Today’s Energy Reality:
“We Are In A Deep Hole”
2005 POSC Annual Member Meeting & Conference
The 15th Anniversary Meeting
November 2, 2005
Houston, Texas
Presented By:
Matthew R. Simmons
Chairman
Simmons & Company International
Our Wake-Up Call Is Here

America (and the world) drifted
into a “benign energy war.”
– Demand was supposed to peak
– Oil supplies were to grow
cheaply
– Cost of energy would steadily fall

It was simply a dream.

The alarm clock is ringing.
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Everything Went Awry

Demand grew “too
fast.”

Costs doubled.

New supply got steadily
smaller.

Proven reserves were
illusory.

Energy reserves
cushion perceived as
glut.
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The Real Demand Story

Global demand grew by
≈15 million barrels per day
in past decade:
–
–
–
–
–

U.S.A.
China
India
Middle East
Etc.
Hard to find countries
in which demand did
not grow.
Highest growth: Light finished
products:
– Motor Gasoline
– Diesel Fuel
– Jet Fuel

“We missed China” was a lame excuse for lazy analysis.
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AWOL: The Surge In Non-OPEC Supply

For the past decade, 4th quarter
non-OPEC supply surge was
AWOL.

Too many countries peaked.

Former Soviet Union was only
unplanned surprise:
– Its growth was not sustainable
– It now might be retreating to lower
levels

OPEC had to make up the gap and
used up its spare capacity.
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The Real Story Of Non-OPEC Oil
OIL SUPPLY
2002
2005
FSU
Rest of Non-OPEC
8.8
36.6
11.7
37.8
Change
+2.9
+0.9
170,000 barrel per day change in 2005 vs. 2004
Source: IEA
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Major Regions Can Decline

Dr. Hubbert was right when predicting U.S. oil
peak.

December 1970: Lower 48 states peaked at
≈ 10.5 million barrels per day.

Circa 2005:
– Lower 48 states (excl. Alaska and Deepwater Oil)
Current Production
Stripper Wells
Residue
3,000,000 Barrels per day
( 860,000) Barrels per day
2,140,000 Barrels per day
Peak Oil: “….It Happens” (Forrest Gump)
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“The Believers Still Believe”

Demand growth is finally slowing down!

Technology is converting non-conventional oil fast!

A new glut by 2010?

The fair price of oil is:
–
–
–
–
$25?
$40?
Current price (unsustainably high)
None of the above
“It is time to leave “I believe” inside a church.”
Herman Franssen. September 20, 2005
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We Now Have 3 Types Of Oil And Gas Reserves


Proven CONVENTIONAL oil and gas.
– Light sweet crude
Dry gas (methane)
– Sour heavy crude
Wet, sour unconventional gas
Proven UNCONVENTIONAL
oil and gas.
– Oil sands
– Tar sands/Bitumen
– Oil shale

PROVEN
PROBABLE
POSSIBLE
– Tight gas
– Sour gas
– Hydrates
CONCEPTUAL oil and gas
(none has been proven).
– Arctic oil and gas
– Barents Sea
– Undiscovered Middle East oil
and gas
– Other undiscovered reserves
Proven
Probable
Possible
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By August 2005
Spare Capacity Was Disappearing

Wellhead oil and gas

Processing oil and gas

Pipelines and tankers

Drilling rigs

Refinery capacity

People, people, people…
All were effectively at 100%
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Katrina Was Our Energy 9/11

Katrina took away more capacity than we had
left.

Full impact still emerging.

Time frame to “rebuild”
is hazy.

Natural gas far worse
risk than oil.

A local emergency will spin into a global issue.
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Rita Finished The Job

Gulf of Mexico has been bombed.

Gulf coast facilities have been crushed.

Too many refineries are now broken.

Workforce is AWOL.
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Katrina and Rita Were Merely Matches

The streets were knee-deep
in kerosene.

The hurricanes were the
match that caused the
explosion.
Lessons learned:

– “Just-in-time inventory” –
a mistake
– Concentrating America’s
energy engines into
epicenter of hurricane
alley – a mistake
Newsweek Magazine – October 3, 2005
– Energy ignorance became
bliss
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The Bigger Picture Problem

Global oil and gas demand
needs to grow:
– 120 million barrels per day by
2020
– Electricity and natural gas growth
far higher

Supply is supposedly “No Problem.”
– “We have 3 trillion barrels of usable oil left”
– “Saudi Arabia has another 200 billion of proven reserve soon to be
added”

If all were true, great!!
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2020 Is “Nearly Here”

15-years is not “years from now.”

Most major projects take 5 – 7 years
to complete.

Any new frontier takes 10 – 20 years.

To meet 120 million barrels per day
by 2020:
– Saudi Arabia needs to produce 20 to 25
million barrels per day
– Rest of the world production needs to
grow from 72 million barrels per day to
between 95 and 100 million barrels per
day
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Oil Supply Is Peaking

Peak oil means sustainable, safe production.

Too many key areas of world have now passed peak
“conventional supply.”
– North America
– Russia
– North Sea
– Iran
– Venezuela
– Kuwait
– Indonesia
– Iraq
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Dr. Sadad Al-Husseini Spoke The Truth
(9/20/2005)
Photo by Charles Coates

Currently Middle East oil capacity:
21 – 23 million barrels per day.

Best case Middle East capacity by
2025: 25 million barrels per day.

Saudi Arabia can reach 12 million
barrels per day but should not
exceed this.
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Shedding Light on Saudi Arabia’s Oil

5 super giant oilfields made up
90% of oil output.

3 giant oilfields made up 8%.

