China & Energy

China & Energy:
Two Powerful Forces That Will
Unite Or Collide
Institute for Geopolitics & Energy Economics
Shanghai
June 18, 2004
Presented By:
Matthew R. Simmons

Modern Energy Is
The Basis For Prosperity
• Oil, natural gas, coal, nuclear
and hydro underpin all aspects
of 21 st Century prosperity.
– Clean water
– Food production
– High technology
– Health care
– Globalization and economy
• No other resource is as important.
• To grow and prosper modern energy must be available
and reliable.
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The World’s Energy Experts Made
A Big Mistake
• Over the last decade, conventional
energy wisdom said:
– Global GDP uses less energy.
– Global energy growth is slowing down.
– Price to extract oil and gas will steadily fall.
– “High Prices” would create surge supply
and kill demand growth.
– Technology will create easy access to
abundant energy.
• Every concept was wrong!
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What The Experts Missed
• Energy demand was about to
soar because of two powerful
drivers:
– Prosperity (OECD)
– Poverty (5 billion people
using little energy)
• Cost to keep oil and gas
production flat was about to
double.
• Decline rates in too many regions was eroding spare
capacity.
• Technology to create energy was misunderstood.
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Revisiting
“China’s Insatiable Energy Needs”
Early 1990’s: My skepticism of
“Flattening Energy
Demand” grew.
Mid 1990”s:
My study of “per capita
energy/ oil use” began.
Spring 1997: My 16-day China visit
awakened me to China’s
real energy demand
issue.
Fall 1997:
I completed my white
paper.
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The 1997 Issues
• Will China’s plan to create prosperity succeed?
• If so, what will their energy
mix become?
– Can coal use stay so high?
– Is it feasible to develop
gas so fast?
– Will domestic oil supply grow
or stay flat?
• Is it possible to expand GDP without similar growth in
energy use?
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Wildest 1997 Demand Forecasts
Chinese Oil Demand
2005 2010 2015
EIA 5.5 6.9 8.6
East West Center 5.3 -- --
Hydrocarbon Asia 5.0 -- --
Petro Consultants 5.5 -- --
China State Planning -- 6.0 10.0
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My “Simple” 1997 China Energy Model
Case 1:
Case 2:
4.3% compound energy growth.
7.0% compound energy growth (Taiwan Experience).
BOE/Day
CASE 1 CASE 2
2005 2015 2005 2015
Coal 16,500 23,200 21,300 38,700
Oil 6,345 10,000 8,200 16,800
Natural Gas 1,523 3,900 2,000 6,500
Total 24,365 37,100 31,500 62,000
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Access To Modern Energy
Is Critical to Asia
• China is the leading nation in its need for reliable modern energy.
Ideally it is also:
– Affordable
– Clean and efficient
• India and “other Asia” long term energy needs are even greater
than China’s:
Current Energy
Consumption
(Per Capita)
China 5.8
India 2.3
Pakistan 2.2
Bangladesh 0.7
Source: BP Energy Statistics.
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What Is Happening In
Global Energy (2004)
• Energy “circa 2004” looks way different than
a decade ago.
• Or even in 1997.
• Many conventional
energy myths were
simply illusions.
• We are now entering “Unchartered Energy
Seas”.
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“Spare Me From Interesting Times”
(Attributed to Chairman Mao)
• These are “interesting energy
times”.
– Crude oil prices recently hit 20-year
high.
– Natural gas prices soared even higher.
– Land rig count edges towards old
2001 “record”.
– Offshore drilling in Gulf of Mexico and
North Sea is moribund.
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Surprises Are Steadily Rising
• High oil and gas prices.
• Lack of visible production growth.
• Low offshore drilling in GOM/North Sea.
• Lack of significant jump in oil service pricing.
• Strong energy demand.
• Proven reserve write-downs.
• Low inventories.
• Little spare capacity.
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Questions Are Growing
• What are “fair” oil and gas prices?
• What is actual shut-in supply and where?
• How fast is demand growing?
• When is capacity gone in:
– Tankers
– Refineries
– Rigs
• Can demand exceed daily supply?
