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Outspoken oil expert challenges common ideas

Matthew Simmons, chief executive officer of Simmons & Co. International, a Houston-based investment bank, has never been shy about challenging the conventional wisdom in the Oil Patch.

In an interview with Houston Chronicle reporter David Ivanovich, Simmons doesn't disappoint.

Q: What's your take on today's $40-plus oil prices?

A: The odd thing about oil prices in the last 20 years was how unbelievably low they were, as opposed to how odd it is that oil prices are at the level they are today. That's where I would draw a sharp distinction with most of the oil industry.

Q: What do the fundamentals look like? Are supply and demand out of whack?

A: The fundamentals, to me, look scarier than hell. Demand ... is having the smell of a runaway train, downhill on a one-way track. The consensus forecast for 2004 fourth-quarter demand is 83.6 million barrels a day, an increase of over 2 million from where we are this summer. And if you look at the consensus for the fourth quarter of 2005, demand is 85.6 million barrels a day, another 2 million increase from the fourth quarter.

Q: What about supplies?

A: There are very few companies that are showing any ability to grow their global oil supplies by more than 1 or 2 percent a year. If you take all the announced projects of any significance, and if they all come on and peak in the first year, they account for — at best — 6 to 8 million a day of fresh supply by 2009. And we just talked about needing 4 of that over the next 14 months.

The missing piece of data in this tight equation is the rate of decline of the existing base. Over 70 percent of the current output is coming from fields that were discovered, at their most recent, 30 years ago. If the global decline rate is only 3 percent per annum, then we lose 11 million barrels by 2009 and add 6 to 8. I don't see how we balance this market, unless we have a stunning depression.

Q: What about imports of liquefied natural gas? Long term, is LNG the solution?

A: I think LNG has to be part of the solution, but you're not going to build 40 LNG plants. That's the mismatch between inherent demand and supply in just the United States. ... I've had an interesting participation in the ferocious debate over siting a plant in Maine. Maine's gone from zero to 45 percent of its generation of electricity coming from gas in the last five years. Maine alone needs almost two big LNG plants to meet its needs.

Q: Most analysts accept Saudi Arabia's claims that it holds about a quarter of the world's oil reserves. You have challenged the Saudis over their reserve estimates. You're even writing a book, titled Twilight in the Desert: The Fading of Saudi Arabia's Oil.What are your concerns about Saudi Arabia's ability to supply the market?

A: The grim fact about Saudi Arabia today is that, at the Saudis' own admission, the Ghawar Field, the king of all kings, is still producing about 5 million of their 8 to 9 million barrels a day of oil. That's all you need to know to be scared.

david.ivanovich@chron.com

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