Miscellaneous - Harvard University

Miscellaneous - Harvard University

Harvard University Energy Lecture Cambridge, MA February 8, 2006 by Matthew R. Simmons Chairman Simmons & Company International Energy In The 21st Century Is Energys Future Sustainable? Energy Matters! Creating energy is worlds largest industrial activity ($8 $9 trillion). Modern energy underpins every cherished aspect of life.

Potable water Food production Globalization Health care advances Every aspect of technology Despite its importance, energy widely misunderstood and ignored. Crisis emerging that threatens energys future. How we got mired in this mess is important to understand. SIMMONS & COMPANY INTERNATIONAL 20th Century Was Miracle Century The best of times and the worst of times. Explosion in:

Technology Population Health Care Wealth Weapons of war Wars Could any one ever predict all this? SIMMONS & COMPANY INTERNATIONAL Ladies Home Journal 1900: Predictions For A New Century SIMMONS & COMPANY INTERNATIONAL Some Big 20th Century Miracles

That Came True Photographs sent around the world. Vehicles obsolete the horse. 150 mph trains. Airship transportation people and war. Wireless telephones allow worldwide communication. Theaters view real-time coronations and wars. Hot and cold air spigots. Etc., etc. How did these forecasters see so clearly and what made these miracles happen? SIMMONS & COMPANY

INTERNATIONAL 20th Centurys Secret To Success: Modern Energy Every significant advance in the 20th century created by modern energy: Great energy milestones: Big oil era began in 1901 Electricity replaced coal, gas and kerosene generated light Internal combustion engine created cars Middle East oil created cheap oil forever Atomic energy created free electricity Piping natural gas created miracle of energy heat Throughout 90% of 20th Century, modern energy was virtually free.

SIMMONS & COMPANY INTERNATIONAL The World Took Full Advantage Of The Energy Miracle Explosion in use of vehicles, trains and planes. Electrical appliances evolve into Silicon Valley. Suburbia created cheaper and bigger homes. The 20th century miracle primarily occurred in North America, Europe and Japan. By end of century, the miracle globalized. SIMMONS & COMPANY INTERNATIONAL

As Sixties Ended, Energys Future Was Bright $1.25 oil is 4 5 times too high. (Morris A. Adelman, Dec. 1969) Exploration had discovered new frontiers: Last giant Middle East oil field (1964 1968) Western Siberian oil and gas (1963 1968) Alaskas North Slope (1967 1968) The North Sea (1969) Atomic energy plants starting everywhere. Cheap energy seemingly was here to stay. SIMMONS & COMPANY

INTERNATIONAL The 1970s: When Energys Cheers Started To Fade 1970: USA oil supply peaks. 1973: U.S. natural gas supply peaks. October 1973 oil shock. New projects costs soar (nuclear plants, Alaskan pipeline and North Sea). Winter of 1977/1978: Natural gas crisis closes down Mid-West. 1979 had two crises: Three Mile Island brought atomic energy to a halt

Oil Shock II creates gas lines again By 1980/1981: $100 oil seemed at the front door. SIMMONS & COMPANY INTERNATIONAL Cinderellas Ball Ends At Midnight 12/31/1981 New Years Eve 1981: epic drilling boom peaked. New Years Day 1982: Rig collapse began. By 1990: Most oil and gas players were broke: 12/31/1981

US rig count declined by 90% Millions of oil field jobs lost S&L crisis all Sunbelt oriented Survivors cannibalized the industry SIMMONS & COMPANY INTERNATIONAL The Oilfield Depression Lasted Two Decades The depression bottomed out in late 1980s. By 1990, worst of excess overhangs were disappearing. Strong fearful perceptions created several phony collapses:

1992 natural gas collapse 1993 oil collapse 1997/1999 oil collapses 2001/02 oil and natural gas collapse Commodity trading created a hall of mirrors. SIMMONS & COMPANY INTERNATIONAL Energys Conventional Wisdom: 1995 - 2005 Demand growth is fickle (and it might be peaking). Technology revolution created a cheap era for oil and gas. Technology recovered more existing reserves and found easy to tap new oil and gas. Non-conventional energy era also arrived. Any return to high prices will kill demand and create new supply glut. The believers felt this passionately. SIMMONS & COMPANY

