How do you introduce the oil peak & decline phenomenon?

It is such a simple concept, but it is so hard for people to grasp what you mean. Let's start with the United States , because this is a classic case study of an area that did peak.

The story of the Peaking of the U.S. is really a mind boggling story when you figure we weren't Afghanistan , or deep in the heart of Africa , or before we had newsprint, and so forth. The story really goes back to 1956 when a scientist, a senior scientist at Shell Oil Company, Dr. M. King Hubbert, the infamous Hubbert curve today, after apparently several years of looking carefully at the resource base of the U.S. and where we were on the scale of how much we produced, prepared a paper that he was going to deliver at some scientific association. I believe it was the U.S. Association of Petroleum Geologists. It's a matter of public record now.

The senior management of Shell pleaded with the guy not to produce this paper because it sounded so harebrained. But, apparently, King Hubbert was a crusty enough old guy that he just delivered it anyway, and his message was that, in the early 70's, the U.S. would peak as an oil province, and it created phenomenal controversy. A bit of hysteria, because, at the time, we were, basically, twice as big an oil producer as anyone else on Earth, and we'd been that way for the last 100 years. So this would be like someone today in Saudi Arabia saying, "ten years from now, we're going to peak." That's impossible! That was 1956.

By the late 60's, Dr. Hubbert has fallen into such disrepute that he'd become, apparently, from just from going back an reading all the literature, almost a joke. (They'd say), "Remember that guy in '56' that said we were running out of oil?", like I hear people talking about the Club of Rome and "Limits to Growth" today, who said we're going to run out in 1990, or 2000, which wasn't, in fact, the case at all. 2050 to 2070 is actually what they wrote about, and it's quite a different story.

One of the classic reasons people dumped all over King Hubbert was that, in 1970 when we were supposed to quote "run out", we'd never produced more oil; the year we peaked. In 1970, the United States , this was before Alaska , (we discovered Prodhoe Bay but it was years away from being developed, and it was before a gleam that we could do deep water), and, really, Alaska might have well have been in Russia . In fact, at one point, Russia owned Alaska , and deep water could have just as easily been in Mexico .

So, you really have to apple and apple, and have to go back and realize he was just looking at the lower 48 and the shallow waters off (the) Gulf of Mexico and California . His assessment was that, once we peaked, it wouldn't make any difference how much we drilled, we would then start into a steady decline, and ultimately, at some point, be down to a very long tail, probably never run out, but once you're down to 10% left, it's like a 93 old guy. He might live another 25 or 30 years, but he's not very productive.

Anyway, in 1970, we were producing 9.6 million barrels per day, Saudi Arabia was producing 4.3 million barrels a day. Go back and look at the literature. Not a single other person had even commented that we just might be reaching a peak.

By 1981, we'd had a 10 fold increase in price, we were drilling four and a half times more oil wells every year than we were drilling 10 years before that, and 9.6 (mbd) had already declined to 6.9 (mbd). If you look at the same number today, again you have to keep Alaska off, and keep deep water in the Gulf of Mexico, we're down to some where between 3.1 and 3.5 (mbd).

Turns out that King Hubbert was unbelievably right, and what I find so uneerie about this is why was he the only person, and why was the message so hard to get across, and why did he almost get destroyed in his reputation for being so ahead of his time?

Today, there are a handful of scientists and Colin Campbell, and Jean Laherrère, Dr. Baktiari in Tehran, that are doing the same work, using sort of the same diagnostic techniques as Dr. Hubbert was in 1956, but now they're armed with fabulous data, all of these computers, and they scratch their head and they look at a bunch of phenomena and say, "we're nearing the day when, in all likelihood, we're going to, basically, peak, or Plateau." Maybe 'Plateau' is a less jarring terminology, and I hear that, and I see their numbers, and I say that's really interesting. That could, possibly, be the case.

Other people hear that, and, with some passion in their voice say, "that's just stupid. the world will never run out of oil." There was a talk I gave in Paris last Thursday afternoon, saying "I never heard any of these scientists ever say we were going to run out. I hear them say we're likely to peak, and I hear them say that we're really coming to the end of conventional oil, which is easy to get out, flows real freely, usually has a lot of pressure so that, actually, your biggest task is keeping it in, verses sucking it out. I don't know why that's such a hard message to get through to people.

