SPECIAL FEATURE: A Conversation With Matt Simmons
As all of us at the MarEx mourn the passing of Matthew Simmons --The Maritime Executive Magazine (PRINT) July-August 2010 Edition has just published this article. We had the pleasure of meeting with Mr. Simmons to discuss the issues of the day
By Nichole Williamson, Assistant Editor
The famed investment adviser and author of Twilight in the Desert shares his views on the oil spill in the Gulf of Mexico, peak oil, and his newest passion, renewable energy.
MarEx: What was the offshore oil industry like 40 years ago when you first started?
Simmons: The growth of the oil industry in the U.S. has been incredible since I first started raising venture capital back in the spring of 1969. Anything beyond 80 feet of water was considered not safe. But a small group of divers in the Santa Barbara Channel were trying to perfect mixed gas diving tables because many of them were on the edge of losing their lives at deeper levels.
I remember when General Offshore Divers finally broke the stranglehold of Associated Divers and got a contract to weld wellheads for Phillips Petroleum. Ken Elmes, one of the top 10 divers for General, had to be put in the hyperbaric chamber. Then Whitey Stefons, who was considered the best diver in the world, put on a bad canister of gas with only 79 percent oxygen as opposed to 82. As he approached 150 feet, he had a grand mal seizure. My friend, Lad Handelman, had to put a tank on his back and get Whitey up to the hyperbaric chamber so he wouldn’t die. That was 1969.
Within three years, hyperbaric diving chambers were onboard offshore rigs in the North Sea. Meanwhile, in the Gulf of Mexico, where the shallow shelf goes out about 40 miles before dropping off sharply, they began drilling wells at 300 feet, then 1,000 feet and 2,000 feet, and finally 5,000 to 10,000 feet. For over 41 years, the offshore oil industry never had an accident – and obviously got giddy with success.
Over the years I spoke at numerous conferences and always said how proud I was of the offshore industry. But what would happen if something went wrong at 500 feet? We simply forgot to develop the fire truck and didn’t have the tools to manage a huge spill even at that level of drilling. So then the industry began moving out to ultra-deep depths, where it would encounter extremely high reservoir pressures and temperatures. Drilling at those depths is the equivalent of putting lunar modules on the dark side of the moon where you couldn’t see and was simply no way to get people home safely.
MarEx: Judging from the BP spill, it seems obvious that the industry wasn’t prepared.
Simmons: Right, and in particular this company that rebranded itself from British Petroleum to “Beyond Petroleum” and has, over the past 10 years, adopted the most unbelievable addiction to cost-cutting and a basic hatred of its vendors, who were supposedly “taking their money.” The Macondo well was probably the trickiest that’s ever been tried. Then you have this BP executive with no operational experience telling the drilling contractor and Halliburton how to do their jobs because it’s costing BP $1 million a day to have them out there. Consequently, BP made every mistake that could be made. Then at the congressional hearings this BP man pleads the Fifth Amendment. He should have been hauled off to jail immediately for being responsible for this ecological disaster.
MarEx: It has been said BP has one of the worst safety records in the industry. What’s your view?
Simmons: BP made every mistake it could to save $1 million. It had been recommended that 21 O-rings be used to stabilize the casing so it could be properly cemented. But BP, in order to save time and $1 million a day, only used six. Furthermore, BP didn’t want Halliburton’s hard cement job because they’d have to wait for it to settle. Another huge mistake was taking the mud out and replacing it with seawater so later, when they wanted to start production, they could get to it faster.
But once the blowout occurred BP became devious and tried to say it was no big deal because it was only a rig fire. Then on April 21 I said, “This rig is melting and they’re calling it a rig fire? There’s only 700 gallons of diesel on that rig.” Then they began saying it’s only a 1,000-barrel a day leak coming from the riser. I knew immediately it was a cover-up with lots of misinformation.
MarEx: Are you saying there may be criminal implications from BP’s actions?
Simmons: Absolutely! First they rounded up all 12 ROVs in the Gulf, which is the only way anyone can see underwater. Then they began sending out misinformation about there only being two or three cracks in the drilling riser, which was creating the spill. It was all lies. The drilling riser is 22½ inches in circumference and two-thirds of it is elastomeric, so it’s a mile-long, tightly packed column of condensate. BP said the oil was coming out of the riser and stationed the ROVs on the leak. The ROVs only have one eye that looks straight ahead with a limit of about 25 feet or so of strobe, and it’s icy black down there.
Now remember the riser is only 22½ inches in diameter and there was a three-to-four-foot plume of condensate, and this surely couldn’t have caused that massive fire on the rig. When the government began sending a few university-operated research vessels with unmanned submarines to the area, they discovered plumes of oil. Meanwhile, BP said adamantly there were no plumes and keep these vessels away because “they’re distracting us from fixing the leak.”
MarEx: What about the workers on the vessels and beaches? There is so much oil out there – what might be the long-term effect on these people?
Simmons: Unfortunately, many already are getting sick and they will continue to get sick because it’s benzene and butadiene, which is mustard gas. What the government really needs to do is order gas masks for the workers.
MarEx: How does this compare to the Mexican Ixtoc oil spill that went on for six months?