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The “Risk Premium” Of Oil
Causes:
• War in Iraq
• Terrorism in Saudi Arabia
• Hedge funds are “too long”
• Refinery “jitters”
• Gasoline tightness
All will likely “end” next season.
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45
40
35
30
25
20
15
10
5
0
Does Watching The “Price” Help?
• Are current prices aberration?
• Or are we into a new energy era?
Crude Oil
8
Natural Gas
7
6
5
4
3
2
1
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
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$/bbl
$/mcf

What Are The “S/D” Fundamentals?
• S = Supply of oil is flattening out.
Supply of natural gas is in decline.
• D = Demand of oil and natural gas is
growing too fast.
• I
= Inventories are too low.
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Non-FSU/Non-OPEC Supply
Has Flattened Out
• In high price environment, non-FSU, non-OPEC
supply has been flat for 5 years.
– Declining production is offsetting all supply gains.
– North Sea has clearly peaked.
– Production growth is becoming rare.
• The numbers are illuminating.
Non-FSU/Non-OPEC
Oil Supply
Million Barrels Per Day
2000 2001 2002 2003 2004E
36.5 36.4 36.9 36.8 37.2
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FSU Supply Gains Were
Enormous Surprise
• Growth came “out of the blue”.
• Some numbers are hard to believe.
• Some gains could not be sustained.
• At some point, FSU demand will soar.
2000 2001 2002 2003 2004E
FSU Supply 7.9 8.6 9.4 10.3 11.1
FSU Demand 3.7 3.7 3.5 3.6 3.8
Exports 4.2 4.9 5.9 6.7 7.3
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Saudi Arabia’s Exports To
OECD Never Soared
• While Saudi Arabia claims it added approximately
2 million b/d in 2003, little arrived in OECD.
1999 2000 2001 2002 2003
Dec-
Feb
2004
2Q
2003
Rest
Of
2003
OECD
North America 1.51 1.63 1.70 1.60 1.82 1.48 2.16 1.71
Europe 1.31 1.39 1.25 1.16 1.31 0.98 1.54 1.23
Pacific 1.65 1.83 1.84 1.72 1.80 1.83 1.90 1.77
Total 4.47 4.85 4.79 4.48 4.93 4.29 5.60 4.71
Source: IEA Regional OECD Crude Imports by Source, May 2004.
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FSU Exports To OECD Create Questions
• Could exports outside FSU have doubled
without more oil coming to the OECD?
2001 2002 2003 2003/2004
(Dec/Jan/Feb)
North America -- 0.09 0.16 0.02
Europe 2.68 3.12 3.49 3.74
Pacific 0.05 0.07 0.06 0.03
Total 2.73 3.28 3.71 3.79
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IEA’s Supply/Demand
Revisions Are Stunning
• Month-by-month “revisions” to global oil S/D
are getting serious.
• In last 10 months, 2004 estimated oil changes:
Demand Growth: Increase of 1.6 million
barrels per day
Non OPEC/FSU Supply: Decrease of 0.6 million
barrels per day
Net Change: 2.2 million barrels per day
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Oil Demand Is Gathering Steam
• “China” is the “one-line story.”
• But the real story is different.
1999 - 2004
(mmb/d)
China 2.19
North America 2.13
Middle East 0.94
Rest of World 1.83
World Oil Demand Growth 7.09
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The Nub Of China’s Energy Use
China’s
Car
Ownership
(Thousands)
1993 700
2001 1,800
2002 3,300
2003 4,500
2004 7,000+
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Has Energy Demand Become A
Run-Away Train?
• Energy “experts” assumed oil demand was peaking and gas demand
growth would be slow.
– Oil demand stayed at 66 million
barrels per day for 5 years.
– Warm winters stifled natural
gas demand.
– Developing countries’ growth
was “suspect.”
• Energy demand growth proved
extremely durable.
• Its drivers are “Poverty and Wealth”:
– India 0.7 bbl oil use per person
– U.S. 25.0 bbl oil use per person
• Between 1994 and 2004: Growth spurt totaled 14 million barrels per day.
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World Demographics:
Far More People Than "Things"
7
6
5
Is this gap permanent or about to change?
