Atlanta Society of Financial Analysts€¦ · SIMMONS & COMPANY INTERNATIONAL The 21st Century Energy Crisis Has Arrived st Century The Atlanta Society of Financial Analysts April

SIMMONS & COMPANYINTERNATIONAL

The 21st Century Energy Crisis Has Arrived

The 21st Century Energy Crisis Has Arrived

The Atlanta Society of Financial AnalystsApril 16, 2008Atlanta, GA

byMatthew R. Simmons

ChairmanSimmons & Company International


$114 Oil Is Not An AberrationIt Is Proof The Energy Crisis Is Here

$114 Oil Is Not An AberrationIt Is Proof The Energy Crisis Is Here

As oil and gas prices rose 10 fold, “market signals” were ignored and considered phony signs of scarcity created by hedge funds, speculators, fear mongers and war.

What energy pundits missed was soaring energy demand, China’s economic explosion, oil and gas decline curve acceleration and the arrival of chronic rig and people shortages.


The Crisis Should Not Be A SurpriseThe Crisis Should Not Be A Surprise

Energy industry leaders were looking in a rear view mirror.

Leading energy “experts”were fighting the last war.

The enemy’s armies started marching ages ago.

The Maginot Line was breached by 2004.


Pundits Assume Crisis Is Phony Or Short Lived

Pundits Assume Crisis Is Phony Or Short Lived

EIA and CERA both believe oil demand can grow by 50 – 75% while prices fall.

These pundits (“optimists”) sound like American Peaceniks in 1861 or “Peace in Our Time” Europeans on September 1, 1939.

Oil demand is supposed to slow down as recession sets in.China’s rise will slow after Olympics.Oil supplies will finally grow again.New technologies will recover more oil and gas, identify new supplies and make unconventional energy more conventional.


Energy Demand Will Be Hard To Slow DownEnergy Demand Will Be Hard To Slow Down

Growth in energy demand was NOT an aberration.OECD growth is now reaching limit of more expansion – supply growth cannot occur.Non-OECD growth is still gathering steam:– FSU demand growth picking up steam– Middle East and Latin American growth

fueled by natural resource boom– Even Africa is beginning to see prosperity

China and India are the poster children of 21st century energy demand. They want prosperity, which in turn generates more energy use.


Energy Supplies Are Facing Myriad Of Limits To Further Growth

Energy Supplies Are Facing Myriad Of Limits To Further Growth

Too much of our current oil supplies come from old giant fields which are now in decline and deepwater fields which peak fast and decline faster.Natural gas from conventional sources are also in steep decline in too many parts of the world.Unconventional gas might be abundant but is poor in quality and is complicated to produce:– Shale gas plays create vast need for

rigs and pumping services– Sour gas difficult to handle and often

a sulfur mix– Tight rock sour gas is even more sour

High quality coal is nearly depleted in too many key areas of the world.


Physics 101:Energy Use Cannot Exceed Energy Supply

Physics 101:Energy Use Cannot Exceed Energy Supply

The theoretical demand for more energy might be limitless, but….– Energy supply will restrict energy use– Few substitutions work (“Robbing Peter to pay Paul”)– Limited energy cushion can quickly evaporate:

A 10% cushion on electricity grid can evaporate on a hot afternoonOne to two days’ usable oil cushion can get drained by holiday demand or bad weather restricting suppliesDelayed two week cold snap can use up last natural gas cushion, heating oil and propane.


Big Pending Risk – The “S” Word(“Shortages”)

Big Pending Risk – The “S” Word(“Shortages”)

If America runs into any energy related shortages, we risk a massive run on our energy bank.Electricity surge creates brown-outs and black-outs – this shuts down gas stations.Late storm could use up North East propane and heating oil – this creates need to evacuate Maine.Refinery maintenance could lead to low gasoline supplies by Memorial Day.

All these trip-wires are like a noose around America’s economic neck.

There are no trap doors.


Case Study: “Gasoline Lines Are Back”Case Study: “Gasoline Lines Are Back”

June 1, 1979: All clear on energy front.

June 20, 1979: USA pleased with earlysuccess of gas rationing.

California shortages led to motorists topping up tanks.

If this happens in 2008, we could drain our gasoline pool in 2-3 days.

A 60-day “driving holiday” would need to be enforced to refill gasoline system.

What happened?


Could This Nightmare Really Occur?Could This Nightmare Really Occur?

Easy answer: “Yes….and soon!”

Reported gasoline stocks low in historical days use terms.

Motorists and service stations running on 2/3rds empty.

Any regional shortage could trigger “topping up tanks.”This could create a run on the gasoline pool.Rationing “too little – too late.”


A Rapid Economic Slowdown Unlikely To Provide Relief

A Rapid Economic Slowdown Unlikely To Provide Relief

Wall Street is now in a recession.America battling the sub-prime crisis.But parts of our economy are booming – the natural resource and energy belt:– Wyoming/Montana/Alberta face job

shortage crisis– Texas economy performing well

because of $110 oil– Coal Belt states prospering– Tin, silver, uranium, copper, iron ore

regions are strengtheningUSA could face a white-collar slump and blue-collar boom.Rest of world’s natural resource economies are being impacted much more by soaring raw material prices.


Your Pain Is My GainYour Pain Is My Gain

From 1982 – 2002 most natural resources were in states of depression:– Prices of almost all raw materials fell to 30 year lows– The replacement cost of oil, steel, aluminum, copper, etc., was

several times higher than price of these scarce materials

Then China “woke up” and ate the cushion of spare capacity.

