Some of us have talked for years of the possibility that natgas production may not decline gradually but 'fall off a cliff'. These ideas have been dismissed as loony tunes by many oil economists. Now even some gas industry tyros say they may be coming true.
Speculating about crisis is one thing; seeing it happen another: but something has gone seriously wrong with the US natural gas production system in just the past year. Even energy corps like Enron seem a little surprised. Despite heroic efforts and a near 200% increase in drilling, US natgas production stays obstinately flat and shows signs of decline; meanwhile the electricity utilities have embarked on a massive programme of electric-generator construction, which is costing up to $200bn in the next 3 years alone and will require a 25% increase in natgas output: and suddenly, no-one is sure if the gas is there. 90% of planned new generator capacity is reliant of natural gas. So yes, it's serious. One may reasonably ask how on earth it is possible for such a catastrophic state of affairs to come about: how is it possible that the US Geologic Service, the oil corps, the American Petroleum Institute, not to speak of the WSJ, Morris Adelman, Mike Lynch and former LBO-er Greg Nowell, have been caught with their pants down like this.
Whether energy shortages might ever be enough by themselves to destroy capitalism is a moot point. The US is the main culprit/victim, because it is both very profligate and is now highly dependent on imports. The US economy is 30% less energy-efficient than the EU and Japan, according to a recent Deutsche Bank report, so there is plenty of room for improvement. Conservation and increased efficiency (so called 'negawatts') would go a long way to solving the more pressing problems of brown-outs etc, at least in the short-term, ie the next 5-10 years. Whether that solves anything fundamental is also moot.
Below is what investment banker and oil maven Matt Simmons has just been saying on the subject of 'the perfect energy storm'. Since Simmons stands to gain from a ''Marshall Plan for Energy" you can take him with as much salt as you like. Perhaps the whole gas shortage scare is just a Bush-Cheney scam to get ANWR and Rocky Mountain Drilling started despite the objections of environmentalists. After all, they have a way of talking out of both sides of their mouths simultaneously, on the one hand talking up the crisis and almost in the same breath reassuring energy-guzzling Americans that there is enough for all their needs 'for centuries'. Hum.
Mark Jones ----------------------------------------------
Montreux Energy Roundtable XII Montreux, Switzerland May 30, 2001
Meeting Energy’s Investment Challenges: Financing Energy’s Marshall Plan
By: Matthew R. Simmons President SIMMONS & COMPANY INTERNATIONAL
MEETING ENERGY’S INVESTMENT CHALLENGES: FINANCING ENERGY’S MARSHALL PLAN
The world is now in the early days of a very serious Energy Crisis. Solving this crisis will take nothing less than an Energy Marshall Plan. Implementing such a program will take a long time. It will also be extremely costly. There is no way to estimate any precise cost to re-create sufficient energy capacity and also rebuild (or at least modernize) the world’s existing energy base. Until detailed blueprints for each part of this massive project are prepared, one can only estimate the costs involved. But a quick glimpse easily gets into trillions of dollars. The challenges to raise these funds will be one of the many arduous aspects of solving the Energy Crisis. A roadblock to beginning even the financial planning aspect of this task is that the Energy Crisis, itself, is still being denied by so many.
There are many skeptics who argue that we have no crisis. These skeptics say, “Perhaps California has some odd laws that now creates blackouts from time to time. Or, parts of the USA certainly have some complex regulations about what type of motor gasoline can be sold in each region of the country, creating price spikes from time to time. But these issues certainly do not spell even a US Energy Crisis, let alone one on a global crisis.” If these were the only energy problems the world faced, then no one, other than those living in these limited regions, should ever worry about energy’s future. But sadly, the energy woes of California or the fears for US motorists this summer are merely the tip of a giant “energy iceberg.” And as this iceberg is mapped, the whole world will soon appreciate how serious our global energy problems really are. In essence, the world has now run out of spare energy capacity. This problem is not simply an oil problem or a problem for both oil and natural gas. It extends across the entire face of energy, ranging from the ability to expand our use of electricity to natural gas and oil. It is the convergence of all three energy sources that make this Energy Crisis a true “Perfect Energy Storm.”
Much confusion and denial exists about what this Energy Crisis is all about. Too many people who hear that there is no spare energy capacity think they heard, “there is no more energy.” This is not the case. The world has abundant energy resources to fuel economic prosperity for generations or centuries. But these energy resources tend to be locked deep in the earth and are often also under thousands of feet of water. Futhermore, the resources tend to be located thousands of miles away from where energy is consumed. These resource constraints are not new, though they have become far more challenging in the past decade or so. It is this complex energy infrastructure that is now at full capacity. This energy infrastructure can and will be expanded. But getting this job done will take years to accomplish, as each piece of the gigantic energy mosaic needs to be designed, built and installed. Adding more energy capacity takes a long time and cannot be done in small steps.
