CNBC: Matt Simmons Discusses a Plateauing Oil Supply with Maria Bartiromo
Posted by Prof. Goose on March 18, 2007 - 11:24am
Topic: Supply/Production
Tags: matthew simmons [list all tags]
[Video moved below the fold because of load times...]
This is from March 7, 2007. Also, if you haven't seen Matt's recent appearance on Bloomberg (where he goes into a little more depth than in this video), here is a link. Send these videos around, they're great ways to get people thinking. Hit digg, hit reddit, hit your linkfarms!
(I liked the animated derrick in the backgound, and the Blackberry interference that occurred halfway through.)
So Simmons does not invest in Exxxon; neither do I.
Look at this math:
http://select.nytimes.com/search/restricted/article?res=F60A10F73E550C7B...
"The chairman and chief executive, Rex W. Tillerson, said that Exxon planned to increase investments in oil and natural gas projects to more than $20 billion a year in the next three years, as it faces higher costs. Exxon's capital expenses have increased more than 30 percent since 2002.
Exxon expects to add one million barrels a day of oil and gas to its current production as the company starts more than 20 projects in the next three years"
So the Exxxon investment will be about $55 per barrel when the expected production eventually reaches steady state. So until then, the investment will be >$55 per barrel. Then consider that since the average price of oil in the last year was $65, just about all profits will need to be sunk back into exploratory R&D. As we always realized, the oil companies are operating on a tight margin and furiously trying to maintain an illusion that they have a viable future business model.
Sooner or later Exxon will need to transition to renewables (if they intend to stay in the energy business), as the shareholders learn the truth about depletion and peak oil. Shareholders tend to get a little touchy about the prospects of diminishing assets. Just curious WHT, you put three XXX's in Exxon, as in XXX rated oil company? Simmons was very articulate with the Money Honey and is providing a terrific service to investors.
I don't know why I did that. I was thinking about the song Joey Ramone wrote called "Maria Bartiromo".
She is a babe, I've thought that since she first joined CNBC. Intelligence, personality and looks all rolled into one. If not for peak oil, I think she would have become what Barbara Walters use to be. Too bad she's a city girl.
My metric for oil companies is market value per barrel of oil/d or per BOE/d. If you do the maths Exxon is about twice the price of BP.
could you detail your calculation (of $ 55/ bbl.)
$20 x10^9/1 x 10^6 (bpd) is $ 20,000 per bpd .
sounds like a good investment to me, if realistic.
of course you could buy wal mart at a p/e of 20 (last time i checked)
for a total of 364=20000/55 days payoff time - not to bad, it sounds like a lot of money, but 1 year payoff on a mult-bilion dollar investment, with 10-20 years production all up of that investment - there aren't too many things that scale that well
Hi ee,
That was $20bn/y for three years, so $60k per barrel/day. Article is paywalled so I don't know how much of that is gas, or whether the increase is just new-project production or net of decline on a company-wide basis. Both these points are vitally interesting of course.
Exxon was going to spend $7bn to build a 150mdb GTL plant in Qatar, which comes to about $42k per b/d; they cancelled it after the costs rose to $18bn.
This...
http://www.247wallst.com/2007/03/exxon_mobil_xom.html
...says their production is going to grow overall, but slower than previously expected.
Investment on the left side, Break-even sales on the right
$20e9/year = 1e6 (barrels/day) * 365 (days/year) * $55/barrel
$20e9 = $20e9 + small profit
But ... don't they then lack that $20 billion dollar windfall per year to invest in the future? It seems to me that they would need price to double, to $110, for them to keep on investing profits to get back their investment. Note then how this turns into a geometric progression of ever increasing costs.
The big assumption in this is that the $20B/year investment over three years only applies to those three years. They will have to repeat it after another 3 years. Does anybody honestly think they will quit making the $20B/year investment after only 3 years? The idea that the investment will last 10-20 years makes no sense from the perspective of the large delta nature of the outlay.
Exxon puts out 2.5 million barrels/day now with an estimate decline of 10% per year, see Stuart's TOD post http://www.theoildrum.com/story/2005/11/16/182053/32 :
You see, 1 million barrels per year increase compares to 2.5 * (1 - 0.9^3) = 0.68 million barrels per year for a 10% decline rate. Make the decline rate 15%, which is common for off-shore and you get 2.5 * (1 - 0.85^3) = 1 million barrels per year. Which is exactly what they are trying to get back after 3 years of investment!
