What's New in Production. Inject Electricity and Pump More Oil?
Publisher: World Oil
Author: Pramod Kulkarni, Contributing Editor
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yet2.com Portfolio Company Passes Key Test -- Heavy Oil Recovery Technology Successful
Publisher: Yet2.com
Author: Ben Dupont
Can Science Save the Oil Sands?
Publisher: Report on Business
Author: NATHAN VANDERKLIPPE
When they are subjected to a certain high temperature and pressure, substances like carbon dioxide enter a state where they are neither liquid nor gas - the super-critical state. When mixed with several other compounds, super-critical carbon dioxide is able to extract hydrocarbons from almost anything, in a process somewhat like the way some dry cleaners work.
Dr. Guigard, an associate professor of environmental engineering at the University of Alberta, is trying to prove it can do the same for the Athabasca oil sands. This is not a mere science experiment: Lab modelling has shown that her process uses virtually no water, and less than a third of the energy spent today on bitumen extraction.
That makes it not only a potentially huge step up from an environmental point of view, it could also help redraw the economics of the oil sands.
There's only one problem. To prove the technology, Dr. Guigard needs to build a small pilot operation, and that will cost $1-million. She's spent a year banging on the doors of the energy companies that stand to gain the most from what she is developing.
They have all declined.
"The response is basically they're looking at this as still in its infancy, and so they are waiting for a little bit more research," she said.
That puts Dr. Guigard in a bind: "They want us to be further along than we can get with the funding sources that we currently have."
Talk to anyone in Calgary or Fort McMurray, and they will tell you that the story of the oil sands has been the story of technology. Were it not for the original hot-water extraction method, mining would never have become profitable decades ago. Were it not for the next step, the steam-assisted gravity drainage (SAGD) techniques developed in the 1970s that use high-pressure steam to send bitumen dripping out, the more-expansive deeper oil sands would never have been tapped.
But those are by and large yesterday's techniques and methodologies. In the past nine months, the dive in oil prices has brought more than $200-billion in spending plans crashing off books, raising profound questions about the ability of the industry to prosper in the future.
In large measure, $50 (U.S.) oil has put existing oil sands technologies on life support. In recent years, companies spent half as much of their revenue on research and development as the rest of industrial Canada - far less than even farmers and fishermen.
The lack of research has helped contribute to the vulnerability of the industry to falling oil prices. Last summer, a company building a new oil sands mine needed $90 oil to be profitable. Anyone building a new SAGD operation needed $70 oil.
Costs have begun to dip in the cooling of the boom. But if ever there was a time for someone to come up with a new way of producing the oil sands - a way that's both cheaper and less environmentally heavy footed - it's now.
Several companies are chasing ways to do exactly that, using electric currents, underground fires and petrochemical solvent cocktails to accomplish leaps in efficiency and lower greenhouse gas emissions. Many of the boldest ideas, however, belong to the oil patch outsiders. They are the upstarts - the mavericks - seeking to claim Fort McMurray's future with a new vision of how oil can flow.
But that new vision is unlikely to transform the oil sands if left to the small companies alone. Both government and industry heavyweights have been slower to embrace the need for new technology.
If they do not adapt to the future and start to invest more heavily, Canada's energy industry risks shrivelling, said Jamie Blair, a former Husky Canada executive who is now advocating for a new technological era in Alberta.
"People will talk about the oil sands being on the backburner," he said.
NEW TECHNOLOGIES
Ever since oil began its long dive last summer, a torrent of callers has been ringing Bruce McGee's phone. Every time he answers, he tells investors, energy companies and whoever else who will listen this story: He believes his company, E-T Energy Ltd., can produce oil at a profit with prices at $26 a barrel.
Mr. McGee, who is president, believes that changes everything. By his calculation, E-T's technology can be used to pump out 600 billion barrels of oil sands bitumen. That's more than triple the Alberta government's best guess at what's currently recoverable from the oil sands, and enough to satisfy total global demand for two years.
"Once we get out there and we're putting barrels on the balance sheet, we're going to have more barrels on our balance sheet than Saudi Arabia in a very short period of time," says Mr. McGee, the company's president. "We won't be second. We will be first in the world."
It could also tear apart current oil sands practices.
"If the price of oil stays at $40 a barrel, it will replace mining," predicts Craig McDonald, E-T's vice-president of operations. In coming weeks, the company will hit the road to raise $150-million to commercialize its technology.
