Friday, July 25, 2008

Facinating, especially when he describes his analysis...numbers, techniques, constraints, etc.

http://globalpublicmedia.com/transcripts/212

Matt Simmons - energy investment analyst (Interviewed on camera in Houston, Texas on 10th February 2003)

"...Q5. When you are interviewed by mainstream media, do you try to tell them about oil peak & decline?

Personally, I think I'm very fortunate, because of having been thrust into creating this firm and being a serious student of energy and all we do is energy. I do believe I have a very sound understanding of the real numbers. Our whole firm is based on a, the real culture of our firm is (to) kinda stick to real numbers. If it's a painful message, don't worry about that, as long as the numbers are real.

So, it's been easier for me to talk candidly about problems of energy, because I've done the numbers myself. I think one of the reasons that my name keeps coming up when the Dow Jones Wire Service, or ABC News, or BBC, or Canadian Broadcasting is doing a story on energy is that in their (opinion) this is a guy that, if he doesn't know, is the first to say, "I don't know", and if he does know, he'll give you a number. You'd think there would be scores of people like that. For some reason, or another, there aren't all that many. I'm not sure why. But I do think this is an extremely important topic...

Q6. How did you come to be an advocate for oil peak and decline?

I'm a great believe in the power of analysis, and that's the bedrock of all of our investment banking projects. Analyse three times before you come to a conclusion, and so as I became more, and more of the student of energy, I am more, and more a believe that you can't over analyse a subject. I can't quite remember how I stumbled on to what was happening in depletion, because I'm not a petroleum engineer, or a petroleum geologist. I've never, basically, paid attention to reserves.

I wouldn't know how to... if someone came in and said here is all my data on reserves, I'd bring in some technicians to tell me what it means. But, particularly since our core expertise has always been the oil service industry, and the petroleum equipment suppliers, this is the sort of (thing) where operating leverage is the best or the worst. You really have to pay attention to rig count, and daily supply, and daily demand.

Sometime during the 90's, [I started], I believe I was preparation for giving a talk about what was going on in the North Sea. The North Sea has some fabulous data on field by field production statistics because the UK sector to the North Sea there's still only about 130 fields, and they all have English names, so it's not like, field 9200-X; it's the Fortis field, and Brent field, and so forth. The UK government puts out an official Brown book every year, where they list every field and the last ten years production.

In about 1995, I was preparing this talk to give in Aberdeen, and I started through the Brown book. We kind of grew up, our friend kind of grew up in the era of the North Sea getting started, and so many of our early clients were heavily involved in building up the Fortis field and the Brent field, and Statfourd and Echofist, these giant oil fields of the North Sea. I looked at this data, and I was stunned to see that these giant fields were pygmies. They had depleted. That's when I started into this. It's amazing how little we seem to know about depletion.

I wasn't using depletion as a concept as 'we've run out', I was using that as euphemism for that production was in decline. Little did I appreciate that, the more I got into this, I said this is amazing. All of these forecasts seem to assume that the base is always flat. So, you're producing 2 million barrels a day in the UK sector of the North Sea, and you have two projects coming on of a 100,000 barrels per day, you should see next year's production of 2 million 2. (2.2mbd) I've looked at these fields, and they are in decline. So, I started speaking out the issue of depletion, and raising the question, "have we forgot about the concept of depletion?"

I recall reading some excerpt about this Scientific American article about the end of cheap oil, and someone alerted me that there was this guy named Colin Campbell that had written a book about depletion. So, I ordered the book, and as I was skimming through it, I saw an appendix at the back. I thought, now, I'm going to figure out, they must say some wonderful things, and I saw my name quoted ten times.

When I finally met Colin Campbell, he said, "My compliments to you. You were actually speaking out on this more frequently than anybody else!" Now, I didn't know that. I was just doing analysis. In fact, one of the interesting things about, as I've gotten to know these wonderful scientists, and they are just delightful people, and I admire their tenacity, is I've actually been using a different language than they have.

They are all looking at the total ultimate resource, and I have no confidence to even to know how to do that. I'm looking at the physical rate of decline, that you can measure. Even more importantly, how important it would be to measure what it would have been had you not exponentially spent more money. So, it's accidentally brought a different discipline to what the scientists have been working on. Now, did I understand I was doing that myself? No! I was just a curious analyst.