4
3
2
1
0
6.3 Billion
People
1 Billion
TV Sets
600 Million
Cars
480 Million
Mobile Phones
350 Million
Computers
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Oil Stocks Consumed To Rectify
S/D Imbalance
• The OECD oil stocks cushion got consumed:
– 2 nd Q 1993 66 Days
– 2 nd Q 2004 51 Days
Difference 15 = 15 X 48 mmb/d = 720 million
• This was not “efficiency gains” but accidental.
• It is equivalent to a 180,000 b/d new oilfield.
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Growth In Non-OECD Demand
Another Reason For Strained Stocks
• The world has no oil stock data outside OECD.
• But growth in oil use requires minimum levels of
inventory and more “oil at sea.”
• Last decade’s non-OECD/non FSU-demand growth:
-----MMBL-----
1994 2004
Oil Demand 24.0 28.4 per day
30-Days’ Supply 720 850
Probable increased oil in storage = 130 Million Barrels
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The Oil Markets Are Running
Out Of Spare Capacity
• Market still believes world has 2.0 to 2.5 million b/d of
shut in capacity.
– This is not much of an energy cushion.
– There is no evidence it actually exists.
• The global tanker fleet now operates at 100% most of
the time.
• Refineries that make the right products from available
grades of crude are approximately 100%.
• Our global “wiggle room” is gone.
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The Problem: A Clash Of Ages
• Demand is still gathering steam:
– 5.0 billion people just starting to use oil.
– 1.2 billion people using more and more each day.
• Oil supply is anchored by very old supply
– 70+% of daily supply comes from fields found
before 1970.
– Giant oil fields are very old.
– Young fields are very small.
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World Has An
Inverted Oil Pyramid
• 14 giant oil fields account for 20% of
daily supply.
• All these giant fields are old. Some are
now ancient.
• ≈ 120 oil fields produce 47% of world’s
oil. (10% are new and all are small.)
• Other 53% = 5,000 small to tiny
oilfields.
• Good gas data is not available but
probably almost this old.
Number Of
Oilfields
5,000+ Other Fields
(53%)
61
(12%)
29 (9%)
12 (6%)
14
(20%)
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Why Oil Supply Has Flattened Out
• Most companies now
struggle to maintain flat
oil and gas production.
• Same companies are
spending 2 to 3 times
more CAPEX.
• Most countries now face
declining production.
• Most new supply additional barely offset “depletion”.
• The fury of depletion now eats up most new supply sources.
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56% Of Current Oil Supply
Is In Decline
• Growing list of key oil producers
now in decline or about to begin
steep decline.
• Some countries declined
decades ago:
USA
Venezuela
Iran
Russia
Indonesia
Argentina
Columbia
Egypt
Cameroon
India
• Some are just beginning:
Norway
Oman
Middle East?
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Global Natural Gas Issues
Are Also Serious
• Conventional wisdom assumes the
globe has vast amounts of
“stranded gas”.
• 98% has never been properly
explored.
• 65% of current gas production is
in decline.
• LNG is growing but consumes 35%
of wellhead gas to create LNG.
• GTL consumes 65% of wellhead gas.
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How Secure Are Global
Oil And Gas Resources?
• The issues are important and complex.
• The data/answers are very “fuzzy”.
• Big issues include:
– Amount of spare capacity:
At wellhead.
At point of export.
At finished product levels.
By type of crude.
– Proved reserves:
Paper barrels or real proven reserves?
Independent audit or internal wish?
– Amount of incremental production growth.
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Proved Reserves Are Complex
• Shell’s proven reserve “bombshell” exposed fuzzy
nature of “proved reserves”.
• Estimating proved reserve science is still an art.
• Many country-by-country reserves have no support
data:
Billion Barrels
1982 1992 2002
Middle East “Proved Reserves” 369.0 661.8 685.6
• No great fields found in Middle East since 1970!
• Are most of these increases merely “paper barrels”?
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Proved Reserve Overstatement
Might Be “Systemic”
• Shell, et al., could be “tip of the ice berg”.
• Root problem: Oil and gas prices were too low.
– Cost cutting reduced:
Skilled people
Third-party “second set of eyes”
Multiple appraisal wells
Testing appraisal wells by:
– Core samples
– Flow rates
• Instead, cheap “technology” saw what was there!