That technology isn't much to look at - just a few well heads and large tanks sitting on a windswept field south of Fort McMurray. A series of electrodes dangle in each well. When they are turned on, they pass a current through the earth - like electricity through a stove element - and heat it up. The result: The bitumen, which is normally locked in sand as hard as rock, begins to flow - like molasses in a microwave. No huge mines needed, no greenhouse gas-spewing steam projects required.
In a place accustomed to prying bitumen from the earth using monstrous shovels and vast quantities of steam, this pilot project is a bold attempt to reshape the environmental and financial costs of the oil sands.
In other parts of Alberta, companies are using radically different techniques: Petrobank Energy and Resources Ltd. is studying how to free bitumen using underground combustion, while Laricina Energy Ltd. is mixing steam with solvents, which dramatically cuts the amount of natural gas used to extract bitumen from deeper oil sands. At universities and provincial research bodies, scientists are studying how microbes could be used in bitumen upgrading, and examining the effectiveness of new techniques inside specially modified medical CT scanners.
All of the major oil sands players maintain research divisions that pour millions of dollars into perfecting extraction processes every year. Some, like ConocoPhillips and Syncrude, are holding those budgets steady in the current downturn (Syncrude alone spends $50-million a year), while Shell has said its R&D budget will drop this year.
Others, like Imperial Oil, are ramping up: The company spent $117-million on research last year, more than double its 2006 budget. It has established a centre for oil sands innovation at the University of Alberta, and plans to build a pilot to test its own version of the solvent technology this summer.
Imperial, like many other companies, maintains that research is a crucial to its future. "Our greatest lever for profitability is technology development," said Imperial spokesman Pius Rolheiser.
R&D LAGS
Indeed, between 2004 and 2006, the most recent year Statscan has numbers, the entire industry's research spending grew by 65 per cent to $515-million.
But compared to other industries, and to their own outsized earnings, energy companies are well behind on research spending. Imperial Oil alone pulled in $3.9-billion in profit last year.
Statistics Canada's most recent figures on R&D spending as a percentage of revenue, from 2006, show the national average among all industries is 2 per cent. Pharmaceutical companies spent 6.7 per cent; the agriculture industry 1.6 per cent; forestry and logging 4.4 per cent; fishing, hunting and trapping 5.8 per cent. Oil and gas companies spent 0.9 per cent.
And not all of the spending is going toward finding new extraction methods. Substantial sums are being spent on improving tailings technology and perfecting extraction processes currently in place.
Those who have experience in the oil sands charge that the companies that work there are not open enough to new thinking.
"They've gotten so complacent and so fixed in the way they've done business up there," said Paul Verhesen, the president of construction firm Clark Builders, which has done work in the oil sands. "They'll spend $1,000 to save $1 as opposed to being innovative, being creative, being willing to look at options."
For many years, there was little incentive to spend on research. Rising oil prices made existing technologies abundantly profitable, masking a need for change. Instead of searching out better extraction technology, energy companies focused more attention on geological innovation: Finding better ways to discover and measure how much petroleum is beneath the surface.
And compared with industries like biotechnology, which spend heavily to grow and develop, the energy industry is mature, "so they don't spend as much" on technology, said Peter Tertzakian, the chief energy economist for Calgary-based ARC Financial.
What's needed, he said, is for the industry to undergo a "renaissance" that requires a boost in spending.
Part of the responsibility also lies with government, which has, in the past, been integral to pushing the oil sands forward. The Alberta Oil Sands Technology and Research Authority, or AOSTRA, was created by the Alberta government in 1974 to help lower the cost of oil sands development. It succeeded in laying the foundations for the SAGD technology that is in use today.
The Alberta and Saskatchewan governments are both spending money on provincial research bodies that are looking for new solutions. Most notably, Alberta is spending $2-billion over the next 12 years to help develop carbon capture and storage technology.
But less is being spent on the extraction technologies that are most critical to oil sands economics and environmental footprint. In its heyday in the mid-1980s, AOSTRA received more than $70-million in annual funding. Its best current counterpart, the Alberta Energy Research Institute, received $44-million last year, and its executive director, Eddy Isaacs, said the problems that need solving today - cost concerns intermingled with environmental and greenhouse gas issues - are far more complex. Mr. Isaacs said his budget needs to be more than doubled, "at the very least."
There is, however, growing hope that Alberta's sudden decline in fortunes has brought an appetite for change rushing back to the oil patch. And it is coming in expected places.
A NEW SURGE OF INNOVATION?
