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Fw: [***] Simmons: "Black Thursday Was Only The Beginning"

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  • Tom Smith
    Conclusions are at the end of the article. clipped from: http://groups.yahoo.com/group/EnergyResources Date: Fri, 22 Aug 2003 08:21:02 -0400 From: Dale
    Message 1 of 1 , Sep 1, 2003
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      Conclusions are at the end of the article.

      clipped from: http://groups.yahoo.com/group/EnergyResources

      Date: Fri, 22 Aug 2003 08:21:02 -0400
      From: Dale pfeiffer <daleliz@...>
      Subject: FTW: Matthew Simmons Interview on Blackout

      PLEASE DISTRIBUTE WIDELY VIA LIST SERVES. MAY NOT BE POSTED ON ANY
      WEB SITE WITHOUT EXPRESS PERMISSION - See Copyright Notice

      FTW Exclusive Interview

      Behind the Blackout

      An Energy Investment Banker and Bush Energy A dvisor Gives
      Unexpected A nswers on the Northeast Power Grid, Peak Oil and Gas,
      and Much More c Copyright 2003, From The Wilderness Publications,
      www.fromthewilderness.com. All Rights Reserved. This story may NOT
      be posted on any Internet web site without express written
      permission.

      Contact admin@.... May be circulated, distributed or
      transmitted for non-profit purposes only.

      August 21, 2003, 2350 PDT, (FTW) -- Matthew Simmons is the CEO of
      the world's largest Energy Investment Bank, Simmons & Company
      International.

      It has a web site located at(http://www.simmonsco-intl.com/). Its
      clients include Halliburton; Baker, Botts, LLP; Dynegy;
      Kerr-McGee; and the World Bank. Since 1993, it has underwritten or
      financed 18 transactions valued at more than $350 million. Of
      those, six were valued at more than $1 billion. Simmons is a
      member of the Council on Foreign Relations and serves on the
      National Petroleum Council's Natural Gas Task Force. He has a lot
      to say about the Northeast power grid blackout, its causes, and
      what they imply for the future. He also has a lot to say about
      Peak Oil and Gas.

      Surprisingly, and with remarkable candor flowing from a sense of
      urgency he communicates at every one of his presentations to
      global energy experts, Simmons delivers a message that sounds more
      like a Democratic "New Deal" plank than a Republican Party
      free-market love fest. He is an arch foe of economists who insist
      that investment and technology will solve what he and a growing
      number of energy industry experts call an unsolvable and permanent
      decline in hydrocarbon energy resources.

      Deregulation was the primary cause of the failure on Black
      Thursday, August 14. But, as far as Matt Simmons is concerned, to
      stop there and pretend everything is okay if only more
      infrastructure is built borders on suicidal behavior.

      Matt Simmons will be the first to tell you that what he says has
      nothing to do with politics and everything to do with survival. He
      is a man of seeming contradictions by virtue of his opposition to
      the environmental movement on the one hand and his absolute
      dislike of energy deregulation in the 1990s on the other. There
      are very few who have interacted with him from any camp who doubt
      either his honesty or his sincerity. For that reason alone, what
      this insider has to say about the Northeast Power Grid collapse
      deserves our fullest attention. His words carry weight in
      Washingtonand around the world. Black Thursday was, he says, only
      the beginning.

      ----------

      FTW interviewed Simmons via telephone from his home in Rockport,
      Maineon August 18, 2003

      FTW: What's the most important thing you want the A merican people
      to know about Black Thursday?

      SIMMONS: This blackout ought to be an incredible jolt telling us
      about a host of energy problems that are ultimately going to
      prevent any future economic growth. It's like people have been
      ignoring annoying phone calls and living in denial about a problem
      that won't go away. It's like the ghost of Enron calling. The
      event itself was astonishing. Senior people like Governor Pataki
      or the head of NERC [North American Electric Reliability Council]
      were asking how this could happen. But the problem was inevitable.
      The only thing we didn't know was when it would happen.

      FTW: What did happen?

      SIMMONS: On a large scale what happened was deregulation.
      Deregulation destroyed excess capacity. Under deregulation, excess
      capacity was labeled as "massive glut" and removed from the system
      to cut costs and increase profits. Experience has taught us that
      weather is the chief culprit in events like this. The system needs
      to be designed for a 100-year cyclical event of peak demand. If
      you don't prepare for this, you are asking for a massive blackout.
      New plants generally aren't built unless they are mandated, and
      free markets don't make investments that give one percent returns.
      There was also no investment in new transmission lines.

