This is Julian Darley for globalpublicmedia.com, interviewing by telephone Matt Simmons of Simmons Co. International at his Houston office, May 19, 2004.
Q1: I'd like to ask you about why you have more concerns than some people about the state of the global gas supply, not just the North American natural gas supply.
There are a litany of reasons. Start with the fact that every serious long-term-energy forecast comes to the same conclusion, that natural gas needs to grow twice as fast as oil, because the whole world has finally realized that natural gas is the world's single-best source of energy; it's the most efficient, it has the least yield loss as you convert it from dry gas into usable energy; light a match and you got energy. It's the cleanest, and we now know how to transport it, either by pipeline or through cryogenic liquefaction, so you can actually get it anyplace. So the numbers on the projected demand are just absolutely enormous. What we don't have much data on is on the supply side, because the amount of analysis and data on the supply side for gas pales in comparison to what we have in oil, which isn't very good.
What worries me is that we are making the assumption in all of the proved reserves that are being batted around that that gas is actually proven-gas reserves, and a vast, vast amount of it has never seen a drill bit. In other words, they're just assumptions that those reserves are there. And the reason that there hasn't been any drilling is there has never been a transportation system, and when something is un-commercial, it doesn't tend to lend itself to people spending a lot of money to find out just how real it was, so that's my second concern, is that we might find that this vast amount of stranded gas was just an illusion.
The third reason I’m worried is that you can basically go down a list of key-gas producers by country and see very clearly that quite a few of the key-gas producer’s current supply is in decline: the United States, Canada, the U.K., Netherlands, Indonesia, Russia. Now that doesn’t mean in all those countries it will always be in decline, but it means categorically that what is now being produced is in decline. I've just rattled off 65% of the world's gas supply that is now in decline, so if you got a top line that needs to grow by even 20%, and a bottom line where 65% is in decline, and you're not even quite sure of the rate at which the decline is accelerating, and natural gas tends to always decline far faster than oil, because the heavier the oil is, the harder it is too have any fast decline, and gas is a vapor (it can decline real fast), so you add all those things up and say that we need an infinitely greater amount of data on our global-gas situation, because we didn’t see peaking in the United States in gas until 3 decades after the event happened.
Q2: That was because other things were making up for it?
Well we had what we call a gas bubble; we inhibited demand and many, many people got confused and thought we had too much supply, when in fact, we were just banning the use of gas from 1978 through 1998 or ‘97, whenever we basically finally repealed the Fuel Use Act. But what we missed was the fact that if you were following gas supply divided by the number of producing gas wells, the rate of productivity decline by well was astonishing. Then we had a funny period in the United States for about ten years when demand stayed flat at 52 Bcf [billion cubic feet] a day and no one ever even questioned why it wasn’t growing. And yet in that 52 Bcf a day, we had a series of miracles happening. First of all, we increased from 44 Bcf a day, which was the low point in 1985, all the way back to 52 Bcf by area-wide leasing in the Gulf of Mexico, 3-D Seismic and Brightspot analysis, and this kind of last great gasp of productivity in the Gulf of Mexico. Then we stayed flat for effectively a decade at 52 Bcf a day, brought on by the emergence of coal-bed methane, brought on by the emergence of tight-sand technology; brought on by the emergence, finally in 1997-98, of deep-watered gas, and then topped off by this gas coming from these remarkable high-technology wells, using hydraulic cracking that basically could produce 80-100-million-cubic feet a day and decline by up to 80% in year one. If you subtract all of those sources out as non-conventional, the conventional base, which peaked at 63 Bcf a day in 1973, is probably down to about 30 [Bcf] today. Think of it. Here is the United States with the best petroleum data, energy data on earth, and we missed the peaking by 3 decades.
Q3: And it’s still not fully admitted by people?
Oh, most people still think that tomorrow we will start to see evidence of gas supply starting to turn up, because it has to turn up.
Q4: The Gulf of Mexico is very important in this. What is your opinion or understanding
of where the Gulf of Mexico is going in terms of natural gas?
Well we finally have good data in for the first five months of 2003, because the MMS computer system got hacked and then broken, so we really haven’t had any good data in until about 3 months ago, and unless the numbers have been revised, which I haven’t heard of, what they showed is that for the first 5 months of 2003, Gulf of Mexico gas supply compared to two years before that was down 21%. If you don’t think that is a stout decline - another interesting number on the U.S. front is that the top-33 producers of U.S. gas (that are publicly-traded companies) reported an average decline of about 2.9 percent year over year, but that was a funny number, because 8 of the companies that were in the small half of the 33 actually had a combined growth of 20% (all doing acquisitions and massive amounts of drilling), so 12% of the base actually increased by 550-million-cubic feet, while 88% of the base declined by 6%. The top-4 companies, Chevron, BP, Exxon and Shell, actually declined by almost 1.1 Bcf a day - that in a year. That basically wipes out the U.S. gas production of _____ and EOG entirely, and yet, there are still people that basically think that our gas supply is going to turn around.
Q5: And they tend to be people in control?
No, they tend to be optimists.
Q6: What I mean is, they are people who are connected to policy?
Well there’s a modeling guy at the EIA [The Energy Information Administration]; he’s been doing modeling (he's a nonpartisan guy) he's been doing modeling for twenty years, and he resides in Dallas, and he's positive, because his model works.
Q7: Sounds like the way the Saudi models work.
Yeah, I mean, it’s just amazing. I was in a program one more time with him, and he just said, “Our model is really bullet proof.”
Q8: Can we just step out to the world situation again, and that one of your concerns about the world supply is with the world's largest gas reservoir, the South Pars North Field, and I know you have some reservations about that. Could you tell us about that?
