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<strong>China</strong> & <strong>Energy</strong>:<br />
Two Powerful Forces That Will<br />
Unite Or Collide<br />
Institute for Geopolitics & <strong>Energy</strong> Economics<br />
Shanghai<br />
June 18, 2004<br />
Presented By:<br />
Matthew R. Simmons
Modern <strong>Energy</strong> Is<br />
The Basis For Prosperity<br />
• Oil, natural gas, coal, nuclear<br />
and hydro underpin all aspects<br />
of 21 st Century prosperity.<br />
– Clean water<br />
– Food production<br />
– High technology<br />
– Health care<br />
– Globalization and economy<br />
• No other resource is as important.<br />
• To grow and prosper modern energy must be available<br />
and reliable.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
The World’s <strong>Energy</strong> Experts Made<br />
A Big Mistake<br />
• Over the last decade, conventional<br />
energy wisdom said:<br />
– Global GDP uses less energy.<br />
– Global energy growth is slowing down.<br />
– Price to extract oil and gas will steadily fall.<br />
– “High Prices” would create surge supply<br />
and kill demand growth.<br />
– Technology will create easy access to<br />
abundant energy.<br />
• Every concept was wrong!<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
What The Experts Missed<br />
• <strong>Energy</strong> demand was about to<br />
soar because of two powerful<br />
drivers:<br />
– Prosperity (OECD)<br />
– Poverty (5 billion people<br />
using little energy)<br />
• Cost to keep oil and gas<br />
production flat was about to<br />
double.<br />
• Decline rates in too many regions was eroding spare<br />
capacity.<br />
• Technology to create energy was misunderstood.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Revisiting<br />
“<strong>China</strong>’s Insatiable <strong>Energy</strong> Needs”<br />
Early 1990’s: My skepticism of<br />
“Flattening <strong>Energy</strong><br />
Demand” grew.<br />
Mid 1990”s:<br />
My study of “per capita<br />
energy/ oil use” began.<br />
Spring 1997: My 16-day <strong>China</strong> visit<br />
awakened me to <strong>China</strong>’s<br />
real energy demand<br />
issue.<br />
Fall 1997:<br />
I completed my white<br />
paper.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
The 1997 Issues<br />
• Will <strong>China</strong>’s plan to create prosperity succeed?<br />
• If so, what will their energy<br />
mix become?<br />
– Can coal use stay so high?<br />
– Is it feasible to develop<br />
gas so fast?<br />
– Will domestic oil supply grow<br />
or stay flat?<br />
• Is it possible to expand GDP without similar growth in<br />
energy use?<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Wildest 1997 Demand Forecasts<br />
Chinese Oil Demand<br />
2005 2010 2015<br />
EIA 5.5 6.9 8.6<br />
East West Center 5.3 -- --<br />
Hydrocarbon Asia 5.0 -- --<br />
Petro Consultants 5.5 -- --<br />
<strong>China</strong> State Planning -- 6.0 10.0<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
My “Simple” 1997 <strong>China</strong> <strong>Energy</strong> Model<br />
Case 1:<br />
Case 2:<br />
4.3% compound energy growth.<br />
7.0% compound energy growth (Taiwan Experience).<br />
BOE/Day<br />
CASE 1 CASE 2<br />
2005 2015 2005 2015<br />
Coal 16,500 23,200 21,300 38,700<br />
Oil 6,345 10,000 8,200 16,800<br />
Natural Gas 1,523 3,900 2,000 6,500<br />
Total 24,365 37,100 31,500 62,000<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Access To Modern <strong>Energy</strong><br />
Is Critical to Asia<br />
• <strong>China</strong> is the leading nation in its need for reliable modern energy.<br />
Ideally it is also:<br />
– Affordable<br />
– Clean and efficient<br />
• India and “other Asia” long term energy needs are even greater<br />
than <strong>China</strong>’s:<br />
Current <strong>Energy</strong><br />
Consumption<br />
(Per Capita)<br />
<strong>China</strong> 5.8<br />
India 2.3<br />
Pakistan 2.2<br />
Bangladesh 0.7<br />
Source: BP <strong>Energy</strong> Statistics.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
What Is Happening In<br />
Global <strong>Energy</strong> (2004)<br />
• <strong>Energy</strong> “circa 2004” looks way different than<br />
a decade ago.<br />
• Or even in 1997.<br />
• Many conventional<br />
energy myths were<br />
simply illusions.<br />
