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ASPO-USA’s Steve Andrews recently hooked up with Matthew R. Simmons, chairman of Simmons & Company, Int’l, for a lengthy interview.  Below is the final portion of the interview. Mr. Simmons does not shy away from the unconventional view.

Question:  Can you compare the early stages of the Obama energy policies to the Bush energy policies.

Simmons: They are as strikingly different as you could get in that the Bush attempts at energy policy were very concerned about shoring up and diversifying our supply, and returning to the need to figure out nuclear power because of signs that maybe our natural gas supply had flattened out.  From the early signs we’ve seen from the Obama energy plans, it’s basically we need to end our addiction to oil because of climate change, and create a green revolution that will strengthen the American economy.  I haven’t seen anything in print that would indicate that any of the people in the Obama administration have the vaguest concern about supply, other than the detrimental impact that supply might have on climate change.  So it’s sort of a Tom Friedman-driven view.  The only guy in this administration who is apparently steeped in concern about supply is General James Jones, National Security Advisor.  As smart as those guys appear to be, I don’t think that any one of them is about to have the epiphany that-as serious as climate change might be-if we have a supply collapse, the game’s over.

Question:  Another major price spike in the offing?

Simmons: We didn’t have a “price spike;” we had a decade-long rise of 15-fold in oil prices.  During the entire decade, we have every lame-brain excuse you can imagine as to why oil prices were temporarily artificially high: the war premium, the risk premium, the labor unrest in Venezuela, the militant unrest in Nigeria, the lack of a quick response from Iraq when the war ended, all the projects that should have been done a decade ago that are just coming on stream, the weak dollar, hedge funds, speculators, abnormal growth in China.  The only thing people forgot to look at is fundamental supply and demand.  And what they should have looked at is the fact that, from 1997 through 2007, petroleum demand grew by just a shade under 13 million barrels a day and crude oil supply only grew by about 7 mb/d; and most of the growth was in the first half of the decade.   So, we created a very tight market.  And too often we topped up the market with stock withdrawls…and the price went up 15 fold.  But the 15-fold rise didn’t really trigger an intense reexamination of our whole oil system.  About 1 millionth as many people are worried about peak oil as those worried about climate change. 

With the benefit of hindsight, some of the numbers that were being bandied around during the 1990s, about how much permanent oil demand we had lost because of the Asian flu, were box-car-like numbers-demand is going to be off 5 or 6 or 7 million b/d.  Demand in Asia was growing like a freight train: from 1993, demand for “other Asia” grew from 5.2 million b/d to 5.6, to 6.1, 6.5, 6.9 (1997), 6.9 (1998), 7.4 in 1999, 7.6 million b/d in 2000.  So in fact the Asian flu just slowed demand down for 9 months….I kept saying, how sad to destroy the industry on the illusion of a glut.  Now, it’s how sad to destroy the industry on the illusion of plunging demand.  How sad.

…The only number we ever get about real gasoline demand is when the states collect gasoline taxes and total them up.  It’s published by the Federal Highway Administration in about the middle of the summer.

…When the US got our total petroleum demand up above 20 million b/d in 2005 – 2007, we literally couldn’t supply it.  We had to run our refineries at an unsustainably high rate, we had to assume that crude oil supply would start to grow again or at least stabilize.  Our maximum capacity to import crude oil is 10 to 10.5 million barrels a day; it’s all we have the pipeline to do.  We import finished products, but we export some as well.  So when we get up around 20 million barrels a day, we make up the difference by stock liquidation.  Something had to slow demand down.  A sustainable figure is more like 18-19 million barrels a day than 19 to 20.  So, gone are the good old days when we used to have booming demand: we can’t supply it.

Question:  When you look back on all the analysis that you’ve done, what do you think were your best and worst calls?

Simmons: Most of my analysis hasn’t been ‘calls’ but just ominous warnings that we need to prepare ourselves for the worst and hope it’s not that bad.  And the calls, per se, were that we were grossly underestimating demand.  Going all the way back to the first five years of the 1990s when everyone was saying we’ve peaked in demand at 66-67 million barrels a day, I would say that what you’re looking at is the collapse in demand of the former Soviet Union and Eastern Europe that has totally counterbalanced the growth everyplace else.  Unless you were willing to believe the FSU decline would go below zero, that will end.  So the major assessment of the needs of China that I did back in 1997 was enormously valuable for me.  I don’t know how it worked for everyone else, but I’m looking at how my education grew.  The paper I did, “Could the Club of Rome Have Been Right?” [in 2000], when I looked at countries that went from being poor to being not wealthy but not poor any more-you can make book on oil demand rising.  Then came my “The World’s Giant Oil Fields” paper.  But then it was just a relentless study of facts and figures about depletion and trying to understand why this depletion happened-what’s mechanically going on, the cause of that, and what we can do to mitigate it.  And finally wading into the reality of Saudi Arabia’s oil, reading those stacks of technical papers that forced me to finally close the loop of what a lot of this stuff mechanically actually meant, like someone finally understanding what makes your toilet flush.

