Matt Simmons: Oil Industry Needs a Shock, Oil Supply is at Risk
CB found an archived interview that King World News conducted with Matt Simmons, head and founder of Simmons & Company International, on November 13, 2009 regarding his thoughts on the current state of the oil industry. The full 23 minute interview can be accessed from the King World News Website. For those who don’t know, Simmons is respected in the industry, but is also considered a controversial figure with his speeches and presentations that claim the oil industry is in much more trouble than the public and media realizes. He has written the popular book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy
(1) The interview began with Simmons thoughts on the an article by the Guardian regarding the International Energy Agency (the “IEA”) inflating oil reserve figures at the request of the U.S. to avoid panic buying at realization of the looming shortage. As far back as 2004, Colin Campbell a former executive with Total France, stated that if the real oil reserve numbers were to come out, then there would be a panic in the stock markets. Simmons believes that until recently, the IEA was more of a cheerleader for the cheap oil, than the oil watch dog it was supposed to be. Yet, the current chief economist at the IEA became convinced more than a year ago that the agency lacked the necessary data to understand when peak oil will likely occur. As a result, he led an effort to revamp the models and analyze the data better. Consequently, the report released a year ago painted a better picture of the oil industry’s reality than it had previously. The report stated that in order to maintain the current demand levels from the present to 2030, the equivalent of four new Saudi Arabias would have to be added. This would be extremely challenging to accomplish. Furthermore, if demand reached the 106 million barrels a day that the IEA projects with conservative assumptions, then the world would need another two Saudi Arabia in addition to the four mentioned above.
(2) Simmons’ belief is that the flow of oil peaked in 2005. There have been unexpected declines in production in North Sea and Mexico.
(3) Oil is not a commodity, there are different qualities, or grades, of oil. The best grade is condensate, which is of such quality that it can almost be used directly in a fuel tank. Then there is light sweet oil, which doesn’t have to undergo a process to remove sourness. Then there is medium oil. Followed by heavy oil. The worst is heavy-sour oil. More refining processes are necessary as one uses worst grades of oil. As production moves from the best grades to the worse grades, much more energy is required to produce a usable product, thus reducing the net energy produced.
(4) According to IEA, most of the increase in future output would have to come from the current OPEC. At present, Saudi Arabia claims to have 11.5 million barrels a day of productive capacity, which it believes can be increased to 12.8 million barrels a day once the country completes its expansion projects. Simmons states that there is reliable data that shows it is questionable that Saudi Arabia can actually produce more than 8 million barrels a day. Also, there are beliefs that some of these new projects will not work.
It is believed that most of the new production would have to come from OPEC countries. However, oil fields in both Iran and Iraq are in poor shape. In Iraq, if those fields produce significantly more than 1 million barrels a day, they will most likely collapse. Yet, if they produce near 1 million barrels a day, then the fields might be able to last 20 years (in the Daily DL for 12-14-09 there is an article by the Financial Times where Shell states that it plans to increase Majnoon’s, a large Iraq field, production to 1.8 billion barrels a day). Meanwhile, in Iran the country has not found the gas necessary to re-inject into the large oil fields to stabilize their decline. As a result, Angola, Algeria and Libya are the OPEC countries that may be able to increase their production, however, these countries will not be able to meet demand.
(5) Will take over $100 trillion to properly address the “zombie list,” which Simmons uses to summarize the following issues: (1) fewer geologists; (2) a aging workforce; (3) rusting infrastructure; and (4) a lack of technological innovation. The industry has not upgraded its corrosion control since the 1960s. The oil industry’s infrastructure continues to rust away. The industry risks losing a majority asset base in the next five to 10 years.
(6) Simmons continually emphasized the need for data reform within the oil industry. It is well known that there is a significant amount of data that is unreliable. Furthermore, there are aspects of the industry like production flow, which the industry does not tend to collect and aggregate data to analyze. If the data reform does not occur, then there will be an future shock in oil that will surprise many people and countries. Consequently, Simmons thinks that such a shock could cause wars to occur. As a side note, Simmons also states that the world’s water problems may actually be worse than its oil problems.
(7) Simmons thinks that the recent deep water discoveries off of the coast of Brazil will be extremely challenging. Basically, the oil producers cannot be certain of the quality of the crude until the wells have been flow tested for nearly a year. At first, due to the intense pressure on the wells, the producers know that the first oil will be light, but do not know the variation in the quality of crude that lays beneath the first oil produced. Simmons states that the world is about a decade or two away from knowing what exactly is in the Brazilian basin. The media is rushing to assumptions about the quality and contents of these fields. BP labeled a field proven with only one test well, which Simmons believes more data is required before such a claim can be made.
CB: In the Daily DL for 12-18-09, there is a Wall Street Journal article that discusses Brazil’s, or rather Petroleo Brasileiro’s, future role in oil supply.
(8) Simmons believes that China and India will continue to drain oil production. The U.S. has prided itself in car ownership, and China is currently developing a similar pride. China is now the main buyer of vehicles. Currently, China has 18 cars per 1,000 people, while in the U.S. there are 850 cars per 1,000 people. If both China and India were able to hold their population growth constant and achieved a per capita oil consumption near Mexico’s, then an additional 45 million barrels a day would have to be produced, which Simmons does not think is possible.
Tagged with Algeria, Angola, Brazil, Car Demand, China, Colin Campbell, Commodity, Deep Water, Flow of Oil, IEA, India, International Energy Agency, Iran, Iraq, Libya, Majnoon, Matt Simmons, Mexico, North Sea, Oil Shortage, OPEC, Peak Oil, Petroleo Brasileiro, Rust, Saudi Arabia, Shell, Simmons & Company International, Total France, Transportation, Twilight in the Desert, Water Shortage, Zombie List