This explains why we think the $60B/3years is going to be a routine reinvestment to make up for the 1 million barrel loss every 3 years due to declines. Therefore, the declines will resume after 3 years unless they put another $20B (+inflation+higher costs+making some profit) in another 3 years. I wouldn't call it quite a death spiral, but they are just running in place right now.
When you apply these types of numbers to the NOC's with their social investment needs you see things get ugly fast.
A NOC like Aramco? I suppose they subsidize everything in a place like Saudi Arabia. Can anybody even see what their financials are?
Yes like Aramco. I would think a estimate of how much of the current oil revenue is being used for social programs is not hard to find. We know for example for Mexico its basically negative. I'd guess that only a small percentage of current revenue is re-invested. Taking billions out of social programs to re-invest will I think eat up a lot of the gains from higher prices.
This can be coupled with WT export land model. The combination means that at some point the amount of money going for social programs begins to decrease. I'd say that Iran and Mexico are already in this boat. I'd not be surprised to see Venezuela join them one reason I think GW is not really messing with them right now. Venezuela because it is rapidly increasing the amount of social programs it funds and gutting its oil industry at the same time.
I've actually got nothing against Chavez trying to reinvest in Venezuela but he has set the stage for a disaster. And it could come quickly if they have another strike.
KSA I don't know. I'm not sure how to find out how they invest their oil revenue's. At some point it seems certain that all the NOC's will face peak social spending.
At some price point demand destruction/reduced supply will
result in a maximum revenue condition for the NOC's.
I think this might be the most destabilizing aspect of peak oil. You would have to run some numbers and its different for each country but you would have to guess that 5-6 years after peak oil is behind us these issues will become important. Maybe sooner in some cases like Mexico.
I found this.
http://www.country-studies.com/saudi-arabia/oil-industry.html
This is not a lot of reinvestment. I think the numbers are a bit old but you can see that as expenses increase investment must increase at the cost of social programs or the price of oil has to continue to rise steadily.
Also the oil industry itself is used as a social program.
Right... slightly more sophisticated analysis, and of course the correct one for a company that wants to continue as a going concern. So now the question arises, what is all that investment for? It's either much too high (disgorge cash to stockholders, shut up shop a few years down the line) or much too low (carry on as before). And that's before any frank symptoms of global peak production. Sorry, I'm going to have to sit down in a quiet room with pencil, paper, calculator and a very large Scotch. See ya...
ok, correct $ 60k/bpd but compared to ethanol, the figure i have heard is on the order of $ 100k to $ 150k/bpd. of course the government is subsidizing some of it (as the govt is subsidizing , and taxing, oil production).
the gtl plant, at $ 18b, would be about $ 105k per bpd (plus the value of the gas). so we can conclude that exxxon's threshold is over $60k and under $105k (plus the value of the gas) per bpd
i'm not so sure that $ 60k/bpd is a good investment or not >> 3 yr payout
incidentally, companies have been trying to evaluate the economics of that qutar gas since at least 1982.
There has been a trend towards LNG projects as LNG demand grows and the use of LPG in transportation is cheaper than the use of gasoline or diesel. There were natural gas buses in the US. Natural gas/LPG cars were used in Australia, Egypt, and elsewhere. There is a Conocco Pnillips LNG project in Qatar seeming to be going towards completion.
The Chinese calculated that they might build coal to liquids plants that could produce diesel for about 40 dollars a barrel in operating costs. They purchased some licenses. SASOL is involved.
Has anyone noticed, the math.
20 billion dollars a year for R&D. 1 million Bbls/day
times 365 times $60./Bbl equals about $21.9 billion
A nice return of about 10%. But what about reduction of other well output and cost of bringing the 1000 Bbls on line?
analt
A commenter over at reddit:
Amen brother! Get 30 more diggs people, and about 5,000 people see this video.
I notice this morning, that something we've touched on before - namely the possibility that Saudi Arabia is 70% depleted [and maybe more] is making headlines again.
http://www.urbansurvival.com/week.htm
http://graphoilogy.blogspot.com/2007/03/could-saudi-arabia-be-more-than-...