Well my reservations are basically how little we know about what we think is the world's largest gas fields. And in Iran I know that they think the North Field holds 900 Trillion cubic feet of natural gas, and that’s just the Qatar border of the field. I don’t know what the reserve estimates are in South Pars, which is the north end of North Field. But in Iran’s case, they are basically counting on most of their share of that gas to be injected to prop up these very mature, fast-declining, giant-oil fields of Iran as basically kind of a tertiary recovery.
In ________they really just started producing that gas, 3,4,5 years ago. They have two producing platforms now, Alpha and ______, and there is a slight differential between the quality of gas between one platform and the other, suggesting that maybe that field isn’t really even a big homogeneous field.
Q9: A lot of fractures and a lot of smaller reservoirs?
Well I don’t know. It was just so interesting when I heard this quality differential and people that kind of understand say, “Gosh, that’s really surprising.” Well again, it gets back to this issue of reserve estimates without the drill-bit penetrations accompanying them are really, basically, pretty pie-in-the-sky estimates.
Q10: We've come back to lack of appraisal well problems.
Yeah, you know, the other interesting thing is Saudi Arabia has the 4th largest proved reservoir of gas in the world, and what they now have discovered to their horror is that all of the dry gas they thought they had turns out to be deeply entrapped in tight rocks and is very expensive to get out, so I just think, you know, what we’re sitting on is a lack of data on perhaps the world’s most important energy assumption.
Q11: And you mentioned that the Iranians were either going to or were using…
They’re spending billions of dollars to build these pipeline systems. I think two trains [natural gas processing] of North Pars is one project - I know once it gets ashore, it’s a 72-inch pipeline.
Q12: That’s South Pars, right?
Yes, South Pars gas, going to the Agha Jari field, and Agha Jari is one of the four key Iranian fields that peaked at over a million barrels a day, and is now down to about 100,000 [barrels a day], and they think that by injecting 2 to 3 billion cubic feet a day into that field that they can basically restore the oil production to 300,000 barrels a day.
Q13: That’s a very large pipeline to get that much gas in.
An enormous pipeline.
Q14: Is this being understood by world policy makers, by ____and IEA and such?
No, no.
Q15: Why do you think that is?
Well I think basically, we’ve just gone for too long assuming that data is facts.
Q16: You mentioned Russia. I mean Russia is now the world’s largest producer of natural gas. What do you think the problem for Russia is?
Well, Gazprom has 4 fields that basically accounts for about 80-85% of their gas supply. And they're all 4 in irreversible decline. These are the great fields that were discovered back in the early ‘60s. Again it’s the law of numbers, when you have 80% in decline, and you’re supposed to be growing by 30 or 40% in ten years, and they’re basically not doing any exploration.
Q17: Why do you think that is?
I think they don’t have anything that they know of to find. They think they have some massive reserves up in the Yamal Peninsula, but that’s a $70-80 billion dollar project, and Gazprom is insolvent today, so it’s really hard to do an $80-billion-dollar project. And again those are these potential reserve categories. So that’s the problem in a nutshell.
Q18: And you also have some reservations about the South American energy situation, both oil and gas?
Well they just basically have – they’re tiny energy users. Their GDP per capita is too small, and most of their energy supply has now peaked.
Q19: Including Brazil, which seems to be making some good finds.
You know what we really don’t know about Brazil is the decline rates in the first generation of their deep-water stuff, which must be now in decline, because it’s been producing too long.
Q20: And in South America, and up north as well, in South America they’re having repeated problems with drought, which are affecting the water, which affects hydroelectric, which then affects natural gas. Do you have any comment on that?
No, just the fact that it would now appear that the entire Western Hemisphere have energy problems.
Q21: And you were at a recent conference about South American energy. Did you hear anything about the Argentinean ______situation?
Well, I discussed it and someone in the audience was incensed that I mentioned the fact that Argentina has an insolvable gas crisis. And he said, “You don’t understand, we will solve this gas crisis in 2 or 3 years.” And I said, “ Well, good luck, that’s what a lot of people think about the U.S.”
Q22: And, presumably, that means Chile has an insolvable gas crisis.
Yes, because Chile has no energy.
Q23: It has a lot of reserves in terms of mineral reserves that need to be got out.
Yes, yes.
Q24: Can you say something about the way you see the North American natural gas problem developing?
Yeah, we basically in the U.S. had an urgent need to be using 90 Bcf a day by 2010, at a minimum, up from 60 [Bcf] in 2000. And we supplied 60 Bcf by getting 52 Bcf a day out of our domestic supply; 7/10 out of LNG; and 7.3 Bcf a day out of Canada. Canada is now in decline; we’re in decline. We have none of the LNG facilities that will come on stream before, at the earliest, 2010-2012, and we will be lucky if we have 40 coming out of the U.S. and 10 coming out of Canada, and expanding all 4 of the LNG facilities - I mean really lucky. So that leaves us a shortfall of 40 Bcf a day, which is 40-large-scale LNG projects in six years.
Q24: How many LNG projects would the world like to build?
The world’s counting on building 40 between now and 2020.
Q25: How much gas would that require to fill that?
Well if you want to amortize them over 30 years, you better have a 30-year supply, and since you lose 35% of well-head gas creating and transporting LNG, it means for every 1 Bcf project you need a 15 Tcf [Trillion cubic feet] of proved reserves. So if the North Field, for instance, had 900 Tcf, you could do sixty LNG projects before it’s used up.
Q26: Thank you very much that was Matt Simmons of Simmons Co. International in interview for globalpublicmedia.com on May 19, 2004.
Transcribed by Rita Wiltsie
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