Most of the capacity additions need to be done in big blocks. Take a refinery or a power plant for instance. It would be easy to expand the capacity of refinery if mini-energy factories could be built in every energy consuming community. But the units all need to be large. And creating them takes years not months to accomplish. If we really are going to solve this crisis, the amount of additional energy capacity needed is enormous. Not only do we need to build enough capacity to meet energy demand growth but we also must restore the energy reserve margin that allowed the world to enjoy reliable, dependable and affordable energy for so long.
If the world only needed to add 10% more capacity, it would still take at least a decade to accomplish. But adding only 10% would merely create the ability to grow energy demand by 3% per annum for three years and three and a half months before we were totally out of spare capacity once again. An expansion of at least 30% needs to be undertaken and once this task is finished, we can never again let energy capacity additions come to a halt, unless we are certain that the age of energy use is finally drawing to a close. Some argue that the world does not need 30% more energy capacity and it is wasteful to build even a ten-percent cushion of energy insurance. These are the same fuzzy-thinkers that applauded the way energy became a just-in- time business. They cheered as the world’s petroleum stocks were being used up as evidence that energy had finally become as modern in its management skills as Wal-Mart had. Even as the last few precious percent of our energy reserve margins were being gluttonously consumed, the exercise was described as “taking the fat out of our energy complex.”
What these poor energy planners missed is that energy is not just a commodity. Energy is our economy’s equivalent of oxygen. Like oxygen for the human body, energy makes every aspect of our economy work. The human body dies without oxygen, and without energy, our economy simply stops. Evenly balancing energy supply to keep pace with energy demand is a tricky art form. Adding even a percent or two of energy supply can take years, while growth in energy demand occurs in an almost fickle fashion. Energy demand growth can spurt by 4 to 5% in a matter of 12 to 18 months. Weather, which is still one of the world’s most unpredictable things, can also impact regional energy demand by changes of 20 to 50% in a single season. Without an energy cushion to absorb these volatile demand swings, the inevitable results of these demand surges are electricity blackouts and shortages of gasoline and heating fuels. Our developing nations have coped with these energy limits for years, but they are painful, extremely costly and wreck economic prosperity. However, blackouts and energy shortages are simply unacceptable for the highly developed countries of the globe. And as California will unfortunately discover, once you lack spare energy capacity, the days of economic prosperity are over until it is once again created. The task of recreating spare energy capacity is as real and important to get done as defending a nation from an invading army. The task might be even more difficult to accomplish. Rebuilding and expanding our energy complex involves thousands of individual energy components. It is like building a wall of thousands of energy bricks. And each of these thousand energy bricks is made up of hundreds of thousands of specific energy parts. Expanding capacity in the oil and gas arena has to begin with new land-based seismic crews and offshore seismic vessels, along with computer laboratories and complex workstations. Expansion at the wellhead involves hundreds of individual parts, all highly customized to a particular type well. Each component has to be built and installed in each well bore before hydrocarbons can ever be unlocked from their energy vaults and brought to the surface of the earth. Then every pipeline and loading terminal needs to be rebuilt and expanded along with the world’s tanker fleet, the unloading terminals, the tank farms and pipelines just to get crude oil to the world’s refinery system.
The Composite Catalogue is the world’s most complete energy buyers’ guide to the upstream part of the oil and gas world. There are over 50,000 individual “parts” in this buyer’s guide if you include items like a “Drill Bit” as a part. Yet in the drill bit category, there are actually over 50 very different types of bits. Every one of these parts is one miniscule piece of the upstream oil and gas side of this massive energy wall. Expanding electricity capacity begins at the mine mouth for coal-created kilowatts or the uranium mines for nuclear kilowatts. Then the complex logistic infrastructure necessary to bring this feedstock to the power plants capable of turning this into valuable kilowatts must also be rebuilt. Once kilowatts are created, they then need to travel across an extremely complex network of transmission lines. Again, this network of wires and transformers are all part of what needs to be expanded by 30% and also simultaneously rebuilt.
Every one of these components needs to be expanded and rebuilt. They all represent the infrastructure that allows the world to consume over 180 million barrels a day of oil equivalent energy each day. Just creating a master plan so that this massive investment can begin is almost mind-boggling. Then doing the detailed engineering drawings for each aspect of this plan could consume billions of man-hours of scarce engineering talent. Merely estimating how long it will take to create this energy blueprint begins to define why it will take at least a decade or more to complete this energy expansion. There is insufficient factory capacity today to even start manufacturing many of the badly needed individual energy parts. And the scarcest resource of all as the world begins what could become the most costly investment task undertaken is energy people.