Simmons: The Mexico spill was like a spit compared to the Macondo spill. I spoke with a couple of oceanographers on the research vessel Thomas Jefferson and was told that in all probability around 40 percent of the Gulf is now oxygen-depleted. No one really knows how long or if the oxygen will ever come back. We never had an oil spill of this magnitude before.
MarEx: Where does the industry go from here?
Simmons: The oil industry simply got too casual about offshore drilling. More importantly, the regulators need to distance themselves and enforce stricter safety policies. Offshore assets are getting old and rusty and a whole new generation of equipment needs to be built to replace the current stuff. Rebuilding will create prosperity and hasn’t been done since the 1970s. There also needs to be better emergency response planning if we are going to continue operating at those depths.
MarEx: In the past you have said that oil should be $300 to $600 per barrel. Are we just kidding ourselves about the true cost?
Simmons: $600 a barrel is 89 cents a cup, and a cup will drive a car two miles. We have been kidding ourselves with politically induced cheap oil, and the reality of the cost of oil would turn the economy upside down.
MarEx: With peak oil in mind and as the largest consumer of oil, the U.S. is in a race with China and India to get sufficient supplies. Will Brazil be our saving grace?
Simmons: No, but programs like our proposed wind farm off the coast of Maine will be our saving grace, and that is the reason I founded the Ocean Energy Institute in 2007. Developing meaningful renewable energy from our oceans and the winds is the future. Recently I met with Senator Susan Collins of Maine and the Energy Secretary, Dr. Steven Chu, at the University of Maine to visit the Advanced Composites Center and the new Deepwater Technology Center. Sixteen of us had lunch, including Governor Baldacci, Senator Collins, two congressmen, Dr. Chu and his assistant, and the President of the University of Maine. Remember, Dr. Chu is a Nobel Prize winner. He told us that, as a scientist, he knew the need for alternative energy but got discouraged about its flaws. But learning about liquid ammonia energy from the ocean was truly exciting, and he planned to share this with Washington.
MarEx: Would you please elaborate on the liquid ammonia energy concept?
Simmons: Ammonia energy has been a known fuel source for decades. It’s three parts hydrogen and one part nitrogen, which you get from air separation. The nitrogen dummies down the hydrogen and at room temperature it turns to liquid ammonia. It is similar to propane except it can be smelled, and it’s about a 30 percent cleaner burn than gasoline. The reason ammonia has never been seriously considered as a fuel is because hydrogen is a tiny byproduct of the refineries and could never be scaled.
Our concept is to go into deep enough water where there is unimpeded wind. By redesigning the wind turbines using the advanced oil fill platform design technology, we can get into about 600-foot depths and maybe more. Then the wind turbine is mounted on the small platform where it can generate around 50 megawatts. The blades are made from advanced composites and can be the length of a 90-story building.
It is our intention to have 50 megawatt power plants every five miles down the Gulf of Maine, and we’re not going to use the power for electricity per se. We’re going to combine electricity and ocean water through forward osmosis to create distilled sea water. We’ll use part of that seawater as a new process of the old electrolysis to combine electricity and water to create hydrogen. Then through an air separation unit we’ll create nitrogen and what you’ll have is NH3, and we’ll also have distilled water.
MarEx: This will be for the people of Maine, right?
Simmons: Well, you have to look at the Gulf of Maine as a laboratory. Once it’s been proven, there can be systems installed all over the world.
MarEx: These turbines would work well in the deepwater Gulf of Mexico, where the winds really howl.
Simmons: Yes, a perfect place. And I was at the Rio Offshore Technology Conference and met with the leadership of Petrobras and they were very interested in the program due to Brazil’s huge coastline. China could use this too and it would solve their water problem as well.
MarEx: So your group will be building these systems around the world. When will you begin?
Simmons: We are pushing for a billion-dollar public offering soon. While that is a small amount in the capital markets, it will fund these projects for a decade. So for now we’re committed to the Gulf of Maine, and I hope to have a project approval for Hong Kong and northern Madagascar.
MarEx: Could your forward osmosis system help clean up the BP oil spill?
Simmons: Yes, we could figure out a way to use forward osmosis and start cleaning up the Gulf of Mexico. We might even find a way to create oxygen. Imagine if we could have a 50-megawatt power plant on 100 platforms out there! We might even be able to save the Gulf of Mexico.
MarEx: How long would it take to build these systems in the Gulf?
Simmons: I keep using the Pearl Harbor metaphor because within a month after Pearl Harbor Henry Kaiser created a system of building one victory ship per day. These systems are so much simpler to build.
MarEx: When is the IPO going to take place?
Simmons: I have always been an optimist. So I am hopeful it will be this fall as I am opposed to saying five years from now. You know, unfortunately, this is the only silver lining of the world’s greatest catastrophe.
MarEx: Thank you for an illuminating conversation and good luck. – MarEx
About Matt Simmons:
**Matt Simmons is a prominent oil-industry insider, former energy advisor to President Bush, and one of the world's leading experts on peak oil. He holds an M.B.A. with Distinction from Harvard Business School and is a past President of the Harvard Business School Alumni Association. He announced his retirement recently from Simmons & Company International to devote his full attention to the Ocean Energy Institute, a think-tank and venture capital fund addressing the challenges of U.S. offshore renewable energy, which he founded in 2007.