• We are now entering “Unchartered <strong>Energy</strong><br />
Seas”.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
“Spare Me From Interesting Times”<br />
(Attributed to Chairman Mao)<br />
• These are “interesting energy<br />
times”.<br />
– Crude oil prices recently hit 20-year<br />
high.<br />
– Natural gas prices soared even higher.<br />
– Land rig count edges towards old<br />
2001 “record”.<br />
– Offshore drilling in Gulf of Mexico and<br />
North Sea is moribund.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Surprises Are Steadily Rising<br />
• High oil and gas prices.<br />
• Lack of visible production growth.<br />
• Low offshore drilling in GOM/North Sea.<br />
• Lack of significant jump in oil service pricing.<br />
• Strong energy demand.<br />
• Proven reserve write-downs.<br />
• Low inventories.<br />
• Little spare capacity.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Questions Are Growing<br />
• What are “fair” oil and gas prices?<br />
• What is actual shut-in supply and where?<br />
• How fast is demand growing?<br />
• When is capacity gone in:<br />
– Tankers<br />
– Refineries<br />
– Rigs<br />
• Can demand exceed daily supply?<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
The “Risk Premium” Of Oil<br />
Causes:<br />
• War in Iraq<br />
• Terrorism in Saudi Arabia<br />
• Hedge funds are “too long”<br />
• Refinery “jitters”<br />
• Gasoline tightness<br />
All will likely “end” next season.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
45<br />
40<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
Does Watching The “Price” Help?<br />
• Are current prices aberration?<br />
• Or are we into a new energy era?<br />
Crude Oil<br />
8<br />
Natural Gas<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
1991<br />
1992<br />
1993<br />
1994<br />
1995<br />
1996<br />
1997<br />
1998<br />
1999<br />
2000<br />
2001<br />
2002<br />
2003<br />
2004<br />
2004<br />
2003<br />
2002<br />
2001<br />
2000<br />
1999<br />
1998<br />
1997<br />
1996<br />
1995<br />
1994<br />
1993<br />
1992<br />
1991<br />
SIMMONS & COMPANY<br />
INTERNATIONAL<br />
$/bbl<br />
$/mcf
What Are The “S/D” Fundamentals?<br />
• S = Supply of oil is flattening out.<br />
Supply of natural gas is in decline.<br />
• D = Demand of oil and natural gas is<br />
growing too fast.<br />
• I<br />
= Inventories are too low.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Non-FSU/Non-OPEC Supply<br />
Has Flattened Out<br />
• In high price environment, non-FSU, non-OPEC<br />
supply has been flat for 5 years.<br />
– Declining production is offsetting all supply gains.<br />
– North Sea has clearly peaked.<br />
– Production growth is becoming rare.<br />
• The numbers are illuminating.<br />
Non-FSU/Non-OPEC<br />
Oil Supply<br />
Million Barrels Per Day<br />
2000 2001 2002 2003 2004E<br />
36.5 36.4 36.9 36.8 37.2<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
FSU Supply Gains Were<br />
Enormous Surprise<br />
• Growth came “out of the blue”.<br />
• Some numbers are hard to believe.<br />
• Some gains could not be sustained.<br />
• At some point, FSU demand will soar.<br />
2000 2001 2002 2003 2004E<br />
FSU Supply 7.9 8.6 9.4 10.3 11.1<br />
FSU Demand 3.7 3.7 3.5 3.6 3.8<br />
Exports 4.2 4.9 5.9 6.7 7.3<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Saudi Arabia’s Exports To<br />
OECD Never Soared<br />
• While Saudi Arabia claims it added approximately<br />
2 million b/d in 2003, little arrived in OECD.<br />
1999 2000 2001 2002 2003<br />
Dec-<br />
Feb<br />
2004<br />
2Q<br />
2003<br />
Rest<br />
Of<br />
2003<br />
OECD<br />
North America 1.51 1.63 1.70 1.60 1.82 1.48 2.16 1.71<br />
Europe 1.31 1.39 1.25 1.16 1.31 0.98 1.54 1.23<br />
Pacific 1.65 1.83 1.84 1.72 1.80 1.83 1.90 1.77<br />
Total 4.47 4.85 4.79 4.48 4.93 4.29 5.60 4.71<br />
Source: IEA Regional OECD Crude Imports by Source, May 2004.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
FSU Exports To OECD Create Questions<br />
• Could exports outside FSU have doubled<br />
without more oil coming to the OECD?<br />
2001 2002 2003 2003/2004<br />
(Dec/Jan/Feb)<br />
North America -- 0.09 0.16 0.02<br />
Europe 2.68 3.12 3.49 3.74<br />
Pacific 0.05 0.07 0.06 0.03<br />
Total 2.73 3.28 3.71 3.79<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
