OTC: Analyst pushes plan for supply chain management

May 16, 2005
The international oil and natural gas industry needs to institute reserves data reform immediately to establish “good supply chain management” of proven reserves, said Matthew R.

The international oil and natural gas industry needs to institute reserves data reform immediately to establish “good supply chain management” of proven reserves, said Matthew R. Simmons, chairman and chief executive officer of Simmons & Co. International, a specialized Houston investment firm.

Speaking at a May 2 topical luncheon at the annual Offshore Technology Conference in Houston, Simmons urged the universal adoption of what he termed the “13 points of light” program to fully evaluate proven oil and natural gas reserves around the world. “It is interesting that possibly 90-95% of the world’s proven reserves have never been through the test of a third-party reserve audit,” he said.

For each field, Simmons wants producers to report-“hopefully each quarter”-a 5-year history of actual production and the average number of producing wells in that field in each of those 5 years. “Every producer in the world has that data. It’s the first thing that a reservoir engineer asks for when he goes in to do reservoir analysis, the first thing a bank asks for if you say, ‘I’d like to borrow on my reserves,’” he said.

Updated estimates

Simmons also wants producers to provide for each field an updated estimate of the original oil in place, an updated estimate of ultimate recoverable reserves, and an update of the field’s cumulative production at that point. “These simple 13 points, which any serious oil producer has at his fingertips, can finally allow analysts to genuinely analyze the quality of the field and how far along the productive life an individual producer really is. While there are various other data items it would also be nice to know, these 13 simple points would go a long way to uncovering that we have no big supply concerns or to expose how fragile the global supplies really are,” Simmons said.

“Such data would permit analysts to spend about an hour per field giving a rating of an A quality field, a B quality field, [or] a C quality field. It would take 30 analysts 30 days to come up with a serious estimate as to whether we have passed sustainable peak oil [production], whether it’s just ahead or off 10-15 years from now,” said Simmons.

Such a program could “light up the world with real data” on proven oil and gas reserves and is being “heavily promoted” the International Energy Agency, the United Nations, and the International Monetary Fund, he said. A big push by “interested parties” might force the program as a new disclosure standard for all publicly traded companies, said Simmons. “Governments need to force the same standard on all national oil companies,” including members of the Organization of Petroleum Exporting Countries, he said.

“The countries that don’t do it should really be branded as ‘You obviously have something to hide,’” he said.

However, Simmons said, “What’s interesting is that there doesn’t seem to be anyone in the oil and gas business that wants to do this. Saudi Aramco doesn’t want to do it, the major oil companies don’t want to do it. I can only guess that they really would not like to show what the data would show.”

Simmons noted, “Spare capacity comes in many shapes. It’s wellhead capacity. It’s oil and gas processing capacity. It’s pipeline and tanker capacity. It’s refiner capacity. It’s port capacity. It’s rig capacity. It’s project-spending capacity, that stuff that you have on your shelf to do. And it’s human resource capacity. And over the course of the last decade, all of that spare capacity has disappeared.”

A year of surprises

A list of contenders as the biggest surprises of 2005 for the oil and gas industry might include spiking prices, a languishing rig count, flattening supplies, runaway demand, vanishing spare capacity, the proven reserves controversy, the peak oil controversy, the aging work force, the scarcity of increasing technology gains, “and maybe 20 more candidates,” said Simmons.

Since last year, he said, “Oil prices went up 37.5%, natural gas prices at the Henry Hub went up 18.1%. As a result, the US rig count went up 14%; the international rig count went up 7%, the offshore rig count dropped by 3.6%, and in light of the fact that it dropped, the Gulf of Mexico jack up rig only increased 93%.”

Simmons asked, “Why was there no drilling boom? First time we’ve ever had such an incredible change in price, and we end up with 14% [gain in the] rig count in the US-that’s not a drilling boom.”

Meanwhile, the US needs to “rebuild our aging railway system and repair our aging pipeline systems,” Simmons said. “If we could levitate our pipeline system in the US out of the ground and physically inspect our 30 million b/d oil and natural gas pipeline system, I think people would pass out [from shock]. I think most of it is too far gone to maintain.”

As for industry personnel, Simmons said, “In the current mindset of the industry, a new person going in [a entry-level job] has a very high risk of being laid off. I think we’re going to have to go to a kind of no cut, no pay contracts.

Simmons leveled other criticisms at the energy industry. “Right now we are not even looking in the right areas for alternative energy. Hydrogen is not a primary form of energy, not a secondary form, it’s a tertiary form of energy,” he said.

As a possible alternative source for ethanol, Simmons recommended Switch, which “takes no nutrients out of the soil, so it saves the use of fertilizer. It grows each season up to 6 ft high. It’s harvested like hay, and it has 3-4 times the cellulose content of corn.”

Referring to how Russia’s launch of the first manmade satellite shook up the US space industry in 1957, Simmons said, “I think that when [energy] prices go high enough, and we have that Sputnik wakeup, we’re going to go on [research and development] spending the likes of which we’ve never seen, and I’ll bet you there’s a chance that within 10 years we’ll create some new forms of energy we don’t even know about.”