Peak Oil News: An interview with peak-oil provocateur Matthew Simmons

Thursday, November 03, 2005

An interview with peak-oil provocateur Matthew Simmons

Grist Magazine

By Amanda Griscom Little

Matthew Simmons has been stirring up a lot of angst in energy circles this year. This well-connected industry insider has concluded that some of the world's largest oil beds may be on the verge of production collapse -- and he's willing to bet his much-vaunted career on it.

Author of the recently published Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, Simmons is founder of Simmons & Company International, an investment bank that handles mergers and acquisitions among energy companies, and counts among its clients Halliburton, General Electric, and the World Bank. A graduate of the Harvard Business School, he served as an energy-policy adviser to the 2000 Bush-Cheney campaign.

Conservative credentials aside, Simmons has been boggling the minds of people across the political spectrum with his recent prediction that the price of a barrel of oil could hit the high triple digits within a few years. To postpone economic meltdown, he says we should be drilling in the Arctic National Wildlife Refuge and other hotly contested spots. At the same time, he's calling for a massive shift in energy policy, including radical improvements in efficiency, as well as a return to local farming and manufacturing. With his unconventional opinions, he's single-handedly reinventing the image of the post-oil energy crusader. He talked to Grist from his cell phone while dashing between energy lectures.

question Let's start with a brief overview of the premise and implications of Twilight.

answer I believe we are either at or very close to peak oil. If I'm right, then we have to assume that five or 10 years from now we'll be producing less oil than we are today. And yet we have a society that is expecting, under the most conservative assumptions, that oil usage will grow by at least 30 to 50 percent over the next 25 years. In other words, we would end up with only 70 percent of the oil we have today when we would need to have 150 percent. It's a problem of staggering economic proportions -- far greater than the temporary setback of a terrorist attack on energy infrastructure -- that could end up leading to more geopolitical fistfights than you can ever imagine. The fistfights turn into weapon fights and give way to a very ugly society.

question How did this thesis evolve?

answer The odyssey began in the early 1980s when I realized that my firm was threatened by a production collapse in the energy and oil-service business. I thought, "How on earth could this have happened without us even knowing?" I started doing some careful investigation into energy data. The more I studied, the more I started to realize that so many people who call themselves experts in the energy market, including government analysts, are in fact experts in their opinions and don't actually base a lot of it in actual data.

question Why? Because the relevant data are confidential?

answer Yes, what's publicly available is extremely vague. No major oil-producing companies or nations allow audits of the data on their reserves and production, which leaves the experts effectively playing a guessing game.

question If the data are concealed, on what evidence did you base your own conclusions?

answer I've spent years poring over hundreds of papers from the Society of Petroleum Engineers that have revealed fascinating clues. First I took an inventory of the top oil fields in the world, field by field. I was aghast to find that nobody had ever listed even the top 20 oil fields by name. I found that there are only about 120 oil fields in the world that produce half of the world's oil supply. The top 14 fields, which make up 20 percent of global supply, are, on average, over 53 years old. In Saudi Arabia, which harbors a quarter of the entire global supply, there are only five key fields producing 90 percent of their oil. They're all old.

Naturally I was very curious to find details on the condition and productivity of these fields. Two years ago I took a trip to Saudi Arabia on a government tour for business executives. They plied us with various data points that just didn't add up, even vaguely. I've since found evidence in the engineering papers indicating that the major Saudi fields are seriously at risk of reaching their peak, at which point they will begin to see their output decline.

question In this case, would Saudi Arabia's leadership collapse?

answer I want to steer away from discussing specifics of geopolitics in the Middle East because I really don't want to shift the focus away from the economics. It doesn't ultimately matter who rules Saudi Arabia. They can't change the maturity of their oil fields.

question You made a $5,000 bet with conservative New York Times columnist John Tierney that per-barrel oil prices will be at $200 in 2010. How did you arrive at this number?

answer Well, first of all, the $5,000 bet was essentially an effort to be provocative and wake people up to how cheap oil still is. I started a year ago saying that we need to prepare ourselves for triple-digit oil prices -- and I don't mean $100 per barrel, I mean high triple digits. Will it be by 2010? We don't have any idea. It could be by the winter of 2006.

