Agora Financial’s Rude Awakening

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Baltimore, Maryland

• Money to be made in servicing oil’s long decline,
• Does Big Oil really equal Big Profits?
• Secret dealings in the Middle Eastern oil fields and plenty more…

Joel Bowman, from the Arabian Gulf…

Given the flood of highly opinionated emails we received from both
sides of the Peak Oil debate after yesterday’s edition, we thought we’d get
straight into today’s essay.

It’s not that we don’t like (or even prefer) opinionated emails…it’s just
that we thought we should finish the story before we print the things.

Enjoy… 

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Empty Holes and Black Swans, Part II
Bud Conrad Interviews Matt Simmons

Bud Conrad (BC): I’ve read “Twilight in the Desert,” and I’m interested in
your view of the overall Middle East reserves, particularly what happened in
the mid-’80s when most of the countries in the Middle East magically doubled
their reserves…

Matt Simmons (MS): At the very least…

(Ed Note: Here’s a graph that shows the sudden jump in reserve numbers that
occurred in the Middle East)

BC: OK, depending on the country, there were a huge amount of paper increases
in apparent reserves. What are your thoughts on Saudi Arabia and what’s going
on in the Middle East?

MS: Well, I can tell you an awful lot of anecdotes that I’ve heard. It’s been
two years since “Twilight in the Desert” came out, and I have so much more
information that I’ve been able to gather in feedback from people within
Saudi Aramco who, I’m told, learned an awful lot by quietly, secretly reading
the book, which is sort of…

BC: (laughing) Saudi Aramco learns from you!

MS: Well, they had been so secretive over the years. If you think Saudi
Arabia’s a secretive place, within Saudi Aramco, it was even more secretive.

And one of the first times that I got a glimpse of this was when I was a
keynote speaker, this must have been six years ago or eight years ago now, at
the bi-annual SPE global conference for coil tubing. This guy comes up to me
afterwards and he’s an American. I saw his card and he’s from Saudi Aramco.

So I said “Oh, do you live over there?” and he said “Yeah, I just flew over
for the coil tubing conference.”

I asked him what he knew about Safaniya. He replied, “You know what – I’ve
never heard anything about it. I’ve been there 18 years. I know where the
field is, that’s about it. Where did you get that data? You never hear field
data in Saudi Arabia!”

So I said, “What do you do at Saudi Aramco?”

He said “I’m a production manager at Ghawar.”

I said “Gosh, Ghawar is the largest oil field in the world.”

He nodded, “Yep.”

“How big is Ghawar?”

“God, I couldn’t tell you that, I’d be sacked.”

I said, “Okay. Now if you walked from north to south and east to west, how
big is it?”

He said, “Oh, it’s about 145 miles long and 20-25 miles wide at its widest
point, but don’t ever quote me on that. I could lose my job.”

And I’ve just talked about the dimensions! (laughter) Any map shows this.

BC: Unbelievable.

MS: I thought “Good lord, if they’re that secretive within Saudi Aramco that
this guy who is senior enough to be going to Houston for the coil tubing
conference, and has been there 18 years, doesn’t dare tell me.

It took about three months after the book came out before I started getting
feedback from within the system, and then there were these Saudi Aramco guys
saying “God, what a fabulous book. We had all told ourselves that this stupid
guy in Houston was writing this stupid book that Saudi Arabia no longer has
any oil through total incompetence and how these camel jockeys screwed up the
world’s biggest oil fields, and it made us madder than hell.” And, of course,
the book didn’t say anything like that.

BC: You’re saying we don’t know what the reserve numbers are, and that we
need more people to honestly tell us. This is a world resource and we
shouldn’t be risking humanity’s future without knowing what’s going on.

MS: Absolutely.

BC: If you’re looking at investments, what draws your interest?

MS: Our firm has daily recommendations, and I basically stay totally out of
that. I tend to buy a stock and then hold it for five or ten years, unless I
think that I’ve made a mistake. And I tend to think more about which sectors
to avoid or be interested in to look at.

One of the things that really amazes me about the stock market and their
love/hate relationship with energy is that of the current weighting of
institutional investors in the market, the S&P weighting of energy is about
9%. Institutional ownership comprises about half of that. What’s interesting
is that about two-thirds of the ownership is in the major oil companies,
which is the one group that I would avoid like the plague. So the market is
invested in the wrong area – the major oil companies.

BC: They haven’t been able to keep up their reserves.

MS: Yeah, and they can’t. Their decline rates are so high and they operate
such old, mature basins that they can’t drill enough wells, and they don’t
have places to drill wells, and they don’t have a sustainable strategy. So,
in that respect, the oil service companies are the savior of all the
problems.

BC: Specifically?

MS: The service industry is Schlumberger (NYSE: SLB), Baker Hughes (NYSE:
BHI), Transocean (NYSE: RIG) and others. There’s about 150 of them and, like
in any sector, some of them are very poorly run companies, and some of them
are outstandingly well run. What I really think is going to be the most
active area is West Africa, or Libya, or that region. You can sort of name
your scenario, and then you can pick the handful of service companies to give
you good exposure.

In the E & P business, you get companies like Chesapeake (NYSE: CHK), for
instance, who have an unbelievably high talent, quality senior management,
and they basically figured out a decade ago that the only way you grow
production is by monopolizing drilling rigs and drilling like crazy. And so
they’ve had double-digit production growth in their natural gas while almost
every one of their peer group is in decline. I guess that’s one thing that I
would observe in forty years of energy investment banking is that management
matters.

BC: Thank you for taking the time to speak with us.

MS: My pleasure.

[Joel’s Note: we’d like to thank Bud and Matt for their ongoing work in the
Peak Oil debate. Judging by the amount of reader mail we received yesterday,
it’s certainly a hot topic for many investors.

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[Rude Endote: We’ll be back with more Rude delights tomorrow. If you wish to opine on our wee Peak Oil series, shoot us an email at the address below.

Until then…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com