TWO ENERGY OXYMORONS:

1. ENERGY INDEPENDENCE
2. ENERGY SECURITY

Oklahoma State University Energy Symposium

Tulsa, Oklahoma
May 19, 2009

By:
Matthew R. Simmons, Chairman
Simmons & Company International
 We Live In An Insecure Energy World

■ USA is largest member of

energy insecurity club.
■ We are a country of energy
hogs.
■ Only a few states provide
energy to others.
■ Texas is an energy parasite.
■ Oklahoma is an energy
parasite, too.
 The World Is “Energy Insecure”

■ Only handful of nations

produce exportable energy.
■ These nations straddle the
poverty line.
■ If these countries ever
created a middle-class, their
energy exports would end.
■ All prosperous countries
(except Norway) are
importing energy “hogs.”
■ This applies to all fossil
fuels and nuclear power,
too.
 America Is Biggest Energy Glutton

■ We have 5% of the world‟s population.

■ We use 25% of world‟s energy.
■ U.S. daily energy use:
– Train car of coal every second
(86,400 train cars/day)
– 10,000 gallons of oil every second
(864 million gallons/day)
– 60 billion cubic feet of natural gas
(to moon and back 25 times)

■ This will not stop as USA population will “soon” be

350 million.
 Gluttony Is Also Global Problem

■ 85% of world (i.e. ≈5.7

billion people) barely use
energy.
■ Take U.S. energy
consumption and multiply it
by 4 to get the world‟s
current use.
■ Think how enormous
demand would be if
6 billion people used even
25% of the oil we consume!
Gluttony Problem Will Worsen Each Decade

■ Absent pandemic, global famine or WWIII, world‟s

population headed far higher than models assume:
– In 1960, population was 3 billion
– By 1990, population was 5 billion
– By 2000, population was 6 billion
– Current population is nearing 7 billion

■ Public policy planners assume

world will have over 9 billion
people by 2050.
■ “They woz wrong!”
■ Real number could reach 15 – 25 billion!
 All Energy Models Assume
Strong Growth In Energy Demand

■ No presumed shift in fuel mix.

■ Natural gas grows fastest.

■ Alternatives/renewables soar,
but still only a sliver.

■ Coal remains “King.”

■ Oil still transports people and

“things” forever.
Source: IEA World Energy Outlook 2008
It Is Hard To Stop Energy Demand Growth

■ Volumes too high.

■ There are no energy dikes.
■ We cannot stop population growth.
■ We cannot ban quest to escape poverty.
■ The rich also get richer.
■ Problem for U.S. is same as global
problem.
■ You cannot turn back “the clock.”
Energy Independence Is “Odd” Concept

■ Virtually every town, county, state in USA is dependent on

someone else for its energy use.

■ Every big country needs someone else‟s energy.

■ Parasites cannot exist independently.

“No Man Is An Island” – A truism in 2009.

Snapshot Of Various States‟ Energy Needs
 USA Energy Security
Morphed Into Energy Insecurity

■ “Blood and Oil” documentary details how USA foreign policy anchored
by need to insure oil supply since FDR‟s days.

■ When USA oil production U.S. Oil Imports (YTD 2008)

peaked in 1970 and gas in „000 B/D
1973, energy security turned
into energy insecurity.

■ America now more vulnerable

than Japan and China to flow
restrictions of oil, gas, coal
and uranium.

Source: EIA-DOE
“Sooner State” Is Perfect Example Of Crisis

■ The Sooner state (aka “Indian Territories”) was one of

USA‟s oldest energy providers.

■ Oil first found in 1890s.

■ Oil production peaked in

1967 @ 630,000 B/D.

■ Natural gas production

peaked in 1990 @ 2,258 MMCF/D.

■ Sooner state oil now anchored by stripper wells producing

tiny oil flows.
Sooner State Problems Not For Lack Of Trying

■ Tulsa was oil capital of world through 1968.