Take Jamie Blair, for example, a man whose pedigree easily ranks among the best in Alberta. Mr. Blair served as chief operations officer for one of Calgary's biggest conventional oil firms, Husky Oil. His father, the late Bob Blair, founded and led Nova Corp., the Alberta icon that almost single-handedly built a petrochemicals industry in the province. His grandfather, Sid Blair, helped develop the pioneering hot-water extraction process in the 1920s, a critical development that used hot water to lift bitumen from mined oil sands and opened the way for the first Athabasca oil sands mine decades later.
Mr. Blair still has a copy of the thesis statement on that process that his grandfather co-authored. What bothers him is that it's not a historical document: Hot-water separation remains an integral part of modern oil sands mines, many decades after it was first commercialized.
Advances in recent years have helped cut in half the temperature at which the process is done - lowering its energy requirements - but "the work that [Sid Blair] was doing in a lab up at the University of Alberta a million years ago is still the technology of today," he said. "And the upgrading technologies, again, haven't made leaps forward."
Mr. Blair himself is helping fund some research at the University of Calgary that is experimenting with microbes in hopes of making "quantum" savings in the energy required to process bitumen.
But he accuses industry of being afflicted with a "syndrome of 'you can't change the technology.' " He points to the business of natural gas as an example of what's possible. In the past decade, that industry has found itself suddenly able to tap enormous new bodies of natural gas after the development of new drilling and rock-fracturing technologies enabled it to access shale gas, which had previously been considered uneconomic.
The results have been dramatic. In one shale alone, the Barnett in Texas, the U.S. Geological Survey estimated technically recoverable reserves of three trillion cubic feet in 1996. By 2008, the best estimate was 55 trillion cubic feet - a stunning 18-fold increase in what could be economically extracted from one area, thanks almost entirely to technological advance.
The oil sands is in dire need of such a makeover, Mr. Blair said - but has been hampered from trying to change by the past decade's steady surge in crude prices.
"We've seen oil price increases make the old technology seem very practical," he said. "But particularly in today's environment, where oil prices have now retreated dramatically and the challenge is now on cost and efficiency, it puts a harder perspective on things."
"And are people going to rise to the challenge? Yes."
They have in the past, and there are examples where they are today. In 1982, Imperial Oil patented the revolutionary steam-assisted gravity drainage technology now used in most new projects. The result: Industry suddenly gained access to a huge new resource of deep bitumen deposits, all without using the gaping open-pit mines that have drawn such environmental ire.
More recently, Shell has experimented with electrical extraction - using a different method from E-T - and produced 100,000 barrels of oil at a test site near Peace River, although that technology is not yet commercially ready.
Yet early stage efforts remain a bet fraught with risks.
E-T has stumbled in its attempts to apply the technology to the oil sands (it has worked dozens of times in environmental remediation applications). In its second major test, it managed to produce oil from only one of four wells. Its problems ranged from electrical cables that were accidentally severed by surface equipment, to the design of its electrodes. In total, E-T has produced less than 3,000 barrels of oil.
Yet the potential prize for success is huge. E-T's technology, for example, could help open up carbonate oil, a huge hydrocarbon resource that is so tricky to produce that virtually no one has tried. And Petrobank believes its process, which uses a controlled underground burn to intensely heat oil sands and make them flow, can be used in a huge variety of heavy oil fields around the world. Like E-T's process, it requires virtually no water and uses dramatically less energy.
"We are breaking new ground in the industry," said Chris Bloomer, Petrobank's chief operating officer for heavy oil.
He knows doubters think it won't work. He remembers when skeptics said steam-based extraction wouldn't work, either. They believed gravity would have no force in the reservoir, and the oil simply would not flow out. They were wrong then, and he believes they're wrong now.
Will the rest of the industry agree?
Mr. Blair is optimistic that low oil prices are cracking old resistance to change. The way he sees it, companies have two choices: Wait for oil prices to jump high enough that oil sands projects are economic again, or "get there first by being the first on the block to implement newer and more efficient technology."
"It seems like an easy choice to me," he said. "But it takes leadership. It takes innovators."
Goldman sees 'swift and violent rebound' for oil
Publisher: Financial Post
Author: Grant Smith, Bloomberg
Oil prices may have reached their lowest point already, after falling to US$32.40 in mid-December, and are expected to rise to US$65 by the end of this year, the analyst said. There is scope for a "new bull market" in oil, Mr. Currie said.