It's been a really interesting odyssey to find myself in an area that I never though I would, basically, be discussing. It was interesting being inside Arabia last week, and speaking to the Finance Minister, and the Minister of Petroleum, and telling them some aspects of things they should be worried about. I'm not sure many people have spoken about depletion inside Arabia before. They should be.

Q7. What is the significance of paying for oil Euros vs US Dollars?

Let me switch into an even larger, more important thing, and then I'll come back to the (original question) as that's sort of the icing on the cake. I'm particularly intrigued to follow the dialog right now because, like it or not, we have $34, $35 oil, and there is a deep seated sense by many of our leading economist in the world that $30 oil and recession are Siamese twins.

It's a destructively high price for oil, and the OPEC countries, you know I thought a lot about this just having coming back from a week in Saudi Arabia, the OPEC countries are being lectured all the time of, "Now, you guys need to remember, don't be greedy, or you're going to kill the goose that lays the golden egg. What you really need to do is bring oil prices down to 15 or 20 and then our economies will be healthy." So, this doesn't matter if it's 15 or 20 Euros, or 15 or 20 Dollars. That's kind of the noise at the margin.

Conversely, the various leading authorities within OPEC, in particularly the past two or three years, have quite passionately spoken out about the urgent need to create a fair, and stable price for energy that works for both the consumer and the producer. If the producer doesn't get enough the risk is that they don't, basically, continue to spend enough to keep supply going, and then we really have a problem.

As I hear this conversation going on, I hear Dr. Luteman, who has been Secretary General of OPEC, now he's the Nigerian Petroleum Minister or [Ali en Ami?] who I visited last week, whose the Petroleum Minister of Saudi Arabia, speak out on, and their cautious to not become harsh in their language, but I translated into the gross hypocrisy of the OECD on lecturing OPEC about why the OECD doesn't actually get oil prices up too high when they can't even balance their budget.

When, in fact, the price the OECD countries charge their consumer has two to three times more tax added on top of the wellhead price. What the OPEC countries are saying in desperation is, if you think the price is too high, lower the tax, but we have to have a price high enough to balance our budget, and high enough to be able spend enough money to make sure we have our supply there. So, you have, again, Mr. 'A' talking to Mr. 'B'. Then, in America, we go on, and on, and on about the fact that our economy needs $20.00 oil, $15.00 oil to be vibrant. Let me tell you how wrong that is.

In the best data we have around, which is '99' so far, I haven't seen any good data for total, but you can guess at the number, is that the total residential energy bill, exclusive of motor gasoline, which we'll come to in a minute, in 1999, totaled about 140 billion dollars, (it was 135), divided by 110 million households;.that's $1350.00 per household. That's, obviously, a lot of money, but let me tell you some of the other things we spend money on in the United States.

That same year, we spend 165 billion dollars on recreation and sports, going to movies, going to football games. We spent a 150 billion dollars on alcohol and tobacco. We spent 205 billion dollars on consumer advertising. (These are things that are?) never seen. So, you add those three things up, which are things we could do away with if we had to, of course, you can't do away with energy. I just identified a pool of 515 billion dollars that we could reallocate if we had to, to, basically, make sure we had enough money for energy.

Now, another phenomenal real statistic. I mentioned that's the residential bill, other than motor gasoline. It turns out that about 45% of the personal energy bill is motor gasoline, and 55% is what you spend on the residence for your heat and power. In motor gasoline, remarkably, in 2001, we had two months that both hit 20 year records in the same year. In May, we had a 20-year high of $1.81, this is with tax included per gallon. In December, we had a 20-year low, $1.20. Now, $1.20 was so low that it would have destroyed the refineries, so it's really a phoney price.

If you take the Delta between the 20-year high, and the 20 year low it just happens to be $.61, and if you look at the U.S. consumption statistics, we happen to use 600 gallons per vehicle. Well, 600 times $.61 just happens to be $366.00 a year savings if you could keep that low, or incremental if the high. That happens to be, conveniently, $1.00 a day. You know how much you can buy for $1.00 a day in the United States?