IEA’s Supply/Demand<br />
Revisions Are Stunning<br />
• Month-by-month “revisions” to global oil S/D<br />
are getting serious.<br />
• In last 10 months, 2004 estimated oil changes:<br />
Demand Growth: Increase of 1.6 million<br />
barrels per day<br />
Non OPEC/FSU Supply: Decrease of 0.6 million<br />
barrels per day<br />
Net Change: 2.2 million barrels per day<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Oil Demand Is Gathering Steam<br />
• “<strong>China</strong>” is the “one-line story.”<br />
• But the real story is different.<br />
1999 - 2004<br />
(mmb/d)<br />
<strong>China</strong> 2.19<br />
North America 2.13<br />
Middle East 0.94<br />
Rest of World 1.83<br />
World Oil Demand Growth 7.09<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
The Nub Of <strong>China</strong>’s <strong>Energy</strong> Use<br />
<strong>China</strong>’s<br />
Car<br />
Ownership<br />
(Thousands)<br />
1993 700<br />
2001 1,800<br />
2002 3,300<br />
2003 4,500<br />
2004 7,000+<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Has <strong>Energy</strong> Demand Become A<br />
Run-Away Train?<br />
• <strong>Energy</strong> “experts” assumed oil demand was peaking and gas demand<br />
growth would be slow.<br />
– Oil demand stayed at 66 million<br />
barrels per day for 5 years.<br />
– Warm winters stifled natural<br />
gas demand.<br />
– Developing countries’ growth<br />
was “suspect.”<br />
• <strong>Energy</strong> demand growth proved<br />
extremely durable.<br />
• Its drivers are “Poverty and Wealth”:<br />
– India 0.7 bbl oil use per person<br />
– U.S. 25.0 bbl oil use per person<br />
• Between 1994 and 2004: Growth spurt totaled 14 million barrels per day.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
World Demographics:<br />
Far More People Than "Things"<br />
7<br />
6<br />
5<br />
Is this gap permanent or about to change?<br />
4<br />
3<br />
2<br />
1<br />
0<br />
6.3 Billion<br />
People<br />
1 Billion<br />
TV Sets<br />
600 Million<br />
Cars<br />
480 Million<br />
Mobile Phones<br />
350 Million<br />
Computers<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Oil Stocks Consumed To Rectify<br />
S/D Imbalance<br />
• The OECD oil stocks cushion got consumed:<br />
– 2 nd Q 1993 66 Days<br />
– 2 nd Q 2004 51 Days<br />
Difference 15 = 15 X 48 mmb/d = 720 million<br />
• This was not “efficiency gains” but accidental.<br />
• It is equivalent to a 180,000 b/d new oilfield.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Growth In Non-OECD Demand<br />
Another Reason For Strained Stocks<br />
• The world has no oil stock data outside OECD.<br />
• But growth in oil use requires minimum levels of<br />
inventory and more “oil at sea.”<br />
• Last decade’s non-OECD/non FSU-demand growth:<br />
-----MMBL-----<br />
1994 2004<br />
Oil Demand 24.0 28.4 per day<br />
30-Days’ Supply 720 850<br />
Probable increased oil in storage = 130 Million Barrels<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
The Oil Markets Are Running<br />
Out Of Spare Capacity<br />
• Market still believes world has 2.0 to 2.5 million b/d of<br />
shut in capacity.<br />
– This is not much of an energy cushion.<br />
– There is no evidence it actually exists.<br />
• The global tanker fleet now operates at 100% most of<br />
the time.<br />
• Refineries that make the right products from available<br />
grades of crude are approximately 100%.<br />
• Our global “wiggle room” is gone.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
The Problem: A Clash Of Ages<br />
• Demand is still gathering steam:<br />
– 5.0 billion people just starting to use oil.<br />
– 1.2 billion people using more and more each day.<br />
• Oil supply is anchored by very old supply<br />
– 70+% of daily supply comes from fields found<br />
before 1970.<br />
– Giant oil fields are very old.<br />
– Young fields are very small.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
World Has An<br />
Inverted Oil Pyramid<br />
• 14 giant oil fields account for 20% of<br />
daily supply.<br />
• All these giant fields are old. Some are<br />
now ancient.<br />
• ≈ 120 oil fields produce 47% of world’s<br />
oil. (10% are new and all are small.)<br />
• Other 53% = 5,000 small to tiny<br />
oilfields.<br />
• Good gas data is not available but<br />
