As oil becomes a scarce resource, the world will turn to other forms of energy. The head of a major investment bank is ahead of the curve in examining the various options.
Don Stowers Editor, OGFJ
EDITOR’S NOTE: Matthew R. Simmons is chairman and CEO of Simmons & Company International, one of the largest investment banks serving the energy industry. He is also a prominent oil industry insider, having served as energy adviser to President George W. Bush, and is a member of the National Petroleum Council and the Council on Foreign Relations. In 2005, he authored the book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, which examined oil reserve decline rates and the unreliability of Middle East oil reserves. Simmons recently sat down with Oil & Gas Financial Journal to discuss some of his ideas on energy.
OIL & GAS FINANCIAL JOURNAL: As an oil industry insider, you shocked the world with your book about declining oil reserves and the crisis you believe we are headed towards. Now, it seems more people are coming around to your view that oil production either has peaked or soon will. What do you say to those who believe we have plenty of oil and gas to meet demand for the foreseeable future?
MATT SIMMONS: Well, I hope they’re right and I’m wrong, but our research suggests otherwise. Many industry analysts are overly optimistic about how long existing fields will last and the prospects for new discoveries. They also have the view that technology will somehow extend the life of old fields and open up new sources of production – oil shale and tar sands, for example. In time this may indeed happen, but it is doubtful that technology will advance quickly enough to offset current production declines.
OGFJ: Is there anything on the horizon that could replace hydrocarbons as a primary fuel source?
SIMMONS: To answer your question properly, you really need to break it down into three parts. Is there anything to replace oil, is there anything to replace natural gas, and are there new ways to generate electricity? Those are literally three totally different problems. That’s like asking your doctor if there’s anything to combat cancer and asthma and tuberculosis.
OGFJ: Would you like me to rephrase the question then?
SIMMONS: No, no. It’s a damn good question, but the answer has three parts. On the oil front, when we strip the natural gas liquids out of oil, you are left with black crude. This effectively creates a little bit of asphalt at the bottom of the barrel. This can be refined into 98% of the liquids we use for transportation. So in answer to your question about a replacement for this, the easy and simple answer is no.
We now have a terrible tragedy on our hands with this love affair we have with ethanol. It is one of the most cruel and vicious scams you can imagine. It’s a very energy-intensive product to create, and what you end up with is a very poor source of energy. In the future, if historians go back and look at all the snake-oil energy sources we created in this era, ethanol will be right at the top.
OGFJ: But what about ethanol from sugar cane? Haven’t the Brazilians had a lot of success with this?
SIMMONS: Sugar cane works as long as you have refineries right next to the fields, and you have labor coming in by foot, and you use machetes to whack off the cane. As long as you don’t use more energy harvesting and refining the sugar cane than you create with the ethanol, you’re okay. The minute you start plowing under the sugar cane to grow a new crop, you’re in dangerous territory.
But there is some interesting work being done with other forms of energy, such as fuel from recycling centers, which is a polite term for garbage dumps. And what they’re finding is that when they sort all this stuff out, they’re really creating some good, sustainable fuels. But, at the rate the world is using energy, we could go through a hundred years of garbage in no time at all. Still, there is some excellent research going on with creating energy from switchgrass, wood chips, and a lot more. You need a certain type of enzyme to break down the cellulosity, and each of those requires a different enzyme. So DuPont and Monsanto and others are really working hard to find out how to create the right enzymes. But, for years I’ve had a cardinal rule and that rule is not to invest in a new invention until it’s been invented. So I don’t think we should bank on a great new energy source that’s yet to be invented.
OGFJ: What about other transportation fuels?
SIMMONS: Toyota recently sold its one-millionth Prius [the hybrid gasoline/battery-powered car]. That is remarkable. However, it took Toyota 10 years to sell a million Priuses, and it took them 10 years to create the Prius. And there has never been anybody in the automobile business that’s been more innovative or efficient than Toyota. But we have 900 million vehicles on the road today. If it took Toyota a decade to put just one million on the road, we have a problem. Don’t hold your breath that this is the answer either.
OGFJ: Don’t you think that things are changing more rapidly today though? General Motors recently announced it is closing down three plants that primarily build pickup trucks and large SUVs. Auto dealers have a huge inventory of these vehicles that they can’t sell even with deep discounts. People who once might have purchased a Suburban or an Expedition are now buying smaller more fuel-efficient models. All this seems to have happened as the retail price of gasoline has approached $4 a gallon.