Go into a 7/11 store sometime. You can't buy a single thing at Starbuck's, which is interesting. You can buy 4 and a half cigarettes. It's really hard to spend $1.00 a day. Yet, serious economists seriously believe that one price destroys the economy , and the other price is an elixir to the economy. I look at that and wonder if these people ever spend any time doing numbers? So, the whole issue of what do we know about the cost of energy is a bizarre cause.

The very last evening I was in Riyadh, last Wednesday night, one of the senior economists of the United States embassy there, we were chatting at this dinner, he said that he'd recently read a report that $19.00 was sort, seem to be a breakeven mark that below $19.00 it was hard to justify drilling for oil, and over $19.00 the economics seemed to work. He said, "Does that number mean make sense to you?" and I said, "No". He said, "Why?" I said, "Well, we don't have any idea what we really need to spend to create the energy we need over the next 10 years, and $19.00 is $19.00 per barrel. What it's the equivalent of...", and then I used the example of this building, and I said, "...have you been to Houston?"

Turns out that this building is the most expensive building built in Houston, Texas. It was actually built, it's kind of a monument to $100.00 oil that we thought we were going to have, and one of my favorite examples is how much this building costs. When he asked, I said it cost $.07 per square foot. He looked at me and said that's, obviously, wrong. I said no, it's actually right. He said, "Okay I give, what's your gimmick?" I said the building actually cost, a little over $300.00 a square foot. It was an expensive building, but what I've done is take an estimated 25-year life and divided it into the cost and given it in a square foot per day.

Now, the number doesn't mean anything. First of all, if that's all you ever spend on the building, by 2003 we wouldn't have any tenants. That's, literally, you $19.00 a barrel. What we really need to do as a society is figure out how much energy we need to add over the next 10 years, 15 years, 20 years, and think of it in terms of a 2 million square foot building, and before you start telling someone how much the rent's going to be, figure out how much the building's going to cost you. At least, estimate it. Maybe we'll get some bids and then figure out what rent would I have to charge to, basically, get a fair return on my investment. If it turns out its $19.00 a barrel, terrific, if it's $28.10, if it's $42.17.... If you don't know that, you don't have any idea what future energy will cost.

That's the biggest missing mark, so it really doesn't matter whether we're talking about Euros or Dollars. Far bigger cost is, do we have any idea what future energy cost even need to be to make sure we actually have sustainable and reliable energy?

Q8. Does nanotechnology have a role to play in the future of energy?

Our office got a call last fall from, while I was traveling my assistant said, "Dr. Smalley at Rice wants to set up a couple of hours to meet with you", and said, "do you know him?", and I said, "I think that's the Nobel Laureate in Bucky(tubes) technology. No, he must have somebody else in mind." Now, my brother's actually just becoming a trustee of Rice, so I just assumed he had the wrong person. Nope, he knew exactly who he wanted.

... I went out and spent the morning with Dr. Smalley, and I started out, "I certainly hope you don't want to talk about nanotechnology, because I tried to pull up some stuff on the website last night and I don't have even the vaguest idea of what it even is." He said, "No, in fact I want to talk to you about energy, or want you to talk to me about energy." Then he told me that he had started a couple of years, maybe a year ago, trying to think through what are some of these special uses, because it's clear that we are going end up figuring out this new element called nanotechnology, which is where, essentially, a strand of hair will, basically, (be) stronger than any metal we ever (had), lighter and stronger. He said, "I'm not sure we've yet figured out the highest and best use for this."

Somehow he got on to energy and he said, within a short period of time, he realized, bear in mind that this is a world-class scientist, how little he understood about energy. So, he got real curious, and he said, "the more I got into this, I got just mesmerized about these issues seemed complicated. If they are, I wonder why none of my scientific colleagues are talking about it." And he then said, "One of the biggest mistakes you can make in science is to leap into some area that really isn't your cup of tea, grab a hole and have no one following you, and all of a sudden the hole collapses on you." So he said, "I quickly backed out of my hole," and said, "this must be wrong!"