World oil demand is likely to fall by about 1.6 million barrels a day this year, the Goldman analyst said Monday at a conference in London. That's bigger than the reduction expected by the International Energy Agency, which last week forecast a decrease of about 500,000 barrels a day, or 0.6 %, this year.
A recent tactic of using supertankers to store crude oil to take advantage of higher prices later this year is "difficult" to profit from and is "near the end of this process" anyway, the Goldman analyst said.
New York crude futures for delivery in December, trading near US$56 a barrel, currently cost some US$15 a barrel more than March futures, a market situation known as contango, where prices are higher for later delivery.
The contango is likely to flatten as supply cuts by OPEC and other producers take effect, reducing the availability of oil for immediate delivery, Currie said.
The Organization of Petroleum Exporting Countries started another round of supply cutbacks at the start of this month. The group's compliance with its overall efforts to cut production will probably peak at 75%, or a reduction of about 3 million barrels a day out of an announced aim of 4.2 million barrels a day, Goldman Sachs said.
In several steps, 10 OPEC members have pledged to reduce production to 24.845 million barrels a day, a cut of 4.2 million barrels a day from September's level.
Morgan Stanley hired an oil tanker to store crude oil in the Gulf of Mexico, joining Citigroup Inc. and Royal Dutch Shell PLC in trying to profit from the contango, two shipbrokers said in reports earlier Monday.
Here comes $500 oil
Publisher: Fortune Magazine
Author: Brian O'Keefe, senior editor
Matt Simmons argues that Saudi Arabia's oil supplies are much more limited than everyone thinks.
(Fortune Magazine) - Matt Simmons is as perplexed as anyone that it has fallen to him to take on OPEC, Exxon, the Saudis, and all the other misguided defenders of conventional wisdom in the oil patch. Why should one investment banker with a penchant for research be required to point out what he regards as the obvious - that from here on out, oil supplies can't meet demand, and if we don't act soon to solve this crisis, World War III could be looming?
Why should a man who scorns most environmentalists have to argue that locally grown produce and wind power are the way of the future? Why should a lifelong Republican need to be the one to point out that his party's new mantra - "Drill, baby, drill!" - won't really fix anything and that his party's presidential candidate is clueless about energy? That the spike in oil prices earlier this year wasn't a temporary market anomaly and the recent retreat in prices is just a misleading calm before a calamitous storm? That we're headed toward $500-a-barrel oil?
"I find it ironic that here we have the biggest industry on earth, and I'm one of the few people to figure out that we have a major problem," he says, in his confident if not quite brash way. "And I did it all in my spare time. How stupid and tragic is that? I shouldn't be one of the only folks that actually has a handful of ideas of how we can keep from blowing each other up and get through this."
Indeed, Simmons isn't the obvious candidate to be the bearer of bad news about oil. He's spent his career working in the business, has lived in Houston for decades, and is such an industry insider that he helped edit the Bush campaign's comprehensive energy plan in the 2000 election - the document that was ultimately more or less rubber-stamped by Vice President Dick Cheney's infamous secret Energy Task Force. Over the past 35 years, his boutique investment bank, Simmons & Co., has helped finance and shape much of the country's existing oil-services business. With profits gushing, you might expect him to be celebrating.
Not to mention that the 65-year-old banker doesn't have the personality of a prophet of doom. He has a puckish wit, a relentlessly cheerful and enthusiastic demeanor, and the appearance of a rosy-cheeked cherub in a navy blazer. He routinely refers - in earnest - to his daily experiences as "tremendous fun." His closest business associates have a hard time recalling him ever showing anger. But when it comes to oil and gas, his message is downright scary.
An unlikely maverick
Simmons was transformed overnight from an influential industry expert to an A-list pundit by the publication in 2005 of his book "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy," a fairly technical read which argues that Saudi Arabia's oil supplies are much more limited than everyone thinks.
Since then he has moved to the forefront of the peak-oil movement - a once fringe but now growing contingent of oil industry veterans, independent consultants, investors, and academics who believe that world oil production is at or near an inflection point, after which it will fall inexorably and fail to meet projected future demands. According to Simmons, we have already passed that peak. And while we're not going to run out of it anytime soon, the era of easy oil is over, and the world is about to enter a period of convulsive change. (Hint: Learn to garden, and buy some comfortable walking shoes.)