■ Oklahoma City pioneered offshore drilling and deep vertical
well drilling.
■ 1947: KMG drilled first offshore well.
■ 1972: Mobil drilled deepest vertical well.
■ Activity so high that Penn Square Bank failure took out
many major banks (SeaFirst, Continental Illinois, etc., etc.)
■ Sooner state‟s oil schools still among the best-of-the-best:
– Oklahoma State University
Still pioneers in
– Oklahoma University
hydrocarbon learning
– University of Tulsa
“Trail of Tears” Followed USA And Oklahoma‟s
Oil And Gas Peak

■ Once oil and gas peaked, conventional supplies went into

irreversible decline, no matter how fast the industry drilled.

■ The increased drilling sucked

out more oil and gas,
accelerating the decline.

■ The lack of ability to add more

rigs by 1981 peak boom made
problem worse.

■ And then came the 1982 “collapse.”

“Trail Of Tears Turns Into “Flood Of Red Ink”

■ No part of oil and gas system spared as oilfield depression

hit in 1982.
■ But, “epicenter/ground zero”
was Sooner state.
■ Junk yards stacked with
rigs became legendary.
■ 30 drilling fluid companies
in one Oklahoma City
building all went bust.
■ And decline of America‟s oil and gas accelerated.
 Sooner State
Had Many Great Energy Pioneers
■ Sooner pioneers weathered all the hard times.
■ Their names were “legends in their own time”:
– Dean McGee
– Senator Bob Kerr
– T. Boone Pickens
– Ardmore‟s Noble family
– Hefner family
– Halliburton
– Philips Petroleum
– Conoco
– Parker Drilling and Helmerich & Payne
– Tulsa‟s four supply house giants
– To name but a few…..
 Technology Boom Created New Hope

■ Oil service industry/drilling

contractors began experimenting
with technological revolution in
1970s:
– Ability to drill ultra-deep vertical wells
– Moving into blue water offshore oil
and gas supplies
– Enhanced oil recovery methods in
mature basins
– Horizontal drilling
– Hydraulic fracing and deep acidizing
– Multi-lateral well completions
– 3 and 4 dimensional seismic

■ All these were invented in the

1970s.
 The Inventions All Worked

■ By end of 1980s, invention successes kept best-in-class

service companies and drilling alive in worst industry-
specific depression of 20th century.
■ Simmons & Company played key role in helping many
great service company technology leaders survive.
■ Austin Chalk Play began first intense use of cracking
tight rock oil and gas formations.
■ This technique soon spread all the way to Saudi Arabia.
 “We Are Now In Foot Race Between
Technology And Depletion”
(Bill White, Deputy Energy Secretary, 1993)

■ Technological advances created monster decline rates.

■ Hydraulic fracing and
acidizing created
artificial permeability.
Observed declines
■ High initial flow rates “Natural declines”
caught everyone‟s
enthusiastic support.
■ But, the high flow rates Source: IEA World Energy Outlook 2008

barely lasted long enough to measure.

■ But, few operators took time to measure “flow rates” and
instead went to reserve booking frenzy.
Kerr-McGee‟s Initiation To Offshore Drilling
Was Remarkable “Next Act”
■ 1947: First well drilled beyond site
of land.
■ By 1990s, this evolved into
“deepwater exploration.”
■ TransWorld (once a KMG
subsidiary) became deep drilling
leader.
■ Noble Drilling became world‟s
largest offshore drilling fleet.
■ By 2000, deepwater drilling
seemed to “save the day” and
prolonged time before world‟s oil
production peaked.
 Deepwater Oil And Gas Projects
Also Failed To Stop Supply Hemorrhage

■ Number of deepwater projects soared. Gulf of Mexico

was epicenter of boom.
■ Few projects even hit peak design capacity.
■ All of these had astonishing peaks and plummeting
production declines.
 Gulf Of Mexico Now Bifurcated USA‟s
Oil Supply And Plunging Gas Flow

■ 1.4 MMB/D of oil still flows from the Gulf of Mexico:

– 31% from 2 deepwater fields
– 19% from another ≈ 20 fields
– ≈50% from ± 600 tiny fields (many were once large)