About three different colleagues of his said, "Have you ever heard Matt Simmons talk about energy? I think he's talking about the same thing you're looking at." So, he said, "I'm going to shut up, and just educate me about energy." It's a fairly intimidating thing to start, "Well, okay! Let's just start with the basics. Here's what intrigues me," and I started out by giving him some really raw numbers. "Here we are, 6 billion people on earth, 12% of the people use 54% of the energy. This is not total energy, this is not oil and gas, this is oil, gas, electricity. Two billion people have no access yet to modern energy.... They use what I call 'ancient' energy which is charcoal, agricultural residue, animal dump. Those three things are the most filthy pollutants on earth. There absolutely bad in every way, shape and form. The rest of the world, you got the 12% that use 55%, one third that don't use any, and the rest, basically, use a little. Then even in the 12% that use 54%, you get the United States that uses twice as much as Japan, Korea, and Europe."

So, the more we get into this discussion, the more Rick Smalley says, "how much of this do you have written down?" I said, "I have a ton of stuff written down." So, we shipped him off a Care package, really a couple of boxes, and within a couple of weeks he digested all of this and said, "this really is a serious issue, isn't it?" I said it's the most serious issue on earth. So, a couple of weeks ago, we had a program that both of us spoke at, and this is so ironic that it was only three months ago that I...

It was called 'The Future of Energy, and Houston's role in this and Nanotechnology", and it was sponsored by the MIT Enterprise Forum, The Center for Houston's future, The Houston Technology Center, The Baker Institute at Rice University, the Rice Alliance, and about 350 people from our sciences and academia and a lot of business people and the media. I was the predinner speaker, and Dr. Smalley was the afterdinner speaker. I decided to, basically, frame my talk on a 'Dicken's Walk Through Energy'.

I began with the ghost of energy past, talking about the history of energy, and ancient energy and how there are still 2 billion people using it, and how King Cole came along and introduced modern energy. In 1901 we introduced the two great revolutions that changed everything, the internal combustion engine and 'Spindletop', the first giant oil field we ever had; the phenomenal growth we had over the twentieth century, and then that ends the first visit.

Then we have the ghost of energy present, January 22, 2003, and all the statistics about how modern energy has been around for a long time. It's the biggest industry on earth. It's, in round terms, a three trillion dollar a year business, and agriculture is half of that, defense is 25% of that. It's a huge business. There's very little understood, and, basically, most people don't like it, and yet it's the underpinnings for everything we now do. Without energy there's no water, without energy there's hardly any food, without energy there's no..., and so forth. Then I go into... That's the second visit.

Then, finally, the ghost of energy's future, and these are just some unbelievable statistics that we ought to be paying attention to, that there are signs that we are peaking in oil production. Whether we have already peaked, probably haven't, but peaking might be right around the corner. Natural gas is supposed to go twice as fast as oil, but we know the U.S. is in decline, we know that Russia is in decline from what they're now producing. We know that Canada is in decline, and we know that the UK is in decline, and that's almost 60% of the base, 55% of the base.

It's really hard to grow our supply at two and a half times if 55% is in decline. So, and most of the ... never seen a drill bit. These are computer estimates. Look at all the other sources. We have an abundance of coal, but coal will never be clean, and it's very inefficient. The amount of energy you have to use to convert coal into being energy is unbelievable. Nuclear is unbelievably efficient, but it's even more unpopular than any of the others. The alternative stuff that we know about today, it just doesn't scale, and it doesn't dispatch. So, what do we do about it then. Also, we, basically, think the population is going to grow to, maybe, be nine billion people somewhere between 2030 and 2050. Well, look at the past numbers.

I just turns out that there were 1.5 billion people on earth in 1890, and it took 60 years to add a billion to get to 2.5 billion, and it took thirty years to add two billion. In the last twenty years, we added a billion and a half. Well, we added as many people in the last twenty years as we had on earth in 1890, and for some reason that's going to slow down? No! It's just slowing down in the most affluent countries, but the most fluent countries... 400 milllion of the six billion. Saudi Arabia has a birthrate of six or seven people per female, about the same as almost all the poor countries. We could actually end up with twelve billion people by 2030 just as easily as 9, because health is getting better.

But where will the energy come from?