The soaring price of crude - it has risen from below $20 a barrel in 2002 to as high as $147 earlier this year - has helped thrust Simmons further into the spotlight. He was one of the main voices, for instance, in the recent oil-shock documentary "Crude Awakening," and his book has now sold more than 100,000 copies. His willingness to make bold predictions about how high crude may go has made him an A-list guest for cable TV news programs and a go-to source for newspaper reporters covering oil and gas. In 2005, when oil was $58 a barrel, he predicted it would be at or above $100 within a few years. Now he sees it climbing to $200, $300, or higher. "There really is no roof on oil prices at this point," he says.
Being so outspoken, of course, invites criticism, and Simmons has endured plenty. But he has also won a lot of high-profile admirers. "Like most people who ignore conventional wisdom, he was scoffed at, ridiculed, and denied," says commodities guru Jim Rogers. "And now, of course, people are starting to say, 'Oh, well, I thought of that.'" Billionaire oil and gas investors Richard Rainwater and Boone Pickens both heap praise on Simmons's analytical abilities. Maine's Senator Susan Collins, a Republican who recently began consulting with Simmons on energy issues, says, "I think he's issuing a clarion call that policymakers need to listen to."
In his own upbeat way, he despairs about what is to come. As the price of oil has fallen this summer (to $101 at press time), Simmons has watched in dismay as complacency has returned and the champions of do-nothingism have popped out of the woodwork to say I told you so. Not that it's lessened his conviction about the road ahead. "I do think there are a growing number of people who are getting it," he says. "But I guess it just reminds me that as a society, we don't have the ability to actually come to grips with a crisis until it's hit us in the face. I am discouraged enough now to think that we're going to have to have a really nasty shock before we wake people up."
Has peak oil peaked?
On a Thursday morning at the end of July, Simmons is sitting in a wicker chair on the back porch of his six-bedroom summer home on the coast of Maine, waiting to do a live television spot on CNBC. Sun glints off Penobscot Bay below him. In the distance, sailboats glide in and out of Camden Harbor. It's the kind of scene that has captivated him since his Harvard days in the 1960s, when he started coming up here on weekends. Wearing a blue-and-white-checked shirt, cream-colored pants, and tasseled loafers, Simmons chats with Ellen, his wife, and Emma, one of their five daughters. His earpiece is chattering as CNBC anchor Melissa Francis teases his upcoming segment.
At the moment, the price of oil is hovering around $124 a barrel, and CNBC wants him to interpret why crude is suddenly tumbling. "Has peak oil peaked? I guess that's our topic," he reports to everyone within earshot, before the shot goes live.
It was on this same porch five years ago that Simmons had the insight that convinced him that the oil age had passed its zenith. During a trip to Saudi Arabia in February 2003 with his friend Herbert Hunt (yes, the son of H.L. Hunt who, with his brother Bunker, almost cornered the silver market in 1980), Simmons had become suspicious of the Saudis' claims about the vastness of their oil supply. In his four decades of working in the oil and gas industry, everyone he had ever talked to had taken it as gospel that the Saudis had enough oil to bail the world out when other supplies ran short. If that wasn't true, Simmons believed, the era of cheap oil was over. Demand for crude was on the rise worldwide, and supplies were getting tighter all the time. If the Saudis were pushing up against the limits of their oil production, the world needed to know.
In his typically analytical fashion, Simmons went hunting for data. He found it in the form of hundreds of technical papers submitted by Saudi oil geologists to the Society of Petroleum Engineers over the past 50 years. Simmons spent the month of August 2003 sitting on his porch in Maine and grinding his way through the minutiae of technical accounts of, for instance, reservoir pressure and water-cut percentages, trying to piece together the challenges that the Saudi geologists had encountered in managing their precious oilfields. In the end, his conclusion was clear. "I finished reading the last paper on a Sunday afternoon," says Simmons, "and I sat back and I thought, Holy crap, this is unbelievable. I've just discovered the biggest energy illusion ever in the world. We're in big trouble. I'm going to write a book."
And so he did. But writing the book didn't exhaust his passion. Today he is more convinced than ever that we've reached peak oil. If he's right, current world oil production- 86 million barrels a day- is about as high as we're going to go.
Of course, if demand goes up but supply doesn't, prices are apt to go through the roof. And unlike global oil production, global oil demand doesn't appear to be anywhere near a peak. Both the U.S. government's Energy Information Association and the independent International Energy Agency, based in Paris, estimate that worldwide demand will be more than 115 million barrels a day by 2030.