Right now on Aera's (Exxon & Shell limited partnership) Bakersfield Cali property there has been testing of a new in situ process that takes heavy oil, tar sands, vacuum bottoms, etc and turns it into light oil with an excess heat that can be applied towards steaming(no NG needed) the tar sands, heavy oil, shale, etc. If the process proves to be as cheap and clean(no solents) to implement and to produce oil from areas that weren't even reservable it should just about double the worlds reserves over night. Tar sands, tar lakes, shale, etc now become cost efficient at about $25 a barrel and makes Canada the equavalent of Saudi Arabia in reserves. There is a finite amount of oil on the planet same as drinking water but if you were told there was a cheap and simple way to convert seawater to drinking water on a huge scale it alters the supply and demand equation. Then as this "new" supply enters the market lowering the price of oil it makes alternatives seem less reasonable.Of course this just postpones the oil problem by about about 50 years and does nothing about global warming.
Matthew Simmons:
I wonder who he means by "we".
I wonder who he means by "we".
We Earthlings
Really? I don't see society looking back a year from now and and agreeing peak happened no matter how strong the evidence.
what? you don't? could you please explain why you see it that way? with references please!
I don't know that I disagree with Mark on this. Imagine if we are still hanging around 84-85 mbpd...prices will have gone up unless demand is destroyed somewhere (US recession, housing bubble, etc.). If that is the case, we'll still be on the plateau, even if KSA/Cantarell/insert your big field of choice here is declining...when you're on the plateau, you can go up or you can go down.
That's why I am starting to hate the term "peak oil." It implies a symmetric bell curve...that's not what we're gonna have due to circumstances.
Hi,
And not to mention that people may not understand the underlying cause ("peak") of different "peak" effects, even if production declines.
And even if down, "...you can go up or you can go down." And there will be many willing interpretors, most likely.
*sigh* it's late...but there's no excuse for my being that trite. :)
the term "peak oil" refers to the point where world oil SUPPLY does not meet world DEMAND. I do agree that MANY people think peak oil means "no oil".
But, you and I know, (as well as many TOD'lers) It's not the end of oil, it's the end of "easy oil". Matt Simmons is well respected, his message is strong. He has a message to convey, we are "getting it" The main stream media just isn't "gettin it". I just filled up at $2.28 a gallon. thats 14.25 cents an cup.
also, dont forget hurricane season is coming soon. May 1. Just one hurricane entering the gulf will likely disrupt production. I think by mid summer, late July, we see a hurricane mess up our mojo! and our gasoline price will go up. where? who knows. but a wild ass guess (WAG) would say $3 maybe $3.50 a gallon! Then that would be the "new" base price for the rest of the year.
throw that in the mix with subprime mortgage debacle and we are headed for a serious train wreck!
IMO the problem of tight supply is coming closer to being 'addressed' through an involuntary collapse in demand. You mention the subprime mortgage debacle, which is very close to spilling over into the Alt-A and prime sectors. IMO the trend in the stockmarket has also turned and we are on the verge of a very sharp acceleration lower. The impact on the economy is unlikely to lag far behind.
My view is that we have recently passed 'peak liquidity', and as liquidity concracts (very quickly IMO), purchasing power will decline substantially as well. I would expect prices to fall, but those lower prices to be less affordable than at present.
Collapse in demand? Leigh, demand just hit an all time high in December.
I know. IMO demand either has peaked or is peaking. We have yet to see the effect on demand that the problems brewing in the financial sector will have, but I doubt if we'll need to wait for long.
I think peak means maximum production regardless of demand. If demand goes down because of price or whatever you might have a peak that lasts for a long time. CERA calls it an "undulating plateau" but somewhere in there is a maximum.
Near San Francisco we are already paying about $3.25 a gallon.
I thought it meant the moment of maximum production rate.
Anyway, ¿how do you define "demand"? It varies with price.
But I guess I agree with you. The important moment in all this was when demand (at "reasonable prices", AKA the OPEC price band) grew over available supply, including any spare capacity in Saudi Arabia or anywhere else. The result is that oil left that price band.
So now we are out in uncharted territory. Let us hope that the photovoltaic cavalry rescues us before anything really bad happens.
I'm interested to see what kind of curve will eventually develop. Do you think it might have any impact on the rate of decline?
