This was an e-m exchange back in October between two people I know. Both previously worked for a large oil company before it was merged into another large oil company. They now work at different companies.

Posted with permission.

In previous conversations w/XXXX my recollection is that he's hewed to the standard line (predictions of peak oil have been occuring for 30+ years, etc.) so this appears to represent at least one person in the oil biz who's rethinking some assumptions...

-----Original Message-----
From: XXXX
Sent: Thursday, October 14, 2004 6:38 AM
Subject: Peak Oil

I am attending the SEG (Society of Exploration Geophysicists) convention this week. On Monday morning, they had a forum of six industry experts that discussed future trends in our business. There was one who was quite a bit more interesting than the rest. His name is Matt Simmons, and he is CEO of an energy investment banking firm that carries his name.

Matt talked about the peak in oil production, when it might/will occur, and what are we going to do about it. He presented EXTENSIVE evidence that we have a problem, and that the industry has NOT responded to it. One of his quotes was from the Wall Street Journal and went something like this – “The price of oil has risen 80% over the past year, and the industry’s response has been the biggest disconnect in the past 150 years of the oil industry”. That quote is not exact, because unfortunately, I didn’t start taking notes, until after his presentation, because the other panelist were not nearly as interesting.

He said that the industry has been focusing on reductions in supply fueling growth in the price of oil. I don’t know which five-year period that he was referring to (1990-1995?), but the demand for oil was constant at about 66 MMBOE/D (Million Barrels Oil Equivalent per Day). Demand from China and India have been strong. The industry has apparently known about these trends in the past, but no one believed them.

Now we have a problem. Right now, the world is producing and consuming about 82 MMBOE/D. The demand in the fourth quarter of this year ALONE is expected to increase by +2 MMBOE/D (I thought that he said 2.4 MMBOE/D). He extrapolated this over the next 15 months, and the world is going to have to come up with an extra 8+ MMBOE/D to cover the demand.

That is equivalent to another Saudi Arabia.

I am here to tell you that it isn’t going to happen.

He went through all of the reasons why the industry hasn’t responded except to pay down debt and buy back its stock. One of the biggest reasons is that we have heard all of this before – that the world is running out of oil, etc. Remember the energy crisis of the 1970s? There is also a belief that higher prices will spur more production, which can definitely help, and that there are vast resources in heavy oil sands in Canada and Venezuela and oil shales in Colorado (unconventional resources). Unfortunately, he says that we don’t have a lot of experience about the cost of getting this oil out. In addition, the tar sand areas of Canada don’t have a ready supply of natural gas and water to steam the resources out, and natural gas prices are sky high too.

One of his predictions is that we are about to hit a wall where demand outstrips supply. You can imagine what is going to happen under that scenario.

He also mentioned that the peak in oil production for the United States was presented in the 1950s. It might have been M. King Hubbert (sp?), but no one listened to him. In the 1970s, when the peak was supposed to have occurred, the industry was crowing that they had never before produced so much oil in the U.S., so obviously, he was wrong. Well, we have never produced as much as we had then, so obviously, that was the peak. His premise was that we wouldn’t recognize the peak until after it occurs.

It was an interesting talk that was definitely a kick in the pants. Unfortunately, very few people still believe it. Our industry has been so shell shocked after cutting over the past two decades that it is hard for many to consider that it might be true. In addition, if you do bet that he is right, you might over extend yourself and go out of business, but if you play it safe, you might still survive, even if he is right.

He does have his SPE convention speech on the Web. It has a lot of the information that his SEG talk did and is definitely worth a look.
http://www.simmonsco-intl.com/research.aspx?Type=researchspeeches

Cheers,
XXXX

-----Original Message-----
From: YYYY
Subject: RE: Peak Oil

XXXX is spot on with this note.

A recent Matt Simmon’s presentation can be found at the following link (I sent this to ZZZZ a week or so ago)
http://www.simmonsco-intl.com/files/SPE%202004%20Annual%20Conference.pdf

XXXX knows what it was like at [previous company at which they both worked]: continual cost cuts. The company employed 60K people when I started and about 34K at the merger. [The merged company] is still a ~90K employee company which is smaller than pre-merger.

These companies have been much more successful at cost cutting than at finding hydrocarbons which, I think, is the root of the problem. The oil companies are currently run by a bunch of cost cutters that don’t have the expertise to go out and set up plays and find hydrocarbons, but I digress.

One thing to remember about Simmon’s presentation is that he is making predictions about the future using the past as a guide. In the link above, I think he doesn’t give technology it due as a supply mitigation tool. Also, forecasts of demand are pretty notorious for being wrong; similarly, the oil companies may just get their act together but not before we all get squeezed hard. Maybe, just maybe, a few small events will occur to avoid the perfect storm but it will still storm.

...

I just received a call from another friend who called about the Matt Simmons presentation.

Slide 6 of 14 in the deck below says it all. The fields are old, the easy stuff has been found, we’re screwed.

This slide also shows that the high prices of the 70’s led to some successful exploration efforts into the 80’s in terms of fields discovered but the low prices in the 80’s and 90’s led to a dearth of discoveries.

Again, the question I have is when will the industry get their collective butt’s in gear to go find some hydrocarbons? I would also like to know what Mr. Simmons is investing in if so few discoveries have been made. Is he investing in production or exploration.