While demand growth in the United States has slowed recently due to higher prices, the EIA projects that China and India will more than pick up the slack. And the IEA recently warned that high prices won't slow demand growth in emerging economies. If demand wants to go north of 100 million barrels a day and supply can't break 90 million (or drops below 80 million, as Simmons believes will happen within five years), it will be a price squeeze felt around the world. The peak-oil crowd will be able to declare victory - but nobody will be celebrating.
The peak-oil theory
The concept of peak oil was introduced to the world in the 1950s by a curmudgeonly Shell geophysicist named M. King Hubbert, who observed that the production of oilfields tended to follow a bell-shaped curve, peaking and then turning down sharply. He came up with a formula to quantify his theory. And in 1956 he was ridiculed within the industry for predicting that U.S. crude oil production would max out in the early 1970s. Sure enough, though, in 1970 the United States reached its apex at just under ten million barrels per day, or roughly what the Saudis produce now, and began a long slide down. (Hubbert later predicted that world oil production would peak in 1995. He was a bit early on that call.)
No one disputes that oil production will top out some day. It is, after all, a finite resource. The argument is about how far off the peak is. As Simmons and others point out, many of the world's largest oilfields - Prudhoe Bay, the North Sea - have already gone into decline. The most optimistic estimate for the average depletion rate of the world's currently producing oilfields is between 4% and 5% annually, or about four million barrels per day at our current rate of production. That means that each year we must find enough new oil to first replace those four million barrels of lost daily production before we even add enough to meet new demand. This is all the more worrisome because world oil discovery of new reserves has been slowing since the mid-20th century.
Despite this gloomy case, most of the oil establishment insists that, while oil may be harder to find, there is still plenty of it, and any peak in production is decades away. OPEC, whose member nations sit on 75% of the world's reported reserves, pooh-poohs concerns about a peak.
Earlier this year Abdallah Jum'ah, CEO of Saudi Aramco, the kingdom's national oil company, called peak oil "a myth." The multinational oil giants are only slightly less optimistic. While they acknowledge that crude is getting harder to find and produce and that so-called unconventional oil (like natural-gas liquids) will be increasingly important, they don't think a peak is imminent either. Exxon Mobil (XOM, Fortune 500) has run ads that dismiss peak oil as a far-off problem. This summer Tony Hayward, BP's (BP) chief executive, bet a peakist that oil production in 2018 will be higher than it is today. "It's unbelievable," says Simmons. "These guys don't even understand their own business."
One difficulty in assessing the situation is the lack of transparent information about oil production and reserves, particularly in OPEC countries. Back in the 1980s, after OPEC decided to base its production quotas on reserve figures, several of the cartel's producers abruptly raised their claims of "proven reserves" by 40% or more. Saudi Arabia, for instance, raised its proven-reserve figure from 170 billion barrels to about 260 billion in 1988. Amazingly, that figure has stayed more or less constant since then - even as billions of barrels have been pumped out of the ground. "We need to send in the audit troops," says Simmons regularly in his speeches. "The major oilfields of the world need to be invaded by third-party inspectors so that we can figure out how bad things are and deal with it."
A favorite target of Simmons and other peakists is Cambridge Energy Research Associates (CERA), a leading provider of supply data to the major oil companies. Led by chairman Daniel Yergin, the Pulitzer-winning author of the oil history "The Prize," CERA rejects talk of an imminent peak and advises instead that the world may reach an "undulating plateau" of production at some point in the distant future, perhaps around 2030. The firm has opened itself to criticism over the past few years by consistently predicting that oil prices would fall back, only to watch them soar.
According to Peter Jackson, a geologist and CERA's director of oil industry activity, the firm's proprietary database of some 20,000 projects shows plenty of capacity growth through at least 2020. "Our analysis just doesn't support a peak in the foreseeable future," says Jackson, who declines to discuss Simmons directly. "I would love to see a decent analysis that shows something to the contrary."
For his part, Simmons would love to get a detailed look at CERA's proprietary information. "All this undiscovered oil they talk about has by definition not been found yet," he says. "And it is as unusable as my unearned net worth. I can guarantee you that I wouldn't have had the guts to go into any bank in the world and say I'd like a loan against my unearned net worth."
Earlier this year, Simmons and other members of the Association for the Study of Peak Oil in the U.S. offered to bet CERA $100,000 that the world would not meet CERA's production forecast of 112 million barrels per day in 2017. CERA didn't respond. "I'm very cognizant of how annoying it is to be the guy saying I told you so," says Simmons, leaning forward and peering over his bifocals. "It's much better to use a bit of ridicule."