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Reserve “Estimators” Are Still “Seers”
• 2000: “Undiscovered recoverable gas in
Western Canada”.
– 15.6 tcf (according to USGS)
– 122 tcf (according to Canadian Gas
Potential Commission)
• USGS assessment of Mexico’s
reserves (billion barrels oil equivalent)
1998 2003
Oil 49 12
Natural Gas 35 6
Total 84 18
• Both sources are just over the border
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Does Greatest Vulnerability
Reside In Middle East?
• For decades, all supply/demand models have
assumed Middle East oil is “inexhaustible” and cheap.
• Saudi Arabia (with 90 years
proven reserves and little
exploration) is the inexhaustible
Energy King.
• Middle East oil has been the
world’s most reliable supply
(other than geopolitical jitters).
• Everyone has assumed this cornucopia of oil lasts
“forever”!
• There is no data to support this belief!
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Saudi Arabia Epitomizes The Fuzzy
Nature Of Middle East Oil
• No country has been more important to world oil markets
(1970 forward).
• Five old giant oilfields have produced
approximately 90% of Saudi oil.
• All are old and face stiff production
challenges.
– Rising water cuts.
– Emerging secondary gas caps.
– Obsolete ability to drill vertical wells.
• Saudi ARAMCO is sure the Miracle will live another
50 years.
– “Disruptive oilfield technology” has changed the game.
– 700 billion barrels of oil in place will rise to 900 billion.
• I fear this will not work.
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The Nub Of The Saudi Arabia Oil Issue
• There is no data to support whether proven reserves
are > 100 billion or < 260 billion.
• There is no public data on field-by-field production.
• Massive water drive reserve drainage will soon drain
all easily producible reserves.
• Once the “cheering stops”:
– The cost of energy rises.
– The need to drill Saudi wells rises (exponentially).
– The volume per well and water per well does too!
• Is this view overly pessimistic?
• The world needs better data.
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It Is Time For A New Era
Of Energy Transparency
• Energy demand can never exceed energy supply.
• Proved reserves are a concept, not a “countable
piece of information”.
• Decline curves are now vicious as a result of oilfield
technology.
• The world is badly in need of a worldwide series of
“Audited Energy Annual Reports”.
– Field-by-field production, well count and reserve data.
– Third-party verification that the numbers are real.
• Suppliers unwilling to furnish such data should be
considered “a shaky energy supplier”.
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Can Reform Work? Is It Too Late?
• Data reform can work if vested interests take the
issue seriously.
• Banning the drilling bans can work if interested
parties get involved and press for change.
• The world needs a new form of energy to begin
replacing limits to adding fossil fuel energy.
• We need a “Plan B” when (or if) oil and gas
production peaks (or has peaked).
• Have we waited too long?
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Could Energy Ever Fail?
• Is energy supply safe, reliable and cheap?
• Could energy ever hit a brick wall?
• Energy demand is insatiable.
• Energy use will never exceed
energy supply.
• Most forms of energy are
not fungible.
• No form of energy is easily
transportable.
• Energy was never cheap to create.
• Unstable pricing created awful energy returns.
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Oil Demand Is About To
Exceed Available Supply
• If global demand growth
continues, it will soon outstrip
available supply.
• Stock draws have been the
biggest new oilfields.
• Just in time inventory is fine
until “min-op” is reached.
• The system is then on “RED ALERT.”
• In electricity, a blackout is necessary to cool demand.
• In oil, physical shortages are “blackout equivalents.”
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Are There Special Solutions
For China?
• China’s need for reliable energy in massive supply is
profound.
• Securing safe long-term supply is sound planning:
– Eastern Siberia
– Central Asia
– Full exploitation of Bohai Bay
• Energy Efficiency needs to
be top priority.
• Energy R&D is barely done today.
China could become global leader.
• Houston could be China’s R&D sister city.
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The World’s Biggest Questions
• Can the planet work without abundant and reliable
energy?
• What should future energy cost?
• When will fossil fuels peak?
• What comes next?
• Can we close the rich/poor gap?
• Can we create a genuine energy central control
tower/early defense system?
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