INTERNATIONAL Real Facts Disproved The New Energy Era Demand still soaring, led by China, Inc. USAs prosperity sent energy use to record highs. Technology hype was hype: Cost to drill and complete wells rose 2.5 to 3 fold Growing oil and gas production got harder Replacing reserves (post-Shell scandal) got increasingly difficult Reserve appreciation was mostly a concept 2000 2005 exploration success grew dismal: The few large finds were in awful areas Costs to develop grew 2 to 5 fold SIMMONS & COMPANY INTERNATIONAL

High Price Volatility Destroyed Price Signals Natural Gas 70 60 50 40 30 20 10 2006 2005 2004 2003 2002 2001 2000

1999 1998 1997 0 1996 1995 Long-term oil and gas prices were growing. Too many pundits thought high prices were aberrations. Many energy experts bet their reputations that energy prices would soon fall to normal levels. $/bbl

SIMMONS & COMPANY INTERNATIONAL Could We Be Entering A New Energy Era? Could end to sustainable energy supply growth be nearing? How soon could peak oil and gas arrive? How long would peak stay at a plateau. How fast could supply then decline? Is peak oil more likely than peak natural gas? These are the 21st centurys most serious questions. SIMMONS & COMPANY INTERNATIONAL Everyone Assumes Energy Demand Will Soar

EIA, IEA, World Bank and ExxonMobil all forecast: Growth in oil by 2020 2030 = 115 to 125 million barrels per day Growth in natural gas and electricity = 30 50% higher The core assumptions might be too conservative: Slow down in population growth Acceleration of energy efficiencies Emerging economies per capita energy consumption still low SIMMONS & COMPANY INTERNATIONAL Theories Abound That Peak Oil Is Distant Issue Reserve appreciation always happens.

Technology always advances. Impact of high prices kills demand and aids supply. Hard work, innovation and ingenuity solves energy problems. Proof of these theories is fuzzy. Peak gas is not on anyones radar screen. SIMMONS & COMPANY INTERNATIONAL A Few Hard Facts UK North Sea: Decline rates coverage 10 30% per year 101 oil and gas fields (1995 2000) 47 increased 47 decreased 7 unchanged *Iran, Iraq, Kuwait, Saudi Arabia, Venezuela and Nigeria

Source: BP Statistic Review Of World Energy 2001 SIMMONS & COMPANY INTERNATIONAL Data Disputes Reality Of Reserve Appreciation 40 years ago, most new discoveries grew in recovering reserves over time (3 8 times). Concept is still alive and well. Data casts doubts on validity of concept today: The North Sea (Silicon Valley of oil and gas): no proof OPECs surge in Paper Barrel Reserves: no proof Countries with irreversible declines and reserve growth: does the reserve data mean anything? SIMMONS & COMPANY INTERNATIONAL

Non-OPEC Supplies Are Approaching Peak Production Source: IEA Data SIMMONS & COMPANY INTERNATIONAL Why Has Non-OPEC Supply Been Flat? Giant old fields are scarce and old. Most new fields are small. Peak fast Decline fast 50% of non-OPEC/non-FSO supply in decline.* Another 22% are set to decline (Mexico, China and India). Russia got a second wind but might start

declining also. There is no non-OPEC shut-in supply. *USA; Argentina, Columbia, Peru, Norway, UK, Oman, Syria, Yemen, Cameroon, Egypt, Gabon and Australia. SIMMONS & COMPANY INTERNATIONAL Twilight Creates Illusions The facts about Twilight: It creates brilliant last light. You can see farther at twilight than mid-day. Darkness soon follows.

Could this be Twilight of the fossil fuel era? Is fossil fuel finite? Do we have warning light when twilight is pending? How solid is the data on fossil fuel resource base? How solid is data on producible fossil fuel? What do we know about energy cost to convert fossil fuel into usable energy? SIMMONS & COMPANY INTERNATIONAL Our Energy Road Map Is Broken Current energy data (oil, natural gas and electricity) is inconsistent, misleading and often useless. 95% of worlds proven oil and gas reserves are unaudited. Demand estimates take years to verify.

Petroleum stocks are mostly computer guesses. Field-by-field production reports (excluding North Sea) virtually non-existent. No data on decline rates. Supply data not precise. SIMMONS & COMPANY INTERNATIONAL Running Out Of Gas Is Easy With No Gauge You run out of gas by ignoring fuel gauge.