probably almost this old.<br />
Number Of<br />
Oilfields<br />
5,000+ Other Fields<br />
(53%)<br />
61<br />
(12%)<br />
29 (9%)<br />
12 (6%)<br />
14<br />
(20%)<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Why Oil Supply Has Flattened Out<br />
• Most companies now<br />
struggle to maintain flat<br />
oil and gas production.<br />
• Same companies are<br />
spending 2 to 3 times<br />
more CAPEX.<br />
• Most countries now face<br />
declining production.<br />
• Most new supply additional barely offset “depletion”.<br />
• The fury of depletion now eats up most new supply sources.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
56% Of Current Oil Supply<br />
Is In Decline<br />
• Growing list of key oil producers<br />
now in decline or about to begin<br />
steep decline.<br />
• Some countries declined<br />
decades ago:<br />
USA<br />
Venezuela<br />
Iran<br />
Russia<br />
Indonesia<br />
Argentina<br />
Columbia<br />
Egypt<br />
Cameroon<br />
India<br />
• Some are just beginning:<br />
Norway<br />
Oman<br />
Middle East?<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Global Natural Gas Issues<br />
Are Also Serious<br />
• Conventional wisdom assumes the<br />
globe has vast amounts of<br />
“stranded gas”.<br />
• 98% has never been properly<br />
explored.<br />
• 65% of current gas production is<br />
in decline.<br />
• LNG is growing but consumes 35%<br />
of wellhead gas to create LNG.<br />
• GTL consumes 65% of wellhead gas.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
How Secure Are Global<br />
Oil And Gas Resources?<br />
• The issues are important and complex.<br />
• The data/answers are very “fuzzy”.<br />
• Big issues include:<br />
– Amount of spare capacity:<br />
At wellhead.<br />
At point of export.<br />
At finished product levels.<br />
By type of crude.<br />
– Proved reserves:<br />
Paper barrels or real proven reserves?<br />
Independent audit or internal wish?<br />
– Amount of incremental production growth.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Proved Reserves Are Complex<br />
• Shell’s proven reserve “bombshell” exposed fuzzy<br />
nature of “proved reserves”.<br />
• Estimating proved reserve science is still an art.<br />
• Many country-by-country reserves have no support<br />
data:<br />
Billion Barrels<br />
1982 1992 2002<br />
Middle East “Proved Reserves” 369.0 661.8 685.6<br />
• No great fields found in Middle East since 1970!<br />
• Are most of these increases merely “paper barrels”?<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Proved Reserve Overstatement<br />
Might Be “Systemic”<br />
• Shell, et al., could be “tip of the ice berg”.<br />
• Root problem: Oil and gas prices were too low.<br />
– Cost cutting reduced:<br />
Skilled people<br />
Third-party “second set of eyes”<br />
Multiple appraisal wells<br />
Testing appraisal wells by:<br />
– Core samples<br />
– Flow rates<br />
• Instead, cheap “technology” saw what was there!<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Reserve “Estimators” Are Still “Seers”<br />
• 2000: “Undiscovered recoverable gas in<br />
Western Canada”.<br />
– 15.6 tcf (according to USGS)<br />
– 122 tcf (according to Canadian Gas<br />
Potential Commission)<br />
• USGS assessment of Mexico’s<br />
reserves (billion barrels oil equivalent)<br />
1998 2003<br />
Oil 49 12<br />
Natural Gas 35 6<br />
Total 84 18<br />
• Both sources are just over the border<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Does Greatest Vulnerability<br />
Reside In Middle East?<br />
• For decades, all supply/demand models have<br />
assumed Middle East oil is “inexhaustible” and cheap.<br />
• Saudi Arabia (with 90 years<br />
proven reserves and little<br />
exploration) is the inexhaustible<br />
<strong>Energy</strong> King.<br />
• Middle East oil has been the<br />
world’s most reliable supply<br />
(other than geopolitical jitters).<br />
• Everyone has assumed this cornucopia of oil lasts<br />
“forever”!<br />
• There is no data to support this belief!<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Saudi Arabia Epitomizes The Fuzzy<br />
Nature Of Middle East Oil<br />
• No country has been more important to world oil markets<br />
(1970 forward).<br />
• Five old giant oilfields have produced<br />