My worst call?  The one I got severely criticized for being just one of the goofiest things for quite some time was back in 1997.  In preparation for giving a keynote address to the National Association of Drilling Contractors, I took on the rumor that the offshore drillers couldn’t stand prosperity and that, one more time, they were going to overbuild the fleet…as they were adding five new rigs. I got so tired of hearing this naiveté that I spent the weekend preparing a talk. I was pleased with the talk and turned it into a white paper–“The Case for Rigs.”  I asked that, if we wanted to have a healthy offshore drilling fleet by 2007-and we’ve better, since the offshore was responsible for 101% of all of our growth-how many rigs would we need to add between now and 2007 if we wanted to have a robust new fleet?  Most of it was for replacing the old rigs.  I said that if we’re dumb enough to actually not do that, then our roof is going to rust away.  I showed a need for 450 offshore rigs, and people thought that was the most astonishing thing they had ever heard.  Then, when the oil price collapsed, that was deemed to be one of the classic bumble papers ever written.  And now were sitting on a fleet of 500 offshore rigs that average 29 years in age, and they are rusting away.  I think it’s actually unsafe to have crews on the oldest rigs.  One of these days, a leg will rip apart and the rig will flip over and 250 people will die and that will be our Piper Alpha [the UK rig disaster in the North Sea that was caused by a fire in July 1988].

Q:  So people viewed that as your “Drowning in Oil” misstep?

Simmons: I didn’t ever think so.  I was talking about what would happen by 2007.

Q:  My last question: have you been surprised by the gas industry’s growth in shale gas?

Simmons: I’ve been surprised by the hype that assumes there’s been major growth in shale gas.  I don’t think there has been any data of any reliability that proves we’ve actually had the growth in shale gas that we think we have.

Question:  Some people here in the industry in Colorado are promoting it big time. They see it as a game changer. Couldn’t they be right?

Simmons: I’ve never seen the industry hype something crazier.  Here are some numbers that I find enlightening.  Of all the shale plays, the only one that we have significant production history on is the Barnett Shale.  In the Haynesville, I think there are around 20 or 30 well-tests so far, and I don’t know that there are that many in the Marcellus.  Consider these figures in the March 22 Barnett Shale Newsletter.  It shows Barnett Shale total natural gas production by year, 1982 to 2008, all counties and fields in the Fort Worth Basin.  In 2004-3890, then 4973, then 6542, then 9180, then finally 12104; and I thought, gee, we increased production X%, but then I realized that’s the number of wells!  In 2008, we went to 4.8 Bcf a day, from 3.56 the year before-or up 1.24 Bcf/day.  We’re looking for an increase of 8 Bcf, according to the EIA numbers, so the Barnett Shale did 1/6th of that.

Here’s another interesting set of numbers.  All the big natural players have all now reported their results.  The top 10 players increased their production in 2008 over 2007 to the tune of 685 mmcf/day.  Unfortunately that was mostly offset by the top 10 gas decliners, led by ExxonMobil, BP, ConocoPhillips, Chevron, RoyalDutch/Shell, Marathon, Newfield, Hess, and they dropped 601 mmcf/day.  So we netted out a plus 84 mmcf/day.  Then you have about another 800 coming from about 40 individual reporting companies, but none of them are big enough-even if they tripled their production-to really make a difference.  So that means that to match the growth that the EIA believes happened, then the residue-these hundreds and hundreds of mom-and-pop operators-would have to have grown their cumulative production twice as fast as the top 10, which obviously didn’t happen.

The EIA started reading the hype.  And even though they probably have been puzzled that the number of gas wells completed went from 8,000 to 10,000 a year up to last year’s 33,000, and all we did was tread water for nine years.  So right at the end of the year last year they started showing month-to-month growth year-over-year of 5%.  Then in January they knocked their model up to 9%, so every month it was up 9%, year-over-year.  They just knew, because they read the hype.  We won’t have any real numbers until the states report what they collect, in the 3rd quarter of 2009.  But I think we have the numbers in [from the companies] to say that we barely grew supply.  Too bad we destroyed the industry.

Barnett Shale also has a production profile where peak initial production happens virtually when you come on stream, because of the way you frac the wells.  By the end of the first year you’re down 70%.

Question:  So you thing that the shale gas story is the most hyped story…

Simmons: It’s the most hyped play since Kashagan, which was later derisively called “Cash is gone.”