Now the cushion for “everything”is gone.

There is no data for what future prices of energy projects will be – but what is certain is that they will not be cheap.


The Miracle Of The Emirates:Singapore And Hong Kong, Circa 1974

The Miracle Of The Emirates:Singapore And Hong Kong, Circa 1974

The explosive prosperity in Doha, Abu Dhabi and Dubai are poster-children for when Middle East and North Africa enter the Golden Years.

Will the creation of middle-class prosperity among 2 billion poor people create sustainable prosperity and peace for all?

The Achilles Heel of this growth is scarce energy.


The Evolution Of Prosperity Was Rapid(Example: Dubai)

The Evolution Of Prosperity Was Rapid(Example: Dubai)

Dubai 1990 Dubai 2003 Dubai 2007

Dubai uses15 – 20% of all the cranes in the world!

When complete, this Dubai complex will be the world’s largest waterfront property

And finally……The Hydropolis – the world’s first underwater hotel. Built in Germany, assembled in Dubai. Scheduled completion: 2009.


What Is Driving Oil Demand Growth?What Is Driving Oil Demand Growth?

Mobility and ProsperityProsperityMobility


Two Billion People Live In Oil-Producing Countries

Two Billion People Live In Oil-Producing Countries

47 million barrels of oil per day come from 15 countries with a total population of 2 billion.As oil prices rise, opportunities to transform poverty into wealth multiply.

This sea-change is unprecedented.


Rusting Infrastructure Adds Fuel To The Energy Bonfire

Rusting Infrastructure Adds Fuel To The Energy Bonfire

The world’s oil and gas infrastructure is rusting away:– Most is beyond original design

life– All reside in highly corrosive

environments– Oil depression forced low-level

maintenance

80% of global infrastructure needs rebuilding (not repair):– Does the world have enough steel?– Where will the engineers and construction workers come from?– How much will this cost?– How long will this take?


The Oil Service Industry Tool BoxIs Rusty Too

The Oil Service Industry Tool BoxIs Rusty Too

From rigs to pump units, all are too old and rusty.All need to be rebuilt.But, the factories and yards are too full due to 5% expansion.People shortages are now acute and will worsen over the next decade.Probable number of wells drilled by 2010 will be lower than today.


The Energy Workforce Is Too GreyThe Energy Workforce Is Too Grey

Oil and gas workforce is shrinking.Coal workforce is even worse.Raw materials workforce capacity is unknown.The world’s need for engineers, construction workers, oil field hands and welders has never been higher.


Is This All A Bad Dream?Is This All A Bad Dream?

No. We sleep walked through consumer dreamland from 1982-2002.

Now we will face a brutal energy storm that has been brewing for some time.

This war will not be easy to win or over soon.

But, like most wars, it will create many economic winners.


“Last time I saw it all coming and I cried aloud to my own fellow-countrymen and to the world, but no one paid any attention. Up till the year 1933 or even 1935, Germany might have been saved from the awful fate which has overtaken her. and we might all have been spared the miseries Hitler let loose upon mankind. There never was awar in history easier to prevent by timely action than the one which has just desolated such great areas of the globe. It could have been prevented in my belief without the firing of a single shot, and Germany might be powerful, prosperous and honored today; but no one would listen and one by one we were all sucked into the awful whirlpool. “Winston Churchill. Sinews of Peace, (the Iron Curtain Speech), at Westminster College in Fulton, Missouri on March 5, 1946.

“There Never Was A War In HistoryEasier To Prevent By Timely Action”“There Never Was A War In HistoryEasier To Prevent By Timely Action”


The Energy Crisis Was As PredictedThe Energy Crisis Was As Predicted

Year List of Simmons' Publications1990 Pending Domestic Embargo Talk1992 The Natural Gas Decline1995 The Case For Crude1997 China's Insatiable Energy Needs

2000 Revisiting Limits to Growth: Could The Club of Rome Have Been Correct, After All?

2001 The World's Giant Oilfields2005 Twilight In The Desert

Our energy crisis could have been prevented…..But, no one listened…


Prevention Is Easier Than CurePrevention Is Easier Than Cure

This energy crisis could have been prevented.

The signs “all was not well” were sharp and clear by 1989.

But most energy experts assumed oil prices would fall by 50% each decade (Moore’s Law).

And they assumed energy demand peaked by 1990.


“I Have Been To The Mountain Top”“I Have Been To The Mountain Top”

We are at peak and we can see over the mountain top.It looks ugly.But “we”, too, can get the to Promised Post-Peak Oil Land.

“He’s allowed me to go up the mountain and I’ve looked over, and I’ve seen the Promised Land. I might not get there with you, but I want you to know, tonight, that we as a people will get the Promised Land.”

-Martin Luther King, Memphis, TN – April 1968


We Can Get Through The Awful Whirlpool…IF…

We Can Get Through The Awful Whirlpool…IF…

The world goes to “war footing” now.We mandate a $100 floor on oil prices.We ensure gas prices rise towards oil parity.We create blueprint to rebuild energy infrastructure.

We adopt a “travel less” program:– Flexible work rules to end long-distance

commuting– Grow food at home– Make goods close to where they are

consumed/used– Use water or rail


Twilight Era Is EndingTwilight Era Is Ending

Darkness follows twilight.

It is always darkest before dawn.

Will dawn ever come?


Documents

Atlanta Society of Financial Analysts€¦ · SIMMONS & COMPANY INTERNATIONAL The 21st Century Energy Crisis Has Arrived st Century The Atlanta Society of Financial Analysts April