Matt Simmons: Oil Firms 'In Liquidation'

[Rajiv]

Matt Simmons: Oil Firms 'In Liquidation (http://www.cnbc.com/id/23794175)

includes video


Simmons' assessment of major oil companies' fate is the "grim reality," he says, of the firms even as they insist that vast potential remains from unconventional sources. Among those untapped reserves are the "tar sands" or "oil sands" of Canada — naturally occurring mixtures of earth, water and oil found largely in Alberta.

Simmons said it's "convenient" for major oil firms like Shell to book reserves, such as its oil sands project in Alberta, but doing so amounts to an exercise in “turning gold into lead” because of the vast energy and potable water resources needed there to produce low-quality oil.

The water is converted to steam to blow oil from the sands and then to melt the tar, but this still leaves low-quality oil that is later mixed with higher quality oil to finally yield synthetic crude.

The cost of Shell’s Canada oil sands project has now ballooned to $14 billion but would yield only 100,000 barrels per day — about the same as a single major well in Saudi Arabia — making it an unsure business proposition, Simmons said.

His critique is not limited to Shell though. All major oil firms, he said, are "overlooking the fact that they are actually in liquidation, their production has been in decline for several years [and] no matter how much money they intend to spend, they just can’t get ahead of their [production] decline curves. And their proven reserves are shrinking very rapidly.”

[Lukester]

The cost of Shell’s Canada oil sands project has now ballooned to $14 billion but would yield only 100,000 barrels per day — about the same as a single major well in Saudi Arabia — making it an unsure business proposition, Simmons said.

Despite this insight we still have many people in the iTulip community who genuinely believe the concerns over emerging critical declines (now occurring most notably in non-opec producers, but also a few within opec) in traditional petroleum are grossly overblown due to the "massive oil sands potential" and "massive non-traditional hydrocarbons" potential - which it is presumed will abate the emerging problem. The extraction problems in all the "alternative hydrocarbon" sources closely echo the above observation about the folly of relying heavily upon Canadian oil sands.

The idea that oil sands will replace any significant portion of global petroleum consumption in five to ten years is a bad joke. This notion is mere "opium" muffling the much needed sense of urgency that must be brought to bear upon the issue. Mega posted an excerpt to a radio interview proposing the imminence of $160 oil - imminent, as in "within 12-24 months". The radio interview is long, and a bit rambling - but the point is stunningly cogent, and probable.

We are sleepwalking into this. The "gradually boiling frog" analogy is apt, as when the water gets uncomfortably hot we still believe we are in a normal paradigm.

[GRG55]

Matt Simmons: Oil Firms 'In Liquidation (http://www.cnbc.com/id/23794175)

includes video

Matt Simmons was one of the earliest and more articulate proponents of the conventional oil production limitation thesis. His book "Twilight in the Desert" is definitely worth the time to read, even though it is a few years old now.

Having said that, Simmons frequently makes statements that border on disingenuous.


This is one that he repeats often:"...The water is converted to steam to blow oil from the sands and then to melt the tar, but this still leaves low-quality oil that is later mixed with higher quality oil to finally yield synthetic crude..."Simmons is confusing primary heavy oil production with synthetic upgrading. Oil sands bitumen (or heavy oil) hydrocarbons have lots of carbon atoms and fewer hydrogen atoms than lighter oil. This bitument is "synthetically" upgraded by a process of "breaking" the long-chain carbon bonds using vacuum distillation and heat processes (coking), and then adding hydrogen (hydrocracking) followed by additional hydrotreating steps to remove impurities like sulphur. This produces a high quality, low sulphur refinery feedstock that is in high demand and sells for a bit of a premium. The Syncrude and Suncor oil sand mining operations are integrated with synthetic upgrading facilities.

The "blending" that Simmons talks about is what the primary heavy oil producers, the ones who do not own upgrading or refining capacity, have to do. They blend natural gas liquids (field condensate) with their heavy oil to dilute it enough to be able to pump it in a pipeline to an upgrader or a refinery. The diluent is not "lost". It is recovered as finished petroleum products such as gasoline at the refinery, or recovered and recycled back to the field at upgraders.

Simmons characterization that it takes large quantities of water and energy (most in the form of natural gas) to produce and process oil sands is correct.

But he conveniently overlooks that it also takes vast quantities of water and energy to produce oil from the sands of Saudi Arabia, condition it, move it to a terminal on tidewater, ship it long distance to the USA, and refine it. Apparently it also takes one of the biggest US Navy bases (the 5th Fleet base in Bahrain), a huge USAF base in Qatar (Al Udeid), and several aircraft carrier groups - costs that Simmons apparently considers unrelated to Gulf State oil sourcing. Very curious, non?


