Oil Prices and Saudi Arabia: Interview with Matthew Simmons (Part 3)
By Sean-Paul Kelley
Matthew R. Simmons founded Simmons & Company in 1974. The company's focus is on oil services, mergers and acquisitions, as well as bankruptcy workouts. In 1995, the company began providing "total energy services" to the industry. It has offices in Texas, Louisiana and Scotland, with 126 employees, including 76 professionals. This is Part 1 of the interview with Mr. Simmons on the energy policies of the George W. Bush Administration. You can find Part 1 Here and Part 2 Here.
SPK: Are you familiar with the report, Exxon's Outlook for energy? From my reading of the report it said that practically all the future production increases in the world are going to have to come from OPEC. With what you are telling me and what you have written in your book, what you are telling me that it's not going to happen.
MRS: It has a one percent chance of happening. Maybe half a percent, really.
SPK: What's the solution? A couple of brief ideas.
MRS: I think they have OPEC going to 50mbd by 2030. That means that we must have Saudi Arabia at between 20-35mbd.
SPK: You categorically don't see that as happening, do you?
MRS: Yeah, the chance of that is less than one percent. Now when you get less than one percent it doesn't matter what it is. I also think the risk of actually producing at 10-12mbd has a chance of maybe five percent. Again, I hate to use those numbers but it is just extremely low. The safest production profile for Saudi Arabia over the next decade is to lower their current production by a third to 50%.
SPK: Why would you lower production?
MRS: It's called conservation. The lower the rate you produce any pressurized oilfield then the longer you can produce it at a sustainable rate and you will recover more oil without having to revert to artificial lift.
SPK: Ok, little funny here. I thought when you said conservation I sensed a little glibness but now I understand. You are talking about the longevity of the oil field.
MRS: This use to be very common in the industry in the 60s and 70s. But now when you hear the word conservation people think you mean not driving an SUV. Being a conservationist in the oil industry meant producing at a gentle rate of production for a long, long period of time. And once prices collapsed you couldn't afford to do that unless you were you a really wealthy family. There are some examples in Texas of some really wealthy families that decided years ago they would never produce a field over a certain amount and they are still producing at the same amount today.
SPK: During the Asian financial crisis and the resulting collapse in worldwide oil prices, it was a demand side issue, I know a couple of people here in town that just stopped producing. They stopped because they weren't making any money as it cost them more to pump the oil out than it brought in the market.
MRS: The Cullen family in Houston, old man Cullen was one of the great wildcatters of the 30s and 40s, I don't know when his era finally passed but his great discovery was the O'Connor field and I was told a few weeks ago that they did a study back in the 60s realizing that if the O'Connor field production collapses their wealth comes to an end. And so they did a very detailed study and decided to produce it at 40,000 barrels a day and it is still producing 40,000 barrels a day. Had they gone to 200,000-300,000 it would have been over in the 70s.
SPK: That being said, what do you say about the demand side. You've talked about supply side, a way of reducing production so that you have a sustainable oil well, now lets talk about the demand side?
MRS: The current model is not sustainable. It is not sustainable but it is insatiable.
SPK: How do I just know that that soundbite is going to be around for a while?
SPK: Joking aside, what's the solution?
MRS: Once it is clear that Saudi Arabia has passed sustainable peak production because once that happens then the world has categorically passed sustainable peak production.
One of the things we need to do is understand the true value of a really scarce resource. You know, we wasted most of the great oil, by giving it away. And get people appreciating that oil and natural gas need to be at prices that are vastly higher than what they are today. And once they get to that people won't get disturbed or mad. They'll accept it.
It's interesting the steps we can take that really aren't exactly as draconian as they sound on the surface. You got to fix the transportation market. 70% of every barrel of oil used in the world today is used to transportation. But there are some really interesting fixes. If you put all of the goods we now move by long haul trucks and get them off the highways and put them on the rails that has an energy efficiency of between five and ten fold, as opposed to five or ten percent. And that is not an impossible mission from a five to seven year time if we had to do it. There is a huge side benefit to that. By eliminating the trucks on the road we actually make a bug dent on traffic congestion. Traffic congestion is public enemy numbers 1 through 8 on passenger car fuel efficiency. And so we can have all of these Priuses and hybrids, don't get me wrong they are great. I drive a fabulous new Diesel Mercedes and I get, on the open road, as long as there is no traffic, I can get almost 50 miles to the gallon. But when I am in stop-and-go traffic I get between 5-11 miles to the gallon. You have to address traffic congestion and you have to address some of these areas where there are magnitudes of savings and then we have to learn to do things like distributed work. The miracle of the internet and working online. It took three months to get my firm online. Rather than have people drive for two hours in the afternoon and two hours in the evening we will actually adjust to people working in their neighborhood for their company.