SIMMONS: That’s true, but I think it’s going to take a long, long time before that makes a significant difference in our fuel consumption. Plus, the Chinese are now buying SUVs as a symbol of their prosperity.
We don’t have a lot of time to debate what we’re going to do because our supply of oil has either flattened out or is going flat. We have very little cushion left in our gasoline and diesel supplies around the United States. And if you’ve been noticing the aftermath of the tragedy in China [the deadly earthquake in Sichuan province], there have been massive fuel shortages, mostly in rural areas and outlying provinces. There is no cushion in China either, and lately they’ve gotten real serious about conserving energy. Most of the big stations that service trucks in Beijing, for instance, are only open two hours a day. We may not like to think about it, but this could happen in the United States, too.
OGFJ: So that’s the situation for oil. What about natural gas and electricity?
SIMMONS: This summer, they’re going to have some problems with electricity outages in the Middle East because they’re having trouble getting the infrastructure built. With all the construction going on, particularly in the Gulf states, and the need for air conditioning, they’re burning an awful lot of oil. They use oil for power generation and air conditioning, which is not a very efficient use of oil. That is going to take as much as a million barrels per day off the market. That is oil that won’t be exported, and nobody seems to be paying much attention to this change in the market.
“For years I’ve had a cardinal rule and that rule is not To invest in a new invention until it’s been invented. So I don’t think we should bank on a great new energy source that’s yet to be invented.”— Matt Simmons
Overall, you’ve got coal, which still accounts for 50% of electricity generation; nuclear, which is 20%; natural gas, 20%; hydro, about 6%; geothermal, about 2%; and everything else, about 2%. Not a single one of those is in good shape. But the one that is absolutely crazy is using our dwindling natural gas supplies to create 20% of our electricity. This is a very inefficient use of natural gas. Even worse, about a third of our electricity usage in the United States is industrial, and about two-thirds of that is using electricity to melt metals and boil liquids. Electricity is a very poor way to heat, so what we ought to do is back all of that up and save our natural gas because it is scarce. All the melting and boiling should be under the burner tip. The way we use electricity is the biggest single waste of energy in this country.
OGFJ: What about nuclear energy?
SIMMONS: I think nuclear energy will have a little bit of a comeback. It is a fabulous form of fuel, but the public soured on it after Three Mile Island. Sen. McCain gives this talk all the time that nuclear will solve all our energy needs. To that I say, Sen. McCain, nuclear generates electricity, it does not fuel automobiles. Nuclear will always be used for electricity because it is extremely water intensive. There are also very limited sources of high-quality uranium, so much of our nuclear energy now comes from reprocessed fuel rods. Some recent studies have shown that it takes the equivalent of 12 to 15 years of electricity output just to build a single 1,000-megawatt nuclear power plant.
OGFJ: So how is it that France is able to generate 80% of its electricity from nuclear plants?
SIMMONS: Because they chose to embrace nuclear many years ago when it was cheaper to build the plants, and they also standardized all their plants. They are all basically the same, whereas all our nuclear plants in the United States are basically different. However, we can’t build more than 40 or 50 more nuclear plants because we simply don’t have the yellowcake uranium that we need to fuel the plants.
What never fails to surprise me is that people tell me not to worry about running out of oil because when we do, we can just turn to nuclear energy. I get a kick out of this because nuclear can be used for generating electricity but not for transportation.
About four years ago, my wife and I went down to Puerto Rico. We were touring this beautiful, historic plantation about 15 miles outside Ponce. Some Germans came in and built this remarkable place with grinding mills – a working plantation. They diverted some water from a stream, and this little bit of water powers the entire plantation. If I hadn’t seen this for myself, I would have bet you a $1,000 that you couldn’t get enough energy out of that little stream to power a plantation.
The house we go to in Maine every summer is on the coast, and I go down and look at the tides change. There is about a 14-foot tide on this part of the coast. It occurred to me how little we know about how much energy is generated by the oceans. By the end of this summer, we hope to launch some serious initiatives on offshore energy.
OGFJ: Tidal energy?
SIMMONS: The big project we’re working on now will be the world’s biggest offshore wind farm. We’re got a team of about five people, including some PhDs from the University of Maine, who are working on the blueprint for this project. About 20 miles offshore in the Gulf of Maine, there’s about a five-by-five-mile sweet spot that is unlike any other weather pattern in the world. They believe that 95 platforms, all mounted with large five-megawatt turbines, can create enough electricity to allow Maine over a five-year time to back out entirely from heating oil. Today, about 80% of all Maine homes are heated with heating oil. We’re putting the turbines offshore because the wind blows much more steadily offshore than onshore.