So, I finally ended up with this classic Charles Dickens, the Ghost of Energy's Future pointing to the tombstone, but it didn't say Scrooge, it said Society. My quotes were, basically, it is, the wonderful Dicken's quote, is this the future as it's going to be, or the future as it may be unless we change. After dinner, Rick Smalley got up and, basically, gave the hope for the future, but the daunting task of getting there, because we need, basically, and energy Sputnik call. We need an Apollo program, and if we don't get there, we really do have a dim society, dim future.

There are some things we possibly could do to really bona-fidely create a new form of energy that really works, and it will be on the back of things like nanotechnology, this unbelievable lightness and strength, and it's things as radical as going into the mantle of the earth where there's phenomenal energy with metal that affordable and strong enough that you can just mill it, and capturing the biggest energy source we ever had called the sun with waystations on the moon, or satellites that bounce the energy, but this is way beyond the edge of the envelope, and it will take thirty years to do. What are we going to do as a bridge?

I found afterwards that there were a lot of people who heard me give a talk before, and I would find, to my astonishment, that they would come up and say, "Boy, that was a bullish talk!" and I'd say, "It was?" People just heard, and implied within what I was saying that energy prices were going to go up. All of a sudden, I think the two of us in concert, started genuinely alarming some people as we needed to do.

Q9. What is your attitude to being called an energy 'bull'?

I came back from being away a few years and I decided that I was so sick and tired of people saying "ah, you're a bull, or you're a "bear" and I was seeing in reports we had (that said), "this is bullish or this is bearish."

I said, "you know what? For the entire (year of) 2003, we are going to ban the use, in our firm, of the term bullish or bearish."

Now I've started to see "this is positive". Said, "No". I said, "we're going to ban that too." Positive for what, or bullish for what? Trying to say bullish, but bullish for what, as opposed to "Well, I just have an optimistic forecast". Optimistic for what? Optimistic for society? Optimistic for price? Optimistic for your own pocketbook?

Let's actually learn how to communicate. It's really (is) amazing how the term "You're a bull" or "You're a bear" (crops up), and too many people just assume that you, obviously, came up with a cockamamie thesis to support your bullish view, or your bearish view.

When this group was putting together the National Petroleum Council, I got accused of being "Well, the problem is that, Matt, you're just a bull." And then, about an hour later, somebody said, "the problem is, Matt, you're just a bear". I said, "C'mon guys. You can't be both. Did any of you ever thought that, maybe, I was just an analyst?

It really is amazing how, and again, (...) energy just devotes strong passions, and most people start out saying "I know where the answer is."

Q10. Can you tell us about your role in advising the Bush administration on energy matters?

I became very good friends accidentally with Secretary Richardson, who was the Secretary of Energy in the last two years of the Clinton administration, with one of his senior assistants who became director of U.S. oil policy. I knew that they were, and we became friends when she was doing a white paper for Secretary Richardson, after he'd become Secretary of Energy, of what are all the serious issues, and I was asked to join a small group of people. Oil prices were at ten, and a lot of people assumed they'd be at ten for the next five years, and I was very outspoken, that day, about how serious ten-dollar oil was and why it would destroy the industry. I was impressed that, rather than roll her eyes, she was really taking down careful notes.

So, anyway, we sort of started exchanging emails once in a while, and I read in the paper that she and Secretary Richardson were headed out to the Middle East about a year and a half later when oil prices were at 25. This was what the media derisively called the "tin cup begging for oil" trip that Bill Richardson made. But, when I read that they were going to visit every single OPEC country, I emailed this person and said, "You know, while you're on this trip, if I were in your shoes, Secretary Richardson's shoes, what I'd really want to try to find out is how much extra spare capacity do we actually have out there, because it doesn't do any good to cajole these countries into producing more if they can't."

At the end of the trip, I got a call from this person, and she said, "Whew, holy mackerel", she actually used a little bit different language, but said, "This is just awful. Hardly anyone has any oil left." We had a very somber conversation, but a half an hour.