      Underlying all this is the fact that we have no idea how to store
      electricity. And every aspect of carrying capacity, from
      generators, to transmission lines, to the lines to and inside your
      house, has a rated capacity of x. When you exceed x, the lines
      melt. That's why we have fuse boxes and why power grids shut down.
      So we have now created a vicious cyclicality that progresses over
      time.

      Another problem was that with deregulation, people thought that
      they could borrow from their neighbor. New Yorkthought it could
      borrow from Vermont. Ohiothought that it could borrow from
      Michigan, etc. That works, but only up to the point where everyone
      needs to borrow at once and there's no place to go.

      Asecond major reason is that decisions were made in the 1990s that
      all new generating plants were to be gas fired. We've had a
      natural gas summit this year and, as you know, I have been talking
      for some time about the natural gas cliff we are experiencing.
      Many thought that this winter would be deadly, and I have to say
      that it's just a miracle that we have replenished our gas stocks
      going into the cold months. This winter could have been a major
      disaster. We've seen a price collapse in natural gas to the five
      to eight dollar range (per thousand cubic feet) and the only
      reason that happened was throughout almost the entire summer there
      were only a handful of days when the temperature rose above eighty
      degrees anywhere. That was miraculous. It allowed us to prepare
      for the winter but we shouldn't be optimistic. One good hurricane
      that disrupts production, one blazing heat wave, one freezing
      winter after that and we're out of solutions.

      FTW: And natural gas too?

      SIMMONS: Well, I know you understand it, but people need to
      understand the concept of peaking and irreversible decline. It's a
      sharper issue with gas, which doesn't follow a bell curve but
      tends to fall off a cliff.

      There will always be oil and gas in the ground, even a million
      years from now. The question is, will you be a microbe to go down
      and eat the oil in small pockets at depths no one can afford or is
      able to drill to? Will you spend hundreds of thousands to drill a
      gas well that will run dry in a few months? All the big deposits
      have been found and exploited. There aren't going to be any
      dramatic new discoveries and the discovery trends have made this
      abundantly clear.

      We are now in a box we should never have gotten into and it has
      very serious implications. We also see the inevitable issues that
      follow a major blackout: no water, no sewage, no gasoline. The
      gasoline issue is very important. Our gasoline stocks are at near
      all time lows. With the blackout, more than seven hundred thousand
      barrels per day of refinery capacity were shut down. People were
      told to boil their water. So what do they do, they go to their
      electric stove which isn't working. What then?

      FTW: Makes you wonder about France and the heat wave that has
      killed 5,000.

      SIMMONS: The only reason Europewas spared a far worse blackout
      than what hit the USAwas that Europebarely uses air conditioning.
      In fact, even though Americauses a lot of air conditioning some
      areas have become fairly efficient in the ways they use it.
      Quantitatively, we use more energy because there are more of us.
      But air conditioning is a relatively new experience in Ontario,
      Canada. Until recently Ontariohad been a net energy exporter. They
      have a population of just over 12 million. With air conditioning
      in the last five years, Ontariobecame a net importer of
      electricity. Now, on just a normal hot summer day, Ontario's peak
      power use averages about 23,000 Gigawatts.

      Texas, with a population of 25 million, set an all time record of
      60,000 Gigawatts just a week before the blackout. The difference
      is that except for one tiny line running into Arkansas, Texasis
      self-contained for electricity. It's not tied to any other users.
      As we saw on Black Thursday, Ottawawas part of a whole
      interlocking system that had no place to go but down.

      FTW: So how big a factor was the weather?

      SIMMONS: It was THE factor in my opinion. To show much weather
      determines power use, in the week of August 3rd, the USset an
      all-time national record for electricity use of 90,000 Gigawatts.
      The Mid-Atlantic States' use of power had jumped 29.5% over last
      year and 20% over just the previous four weeks. Why? The
      temperature had been as hot as we experienced on Black Thursday.
      If you want to compare it to vehicles and roadways, air
      conditioning is the interstate highway system and the Internet is
      the equivalent of SUVs. Everything that happened on August 14
      started in the 17th hour. (5 PMat various local times). That's
      when everything is running at once: industrial, residential, and
      commercial.

      This is when demand peaks regardless of the weather. And we know
      that in hour 17 on that day the USexperienced all-time peak energy
      use. That's when the system tripped out.

      FTW: So we have two basic camps saying that the problems are
      generating capacity and transmission lines, without addressing
      feedstock issues. What about the advocates for deregulation who
      argued that there would be more generating capacity as a result?

