Global Oil-Supply Worries

Fuel Debate in Saudi Arabia

Sadad al-Husseini and Nansen Saleri raced up the ranks at Saudi Aramco,
the world's most powerful oil company, working together for years to
squeeze more crude from Saudi Arabia's massive fields. Today, the two men
have staked out opposite sides of a momentous industry debate.
Mr. Husseini, Aramco's second-in-command until 2004, says the world faces
a brute reality of depleting resources and ever rising prices. Mr.
Saleri, until recently the company's oil-reservoir manager, insists that
with enough ingenuity and investment, plenty more oil can be found.
With oil prices having doubled over the past year, political leaders,
Wall Street investors, commuters, airlines and car makers are all
scrambling to divine where prices will head next. The disparity of
opinion between two of the most knowledgeable men in the industry shows
how much fog hangs over the most basic question of all -- whether oil can
be unearthed any faster than it currently is.
At the moment, Mr. Husseini's pessimistic view is clearly ascendant. Even
before this year's surge in oil prices, there were gloomy industry
predictions that world oil output would soon hit a ceiling. U.S.
benchmark crude hit a record high on Thursday, propelled by Libyan
threats of possible supply cuts, closing at $139.64 a barrel, up more
than threefold since 2004. (Please see related article.)
But Mr. Saleri isn't alone in dismissing the gloom as misplaced.
Optimists, from Exxon Mobil Corp. to the U.S. Energy Department, argue
that high prices propel companies to innovate and invest more. As
supplies rebound, prices will fall from today's levels.
Saudi Arabia itself, producer of 12% of the world's oil, has vacillated
for years over whether to try to extract oil faster than it already is.
Last weekend, urged on by Saudi King Abdullah, it appeared to move into
Mr. Saleri's camp. Fearful that supply jitters were damaging the world
economy, the kingdom said it was ready to invest tens of billions of
dollars to boost its capacity to unprecedented levels -- to 15 million
barrels a day over the next decade, from just over 11 million now.
Opinions within the region on the health of the Persian Gulf's remaining
petroleum riches vary more widely than many realize. Messrs. Husseini and
Saleri disagree over whether the new Saudi production target is either
feasible or wise -- echoing a debate that has swirled behind the scenes
at Aramco for years.
That the two men worked side by side at the company that controls one-
quarter of the world's proven oil reserves makes their divergent outlooks
all the more striking.
Mr. Husseini, now an independent consultant, has jetted around the world
spreading his views, including recently over dinner with George Soros and
a clutch of other top financiers. Mr. Saleri has lectured, written
opinion pieces and buttonholed top oil officials from Latin America to
Kuwait.
Mr. Husseini, 61 years old, lives across the street from the Saudi oil
minister, Ali Naimi, in a leafy neighborhood of Dhahran, the Aramco
company town on Saudi Arabia's east coast. The suave but sharply
opinionated petroleum geologist says most of the big oil repositories
have been found, and no amount of gadgetry will restore bubbly youth to
aging fields from Indonesia to the Gulf of Mexico. War, politics and
soaring costs, he adds, are slowing development in many of the most
promising regions.
"The fact is, we have to work harder and harder to get the oil we need,"
he says. Those who contend otherwise, he insists, "claim to have some
magic potion, like voodoo, that doesn't exist."
Mr. Saleri, who is a year younger, shrugs off his former boss's
pessimism. A self-described "technology nut" who resigned as Aramco's top
reservoir manager last fall to set up his own consulting shop in Houston,
Mr. Saleri has become a vociferous opponent of the "peak oil" view, which
holds that global oil production is about to enter a permanent slump due
to shrinking resources and limited investment.
"We have consumed only one trillion of the 14 or 15 trillion barrels of
oil that are out there," says Mr. Saleri, citing a personal estimate for
all types of oil that is far higher than most. "For the next 40, 50 or 60
years, I see no problem at all."
Aramco Outsiders
Both men started their careers at Aramco as outsiders. Mr. Husseini's
family moved to Saudi Arabia from Syria in 1961, when he was 14. The
royal family had invited his father to help establish the Saudi National
Guard under the command of Prince Abdullah, who is now the Saudi king.
Prince Abdullah became a guardian of sorts to the six Husseini children
after their father died in a car wreck in 1968.
After graduating from Brown University, Mr. Husseini took a job with
Aramco, which was then in American hands. By 1980, when the Saudi
government took over the company, the young geologist was rising fast.
"Sadad was one of the best engineers I worked with anywhere in the
world," says Edward Price, Aramco's president at the time.