Oil price will ultimately be set by demand and supply. Current oil prices are ridiculously cheap. People find that hard to believe, particularly now, but consider this: $65 a barrel translates to 10 cents a cup. Ten times cheaper than bottled water. People who think that this is a really high price need to have their heads screwed back on.

question You have an enormous amount, professionally, riding on the prediction that peak oil is nigh.

answer I'm basically betting my entire career.

question What evidence did you find of looming production limits?

answer Let's start with the plummeting rate of discovery of critical oil fields. The French Petroleum Institute did a major study a couple of decades ago about the distribution of oil fields by basin, which lends itself to a chessboard analogy. What happens with phenomenal regularity worldwide is that within about five years of moving into a new area of potential oil reserves, prospectors tend to find the queen first, which is the second-largest; within a handful of years they find the king; and then over the next decade you find the next eight to 10 lords. And once you've found the royal family, the rest of the hydrocarbon deposits you'll ever find are basically peons in size. Research overwhelmingly shows that all the royal families have been discovered.

question Can you describe your findings that most of the king- and queen-sized deposits are so old that they have to be injected with increasing amounts of water to produce the crude?

answer For decades, Saudi Arabia has been injecting water in each key oil field to keep reservoir pressure artificially high. The data show that Saudis are now injecting somewhere between 15 million and 18 million barrels a day of water to recover 8 million barrels a day of oil. This is not sustainable. Geologically speaking, the faster you produce a highly pressurized reservoir, the faster the reservoir pressure collapses. Conversely, the more gently you produce the field, the longer you can produce it at a steady rate, and the higher amount of oil you get out of the field.

question I suppose it's safe to assume we're not poised to go gently into the twilight of global reserves.

answer To put it mildly. What they are doing is rapidly depleting the high-quality, high flow-rate oil, so they'll be left with vast amounts of oil that just won't come out of the ground without massive water input or thousands and thousands of wells being drilled.

question What kind of response have you gotten to this book? I saw in a New York Times Magazine article by Peter Maass that Sadad al-Husseini, a former executive of state-owned Saudi Aramco, essentially corroborated your thesis.

answer Yes, he's a first-rate person. We've actually become quite good friends. I don't know to what extent I might have actually liberated him to speak more openly about the limits to Middle East oil. I think I've given quite a few Saudi insiders cover for being able to finally speak up and say, yes, that's actually what I thought, too.

In the U.S., the response within industry and among politicians has been overwhelmingly positive. About 10 people total have attacked the book, and my guess is that most of them have one commonality: a consulting client called Saudi Aramco.

question It boggles my mind that data on oil reserves can be concealed. Knowing when we're going to run out would seem as critical to global security as knowing who has weapons of mass destruction. Why isn't disclosing oil data a responsibility on par with disclosing WMDs?

answer It should be. The foreign minister of Saudi Arabia spoke at Rice University about five weeks ago and he said, "We're as transparent as anybody." And he's right. Until we force that same standard of disclosure on Exxon and Shell and BP, then I don't think there's any reason to expect Saudi Arabia to behave better. What I'm suggesting is the whole world needs to go to a new standard. The problem, of course, is this: In political and corporate worlds there are currently significant disincentives to be forthright about these risks. That's why we're going to have to have some sort of enforced mandate. It won't happen voluntarily.

question What would you advise the Bush administration to do?

answer Clamor for energy-data reform. That's the only thing the governments of the world can do this year. But they can't do it alone. I think the global mandate of how we have to attack this problem needs to be a very coordinated, central plan. We need to have international energy cooperation so we don't go into an accidental energy war.

question Have you discussed these ideas with President Bush?

answer I have met with the president quite a few times on energy, but not since coming to these latest conclusions. But I have spoken very openly with senior politicians from both parties, and key people are paying attention.

Spend Your $.02
Discuss this story in our blog, Gristmill.
question I understand you are a strong proponent of allowing drilling in the Arctic National Wildlife Refuge and the outer continental shelf.

answer Yes, ASAP. There's nothing we can do to solve our problems, but everything we do that helps is a bridge to buy us time. Ultimately, we have to actually create some new forms of energy that don't exist today. Solar and wind are, of course, electricity, so not helpful near-term on the transportation front, which is the most intractable part of the problem. Biofuels need to be intensely examined, but corn-based ethanol is a scam because it requires such intensive oil inputs.

question What about the shift to hybrid engines and, ultimately, hydrogen?

answer There are some 220 million cars currently on the road in the U.S. alone. The problem with that concept, which so many people think is the way you end the energy war, is it will take 30 years to turn over the entire vehicle fleet. We don't have 15 or 20 years, much less 30.