Not a preordained prophet
When Simmons gets interested in something, he goes all out. In 2005, the same year that "Twilight in the Desert" came out, Simmons self-published a book of his watercolor paintings, the fruit of 30 years of carrying his paint set wherever he traveled. He and his wife sit on the board of the National Trust for Historic Preservation, and a few years ago he funded the restoration of an old movie theater in Rockland, Maine, near his house. Simmons is also an avid book and antique collector.
It's no wonder a topic as complicated as oil would beguile him. But his path to peak-oil prophet was anything but preordained. In fact, he was raised to be a banker. He grew up in a Mormon family, the second oldest of six kids in Davis County, Utah, just north of Salt Lake City. His father, Roy, was a self-made man who in 1960 took over the struggling Zions National Bank, founded by Brigham Young, and built it into an empire. Roy always engaged his family in business discussions and even took a teenage Matt along on trips to New York to sit in on meetings. "I don't remember us sitting around the dinner table discussing who was going to win the Super Bowl or anything like that," says Harris Simmons, Matt's younger brother and current CEO of Zions Bancorporation (ZION), which has a market cap of $3.5 billion.
Simmons got his first exposure to the oil business in 1969. After graduating from Harvard Business School a couple of years earlier, he took a job writing case studies for one of his professors. (On the side he was also operating a booming business as a money manager; his clients included former Michigan governor George Romney, the father of both Mitt and Simmons's Harvard buddy Scott Romney.) That spring he traveled to Los Angeles for a case study interview and met up with his father, who was attending a conference in Palm Springs.
During a break, Simmons's father introduced him to a fellow attendee, a deep-sea diver named Lad Handelman who had been doing underwater work for the oil companies on rigs off Santa Barbara. Handelman explained that his fledgling company was growing faster than he could manage it, and he was planning to sell out. Simmons told him he should bring in new money instead. "I can help you with that," said Simmons. "Why don't we raise some capital?" The venture, Oceaneering, became one of the country's fastest-growing and most successful offshore-drilling service companies, and suddenly Simmons had a new career as an investment banker.
In 1974, Simmons moved to Houston with his younger brother L.E. to launch Simmons & Co. and take advantage of the exploding oil-services business. To get an edge over his bigger competitors from Wall Street, Simmons made it a point to learn his chosen industry inside and out. "He probably does more research than anyone I've ever seen in the energy business," says Bob Long, the CEO of offshore drilling contractor Transocean and a longtime Simmons & Co. client. "He's always been passionate about gathering and analyzing statistics." His business thrived until the mid 1980s, when oil prices crashed and, as Simmons says, the services industry "fell off a cliff." He found himself working on bankruptcies and liquidations. The fact that the experts missed the coming collapse of oil prices pushed him to study harder.
By the early 1990s, Simmons thought the industry had contracted too far and that at some point in the near future, America would be facing a new oil crisis as a result. He launched a securities business at Simmons & Co. to exploit the demand for research and trading that he envisioned in oil and gas. And at a stage in his career when most senior partners would be leaving the research to their young analysts and spending more time on the golf course, he did more and more independent research, publishing white papers for friends and clients. (He hates golf.)
In 1997 he wrote a prescient report called "China's Insatiable Energy Needs." And in 2001, when he realized there was no publicly available resource, he embarked on a study of the world's major oilfields. He found that an alarming percentage of today's oil production comes from a handful of giant fields that were mostly discovered decades ago. (Saudi Arabia's Ghawar field, by some estimates, still accounts for upwards of 6% of the world's daily output after 60 years of production.) By the time he arrived in Saudi Arabia in 2003, he began to suspect that worldwide oil production was reaching its peak.
Oil illiteracy
"John McCain is energy illiterate," Simmons is saying. "He's just witless about this stuff. As a lifelong Republican, I'm supporting Obama." A dozen oil and gas men sitting around a conference table in Lafayette, La., chuckle nervously as he continues. "McCain says, 'Oh, we're going to wean ourselves off foreign oil in four years and build 45 nuclear plants by 2030.' He doesn't have a clue."
On this humid day in early June, Simmons is visiting a gas exploration company called PetroQuest Energy. Lafayette is a hub for the Gulf Coast oil and gas industry, and Simmons is in town to give a talk at the local college this evening. But he and Mike Frazier, the CEO of Simmons & Co., have stopped off for a private visit with the PetroQuest board. After a bit of his usual sermon - "There's no end in sight to higher oil prices, unless the world economy absolutely collapses" - Simmons opens the room to questions. It's obvious that his rhetoric has surprised his hosts. But Simmons is not the sort to mince words. ("Matt is the smartest analyst I've ever seen on energy," said Frazier to me later, "but we don't always agree on everything. Including politics.")