Another interesting situation is that when you have electricity and ocean water, you’re only about three conversion steps away from having liquid ammonia. And liquid ammonia is a realistic candidate for replacing gasoline and diesel in the internal combustion engine.
OGFJ: What stage are these projects in now?
SIMMONS: The governor of Maine just gave a talk on this a couple of weeks ago at Bowdoin College. Some people at the University of Maine are also involved. I’m sort of the founding partner or chairman of the project. So, if we can pull this off, what we’ll be doing is far more significant than many other initiatives, and it’s being done on a shoestring.
OGFJ: Do you anticipate objections from the public or the environmental community?
SIMMONS: No. This is an area that small boats and sailors avoid because it is so rough. The wind just blows continually. These turbines would be constructed near Bowdoin College before being transported offshore, and they would hire 12,000 or 13,000 workers to build them, so this is another benefit.
The other project we’re working on is tidal power. There’s a hotel right on the beach that is elevated above the tidal surge. We plan to build a small tidal power project about the size of a coffee table right under that hotel. I’ve put up about $20,000 and the State of Maine about $50,000. It’s not very expensive, but it’s enough to provide power for the hotel and about 25 or 30 homes in the area. This is the type of thing that people could do all over the country if they put their minds to it.
So we’ve got this tiny tidal project here and a huge wind power project over there.
But the real exciting stuff relates to geothermal. This architect in Maine designs his house and drills a well down to 450 feet. Enough to heat the water up. All he wants is hot water to go through the pipes and heat his house. From all we know, the deeper you go – unless you run into some really hard rock – the temperature gets hotter.
OGFJ: When I think of geothermal, I think of geysers in Yellowstone and hot springs in Iceland. Do you have geysers in Maine?
SIMMONS: All the real energy work that has been done on geothermal to date involves geysers, but this is not the only way to utilize geothermal heat and energy. If you’re drilling to find an aquifer, then you have to fine the aquifer. But if you’re drilling to get a heat column, you can drill anyplace. If you put cold Atlantic Ocean water down your heat column, you create steam for heating houses and buildings. This is renewable and much better than heating oil.
OGFJ: So, can you bring all this together for us a bit?
SIMMONS: Well, my point is that you’ve got alternative energy folks spending millions and millions of dollars on expensive projects on the one hand, and on the other you’ve got oil and gas companies spending millions and millions of dollars on advertising to show their commitment to green, and the real solutions may be much easier and cheaper than they imagine. If all this works the way I think it can, the state of Maine will be light years ahead of everybody in utilizing alternative forms of energy.
OGFJ: So you’ve concluded there are some viable forms of alternative energy?
SIMMONS: Of course. But all of this is mostly a skunk works project. All of it is pretty much under the radar right now, although it’s starting to get a little more visible. We’ve got some very intelligent people involved in this, and what we’re doing right now is moving our scouting teams out. We’ve got a team on geothermal. We’ve got a team on offshore wind. We’ve got a team on the tidal project.
OGFJ: Haven’t I read that Matt Simmons is negative about wind energy? What is that all about?
SIMMONS: I’m not negative about wind energy. I’m negative about people who tout wind energy as the solution to our energy problems. It clearly isn’t. The problem with wind onshore is that wind over land only blows occasionally. Because of the phenomenal growth of wind energy in Texas (over 7% of our electricity is from wind turbines), we have become overly reliant on wind to furnish power to the grid here in this state. That creates a tenuous situation. And the goal is to have 20% of our power from wind energy. Well, that works just fine when the wind is blowing. But guess when the wind doesn’t blow? That’s right, in the summer – when we need more electricity than ever to air condition our homes and offices. We are setting ourselves up for failure.
OGFJ: Should we all be concerned about our carbon footprint?
SIMMONS: What we ought to be concerned about is whether we are auditing our energy usage and measuring it correctly. I’m not convinced we are. I’ve been told that to accurately measure the different gases that come out of exhaust pipes and smokestacks and so forth, you would need an extremely expensive laboratory and extremely expensive equipment to do that. So I would be willing to bet you that all these numbers that are thrown around are nothing more than computer projections. The data shows that the United States is a lot dirtier in terms of carbon emissions than Russia. Well, I’ve been to Russia, so I don’t believe the data. I think we’re just making up numbers. And in my view, Al Gore’s An Inconvenient Truth is as data free as anything I’ve ever seen.
OGFJ: Best of luck with your projects, and thanks for taking the time to talk to us.