We need to think on a grander scale. We have to find, for instance, far more energy-efficient methods of transporting products by rail and ship rather than trucks. We have to liberate the workforce from office-based jobs and let them work in their village, through the modern technology of emails and faxes and video conferencing. We have to address the distribution of food: Much of the food in supermarkets today comes from at least a continent or two away. We need to return to local farms. And we have to attack globalization: As energy prices soar, manufacturing things close to home will begin to make sense again.

question What do you do personally to reduce your energy footprint?

answer Very little, actually. I do have a new Mercedes diesel car that on the open road gets up to 50 miles per gallon. But in fact I'm one of the problems right now. I'm flying around the country giving too many energy talks. If I really wanted to say I'm going to be a personal crusader, I'd actually shut up and stay home.

- - - - - - - - - -

Amanda Griscom Little writes Grist's Muckraker column on environmental politics and policy and interviews green luminaries for the magazine. Her articles on energy and the environment have also appeared in publications ranging from Rolling Stone to The New York Times Magazine.


At 3:37 PM, November 05, 2005, Anonymous Anonymous said...

Not one of the several pieces of evidence - grounds for belief" given by the author is conclusive or even persuasive enough to constitute a premise for a theory that holds we are on the verge of a petroleum energy shortage.

The author is contributing to the cover story required to justify inevitable price hikes in the petroleum industry.

Liquid petroleum is not North America's biggest energy threat. It is natural gas. But that is a story for another day.

Petroleum as crude oil naturally resides in porous rock the industry calls "reservoirs". The stuff sticks to the rock or sand just as it does on the surface when the stuff is spilled on the sea and washed onto a sandy shore. Reservoirs often produce better when they have the hydraulic assistance of either/ both of pressurized gas and/or underlying water.

It is considered sound reservoir management (ie likely to result in eventual production of the greatest proportion of reserves in place) to re-pressure, maintain pressure, balance pressure or influence viscosity and other resistive properties of crude oil, by injecting stuff. Water is a favourite make-up fluid. It is not unusual to inject fluids out of proportion to produced oil, even in new reservoirs.

People who count on the ignorance of public readers and listeners to forgive misleading comments presented as facts are, by definition, snake-oil salesmen.

The common wisdom abounding in the world as recently as 2001, was that the world was awash with crude oil.

This article starts with "I believe...." One does not apply belief to evident facts. To say, "I believe there is oxygen in the air," or "I believe there are rocks in the rocky mountains," would seem silly. One "believes" only where one admits a lack of evidence. It is therefore a shortcut from ignorance to expertise.

At 3:56 PM, November 05, 2005, Anonymous Anonymous said...

I don't really know where you are going with your answers or points.

Oil has been viewed in the industry for many years as existing in tiers for economic purposes. Tier one was cheap oil. Tier two was more expensive and so on until its cost makes it prohibitively valuable for certain purposes like heating fuel in current technology burning apparatus.

Cheap oil was torn out of the ground by irresponsible and non-accountable business people protected by compromised government personages. Some parts of the worrld - notably the third world and former soviet union were worse than others. Some were responsible like the scandinavians producing the north sea.

Also the American refining and distribution system was allowed to fall apart since it was established as part of the war effort in the early 1940's. That PADD system and its pieces were in bad need of replacement as it has long been beyond repair. Recent weather events give the US an excuse to re-think this and re-do it. But the reason it was never done before has been cost. As it is done now, it will result in huge cost increases at point of consumption.

That is the way it is.

We've been saying for years, "the sins of the father shall be visited on the sons." In other words, irresponsibility in one era is at the expense of the next.

This and next generations have to change out the transportation fleet in favour of efficiency. We have to conserve and re-cycle - al that stuff we talk about but don't much do.

We'll make out alright. Humans seldom do what they should until they have to do it.

We will get all the petroleum we need for a very long time but it will cost a lot more to put it into the burner

At 4:22 PM, November 05, 2005, Anonymous Anonymous said...

"question You made a $5,000 bet with conservative New York Times columnist John Tierney that per-barrel oil prices will be at $200 in 2010."

Anyone can make a similar bet by buying options on crude oil, including those business interests likely to be devastated by such a drastic move. Yet with 2010 crude oil forwards at $57 and fairly low options premium (ie high certainty), the market odds of a >200 price at any time in 2010 is incredibly low (around 1% or so) so I hope Simmons at least received some odds on his bet w/tierney. Which introduces a question: why isn't anyone in the oil industry "betting with him" and pushing the forwards higher?

in other words why are forwards in crude oil 5 dollars cheaper than the spot price?? why wouldnt there be a strong preference for calls over puts instead of the opposite (as is the case?) Why do you imagine is the collective forecasting mechanism of the marketplace ignoring Simmons forecast so completely? they're all just very very wrong?


Post a Comment

<< Home