Empty Holes and Black Swans, Part II

• 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...

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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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In Bud's current edition, you can read about the ultimate contrarian opportunity in today's oil and gas sector, and about the under-the-radar junior company poised to exploit these conditions. If this is the kind of thing that shakes your cage, you can check out their 3-month risk-free trial offer right here: Casey Energy Speculator – Risk Free Trial Offer .

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[Rude Endnote: 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...