USA has no city-by-city energy gauge. World has no concept what a gauge even means. Cars run at 70 mph until they run out of gas. Energy shortages happen instantly. When shortages happen, people hoard. Hoarding intensifies the shortage. This is Energy 101 in 2006 SIMMONS & COMPANY INTERNATIONAL Running Out Of Gas Does Not Mean World Has No Gas

Two energy facts: When a car is out of gas, the issue is how far do I walk? Running out of usable inventory creates a shortage Our Current Vulnerability: We have demand growing at an unknown pace Supply is flat or declining in most regions. Many supply areas are in danger zones There are no easy supply additions left E F Money is no object, scarcity in good projects SIMMONS & COMPANY INTERNATIONAL The World Is Entering A Peak For Oil And Gas

Optimists have no meaningful facts to bolster enthusiasm. Peaking of usable oil and gas is either: Approaching front door Knocking at the worlds door Now inside the house Denial has created an awful global crisis. Denying peaking of modern energy creates the ultimate crisis. SIMMONS & COMPANY INTERNATIONAL Once Middle East Oil Peaks, World Oil Has Peaked

Kuwait, Iraq, Iran, Oman, Yemen, Syria and Jordan have already peaked. UAE and Qatar are too small to matter. Saudi Arabia is all that matters. Can Saudi Arabia: Grow to 15 25 million barrels per day? Increase sustained supply to 12 million barrels per day? Sustain 8 9 million barrels per day? Safely produce 5 million barrels by 2020? SIMMONS & COMPANY INTERNATIONAL Some Saudi Arabian Energy Facts

5 old super giant oil fields have produced 90% of its oil. 3 other giant fields make up most of the balance. All their producing fields are mature, have depleted their highest quality oil and face serious water maintenance and corrosion problems. All new projects are complex oil structures that never worked in 1970s era. 35 years of intense exploration found little new oil. SIMMONS & COMPANY INTERNATIONAL Saudi Arabias Oil Sweet Spot Was Deep But Geographically Small

North Ghawar (25 x 12 miles) produced 80% of Ghawars peak oil. North Ghawar, Abqaiq and Berri were best of the worlds best. Collectively, they produced peak oil of 7 million barrels per day The ring road fits into Utahs Great Salt Lake The rest of Saudis oil gets more complex to produce or contains less valuable oil. Hundreds of small fields undoubtedly exist but will never replace the oil field King,

Queens and Lords. Great Salt Lake Saudi Arabias Oil Fields SIMMONS & COMPANY INTERNATIONAL Burgan Is Exhausted: Is The Canary Now Singing? November 2005: Burgan, the worlds second largest oil field, having produced 2 million barrels per day for 6 decades, is exhaustedby reducing production to 1.7 million barrels per day we hope this sustains production for decades to come. (Media quote by Chairman of Kuwait Petroleum Company) January 2006: PIW reports that Kuwaits real proven reserves are 45 billion barrels. Is this the coal mine canarys first chirp?

SIMMONS & COMPANY INTERNATIONAL Peaking Of Natural Gas Is A More Critical Issue Natural gas reserve data very sketchy (worse than oil). Natural gas, a vapor, declines faster than oil. Too many key gas producing regions/key fields in decline. USA Western Siberia Canada United Kingdom

Indonesia Too many future sources are barely drilled: Saudi Arabias non-associated gas Qatar and Irans North Field/South Pars Too many exploration basins are undrilled: Arctic gas Most deepwater regions SIMMONS & COMPANY INTERNATIONAL Unconventional Oil Resources Are Vast (And Difficult) Current IEA estimates assume 6 trillion barrels of heavy oil and bitumen. Two trillion may ultimately be recoverable.

Production and processing costs have fallen significantly. In Canada it currently takes 30 cubic meters to heat heavy oil and 15 cubic meters to upgrade, using 4 7 barrels energy for every usable barrel created. Source: 2005 IEA Resources to Reserve, Chapter 3: Heavy Oil SIMMONS & COMPANY INTERNATIONAL Non-Conventional Gas Resources Also Hard To Utilize Coal bed methane has low permeability. Fluids do not easily flow.