Mr. Saleri's route to Aramco was more circuitous. Born to a prominent
Armenian family in Istanbul, he studied in the U.S., then joined Standard
Oil of California, now Chevron Corp. His job was to take all the known
data on an oil field -- well-flow rates, geological core samples, seismic
charts -- and predict how the reservoir would behave under different
production scenarios. "I basically sat in a dark room and crunched data,"
he says.
In 1978, Chevron sent him to Saudi Arabia for a seven-year stint as a
consultant to Aramco, where he met Mr. Husseini. The oil world was about
to experience a price spike that began with the Iranian revolution. For
three years, starting in 1979, Aramco pushed its oil production to nearly
10 million barrels a day -- still its all-time record.
What happened next bears directly on Mr. Husseini's current view. The
effort to draw out so much more oil, he says, nearly crippled the
kingdom's mightiest fields. The pressure in many of them plummeted. Water
seeped into oil zones.
"They were going hellbent for leather to take care of world demand," he
says. "And then we spent the next seven or eight years cleaning up the
mess."
After Aramco began cutting back on output in 1981, Mr. Husseini worked to
mend its huge reservoirs -- and to understand them better. In 1992, he
persuaded Mr. Saleri to join Aramco full-time to help create computer-
simulation models of all Saudi oil fields. The two men worked side by
side on some of Aramco's most ambitious projects, including the
development of a vast oil field called Shaybah, deep in the country's
remote and forbidding Empty Quarter.
It was at Shaybah that Mr. Saleri had what he calls his "big eureka
moment." Aramco had developed the field using hundreds of wells that went
down, then snaked horizontally. But when Shaybah came on stream in 1998,
its production fell short of the planned 500,000 barrels a day.
Mr. Saleri led an aggressive campaign to drill a new batch of
extraordinarily long wells, many with multiple branches shooting off in
all directions. Shaybah's production shot up. "That was a true
engineering breakthrough," says Rick Chimblo, Aramco's chief geophysicist
at the time.
That success helps explain why Mr. Saleri is now such an optimist.
"Shaybah brought me fame," says Mr. Saleri. "And it made me realize how
the old rules no longer applied."
Mr. Husseini applauded Mr. Saleri's accomplishment. But soon, the two
executives were disagreeing on key forecasts. In 2001, Aramco was looking
to open the kingdom's vast Empty Quarter to foreign natural-gas
exploration. Mr. Husseini estimated that the area contained at most about
30 trillion cubic feet of gas -- not large by Saudi standards. Mr. Saleri
predicted the area would yield 10 times that much. So far, drilling in
the area has found no commercial quantities of gas.
At around that time, rising oil demand revived discussion within Aramco
over when and how to boost the kingdom's production capacity, then just
over 10 million barrels a day. Then, as now, Messrs. Husseini and Saleri
had sharply different views on the issue.
Recalling his experience in Shaybah, Mr. Saleri argued that the kingdom
could hit 15 million barrels a day and hold that level for decades. Mr.
Husseini, remembering the missteps of the late 1970s, pushed for what he
calls "a realistic, gradual approach." Fifteen million barrels a day
would be sustainable only briefly, he said, and then only with huge
effort and expense.
"My view is that you produce a field for the longest period of time at
the least capital cost," says Mr. Husseini. "Nansen comes from the
international-company school of thought, which is to get the maximum
amount of oil you can in the shortest time."
International Pressure
In recent months, Saudi leaders appeared to have adopted Mr. Husseini's
view. Local reports quoted King Abdullah saying that some new discoveries
should stay in the ground. "With grace from God, our children need it,"
he said. Mr. Naimi, the oil minister, announced that Aramco saw no need
to go beyond 12.5 million barrels a day next year.
But on Sunday, under heavy international pressure, the kingdom revived
its earlier promise to push for the far higher target of 15 million
barrels a day.
Mr. Husseini, once viewed as a shoo-in to be Aramco's top executive, left
Aramco in March 2004 after clashing with other senior managers over
production targets and other matters, others at the company say. Mr.
Husseini declines to explain why he left, saying only: "I'd done all I
could to support all our collective objectives without having to do
anything I would feel embarrassed about."
Months later, he issued his first gloomy take on the world's oil. Forces
ranging from resource nationalism to depletion rates in the biggest
fields, he wrote in Oil and Gas Journal, meant that oil prices will
"continue to escalate through the end of the decade."
By fall he was warning that consumers shouldn't expect any big Saudi
production increases over the next decade. His statements earned him
several sharp rebukes from the Saudi Oil Ministry, though Mr. Husseini
insists that his relations with the country's top oil officials remain
warm.
Mr. Husseini says he often bumps into Mr. Naimi, the Saudi oil minister,
in their Dhahran neighborhood or at parties. "We are great friends. I see
him all the time," he says. Mr. Naimi declined to comment.
By last fall, anxiety was growing within the industry and on Wall Street
over whether long-term supplies could keep pace with the rising world
demand. Mr. Husseini stoked those fears at a London conference in
October. The major oil-producing nations were inflating their oil
reserves by as much as 300 billion barrels, about one-quarter of the
world's proven reserves, he said, while the giant fields of the Persian
Gulf region are 41% depleted.
Mr. Saleri, who left Aramco in September, doesn't share those worries. He
has hired a half dozen former Aramco and Chevron officials and opened a
business in Houston. His company, Quantum Reservoir Impact, says it has
the reservoir-modeling and management know-how to revive declining oil
fields. Mr. Saleri is now shopping his services to big national oil
companies in Latin America and the Middle East, though he has yet to sign
any contracts.
Peak-Oil Dispute
In a Wall Street Journal opinion piece in March, he dismissed the peak-
oil theory. "The world has plenty of oil," he wrote.
Three weeks later, Mr. Husseini flew to New York at the invitation of a
clutch of high-powered financiers, including Mr. Soros, Leucadia National
Corp. Chairman Ian M. Cumming and Aubrey McClendon, the chief executive
of natural-gas company Chesapeake Energy Corp.
The group of about 20 met for dinner in the 21 Club's wine cellar. Mr.
Husseini declines to comment on the session. One guest says he spoke
mainly about the geopolitical thunderclouds hovering over the oil market,
especially the U.S. and Israeli standoff with Iran.
In a longer presentation the following morning, he argued that the world
will have to work hard just to keep its oil production where it is.
Conservation, not new oil discoveries, will be "the primary source of
overall energy availability" going forward, he said.
He delivered the same message to oil magnate T. Boone Pickens over lunch
in Chicago. "It was just two oil guys talking," says Mr. Pickens, adding
that Mr. Husseini's views dovetail with his own.
Messrs. Husseini and Saleri remain collegial, though they haven't spoken
for months. Both see the other's views as largely a matter of personal
disposition.
"Sadad by nature sees the dark clouds overhead," says Mr. Saleri. "He's a
pessimist."
His former boss laughs at the description. "The problem with Nansen," he
says, "is that he loves his theories, even when they run up against
reality."