Simmons: Energy industry facing enormous challenges

The keynote speaker at the Alliance Expo & Annual Meeting offered a sobering revelation to the oil and gas industry employees seated in front of him: the boom of summer 2008 that sent oil and gas prices skyrocketing was the only truly great situation the industry ever had, and itÂ’s not likely to return any time soon.

In a room with more than 1,100 people, Matthew R. Simmons, chairman of energy investment bank Simmons & Company International, addressed the dismal economy and rough seas in which the energy industry has found itself.

“At the peak of the boom everyone prospered,” he said at the April 22 event in Wichita Falls, presented by the Texas Alliance of Energy Producers. “High prices created the first genuine win-win-win we ever had, but too many people were saying these high prices will hurt the economy. Then came the collapse.”

By his assessment, Simmons said that for two decades the prices of gas and oil were so low that the energy consumers were the only winners.

“The energy consumers were living in a fool’s paradise,” he said. “…But the consumer party had to end. As oil and gas prices rose the consumers got angry. There was a period of time last year that I think every single morning that I saw the Today Show on the first story was ‘Pain at the Pump.’”

He offered many questions – “Were the Barnett Shale gas wells net energy losers?” and “Did the Barnett gas boom create a gas glut?” – but answers to neither.

“Can the Lone Star State survive another bust? Well probably, because we always seem to have done that before but the world might not, is the easy answer,” he said.

It wasn’t clear what the Plan B is in his ultimate question: “Texas, and the world, has no Plan B to address living in a post-peak oil and peak gas world. We’ve not even thought about it. Does Texas need a Plan B? The obvious answer is an unqualified yes.”

Peak oil is generally defined as the point at which the maximum amount of oil and gas have been produced, with production declining after that point. The argument is whether the world has reached that peak or if it is still to come; Simmons previously has said he believed peak oil was met in December 2005.

Outside the Multi-Purpose Event Center, dozens of shiny, 2009-model trucks, painted vibrant reds or whites, sat under the hot sun looking for a new home. There were compressors, pumping units, cranes, and more heavy machinery freshly cleaned and under the watchful eye of oilfield services employees eager to explain how it all works.

But until gas prices turn around that equipment isnÂ’t likely to be put to use.

“Shale gas, without any question, is commercially unviable at $5 to $6 natural gas, let alone $3 to $3.50,” Simmons said. Shale gas is expensive to produce so high gas prices were a “necessary evil” in order for it to be economical.

Another factor that made the shale plays possible were years of cheap labor and supplies, in some respect.

“The easy, old cheap oil and gas era has ended,” he said. “For three decades, operators didn’t worry about that because the service costs were so low we didn’t really think about that.”

During the 1980s and beyond, oilfield service companies and suppliers kept their prices low to keep employees on board and rigs and other equipment running. Many companies reported negative cash flow or minimal profit throughout those years until the oil and gas boom allowed them to raise their prices.

“Service providers and equipment suppliers finally for the first time in almost three decades gained pricing leverage,” Simmons said, “and the prices finally rose to not exorbitant levels, they actually rose to realistic levels that ensured adequate crews, adequate maintenance. They were not high enough, ladies and gentleman, to start replacing old assets, so they needed to be far higher.”

The necessary replacement of old assets is one of two “cancers” that face the industry, he said, with the other being an aging workforce.

“Our aging workforce will shrink the labor pool by two-thirds over course of the next decade,” said Simmons, adding the recruiting boom is over because of the recession’s impact on the industry. Layoffs have made the situation worse, and rust is setting in on equipment and infrastructure not designed to last as long as they have.

Oil at $150 per barrel and $10 per million cubic feet natural gas wonÂ’t solve these problems.

“We have to get prices way higher or rebuilding the work force and the asset base will not begin,” he said.

After 30 minutes of dire assessments and predictions, his final statements were hardly uplifting: “I think we might find that winning World War II was an easier task than what we have ahead of us,” he said. “Thank you very much.”