      SIMMONS: History answers that one. Following the 1965 blackout when
      NERC was created there was a mandate that publicly owned and
      regulated power providers had to build new plants. Every five
      years, ten per cent was added to the generating base. As
      deregulation was implemented in the 1990s, it was argued that it
      would open up vast quantities of energy in neighboring states. In
      the first five years of the decade, only four per cent capacity
      was added over the entire period. In the second five years, only
      two per cent was added.

      In the summer of 1999, we had thirty consecutive power events
      which unleashed the single biggest construction boom in history
      which built 220 thousand megawatts of new plants at a
      capitalization cost of six to seven hundred thousand dollars per
      megawatt. Ninety-eight per cent of those plants were gas fired.

      It was decided to use solely natural gas plants for several
      reasons. Coal fired plants took five to seven years to build. They
      are very dirty environmentally and the permit process is
      difficult. We have built on all the available hydroelectric sites
      we can build on. Nuclear is unpopular and expensive. Oil fired
      plants are remnants of the days when oil was cheap. Those days are
      not coming back because Peak Oil is with us now. Besides that, oil
      fired power plants are about the least efficient use of a barrel
      of oil that I can imagine. That left natural gas and the
      economists mistakenly presumed there would be large supplies. But
      natural gas plants were built with no supplies. Synthetic
      contracts were used, Enron-style, to sell gas futures when the gas
      didn't necessarily exist.

      FTW: A ssuming that there was enough feed stock to run the new
      plants how much building are we talking about?

      SIMMONS: Each state would need to build forty to fifty per cent
      excess capacity. Aforty per cent cushion merely provides the
      chance to withstand a day of high summer heat and the chance to
      grow by about 3% per year for three years.

      FTW: Yet even if we re-regulate there are still going to be
      problems with feed stock to power the plants. How serious is that?

      SIMMONS: Someone's going to be left holding the bag big time. If
      natural gas consumption surges in ten days of excessive heat then
      it would require almost a complete shutdown of industrial
      consumption to compensate and protect the grid. As I have been
      reporting for years now, there isn't going to be enough gas to run
      those plants, let alone new ones.

      FTW: You mean shut down the economy for ten days to keep people
      from cooking?

      SIMMONS: Yes.

      FTW: Everyone keeps saying that ANWR (The Arctic Natural
      Wildlife Reserve) is the answer if we drill there. Is it?

      SIMMONS: ANWR is not "The Answer." However, it makes great sense
      to develop. Drilling there should not have a negative impact on
      the coastal plains of the Arctic. With great luck, it could create
      between 300,000 and possibly up to 1.5 million barrels of oil a
      day and lots of natural gas that could last a decade or two. But
      this does not become the sole answer. On the other hand, if ANWR
      is kept off limits, it becomes no answer.

      FTW: What about imports of natural gas from overseas? Russia and
      Indonesia have huge reserves; Canada, as the Canadians are
      painfully aware, is almost depleted when it comes to natural gas.

      SIMMONS: Indonesia's gas fields are very old. Its Natuna gas
      fields, a source of stranded gas that gets discussed all the time
      has 95% CO2 and apparently costs about $40 billion to develop a
      mere 1 bcf/day of dry gas. Russiahas four old fields that make up
      over 80% of their gas supply and they all are in decline. Canada's
      decline problems are as serious as the US.

      FTW: Windmills? Solar?

      SIMMONS: There's no way they can replace even a portion of
      hydrocarbon energy.

      FTW: Reducing consumption?

      SIMMONS: Reducing consumption has to happen, but many of the
      favorite conservation concepts make little overall difference. The
      big conservation changes end up being steps, like a ban on using
      electricity to either heat water or melt metals and instead,
      always using the "burner tip of natural gas". The latter is vastly
      more efficient, the energy savings are enormous and we need lower
      ceilings and smaller rooms. We need mass transit, and to eliminate
      traffic congestion. Finally, we need a way to keep people from
      using air-conditioning when the weather gets really muggy and hot
      at same time. The strain this puts on our grid is too
      overwhelming.

      We also must begin to use our current discretionary power during
      the nighttime. All of theses steps are hard to implement but they
      make a difference.

      FTW: What is the solution?

      SIMMONS: I don't think there is one_ The solution is to pray. Pray
      for mild weather and a mild winter. Pray for no hurricanes and to
      stop the erosion of natural gas supplies. Under the best of
      circumstances, if all prayers are answered there will be no crisis
      for maybe two years. After that it's a certainty.

      FTW: On that cheery note let's take a look at oil supplies.