■ Gulf of Mexico natural gas

flows fell by 70% within last
5 years.
■ Abandonment liability now
probably exceeds value of
≈50% remaining oil and gas
fields.
 A Picture Is Worth A Thousand Words

16 100 60 60 10
14 50 50
12 80 8
10 60 40 40 6
8 30 30
6 40 20 4
4 20
20 10 2
2 Amberjack Auger Baldpate 10 Cognac
0 0 0 Brutus 0
0

50 100 40 60 300
40 50 250
80 30 40 200
30 60 30 150
20
20 40
Horn 10 Llano 20 100
10 Lobster/Oyster 50 Mars-Ursa
10
Hoover
20
Mtn/King 0
(GB 387) 0 0
0 0

30 30 60 50
35 45
30 25 25 50 40
25 35
20 20 40 30
20 15 25
15 30
15 20
10 10 20 15
10 Nansen Neptune Ram-Powell
5 5 10 10
5 (VK 825) Phoenix Pompano 5
0
(EB 602) 0 0 0 0
(VK 956)
 Deep Vertical Gas Wells
Were Next Great Hope
■ By mid-1990s, ultra-deep vertical wells in south Texas
ushered in new hope for growth in USA‟s gas flows.
■ 20 – 22,000 foot vertical wells produced from every
formation once they were hydrocarbon fraced.
■ Initial flow rates hit 80 – 100,000 MMCF/D, but
production plunged rapidly thereafter.
■ Within four years, south Texas boom was sucked “dry.”
■ But, some smart operators made a great deal of money
while the boom lasted.
 Then We Fell In Love With
Unconventional Natural Gas to Replace Fallen Base

■ But, deepwater gas

declines fast.
■ Conventional declines
fast.
■ Tight rocks decline
super fast.
 How Fast Does USA Natural Gas
Now Decline?
■ Over last decade, most conventional and all non-conventional
gas wells created monster decline rates.
Type of Well Typical 1st Yr. Declines Initial Production Flow
% (MMCF/D)
Conventional GOM Shelf 80 9.0
Deep GOM Shelf 20 10.0
GOM Deepwater 33 250.0
Cotton Valley 70 1.2
Piceance 70 1.2
Uintah Basin 67 1.2
Green River Basin 60 2.5
Pinedale 67 6.0
Barnett Shale 70 2.3
Fayetteville Shale 75 2.0
Woodford Shale 67 3.0
Source of U.S. Natural Gas Production
And Drilling Rig Activity
■ Six states and GOM
make up 83% of total
U.S. gas supply.
■ Conventional gas
production in all 7 areas
in decline.
■ Other areas primarily
contain “unconventional
gas plays.”
■ “Other areas” have very
few drilling rigs.
Why Do Tight Gas Wells Decline So Fast?

■ Rock is not permeable.

■ Without horizontal
wells, no flow.
■ With hydraulic fracing,
flows come too fast.
 A Picture Is Worth A Thousand Words
Unconventional Oil Drilling Increases vs. Production Declines
 These Steep First Year Declines
Created Gigantic Treadmill

America can only rely on unconventional gas plays

to keep supply flat IF…
■ Lease plays continue to move into new shale sweet
spots…
■ Abundant rigs, pumping service trucks, vacuum
trucks, etc. were limitless…
■ Water use remains “free”…
■ Gas prices stay high…
 Non-Conventional Oil And Gas
Recovery Techniques Are Real
■ Industry conquered ability to turn
“unconventional” into “useable”:
– Oil sands
– Tar sands
– Orinoco Oil
– Shale gas
– Bakken Shale Oil
– But not Utah/Colorado Kerogen Shale, yet.
■ Key participants took risks and reaped
great rewards:
– George Mitchell earned medal for cracking
Barnett Shale
– Suncor, Shell Canada earned medal for
Canadian Oil Sands
 But “Gold Medals” Do Not Create
Sustainable Energy Supplies

■ Any new energy source using vast quantities of useable

water has embedded risks.
■ Any new energy source requiring massive equipment
and manpower to create flows has embedded risks.
■ Any new energy source with high initial flows that soon
plunge is not sustainable play – at any cost.
■ Any energy source that needs exponential use of “rigs
and trucks” uses too much energy and rigs/trucks will be
scarce.
Steep Initial Production Declines Do Not
Create Sustainable Growth

■ Treadmill envisioned by Bill White materialized.