I went to a reception that evening, and I ran into a good friend of mine, who is first cousin to, then Governor Bush. I pulled him aside and I said, "Listen to this interesting conversation I just had with a person whose actually visited every OPEC country other that Iraq, Iran, and Libya. You know what this means? We're probably going to have an energy crisis, and, boy, I hope there's somebody in Austin that is working on this issue, because this is one thing that your cousin really..., and what I would worry about is if..., all the major oil companies have no idea of these problems. They really think we're going to have..., that these are just passing sort of things," and I remember he said, "Well I'll... I'm not sure what we're doing on that," because it wasn't an issue on anyone's radar screen in the spring of 2000.

To make a long story short, I got a call the next morning from this guy on the campaign strategy team, and he said, "I understand that you have some concerns about energy. What are they?" About an hour later, he said, "Do you have anything you can send me to read," and I said, "How much do you like reading?"

By the fall, I had the privilege of, effectively, editing every word that went into the George W. Bush comprehensive energy plan that he put forward four times during October as a candidate. It wasn't that I created the idea, but I was one of the people that was asked to, basically, say, "you have no axe to grind. We want to make sure that this is as technically correct as we could possibly do."

I was so impressed with the intellectual rigor that went into this, and I knew, categorically, because I had too many conversations, that they had not earthly interest in wading into this issue. Why? Because as much as they were distain don't run a campaign for polls, you can't run a campaign..., and everytime Bush mentioned the energy word, his polls went into the tank, because the other side, "big oil, big oil, big oil," and he wasn't a big oil guy. He survived the oil and gas business during the 80's so I found to my surprise he was very knowledgeable about how these issues were all about, but it was a painful... it was something that there was no appetite, natural appetite within the campaign to, in fact it was to the reverse.

I got quizzed one day by one very senior person who called and, effectively, said, "I don't want to be rude, but let me ask you very bluntly, and very honestly. Is there anyway you're, basically, putting an extra spin on this just to get our attention, because you have gotten our attention." My answer was, "it would pain me badly to feed either campaign any bad information just to get their attention. I'm a passionate fan of Governor Bush, but I also think its important that this message get out, because I wouldn't want to be President of the United States having not told the American people that were going to have these problems. If it costs you the election, it costs you the election."

So, I watched with unbelievable pride as Bush waded in in October to four very tough.... The fact the media hardly picked these speeches up is neither here, or there, but the one place they did resonate, West Virginia. First republican candidate to carry West Virginia. That turned out to be just four votes. But you can argue, but without those four votes we might have heard President Gore give his State of the Union speech two weeks ago. Once the campaign was over, and we finally, remember we didn't have another President for another almost six weeks, by then it was uncontroversial that these problems were problems.

By the eve of the inauguration, ironically, California had its worse blackout since World War II, the Kinder-Morgan product pipeline shutdown at one of the two California airports, and it looked like they would have to halt all flights so it couldn't have been a more classic "look how real these problems turned out to be."

I'm told that maybe the first actual business meeting held on Sunday morning, the inauguration was on a Saturday, was beginning to form this emergency team that became known as the, not the transition team, but the Cheney Energy Task Force. Which, really, the only people who served on that were Cabinet Officers. This big controversy that finally erupted about who were all the people who were talking to.... I have no earthly idea of who... Lots of people were lobbying to make presentations, and I don't know who those people were, because I had already done my work. I sent lots of emails to the staff as I would see data saying here's some more, because that's the kind of role I was doing during the... and I would get lots of emails occasionally saying what do you think about this. Is this a real issue, or not?

When I read the comprehensive energy plan that President Bush unveiled in the middle of May, 2001, the..., first of all, I probably understood what his program was when he was Governor put forward, because I edited every word of it, and there was only one significant... there were a lot more T's crossed and I's dotted in this 117 page report than the brief things they had time to do it, but the only significant change between what he put forward as a candidate that I could see was a subtle, but very important tilt away from reliance on natural gas to a need to embrace more seriously, nuclear. Of course, the media made a big todo over it, "some must have got to him in the nuclear business." No, he was looking at the same thing I was; the decline curve in natural gas. We just had a drilling boom and it wasn't working, so, therefore, it was absolutely clear that we had problems in natural gas that we didn't even vaguely comprehend. I've, basically, only briefly shaken hands with Vice President Cheney, and I haven't seen President Bush very often [since then]..."

Aloha, Brad