Simmons is also correct about the "grim reality" of the magically disappearing super-major oil company. The very recent BP-TNK saga in Russia is but the latest illustration. But once again completely bypasses the real reason that companies desire long life reserves on their books."...Simmons said it's "convenient" for major oil firms like Shell to book reserves, such as its oil sands project in Alberta, but doing so amounts to an exercise in “turning gold into lead” because of the vast energy and potable water resources needed there to produce low-quality oil..."
Publicly traded petroleum companies are subject to the same Wall Street FIRE-economy influences as any other part of the economy. The reserves on the books are the primary asset of a producing company, and those reserves, and the reserve-life-index (ratio of reserves to current production), determine the "financability" of a firm...operating credit lines, that sort of thing. By acquiring a long reserve life asset like Canadian oil sands leases a company can expand its balance sheet, lever that up and use the money to drill for, say, natural gas in Colorado, or do a takeover of a smaller rival. Maybe this financial engineering isn't as "sophisticated" as CDOs and CDSs, but that's how the financial side of the game works. US companies have been at a disadvantage to foreign firms like Shell, because the SEC has some antiquated rules related to what can be recognized as reserves. The SEC is reviewing these, and at some point soon, as part of "energy security" they will relax those rules.

An investment banker like Matt Simmons knows full well why companies want oil sands reserves. He damages his credibility when he talks nonsense about "turning gold into lead". As long as the UN-IPCC and its hordes of groupies insist on flying to their luxury-resort confabs in private jets the world will need liquid hydrocarbons. As Simmons himself keeps saying "There is no magic bullet". The Canadian oil sands will be a part of the solution to the very problem that Simmons has been pounding the table on for years, global warming or no global warming.

[Lukester]

Matt Simmons was one of the earliest and more articulate proponents of the conventional oil production limitation thesis. His book "Twilight in the Desert" is definitely worth the time to read, even though it is a few years old now. Having said that, Simmons frequently makes statements that border on disingenuous. ...

He damages his credibility when he talks nonsense about "turning gold into lead". ... The Canadian oil sands will be a part of the solution to the very problem that Simmons has been pounding the table on for years, global warming or no global warming.

GRG55 - the following is in defense of Simmons integrity:

Your objections are well taken, but they do not seem to more than correct some details of what Simmons proposes, and the main thesisi he proposes is nothing hugely controversial any more amongst all of us here, right? The main thesis is merely that the scale of the coming supply growth weakening may risk being larger than many other observers (read people like Charles Vincent Gave, a proponent of "technology") anticipate.

And just small cavill of my own, but I do remember you initially posting you'd barely been able to get through reading "Twilight in the Desert"? This groundbreaking book (no-one else wrote about it before - but plenty since) has apparently gained solme merit in your eyes as discussions have progressed?

You have pointed out a few partial inaccuracies which could be committed in the course of elaborating any thesis. I have seen larger such initial inaccuracies in discussing this same energy question initially posted by the editors right here at iTulip, about which no-one felt the need to comment precisely because they were nonetheless still quite minor.

That the Canadian sands will be a part of the solution nobody is questioning - it's merely being pointed out how modest a portion of the solution they will be because this petroleum source is considerably more constrained as a mining operation than the petroleum coming out of the ground in the gulf.

That there is a hidden cost in guarding the Gulf's petroleum which Simmons does not factor in this particular discussion, and maybe it's true he does not adequately factor it anywhere, is a truism, but it does not effectively detract from Simmon's larger point, which is not that Oil Sands are singled out as the worst source, but that all sources are heading for a monumental bottleneck relative to global consumption.

These discussions therefore are all about estimations of scale, which is perhaps the trickiest part of this entire subject to pin down? And on the question of the mismatch of scale, between coming production growth and global expected demand, Simmons has been early, and spot on in his calls. This is the main point where we should "grade" Simmons work, and it appears he's getting short shrift here.

[GRG55]

GRG55 - the following is in defense of Simmons integrity:

Your objections are well taken, but they do not seem to more than correct some details of what Simmons proposes, and the main thesisi he proposes is nothing hugely controversial any more amongst all of us here, right? The main thesis is merely that the scale of the coming supply growth weakening may risk being larger than many other observers (read people like Charles Vincent Gave, a proponent of "technology") anticipate.

And just small cavill of my own, but I do remember you initially posting you'd barely been able to get through reading "Twilight in the Desert"? This groundbreaking book (no-one else wrote about it before - but plenty since) has apparently gained solme merit in your eyes as discussions have progressed?.

Perhaps your memory is better than mine, and you can point me to the posting where you think I made the statement about Simmons' book.

Here is what I said about Matt Simmons in answer to a question from metalman in a post I made back on November 12, 2007. You may find it somewhat different from your recollections, and I believe it is consistent with what I have written today on this thread.
http://www.itulip.com/forums/showthread.php?p=19793&highlight=Simmons#post19793

If you read only one book on "Peak Oil" IMO it should be Matt Simmons' "Twilight in the Desert". Not only is it a great primer on the whole situation, but after carefully building a case using primarily SPE technical publications to support his thesis about Saudi production, he did something more credible than most of the others pushing books on this - he pointed out that nobody, including himself, could be absolutely certain about his conclusions, as up-to-date confirming data from OPEC is simply not available (You know how the banks don't trust each other and won't lend each other money any more? Well that's sort of how OPEC members approach sharing information with each other.)