McCain's midsummer move to begin campaigning on a platform of more offshore drilling has only hardened Simmons's position. "What a hypocrite," says Simmons, who supported McCain's rival Mitt Romney in the primary - no surprise given Simmons's history with the Romney family. "Here's a man who for at least the past 15 years has strenuously, I mean strenuously, opposed offshore drilling. And now it's 'drill, drill, drill.' And he doesn't have any idea that we don't have any drilling rigs. Or that we don't have any idea of exactly where to drill." (As for McCain's running mate, Sarah Palin, Simmons says: "She's a very colorful person, but I don't think there's a scrap of evidence that she knows anything about energy.")
For the record, Simmons has been advocating more drilling off the coast of the United States since the early 1990s, but now he says that treating it as our salvation is misguided. "I'm not saying we shouldn't do it," says Simmons. "We should, and the sooner the better. But we shouldn't think that it'll have any impact for a decade or two." The exception, he says, is the reservoir in the hotly debated Arctic National Wildlife Reserve. "ANWR," he says, "is the only place that we could drill right now and it might actually make a difference in a year or two."
As for some other currently voguish sources of fuel coming to the rescue, he's dismissive. Oil shale? "Buck Rogers stuff. It just can't work." Ethanol? "It's a joke. The numbers just don't add up."
Simmons believes that a radical change in the way we live is inevitable. "We should basically be going back to creating a village economy, so that we really reduce the energy intensity of how we live," he says. "We need bigtime conservation, not feel-good conservation. Make things where they're used. You'll end long-distance commuting, and we have the tools to do that now with webcams. Grow food locally. Grow food in your backyard. If they're not commuting, people will have time to do that."
Ocean energy
One afternoon in 2005, Simmons was sitting in his study in Maine watching waves crashing ashore when he started to think about all the potential power to tap from the ocean. "I thought to myself, Wouldn't it be fun to start an institute to study ocean energy?" he says. So he did. Sort of.
Today the sole employee of the Ocean Energy Institute is a physicist named George Hart, 62, who has spent the past 25 years working on the government's Star Wars missile defense system. (In the 1970s, at the Naval Research Laboratory in Washington, D.C., Hart helped develop the excimer laser, which is used today for tasks as varied as Lasik surgery and printing the freshness dates on Budweiser cans.) The institute doesn't yet have a headquarters, but it does have a big idea. And it doesn't involve waves.
Last spring Hart and Simmons cooked up a plan to build a floating wind-turbine farm 20 miles off the coast of Maine that they say could easily power the entire state - the equivalent of five nuclear power plants (and far enough from the coast not to be visible). The Gulf of Maine has 100 gigawatts of wind power, or 10% of U.S. daily consumption. The hope is that Maine can be an example for the rest of the country. Playing off the high profile wind-farm plan recently proposed by Simmons's buddy Boone Pickens, they're calling this idea the Pickens Plan Plus. Things appear to be moving fast. Senator Collins has thrown her support behind it.
The day after the CNBC interview, Simmons and Hart drove up to the University of Maine to visit the Advanced Engineered Wood Composites Center (AEWC), a 60,000-square-foot structural testing facility. The lab's director, Habib Dagher, is one of the world's leading experts in composite materials. He's working with Simmons and Hart to develop new windmill-blade technology.
The AEWC guys gave a presentation showing how the project could be ready by 2020. Simmons then donned a hardhat and safety glasses and got a tour of the testing floor. As it happens, the lab had already been hired by a large wind-power company to fatigue-test a prototype for a 55-meter turbine blade. A ten-meter segment of the blade was locked in a device called a hydraulic actuator - what looked like two massive steel vise grips - receiving 38,000 pounds of pressure up and down every second. "This is really incredible," Simmons announced. "I'm going to come back up here with two or three investor types I know."
On the way out, I asked Simmons if seeing the lab made his virtual institute feel more real. "Oh, yeah, very impressive," he said. "But we need to compress the time frame - 2020 is way too far out. That plan is fine assuming that we go along like we are now, and everything is okay in the world. But it's not going to be okay. We're going to need this stuff much sooner."
By Brian O'Keefe, senior editor
Fortune Magazine
Last Updated: September 22, 2008: 4:43 PM EDT