OTC: 'Marshall Plan' needed to fund OPEC members, analysts say

Saudi Arabia and other members of the Organization of Petroleum Exporting Countries may need the energy market equivalent of the post-World War II Marshall Plan to lift their growing populations above the poverty level and ensure a sound and secure energy future for the world, said a Houston investment banker at the recent Offshore Technology Conference in Houston.

"It would make sense, from a long-term planning model, for us to hope that Saudi Arabia creates the prosperity of about $15,000/capita," said Matthew Simmons, chairman and CEO of Simmons & Co. International, at a topical luncheon May 5 at OTC.

But with a growing population that's projected to reach 40 million by 2014 from 24 million today, Saudi Arabia will be able to generate a gross domestic product of $15,000/capita only "if it exports an average 6 million b/d, and oil averages $50/bbl." Otherwise, Simmons said, "They don't create the money to create prosperity."

If the US and other developed countries want to ensure "a sound and secure energy future," he said, then perhaps all third-world oil-producing countries should have higher GDPs. Like companies, countries should worry if a key supplier of a critical resource such as crude oil is insolvent, "because a key supplier who is in solvent is not a key supplier for long," Simmons said. "Sound supply chain management requires that financial returns to be fair."

OPEC members' GDP

Looking at all OPEC members, he said, "In 1982, their [total] population was 340 million people; in 1992, it was 434 million people; in 2002, it was 523 million people." Meanwhile, the group's overall GDP dropped to $1,500/person in 2002 from $1,900/ person in 1982.

Simmons questioned, "Does it really make sense to have OPEC that low?" To raise all 11 OPEC countries to an overall GDP of $15,000/person by 2015, when their total population would be almost 700 million, would require an average oil price of $182/bbl over the next 10 years, if OPEC production averages 25 million b/d as it has in the past, Simmons said. If OPEC increases its average production to 40 million b/d, the required price would drop to $105/bbl, he said.

"Could the world even afford this kind of energy cost? Instead, should we demand that OPEC stay poor because we need their oil? Or could this kind of spending perpetuate global prosperity?" Simmons asked. He noted that the Marshall Plan, named for former US Sec. of State George C. Marshall and developed to rebuild European and Asian countries after World War II "created the need for an enormous amount of money being spent, and that money being spent created the prosperity that we enjoyed for 50 years."

He said, "Safe and reliable energy is going to cost a great deal of money. And if the returns are not there, I guarantee one thing—we are not going to have safe and reliable energy."

The world's most important product today is the same as it was in 1950—reliable and abundant modern energy, Simmons said. "It would be nice if modern, reliable, and abundant energy were also affordable. But if it can't be affordable, we still have to have it," Simmons said. "It might be that affordable energy is a luxury we wasted in the era when we had cheap energy that turned out to be a really bad deal for everybody."

In the low-cost energy era of the last 20 years, Simmons said, "Many sane business activities had to be scrapped. Some of the things we had to jettison were hiring sustainable employees, paying fair prices to drill and complete wells, maintaining physical assets in top form—all great concepts. We just couldn't afford them."

Among the most critical losses was the virtual elimination of third-party reserve engineers—"a second set of bodies," he said. "And we had to jettison drilling multiple appraisal wells to test the limits of oil and gas found. We then convinced ourselves that this was okay, because new technology fortunately replaced the need to gather drill bit data. Simulated data was cheaper than drill bit [data]."

Appraisal wells, finding costs

However, Simmons noted, appraisal wells are "the other exploration gun after a wildcat [well] determines there are hydrocarbons present in the structure." Appraisal wells "told you how large the structures were, but they also told you how large they weren't. They delivered the bad news," he said.

A limited number of appraisal wells translated into limited knowledge of the find, especially when "you hadn't found the dry hole. This allowed proved reserve estimates to see through technology what people wanted to see," he said.

Under the "old system," he said, "We used to drill a new-field wildcat offshore for $30 million. We then drilled six appraisal wells for $20 million each." Under that system, a discovery of 7.5 million bbl would translate into finding costs of $20/bbl, he said.

Under the current system, Simmons said, an operator drills the discovery well but only one appraisal well for a total of $50 million. "It's now easier to say" that estimated reserves "are not 7.5 million bbl but are instead 10 million bbl. That would put finding costs at $5/bbl," he said.

"I would contend that this was probably the single biggest reason we've had a miracle drop [in finding costs] from $25-30/bbl to $5/bbl, because we just didn't spend enough money to know what we didn't have," said Simmons.

"I'm not sure we have even enough data to start addressing the question" of what future energy should cost, he said. He noted that a report issued last fall by the International Energy Agency estimated that $16 trillion would have to be spent by 2030 to expand the world's energy base, including $10 trillion for electricity and $6 trillion for oil and natural gas.

However, Simmons claimed IEA underestimated oil and gas costs "by two- to-fivefold." He said, "That real number [for oil and gas investment] should maybe not be $6 trillion but $30 trillion."

He said, "Energy prices are the only way you create energy profits. You never create energy profits by just continually reducing costs. And merely recovering your replacement costs is insufficient—you have to create profit [because] shareholders and governments want their fair shares too."