of production. How confident are you that you will have the financial capability to do this? Mr. Abdul-Baqi: Let me explain our financial model. Financial, we call it, we are a self-financing company. What does that mean? It means simply that we go sell our crude. We get the revenue back. When we get our revenue back we deduct our operating costs, this is running the company, day to day running. Then we go to the government and pay our taxes and royalties. After that the amount of money that is remaining is used to finance our capital expenditures, maybe that's a term that not everybody -- anyhow, this is new projects, putting on new increments. And we have been doing that since the company started in 1933. The system did not change over those 70 years and it served us well during that period. Not only were we able to finance all of the huge projects that we have done, we put in 10 million barrels a day of sustained capacity with that money. But money remains annually after those capital projects are achieved and we distribute that as cash dividends for the shareholder. So this is what we have done for 70 years and I don't see any problem for us continuing to do that. We don't normally go to the banks and borrow, although we can do that, but we mostly are self-financing. We don't need to do that. Dr. Saleri: Just to put everything in context, at the type of rates we're talking about like 50 million barrels, you're talking about a revenue stream upwards of $150 billion annually. So any capital expenditure to expand is a relatively small faction of the revenue stream. That's why the company feels very comfortable that financially, organizationally and technically it will be able very comfortably to meet the higher off-take levels. Mr. Verrastro: This has been an excellent discussion. Regrettably we have to turn the room back over. We have a host of



good questions that still remain to be answered. I would like you to join me in thanking our panelists. [Applause] And thank you for your kind attention. Thank you. (END)

global oil supply: are we running out? experts to analyze … · 2013-07-03 · questions. as frank...

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