      SIMMONS: Currently, oil supply issues are as serious as the
      electrical grid. Last month the IEA (International Energy Agency)
      updated their database. They had for years been talking about a
      coming huge surge in non-OPEC supply, excluding the FSU (Former
      Soviet Union). It hasn't happened. We have the highest oil prices
      in 20 years and even great technological advances have not had a
      measurable impact on discovery or production.

      FTW: I have recently noted the speed with which the Chad-Cameroon
      pipeline was built and switched on. Chad only has estimated
      reserves of around 900 million barrels (World consumption is I
      billion barrels every 12 days). I see a sense of urgency there.

      SIMMONS: It's amazing. What's that pipeline going to pump, fifty
      thousand barrels per day? That figure may go up, but it's
      inconsequential in the long run. It's a sign of how strapped world
      supplies really are and that we may be finding out that we are
      already over the peak.

      FTW: What about Iraq and Saudi Arabia? We have been following
      Iraq closely and all the sabotage, infrastructure damage and the
      pipeline bombings are actually reducing Iraqi capacity. That
      leaves Saudi Arabia with 25% of known reserves.

      SIMMONS: I have for years described two camps: the economists who
      told us that technology would always produce new supply and the
      pessimists or Cassandras who told us that peak was coming in maybe
      fifteen or twenty years. We may be finding out that we went over
      the peak in 2000. That makes both camps wrong.

      Over the last year. I have obtained and closely examined more than
      100 very technical production reports from Saudi Arabia. What I
      glean from examining the data is that it is very likely that Saudi
      Arabia, already a debtor nation, has very likely gone over its
      Peak. If that is true, then it is a certainty that planet earth
      has passed its peak of production. What that means, in the
      starkest possible terms, is that we are no longer going to be able
      to grow. It's like with a human being who passes a certain age in
      life. Getting older does not mean the same thing as death. It
      means progressively diminishing capacity, a rapid decline,
      followed by a long tail.

      FTW: What about people like Alan Greenspan and popular writers
      who tell us that there is no basic problem with energy supplies?
      Others offer us hydrogen, which is laughed out of hand by people
      who have looked at its feasibility and efficiency.

      SIMMONS: Basically they just don't get it. Some of them have gotten
      lazy.

      They were so carried away by the arguments of the economists that
      they stopped doing their homework. Month by month, and year by
      year, events are proving them systematically and thoroughly
      incorrect. They just don't get it. Right now, there is a deluge of
      stories on the wonders of hydrogen. This is another area of great
      confusion. Hydrogen is not a primary source of energy. For a
      Hydrogen Era to occur you need an abundance of natural gas, or you
      need to create a great deal of new power plants using coal and
      nuclear power.

      What I find so ironic about our very serious energy problems is
      that they started in Santa Barbarain 1969. This was where the best
      work was being done to create a new technological evolution in our
      ability to recover energy from deep water sources. Then we had a
      tragic spill. This gave birth to the environmental movement. It
      began the war between modern energy and environmental
      "anarchists". They have worked overtime to shut down our access
      to areas that might have diversified our energy supply. Had we
      been able to develop these areas, then we would have more options
      now to ensure a continuation of the economic prosperity we take so
      much for granted. And there is no better friend of the environment
      that economic prosperity.

      FTW: But peak oil is peak oil, is it not? A ren't we just talking
      about something that would have delayed the inevitable for a few
      years? It would take a couple of years to drill and pipe out of A
      NWR but there's only a two year (total US ) supply of gas there at
      best, and even less oil. Then what? A t the A SPO conference in
      Paris , I think it was you or another expert who disclosed that
      four out of five very expensive deep water holes were coming up
      dry?

      SIMMONS: Peaking of oil and gas will occur, if it has not already
      happened, and we will never know when the event has happened until
      we see it "in our rear view mirrors."

      FTW: Is it time for Peak Oil and Gas to become part of the public
      policy debate?

      SIMMONS: It is past time. As I have said, the experts and
      politicians have no Plan B to fall back on. If energy peaks,
      particularly while 5 of the world's 6.5 billion people have little
      or no use of modern energy, it will be a tremendous jolt to our
      economic well-being and to our heath -- greater than anyone could
      ever imagine.

      -----------------

      After I ended the interview, I recalled something that I had read
      recently in a book called "Contraction and Convergence - The
      Global Solution to Climate Change." (www.gci.org.uk). It was a
      startling revelation that since 1950 there has been a near perfect
      correlation between the growth in world GDP and the emission of
      greenhouse gases (i.e. - the consumption of hydrocarbon energy).

      In an economic system that is predicated first and foremost on
      perpetual growth, Matt Simmons' statement that we are no longer
      ever going to grow took on a whole new meaning.

      -- Mike Ruppert
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