Matt Simmons: There may in fact be as much as 1 billion phantom barrels of oil in storage around the world.
Simmons is calling for an energy industry "Marshall Plan".
$30 crude is not a short-lived blip.
The Scotsman, 21st November
By Jeremy Cresswell
Energy crisis threatens a winter of discontent
THE wheels are about to come off the international oil and gas juggernaut, threatening to pitch the world into an energy crisis on a scale that has never been seen before, and the US and Europe will suffer most.
This dire prediction comes from an American banker, one of the most respected on the circuit today. But few are listening to Matt Simmons, who claims the oil and gas industry is in such a mess that it has lost the ability to keep ahead of global demand.
The consensus is that the current run of $30-plus oil won't last. It is unsustainable. BP believes this is the case, so does Shell, so do most, if not all, oil companies.
Everyone seems hooked on what has become the generally accepted view that commodities such as oil can only get cheaper over time and that supply and demand statistics can be trusted.
Not Simmons and, a few days ago at a summit conference in London, he told a gathering of leading lights from the oil industry, academia and the International Energy Agency (IEA) that the world not only faces an energy crisis, it is with us now - like global warming.
He likens the current situation to a perfect storm -a converging shortage in all three forms of energy: oil, natural gas and electricity - and it will wreak havoc in North America first.
Matt Simmons is president and founder of the Houston energy bank Simmons & Company International, and his client list reads like a Who's Who of the oil and gas industry contracting sector.
This is surely good reason for staying conservative and saying as little as possible about such issues so as not to upset the oil companies?
Not, Simmons. He has always been outspoken and willing to stick his head above the parapet when others have dived for cover. He has the scary habit of being right ... eventually.
Today, he talks of little or no capacity to cope with rising demand, now or in the future, and is calling on oil companies to stop prevaricating and get on with investing again, now the late 1977 through early 1999 slump is fading into memory.
Simmons is calling for an energy industry "Marshall Plan".
The seeds of the energy apocalypse are:
- The world is running out of spare capacity to produce more oil;
- There are no longer enough tankers to shift any additional oil anyway;
- There is little or no scope to boost throughput from refineries;
- An accelerating changeover to gas usage for power despite clear insecurity of gas supplies;
- Global energy demand is picking up faster than had been generally assumed, while backbone non-OPEC oilfields such as in the North Sea are depleting faster than expected.
Such key factors have never converged like this before, claims Simmons.
Those in charge the energy sector have, in his opinion, failed to grasp the existence, let alone severity of the current crisis, which has seen oil prices stick resolutely above $30 per barrel for many months, hitting above $37 during the summer and likely to do so again during the winter. And those responsible for assembling supply and demand statistics and forecasting - the IEA - have got their numbers badly wrong.
There is a growing body of opinion doubting the veracity of the current IEA claim that supply currently outstrips demand by 1.8 million bpd. There may in fact be as much as 1billion phantom barrels of oil in storage around the world. These are barrels of oil that never could exist, because there is not the storage capacity to contain them.
Simmons says $30 crude is not a short-lived blip. While prices may ease a little in the spring, they'll soon clamber back over the threshold that has forced petrol, diesel and heating oil prices to rise sharply this year throughout the US, Europe and elsewhere.
Stateside, the bespectacled, conservatively dressed investment banker calculates that heating oil supplies are now so tight that, if the north-eastern states run out of heating oil this winter because of a cold snap, it could become "the greatest human tragedy of lost lives in US history", with thousands of lives lost as the elderly and disadvantaged freeze to death.
In Europe, Simmons says there is too much reliance on the ability of the Russians to deliver gas from western Siberia. "If Siberian natural gas ends up declining as sharply as Russian oil did 10-12 years ago, Europe will have to find a lot of new energy sources fast to save its economies from real pain."
He believes this will impact on the UK too, where oil production is peaking and where gas self-sufficiency is already close to being on a knife-edge, though North Sea gas is currently being exported to the continent. And yet gas is seen as the backbone fuel of the future.
"How did we get into this mess?" asks Simmons. "Simplr. We spent the past decade making a series of bad energy mistakes. We thought that energy demand was slowing down while energy growth became one of the big stories of the past decade.
"As energy stocks dwindled to their lowest levels in 30 years, we chalked it up to technology creating just-in-time energy supplies. Instead, we were using up all the energy cushions as a last gasp source of cheap energy supplies.
"We should have spent the last decade preparing to run the energy Olympics that the next 10 years will demand."
As far as Simmons is concerned, there is no point blaming OPEC for the problems.
Picking up on this theme, Dr Robert Mabro of the Middle East Centre at Oxford University says it is too convenient for the West to blame OPEC for the current parlous situation. After all, it is no longer the Organisation of Petroleum Producing Countries that drove the world’s oil markets, rather it is London and New York, and that has been the case since the mid 1980s.
Dr Mabro, a world authority on OPEC affairs, agrees the world is desperately short of production capacity and that Saudi Arabia is about the only country able to boost oil output. In his opinion, the Saudis have around two million barrels per day productive capacity in reserve. He deems Nigeria to be in a mess; Iran has no surplus capacity; Venezuelan capacity has declined and not risen as some have been led to believe; and, one way or another, other cartel members cannot plug the gap either. Like the North Sea, the Saudis produce high quality crude, the kind everyone wants because it is cleaner than sour crude, which is bedevilled with contaminants like sulphur.
The problem is there isn't enough to go around. It is said Kazakhstan is the future competitor to Saudi. But its crudes are stuffed with sulphur that has to be stripped out and is in itself starting to pose a major environmental hazard. Added to that, 40-50-60billion barrel East-West Kashagan oilfield is geologically complex and located in one of the most environmentally sensitive parts of the Caspian.
"If we look ahead, if demand grows at the rate it did in 1998-99, then we are going to hit supply constraints," says Dr Mabro.
Meanwhile, oil company investment is running at record lows, though starting to pick up now - 20 per cent this year according to BP’s chief economist, Peter Davies. Analysts at Lehman Brothers say it is nearer 15 per cent.
Davies does not follow the Simmons line and said so last week. He says BP for one will continue to plan ahead based on historic oil price averages. For new projects this means around $14 per barrel, a figure that even new developments in the high price North Sea, such as Clair, are expected to make money.
""The consensus, and the company view, is that today's prices are not sustainable long-term."
Davies points out that the leading oil majors still have unfinished business in terms of completing the huge mergers that have dominated the world energy stage these two years past. He dismisses as a myth the generally held view that the 1999 recovery of oil prices was behind the super-majors committing more funds to growth. "This is not driven by prices and in most cases not even by cash flow. Instead, it reflects a move to a growth agenda."
If that is the case, then why was investment all but scrapped during the 97-99 slump?
Only time will tell who is right about what the future holds.
However, Simmons is no fool. He is one of the few people who seems genuinely able to make sense of the immensely complex global energy equation.
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