And we need to learn how to make things closer to home.
Then there is agriculture. Food models. Apples sold in the summer in the UK 85-90% of them comes from New Zealand. That's a 22,000 mile journey for an apple! If we went back to growing our food closer to home which is easily done, we could help our economy, get better apples because they are local, and we save enormous amounts on money on energy/transport costs. We can make those changes in a 5-10 year period of time without going into an energy war.
SPK: Do you suggest taxing the price of oil? Would you suggest a tariff or something along those lines?
MRS: No, because you just basically make it look like the only reason there are high prices for energy are from taxes. I think there is a whole different issue. And that is what do we do with the abnormally high wealth and revenue this created. We need to make damn sure that the money is spent for good purposes.
For instance, in the United States we have a pipeline system that is delivering 21mbd of finished petroleum products and about 9mbd equivalent natural gas that is so utterly old and rusty that it cannot be maintained. Over the next five years we need to take this fantastically high revenue from this and reinvest it in rebuilding the pipeline system. Because what would really be a problem is that we not only have falling supply but a collapsed pipeline system. That would be the largest construction job in the history of the United States and it would touch every state. I think this would be a trillion dollar job. It would be good for and help our economy and wonderful for blue-collar jobs in a way that would tolerate the impact of $150-200 barrel prices.
SPK: You think that oil is going to be at $150-200 a barrel? It's gonna happen?
MRS: Yeah. On an inflation-adjusted basis the price we paid in the 70s was over a $100 a barrel. And that was when we had far more world wide supply than we have today. And we had a drilling system that was relatively new. The whole system is so utterly old that it needs to be replaced. There are 3,000 drilling rigs in the world, about 600 offshore and 2,400 on land. And the average age of the rigs onshore is about 30 years. The average age offshore is about 22 years. If they don't rapidly start re-building new rigs they are going to compound a whole `nother problem.
There are lots of ways to spend the money generated from oil. We might just have to actually have some tax policies because what we cannot tolerate is the owners of the oil just putting it in their pockets and getting even more utterly wealthy.
SPK: That is a very interesting comment. I do not think I have ever heard someone that works in the oil industry living in Houston say something so blasphemous! I'm glad to hear it, but very surprised.
MRS: Well, first of all, I am not an ideologue, I am a realist.
SPK: Along those lines, do you think there are more people in your industry who are beginning to feel the way you do?
MRS: I'd say it is probably now somewhere between 75 and 100 hundred of us. But that's out of a population of, oh, 2, 2 and a half million.
SPK: That isn't very many.
MRS: It's better than the ten or fifteen of us it was five years ago. The Swedish Academy of Royal Science have now held three hearings in the last two weeks and the first hearing, I was one of the four participants of the first one and they are going to come out with a major paper in the next few weeks addressing the issue of Peak Oil. And the Swedish Academy of Science is the group that picks the Nobel Prizes.
SPK: Pretty serious crowd.
MRS: And the reality is that this is now the work of about 300 people. I obviously think this is just as important as people being aware of the possibility of war in 1938-39.
SPK: As you are labeled as an investment banker I want to ask you who is going to profit from this and where should investors look to put their money?
MRS: The money that needs to be spent on this problem will create some very healthy companies. It won't be good for all the companies. I think the majors have themselves in a very serious box. They are too big. And they cannot acquire with high oil prices. I don't like the majors. Over the next year, the majors will do well in the stock market, but I think being small is beautiful. If you are small you are still nimble enough to have real growth. The service industry, are the foot soldiers and the refiners are the toll gate of being able to create a stable crude stream into high quality products. Like Valero. Any of the independent refiners, too.
SPK: Last question: Any ideas on the infrastructure rebuild play?
MRS: No specific names, because of the new rules. Being too stock specific can get me into trouble. But it is a good group.
SPK: Mr. Simmons, I really appreciate you taking the time out of your busy schedule and I hope that you sell lots of books. Thank you very much.
MRS: Well, there has never been a book published like this that is un-ideological and I hope that it is a serious wake-up call.
Sean-Paul Kelley is the Editor of The Agonist, an online global commentary and news community. He has traveled widely and is currently writing a book on his adventures in Central Asia. He graduated with a B.A. in Diplomatic History from the University of Houston and is currently completing his Masters in History.