These oilfields are between 40
and 60 years old.

All are reaching point of decline.

Half of “proven reserves” are
“questionable.”

Remaining oil is harder to
produce.
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The Old Royal Family Of Saudi Arabian Oil
Ghawar
King
Safaniya
Queen II
Abqaiq
Queen I
Year Discovered
1948
Peak Production
[MB/D] / Year
Berri
Lord
Zuluf/Marjan
Lord/Lord
Shaybah
Lord
1940
1951
1964
1965 / 1967
1968
5,800
930
1,500
586
658
500
(1980)
(1972)
(1981)
(1978)
(1981)
(2004)
Collectively the 7 super giant oilfields account for 7.4 million barrels per day
(92%) of 8.1 million barrels per day of 2004 crude output
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Saudi Arabia’s Oil Faces Challenges

Current production base in
decline.

800,000 barrel per day addition
by 2009 to offset “declines”
(2% per annum decline).

4 “new” projects that add
2 million barrels per day are
all old fields which never
produced high oil flows.

35 years of exploration
unearthed only 1 large field
and several satellites.
BusinessWeek Online April 5, 2004
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Does Saudi Arabia Have Ample Reserves?
1979:
Proven reserves total 110 billion.
Probable reserves add 67 billion.
Possible reserves add 68 billion.
1988:
Proven reserves total 260 billion.
2005:
Proven reserves total 260 billion,
with another 200 billion to soon be
added.
Sept. 2005: Over 50% of 260 billion from 8 key fields.
Remainder from fields which have barely produced.

USA had 29.6 billion proven reserves in 1970.

USA has 22.0 billion proven reserves in 2005.
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Rolling The Dice On Saudi Arabia’s Oil Future
Saudi Oil
Output
Crude Oil
Neutral Zone Oil
Total
Condensate
Nat. Gas Liquids
Total
FUTURE (2020)
2004
8,100
260
8,360
140
8,500
1,111
9,611
20 – 25 MMB/Day
15.0
MMB/Day
12.0
MMB/Day
9.611
9.6
MMB/Day
4.5
MMB/Day*
*5% net decline per annum
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Once Saudi Arabia Peaks…

The world will pass sustained peak oil
when Saudi Arabia’s oil output peaks.

Peaking might now be “past tense.”

The higher an “oil system” produces, the
faster it peaks and declines.

“Conservation production” is best
insurance policy.
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Natural Gas Is Next Big Surprise

Too many key areas have passed peak supply:
– USA
– Canada
– Russia
65% of current production
– Netherlands
– Indonesia

Most “stranded gas” has never been discovered.

Gas depletes faster than oil.
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Non-Conventional Oil Is Very Real But Hard To Use

Tar sands require
massive energy to
convert into heavy oil.

Oil shale is far more
energy intensive to
produce.

Neither creates easy
substitute for natural
gas and light oil.
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Atomic Energy Needs A Big Comeback

Five pellets create annual
electricity needs for average
home.

Nuclear energy is clean.

Waste can be minimized.

Security of small amounts of
waste is the only “con.”
This nuclear pellet is equal to one ton of coal!
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When Oil Age Ends….Renewable Era Begins

Some hope oil curse ends as it ushers in
clean or renewable energy.

“Renewables” now work:
–
–
–
–
–


Wind
Solar
Geothermal
Waste
Hydro
All create
electricity
Oil creates transportation fuel
and petrochemical feedstock.
Natural gas creates heat.
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Even Coal Has Some Limits To Growth

High quality black coal
supplies are getting scarce.

Low quality brown coal is next
generation supply.

Proven coal reserves have no
“quality differential.”

Most reserve estimates are
“volumetric estimates.”

Using coal requires intensive
energy.
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We Dug A Deep Energy Hole

Getting into this mess
took decades.

The deeper we dig, the
higher the risk the hole
collapses.

Grasping the magnitude
of the problem is urgent.
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How And Why Did We Dig Such A Deep Hole?

Two decades of poor
data.

Even worse analysis of
poor data.

The Generals were
fighting the last war.

Low prices created wrong
signal.

Strong opinions overruled
fundamental facts.
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What Is Our “Next Step?”

Rule #1: Stop digging.

Step #2: Reform energy data.

Step #3: Go to “energy war
footing.”

Today is when Plan B needs to
begin.

September 1939 – August 1945:
We created war machine.

June 1947 – August 1951: We
created the Marshall Plan.
E
F
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Plan B Can Be Achieved

Transportation energy use must
be reduced.
– Movement of goods: by trains
and boats
– Movement of people: stop long
commuting
– Distribution of food: eat local
produce/goods
– Globalization: manufacture
things closer to home

Natural gas problems are not
easy to fix.

R&D explosion must occur
(Tuxedo Park).
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Can The Job Get Done?

It has to.

Ingenuity is the by-product
of panic.

The alternatives are too
bad.

The longer we wait the
deeper the hole becomes.

TODAY is when Plan B
should begin.
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A 1935 Oil Prediction
(When Global Oil Usage Was 3.5 Million Barrels Per Day)
“Oil has become more and more
necessary to everyone. At first it was
used for medicine, for lamps, and for
lubrication. Now, if the supply of oil
were cut off, our manner of living would
change completely until something to
take its place was found.”
(Written in 1935 by Maud and Miska Petersham
when the world used 3.5 million barrels of oil each day)
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For information and/or copies regarding this presentation, please contact Laura Russell at (713) 546-7351 or lrussell@simmonsco-intl.com This
presentation will also be available on our website www.simmonsco-intl.com within seven business days.