Lately I've been wondering if the extraction rate curve for the logging industry is asymmetrical. If so it has nothing to do with price or demand destruction. When a logistical peak is suspected the extractive industry backs off as a form of conservation. Before suspected logistical peak the thinking is 'go for it'; afterwards it is 'save some for the future'. See the green and yellow curves in
http://en.wikipedia.org/wiki/F-distribution
not that there is any connection in theory, just similar asymmetric curves.
And then there's the KSA and whether or not they can increase production this summer. I'd guess that the Saudis almost always have reserve capacity (with rare exceptions). Thus they may well increase production this summer for a couple of months to create the illusion of increasing production capacity and that they are not experiencing a geologic limit.
This may assure the oil market that all is well when actually the runner is beyond his anaerobic threshold. And perhaps the Saudis will annouce that the new floor for oil is maybe $75? and once again cut production?
In other words, increasing short-term Saudi production increases might be all about smoke and mirrors (or not).
I work in the medical field and many of my coworkers have advanced degrees. There's nary a word of a pending liquid energy emergency. Some of my friends drive 35,000 miles a year and just expect that they are going to pay through the nose for gas but that they will always be able to buy the stuff. Each time we start up the gas and push the pedal to the metal, that fossil fuel is gone forever.
B.W.
Prof. G.,
Looking back at this someday we will see a tiny few year blip against the history of mankind. Whether that blip is 1 year, 3 years, 10 years is really irrelevant. Even against the backdrop of the age of oil, a 10 year plateau would be less than 1/16th of the period we recognize as the age of oil. It may seem interminably long to those of us in the plateau but for students of history it will be a passing nod.
Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett
geewiz questions a posters disagreement with the assertion that a year from now, we will all be looking back and agreeng that this year was peak, saying ...
"what? you don't? could you please explain why you see it that way? with references please!"
-------------------------------
O.K., let me have a crack at that one.
First, I want to commend Prof. Goose on his sentence, "That's why I am starting to hate the term "peak oil." It implies a symmetric bell curve...that's not what we're gonna have due to circumstances. He then seemed to backtrack a bit in a post a short time later, accusing himself of being "trite".
Well he may be trite but he is also right. This is the argument I have made since my first days here, that being essentially "Peak what?"" and "What is peak?" So far I have seen ongoing discussion of variously, "Peak OIl", "Peak Oil and Gas", "Peak all Liquids", "Peak Conventional and Condensate", "Peak EROEI of oil extraction", and then further confusion to which I have helped add by mentioning the critical difference between "Logistical Peak" and "Geological Peak".
For someone to be able to authoritatively call Peak now, they must first tightly define what they are saying is "Peaking". Many groups have been switching and swapping back and forth between "Peak Conventional", " Peak oil and NGL" and "Peak Oil and Gas" that attempting to get a baseline to work with is now all but impossible, and this before the new catch all term "Peak all liquids" became fashionable.
As my first reference, I will give the definitive one: History. I personally would not dream of accepting a global peak until we have AT LEAST matched the 1978 to 1982 period of roughly 5 years straight down at a full fifth of production down. That's what happened then, and it was the ultimate "false peak", as oil production rebounded at a speed and to a level that had been thought until then completely impossible. The so called "Plateau" we are seeing now borders on nothing more than measurement error compared to the massive and long decline of the 1970's.
The second issue is of course whether this is a "logistical peak" or a true "geological peak". In 2006, Christophe de Margerie, the head of exploration for Total, the French oil giant, set the "peak oil now" crowd all a tingle with an interview in which he said "120 million barrels a day, never." Many in the Peak community assumed that they had found an ally, but they failed to read all of De Margerie's words.
In the Times interview De Margerie expressed no doubt at all that the oil needed was out there, so he is NOT in agreement that we are at geological peak. His perception is one of political and logistical peak, a completely different kettle of fish. In an article in 2003, Iraqi reserves alone are given by Total oil as "There might be 250 billion barrels under Iraq, good for $3 trillion." This extracted from a Forbes article July1, 2003, a fascinating long article called "The French Connection" describing the corruption of the French oil industry in Iraq, Burma, and other places, and why the stakes are so high. De Margerie was quoted throghout the article, and has no belief that the we are anywhere near peak oil on a geological basis, but is convinced that nationalism and political/logistical issues are at play, a completely different scenario than the lower 48 U.S. faced when it peaked geologically in 1970.
http://six.pairlist.net/pipermail/burmanet/20030701/000197.html
Lastly, I want to repeat some extractions I did on a post the other day, that was for all practical purposes, ignored, quoting the recent ASPO Newsletter.