approximately 90% of Saudi oil.<br />
• All are old and face stiff production<br />
challenges.<br />
– Rising water cuts.<br />
– Emerging secondary gas caps.<br />
– Obsolete ability to drill vertical wells.<br />
• Saudi ARAMCO is sure the Miracle will live another<br />
50 years.<br />
– “Disruptive oilfield technology” has changed the game.<br />
– 700 billion barrels of oil in place will rise to 900 billion.<br />
• I fear this will not work.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
The Nub Of The Saudi Arabia Oil Issue<br />
• There is no data to support whether proven reserves<br />
are > 100 billion or < 260 billion.<br />
• There is no public data on field-by-field production.<br />
• Massive water drive reserve drainage will soon drain<br />
all easily producible reserves.<br />
• Once the “cheering stops”:<br />
– The cost of energy rises.<br />
– The need to drill Saudi wells rises (exponentially).<br />
– The volume per well and water per well does too!<br />
• Is this view overly pessimistic?<br />
• The world needs better data.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
It Is Time For A New Era<br />
Of <strong>Energy</strong> Transparency<br />
• <strong>Energy</strong> demand can never exceed energy supply.<br />
• Proved reserves are a concept, not a “countable<br />
piece of information”.<br />
• Decline curves are now vicious as a result of oilfield<br />
technology.<br />
• The world is badly in need of a worldwide series of<br />
“Audited <strong>Energy</strong> Annual Reports”.<br />
– Field-by-field production, well count and reserve data.<br />
– Third-party verification that the numbers are real.<br />
• Suppliers unwilling to furnish such data should be<br />
considered “a shaky energy supplier”.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Can Reform Work? Is It Too Late?<br />
• Data reform can work if vested interests take the<br />
issue seriously.<br />
• Banning the drilling bans can work if interested<br />
parties get involved and press for change.<br />
• The world needs a new form of energy to begin<br />
replacing limits to adding fossil fuel energy.<br />
• We need a “Plan B” when (or if) oil and gas<br />
production peaks (or has peaked).<br />
• Have we waited too long?<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Could <strong>Energy</strong> Ever Fail?<br />
• Is energy supply safe, reliable and cheap?<br />
• Could energy ever hit a brick wall?<br />
• <strong>Energy</strong> demand is insatiable.<br />
• <strong>Energy</strong> use will never exceed<br />
energy supply.<br />
• Most forms of energy are<br />
not fungible.<br />
• No form of energy is easily<br />
transportable.<br />
• <strong>Energy</strong> was never cheap to create.<br />
• Unstable pricing created awful energy returns.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Oil Demand Is About To<br />
Exceed Available Supply<br />
• If global demand growth<br />
continues, it will soon outstrip<br />
available supply.<br />
• Stock draws have been the<br />
biggest new oilfields.<br />
• Just in time inventory is fine<br />
until “min-op” is reached.<br />
• The system is then on “RED ALERT.”<br />
• In electricity, a blackout is necessary to cool demand.<br />
• In oil, physical shortages are “blackout equivalents.”<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
Are There Special Solutions<br />
For <strong>China</strong>?<br />
• <strong>China</strong>’s need for reliable energy in massive supply is<br />
profound.<br />
• Securing safe long-term supply is sound planning:<br />
– Eastern Siberia<br />
– Central Asia<br />
– Full exploitation of Bohai Bay<br />
• <strong>Energy</strong> Efficiency needs to<br />
be top priority.<br />
• <strong>Energy</strong> R&D is barely done today.<br />
<strong>China</strong> could become global leader.<br />
• Houston could be <strong>China</strong>’s R&D sister city.<br />
SIMMONS & COMPANY<br />
INTERNATIONAL
The World’s Biggest Questions<br />
• Can the planet work without abundant and reliable<br />
energy?<br />
• What should future energy cost?<br />
• When will fossil fuels peak?<br />
• What comes next?<br />
• Can we close the rich/poor gap?<br />
• Can we create a genuine energy central control<br />
tower/early defense system?<br />
SIMMONS & COMPANY<br />
INTERNATIONAL