My problems with Simmons are the apocalyptic tone that his interviews and some of his presentation material tends to take (I am always suspicious of histrionics) and, as I posted before, I just flat disagree with his opinion about the Canadian oil sands (and perhaps his position, as I understand it, about all un-conventional oil sources). Tet, who periodically posts some really interesting stuff on iTulip, also appears diametrically opposed to my views on the oil sands (and the whole industry?) - but Lukester and I are determined to save him. ;)


You have pointed out a few partial inaccuracies which could be committed in the course of elaborating any thesis. I have seen larger such initial inaccuracies in discussing this same energy question initially posted by the editors right here at iTulip, about which no-one felt the need to comment precisely because they were nonetheless still quite minor.

That the Canadian sands will be a part of the solution nobody is questioning - it's merely being pointed out how modest a portion of the solution they will be because this petroleum source is considerably more constrained as a mining operation than the petroleum coming out of the ground in the gulf.

That there is a hidden cost in guarding the Gulf's petroleum which Simmons does not factor in this particular discussion, and maybe it's true he does not adequately factor it anywhere, is a truism, but it does not effectively detract from Simmon's larger point, which is not that Oil Sands are singled out as the worst source, but that all sources are heading for a monumental bottleneck relative to global consumption...

At the risk of re-starting this debate here's more from my Nov 12 post:

...There's no shortage of oil reserves (of all types), technology will continue to find new ways to extract the stuff, there will be alternatives developed, there will be substitution to non-hydrocarbon alternatives like nuclear (e.g. the Eurostar train), unconventional oil and natural gas sources (like GTL/LPG/CNG) will make a contribution, pricing will drive conservation measures, and, frankly, I think the most likely outcome is that we spend quite a few years fluctuating between say 85 mm and 90 mm bbls/d of total global hydrocarbon liquids, with maybe some excursions above that. People who look ahead and take steps to prepare should not have any serious problems; those that assume nothing will ever change may have a rude awakening one day.

The potential fly in the ointment, IMO, is a decline in Saudi production and exports that mimics the sort of declines we've experienced in the North Sea or Cantarell in Mexico. If that happens we're going to have real adjustment problems...

These discussions therefore are all about estimations of scale, which is perhaps the trickiest part of this entire subject to pin down? And on the question of the mismatch of scale, between coming production growth and global expected demand, Simmons has been early, and spot on in his calls. This is the main point where we should "grade" Simmons work, and it appears he's getting short shrift here.

Simmons is not getting short shrift here. His position is that the oil sands are like turning "gold to lead" and should not form any part of the solution to conventional oil production limitations. I just flat disagree with him on that point. Period.

[Lukester]

GRG55 -

Sorry to attribute comments to you which you don't recall making. I do distinctly recall one of your earliest posts when Matt Simmons was brought up, and to paraphrase, you said you 'struggled to get through the book', (because you considered to be so specious) or something to that effect.

No matter. I do take all your above quotes as a full clarification, and indeed I had not recalled them sufficiently and factored them in. I stand corrected, and emphatically appreciate your general viewpoint and expertise on the 'peak oil' question. I also trust you agree with me that we can occasionally disagree on points and still remain within a cordial debate.

[DemonD]

I will again reiterate my support in favor of the company Suncor, which will be increasing it's oil production over the next 5-10 years of the canadian oil sands, with lots of proven reserves and room for more growth in the decade after that.

In all cases (whether we have peak oil or not, whether production declines a lot or not), Suncor is a winner. If it for some reason drops below 80/share, it's a buy. I tend to believe the general thesis, that the huge integrated companies like chevron, xom, rds, and bp are not going to be able to increase output, at least in any significant way, ever again. But a smaller company that has room to grow is a fantastic way to play both the devaluation of the dollar and decreasing worldwide oil supply in an environment where oil demand will continue to rise.

Sorry if this is a bit tangential, but whenever I see this argument, I kind of just think "Well, in all cases, wouldn't an oil company with huge proven reserves that is a smaller company and will be increasing output, wouldn't that be a sure bet?" And the answer i see is that yes, it's about as close to a sure thing as I've ever seen in my (albeit young) investing career.

And yes I am long suncor, but it's one of those companies that I would like a drop in price per share so i could buy some more.

[Lukester]

Demond -

Suncor will indeed be a great investment. No argument there at all. I was only pointing out Canadian Oil Sands won't be more than a band-aid, at their peak of production, for the coming mismatch between global consumption and global production of liquid hydrocarbons. It will barely be a band-aid. But that does not preclude you making out like a bandit in the process.

[Rajiv]

This video shows some of the problems yet to be faced in the Tar Sands journey

People & Power speak to native and environmental groups, as well as government and oil industry spokespeople about the impact Alberta's oil sands development is having on the environment. (http://www.youtube.com/v/Eucr370Oz60&hl=en)

Click above to see the video