As many of you may know, the ASPO holds a special place in the Peak Oil discussion. It is the intellectual home stomping ground of Colin Campbell, the heir apparent to King Hubbert as the geological sage that is most responsible for the popularity of Peak Oil and the public forum for the likes of Peak oil popularizer Kjell Aleklett. Below is an extract of the post I did the other day on TOD:
2004:
http://www.exitmundi.nl/oilproblem_2004Scenariovan_deaspoassociation_for...
(Downslope shows world producing as much oil and gas in 2045 as it did up to any year including 1967, top just barely topping 30 Gb/a at Peak before dropping to 12 Gboe in 2050 (!)
2005:
http://www.energybulletin.net/image/primer/aspo_oil_and_gas.png
(Downslope shows world producing as much oil and gas in 2045 as it did up to any year prior to 1997, top just touching 50 “Gboe” at Peak before dropping, but not coming back down to the old “projected peak” of the 2004 scenario of 30 Gb/a until 2050, or the end of the chart (!!)
2007:
http://www.aspo-ireland.org/newsletter/en/pdf/newsletter75_200703.pdf
Downslope-flatter, showing as much oil being produced in 2040 as in any year up to 2000, and then a steep “tail” drop to as much oil in 2045 as in any year up to approx. the above 1997, top now at approx 52 “Gboe” before dropping, and not coming back down to the 2005 scenario projeceted peak of 50 Gboe until approx. 2017, and now ending the chart in 2050 at approx. 32 Gboe, or 2 Gboe above the once projected “peak in 2004 scenario (only 3 years ago) of 30 Gb/a in the approx. year 2048 (!!!!!!!!!!!!)
What we now see, USING CAMPBELL'S OWN MODELS, is more oil/gas barrel equivalent being produced in 2048 in the world than was projected would EVER BE PRODUCED IN ANY YEAR in the scenario published only 4 years ago.
It absolutely staggers the imagination that such a set of data could be published, and be considered useful in any way.
NOTE: I am using only ASPO's own projections and not the words, statistics or conjecture of their detractors.
Now this would definitely be a Peak, but a completely different type of Peak than the "symmetric bell curve" that Prof. Goose took to task in his "trite post.
So, you say, what the helll does all this matter? Simply this: With each ASPO Newsletter, Peak is moved forward, Saudi/Middle East peak is moved, and most importantly, the slope of the curve on the "downslope" are modified. Right now, if we freeze the game where it is, the world will endure a downslope of about one fifth drop in production, but it will take until year 2045 to manifest itself. This is bad enough, but what it means is that we will see a drop in production of oil taking some 37 years that will roughly match the drop we saw occur in only 4 years in the 1970's on a percentage basis....and recall, in the 1970's, the U.S., Europe and Japan were far more relient on oil a percent of gross national product and even grid based electric power production. And this is not the model of some optimistic group like CERA, but instead, the model as adjusted just this last month by ASPO, at the very heart of the Peak movement.
So, will we be able to say with authority next year, that peak occured this year?
Maybe you will, but I sure won't, and I sure won't bet my retirement fund, my house or my belief in the American way of life (as much as it is hated here, I kinda' get a kick out of it!), on it. Like I said, give me a one fifth drop in production in 5 years instead of the almost 40 years as foreseen by ASPO (and that's if they don't adjust the numbers forward again, which if history is any indication, is highly unlikely), and then I will consider it.
Am I denying peak? Of course not. It will occur, the question is when. Will we be ready? Not if we don't start work now. Energy diversity and reduction of waste is a good thing, a critical issue, peak now or peak later. Am I denying the "doomer" scenarios and mass dieoff collapse scenarios? Well, I always have, and based on the numbers that even the Peakers are using now, I will continue to do so.
Thank you for your interest.
Roger Conner Jr.
Remember, we are only one cubic mile from freedom
Roger: Since you are discussing 2048, 2050, I have a question. If current trends continue, what % of world GDP will the USA contribute? A guesstimate would be 7%. Even if all the oil is around in 2048, the USA will not be able to consume 25% of it, probably more like 7%. It makes a big difference to your assumptions.