The last time such a costly and massive undertaking was done, which also had a similar degree of urgency, was when The Marshall Plan was organized as a means to systematically and urgently begin the re-building of Europe after World War II. This remarkable feat not only worked, but also became perhaps the finest example of how the public sector can work hand-in-hand with the private sector and the labor movement. The government money spent on The Marshall Plan ended up being less than 1% of the total cost of rebuilding Europe. These government funds were judiciously used on an eyedropper basis to grease certain skids or break bottlenecks so the private sector could get the job done. When Secretary of State George Marshall announced the need for such an effort at Harvard University’s 1947 Commencement, he warned that the world had become more unstable than it was in 1939 and without such a crash program, the economies of both Europe and the United States would likely sink into a sickening depression again.
Because the Marshall Plan worked, it not only led to the longest stretch of economic prosperity Europe and America had ever known, but it also created the beginnings of a globalized world economy and peace throughout Western Europe for the first time since these nations were established. The Marshall Plan, in my opinion, is a great template for how the world goes about solving our energy crisis. As tempting as it is to simply leave the task to the free market to solve, it would take too long. And the free market can often operate in a capricious fashion. The burden of expanding and modernizing our energy systems has to be undertaken not only by the energy private sector but the public sector has to play a role, too.
Another key aspect of the Energy Marshall Plan is to assemble the most able energy experts to help the poor countries of the world construct systems of clean, modern energy. If the true environmental problems of the globe were properly prioritized (like when the FBI begins solving a crime), the top ten issues would likely all be anchored around poverty and we all know poverty and pollution always go hand-in-hand. Like the task-forces of volunteers who mapped out how Europe needed to get rebuilt, the Energy Marshall Planners could make the biggest impact in cleaning up our globe since the environmental movement first began. Getting all this done will be extremely expensive. Can trillions of dollars be raised to finance this Energy Marshall Plan? There has never been a worthwhile project that stopped because of lack of funds. Money flows to projects that work. So the key to insuring the financing can be raised is to make sure each brick of this thousand brick energy wall works.
Making sure each part works means that each individual energy project has “connected the dots” to insure it is a seamless energy system. It does no good to build billion dollar power plants if the needed feedstock turns out to be in short supply. Nor does it help to generate major additions of kilowatts if a transmission shortage prevents them from being delivered. Each energy dot needs to be connected or many badly needed energy solutions will not work. Spot market projects worked when the world was awash in spare energy capacity. Now it is gone, all the “dots” need to be connected, from the location of the primary energy resource to the point where energy is consumed. Otherwise, a multi-billion dollar project might grind to a halt because one simple “dot” failed to get connected. The other requisite for a successful energy project is the creation of a sufficient and predictable return on the capital needed. To make this happen, energy prices need far better stability and predictability than we had over the last two decades. We might also need energy prices much higher than today’s.
This we will not know until the rough cost estimates of this program are completed. One thing that is certain is that the energy prices of the past decade will never come close to paying for any aspect of the Energy Marshall Plan. They were simply too low. Price out any aspect of our energy complex on the cost of building a complete energy system and the returns created from “historical norm” energy prices are almost nil. The easiest way to insure we never solve the Energy Crisis is to try and drive down future energy costs. Unless they rise to a level to create attractive financial returns, the projects will simply not work. Most energy consumers will not welcome higher energy prices but they have to happen. It is far better for consumers to pay realistic energy prices and have reliable energy than to have undependable “cheap energy”.
Higher energy prices also usher in many already developed technologies to create genuinely clean coal and even more energy-efficient technology that has historically been hampered because energy prices were so low. It is time to stop pretending that energy is almost free. It is extremely costly to produce and the most precious aspect of our global economy Finally, the industry needs to back away from pricing energy on a spot market basis, set by the trading action of speculators in commodity pits using 90% leverage and only 10% real money. Let these pits be energy casinos but they cannot be responsible for setting future energy prices. If the volatility this casino pricing creates continues, then the cost of the Energy Marshall Plan needs to include financial returns equal to what is demanded in venture capital to justify the inherent risk involved. There has to be a better way to price “industrial oxygen.”
The world can solve its Energy Crisis. It will just take a long time and massive amounts of money. The sooner it starts, the faster the job will be accomplished. And when it is finished, the world needs to take a blood oath to never again fritter away spare energy capacity by calling it glut. Energy is truly our industrial oxygen. We need to grow up and begin treating it in as precious a manner. The stakes are high. It we get the Energy Marshall Plan launched and solve the serious problems, it unleashes decades of future prosperity. But, if we fail to deliver, we risk destroying our economic prosperity. Thank you for your attention to this extremely serious topic.