■ With even higher prices and steady increases in rigs,

pump trucks, etc., supply could grow.

■ But, if the music ever stopped…“Katie Bar the Door.”

■ We created world of musical chairs.

■ And then…The music stopped!

 Light, Sweet Oil And
Sweet Dry Gas Supply Waning
■ World will never run out of hydrocarbons.
■ We are now approaching end of having high flows of
sweet, dry gas and light, sweet oil.
■ Replacing these flows are more sour, heavier and more
toxic sources.
■ And vast amount of remaining supply is unconventional.”
■ Unconventional oil and gas is sadly “unconventional”:
– Hard to extract in high sustained flows
– Energy and water intensive to produce
– Useable flows often need heavy “treating”
 Industry‟s Workforce And Supply Chain
Infrastructure Got Old And Too Rusty

■ Twin cancers to sustainable hydro-carbon flows: Aging

workforce and rust.

■ People issue will take decades to solve.

■ Rust issue will only be

solved by rebuilding
the asset base supply
chain.

■ Cost of rebuilding will

be massive.

■ We have no blueprint yet on how to solve either problem.

 Meanwhile, Global Oil And Gas Flows
Probably Past Peak
■ Data proving global oil passing peak
is “enough to convict.”
■ It happened in 2005.
■ Key field production audit would
convict and execute.
■ Why world has not demanded such
an audit is foolish.
■ Poor natural gas data is far worse
than oil.
■ But, too many giant fields have past
peak flows.
■ Too many global new fields too sour
and never properly explored.
 Industry Needs New “Blue Print”

■ We need to know more about actual flows for all super

giant/giant oil and gas fields.
■ We need solid, transparent, decline rate data.
■ We need some idea of long-term rig/truck, manpower needs.
■ We need plan on how to build them while replacing
“clunkers.”
■ We need to understand water scarcity consequences of
meeting oil and gas demands.
■ We need to grasp “rust” issue and plan to rebuild ASAP!

Hydrocarbon‟s future does not look sustainable!

 We Need A Wake-Up Call
To End Sleepwalking

■ We need “call to arms” to prepare for post-peak flow of oil

and gas.
■ Time frame for adjustment:
5 – 7 years.
■ Delays will make crisis worse.
■ Most alternate energy
sources take too long/or
too energy intensive.
 Time…..Is Not On Our Side

■ TIME to act is NOW.

■ TIME is our only asset.
■ TIME is running out.
■ Twilight era is fast
approaching.
 Perils Of Pauline:
Walking A Tightrope Across A Chasm

■ Industry now tightly balanced between soaring decline rates

in oil and natural gas.
■ 12 months ago, drilling and service costs deemed “too
high.”
■ Manpower shortages induced labor wars.
■ Supply did not grow.
■ Now, we have laid down U.S. rigs, fired manpower, stalled
major international projects.

This is like slicing the tightrope!

 “We” Created A Prisoner‟s Dilemma
(Damned If You Do…..Damned If You Don‟t)
■ Consumers got/get mad at high energy prices.
■ Oil companies got furious with high service costs.
■ Oil and gas companies were livid as equipment shortages
worsened.
■ Service companies got mad
when customers hired their
people.
■ Then prices collapsed.
■ Then drilling collapsed.
■ Then firings began.
EVERYONE WILL LOSE NOW!
 Energy Industry Needs “Sharp” U-Turn

■ Oil and gas prices must rise fast and stay high.
■ Drilling needs to ramp up
and stay up.
■ Audits needed on all key
supply sources to begin
accurate decline models.
■ Blueprint of manpower
needs and recruitment drive
a must!
■ Rebuilding of industry‟s
rusty assets must start ASAP.
■ Oil and gas consumers need to plan on how to use less ASAP!
 SIMMONS & COMPANY
INTERNATIONAL

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to the
Energy
Industry
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