Tight gas comes from rocks with extremely low permeability. Methane Hydrates are thought to be most abundant source of hydrocarbon on earth. Little is known about quantities Limited scientific knowledge on how to explore or produce Source: EAS resources to reserves 2000 SIMMONS & COMPANY INTERNATIONAL If Peaking Of Energy Is Real, Be Prepared Mitigating peaking of modern energy will be an unprecedented global challenge. Fixing the problem takes between 7 years and up to 50 years.

Starting ahead of the problem has no downside risk. Ignoring the crisis until it is in full bloom will make USAs two worst mistakes seem modest: The Civil War World War II It is time to take the crisis seriously before it is too late. SIMMONS & COMPANY INTERNATIONAL What Happens Once Fossil Fuel Supply Peaks? When oil or natural gas peaks, fossil fuel use will soon decline. Current world blue print envisions a 2020 2030

world. Using 115 130 million barrels per day of oil 30 50% more natural gas and electricity By 2020, world might be lucky to supply 80% of current oil and gas use. The gap between demand and use is The Crisis. SIMMONS & COMPANY INTERNATIONAL Options On Dealing With The Gap When demand far exceeds supply, options are: Bullies get first in line Governments allocate supply Stakeholders create solutions to crisis before crisis is terminal

We have the choice on which box we vote. SIMMONS & COMPANY INTERNATIONAL How We Solve Peak Oil We reduce transportation intensity of oil: Shipments of goods by truck becomes train to boat Liberation of employees to work close to home End 9 5 check in Begin era of pay by productivity Grow food locally: End era of ornamental food Reverse globalization: make things at home SIMMONS & COMPANY INTERNATIONAL

Oil Prices Need To Soar $65 oil is $.10 a cup. High prices do not kill economies. What should we do with high oil price era? Rebuild the energy infrastructure Create an OPEC middle class Unlock R & D era for new energy source High energy prices are salvation. Low energy prices are a curse. SIMMONS & COMPANY

INTERNATIONAL Creating An OPEC Middle Class Is Vital OPEC nations have vast population of poor people. Using high energy prices to eradicate poverty creates OECD prosperity. It can be a Marshal Plan. The grim facts: SIMMONS & COMPANY Source: Economist Country Profile INTERNATIONAL Solving Peak Natural Gas Is Tough

Natural gas is the only efficient source of instant heat. Premium natural gas also has low emissions. Natural gas should not be used to create: Usable heavy oil Electricity Until new heat source is invented, natural gas will be scarce. Natural gas is the worlds most precious energy source. SIMMONS & COMPANY

Source: Economist Country Profile INTERNATIONAL Lets Win One For Rick Smalley Richard Smalley had an energy vision. It was rooted in fear about peak oil and natural gas. If we win an energy victory, we avoid an energy crisis. If we ignore the issue, we will live in a far darker world. HUMANITYS TOP TEN PROBLEMS FOR THE NEXT 50 YEARS 1. Energy

2. Water Food Environment Poverty Terrorism and War Disease Education Democracy Population 3. 4. 5. 6. 7. 8. 9. 10. SIMMONS & COMPANY INTERNATIONAL Twilight Can Turn Into A New Dawn

Twilight creates illusion of light getting stronger. Twilight then fades into a dark night. It is always darkest before dawn. If we solve our energy crisis, the 21st century will be our greatest dawn. If we fail, we will have a dark future. SIMMONS & COMPANY INTERNATIONAL Harvard Has Important Role In This Pending Crisis

Issues raised by peaking of fossil fuels cuts across every school with the University. Harvards Academic and Moral Authority can change attitudes, create better facts and set agenda for a better world. Energy matters. Thus, Harvards role is critically important. SIMMONS & COMPANY INTERNATIONAL Harvards Energy Challenge Pending energy crisis creates unforeseen challenges impacting each of Harvards diverse schools.

Economic impact could challenge viability of Harvards financial resources. Faculty of Arts and Sciences Faculty of Medicine Faculty of Business School Graduate School of Design Harvard Divinity School Graduate School of Education Radcliffe Institute for Advanced Study

John F. Kennedy Harvard School of Public Health School of Government SIMMONS & COMPANY INTERNATIONAL SIMMONS & COMPANY INTERNATIONAL Investment to the Energy Bankers Industry For information and/or copies regarding this presentation, please contact Laura Russell at (713) 546-7351 or [email protected] This presentation will also be available on our website www.simmonsco-intl.com within seven business days.

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