The people who seem to have the hardest time digesting it, ironically, are the people that call themselves the world's energy experts. I find that really interesting. I tend to, basically, I speak so often on energy programs, I've sort of gotten to know both sides of this camp, and I've talked to both sides and I listen to what they say. The scientists are very concerned and their opponents spend so much time dumping all over the scientists, and I continue to say, "guys, where's your data?". By and large, their data is....

I am, basically, just an optimistic person, and I really believe in the resourcefulness of human nature. Well, luckily, King Hubbert didn't think that. If it turns out that the scientists are right, what makes me concerned is that they haven't set a trap door in society for what would we actually do if we did peak? What are the social consequences? Do we have any idea of what the future cost of energy actually has to be if we're turning more, and more to unconventional oil? Canada, for instances, has vast amounts of unconventional oil in their tar sands and heavy oil, but it's really hard to get at, it takes an awful amount of energy and water to convert it from non-usable into usable energy, and it's expensive.

So, yes, we have a lot of it, but do we have any idea of what the economic consequences are of having to rely on it, and what I find fascinating, from just an observing society, is why did we ever let such an important message go unaddressed for so long, and then the handful of people that tried to thoughtfully address it get really badly abused, (by being called) crackpots, chicken littles, as opposed to there's a serious side of ... that might not be right. The dialog has been odd.

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.

After 911, I made the comment, many, many times that I think it would be very hard for terrorists to destroy the U.S. economy. You deal in a good old fashioned energy crisis, and make it serious enough, and we can rip this economy apart faster than you'd ever believe. So, it is something that I worry about, and there's so much bad information floating around, theories as to how if we just quickly did this, we wouldn't have a problem, that I think the few people who have done their homework really owe it to the system to speak out.

 

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.

 

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 have 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 people 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, but the few times I have, he's a very serious guy, he is a unbelievably quick study, and he clearly understands a lot about energy and takes it very seriously.

Does President Bush want the American public to know about oil peak?

I was going to be testifying at a Senate Energy hearing the next day, and he said what are you going to say, and I said, "Boy, you have some complicated things to deal with, what can people like us do to help you?" He looked as me and said, "Matt, you continue to speak out, loudly and honestly, about how serious our energy problems are. You have no axe to grind and it really helps."

You know, when someone says, "Can you do this?" and it's sort of inconvenient, I do think about that. Bush has spoken out a lot of times about energy. For some reason, or another, the media... I mean part of the problem with being a politician is you can speak many, many, many times, but how often do you speak get covered, or don't they. They've had a very hard time, from my perspective, getting the message across, and then, when 911 happened, they were just totally preoccupied, so I think that's been a different issue. I remember about four weeks after the comprehensive energy plan got unveiled, and I listened to about three different lengthly talks on C-Span that Bush gave. Those are really first rate talks.

Even though I though Bush was a very good speaker, but the media kept saying, "the guy can't speak at all". I think after 911, we began realizing that he's not a bad speaker. What's interesting is, I remember reading an article in the New York Times, an editorial by Paul Krugman, who is a very well known economist, and it was called 'Dick Chaney's Dirty Math; Burn Baby, Burn'. I thought it was just scumbag stuff. Where's this guy coming from? Doesn't he realize that were talking about energy? He was, effectively, saying these two guys are just making this stuff up so they dole out goodies to their love buddies!

They actually, for some weird reason, believe like I do, that energy is the glue that makes our society work, and if we don't watch it, we're going to have some unbelievable problems.

 

Was the mention of 'Freedom Fuel' (hydrogen/fuel cells) in the State of the Union speech an admission that the Bush administration doesn't know what to do about oil peak?

I don't know. I was surprised that made it into the (speech) and I think it really bothers the Bush administration that they have been painted as (being) such anti-environment, because I think that's wrong.

I think they're, basically, trying very hard to say, "look, let's actually cool it and get off (the) throwing bricks and stuff and, basically, let's get grow up and get real about what the real issues are, and, sadly, I am very skeptical about the age of hydrogen because you can't be a believer of the age of hydrogen and not be a skeptic that we have a scarcity of methane, because hydrogen is just a byproduct of methane.

So, I tend to think that we need to, basically, be looking beyond that into something else (...). I'm encouraged when I hear Rick Smally talking about some of the stuff that just would have sounded like Buck Rogers to me, but I think that what's going within the Bush Adminstration is as they have time to, basically, think of other things other than their preoccupation with terrorists, that we really do need to, basically, be thinking outside the box now on energy, and that this hydrogen is the beginning of speaking outside the box.

 

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