**INTRODUCTION: MR. SWISHER**

Our next speaker, Matt Simmons, will discuss in the President's words,
*\"America's addiction to oil and natural gas."* And he knows the oil
and gas industry extremely well. He's the Chairman of Simmons and
Company International, a specialized energy investment banking firm. The
firm has completed approximately six hundred and twenty-nine investment
banking projects for its worldwide energy clients at a combined dollar
value in excess of 84 billion dollars. Please welcome Matthew Simmons.

**[KICKING AMERICA'S ADDICTION TO OIL]{.underline}**

**[AND NATURAL GAS: WHY THE ISSUE IS]{.underline}**

**[SO URGENT AND HOW WE GET THE JOB DONE]{.underline}**

**MR. MATTHEW R. SIMMONS**

I'm delighted to be here this morning and I really applaud the
Department of Energy for creating this workshop to address this very
serious topic.

There is no question that America has become, for good reasons and maybe
poor planning reasons, addicted to the use of oil and gas. If you
basically look at the numbers here, \-- if someone could get these
visuals up. There we are.

It's just interesting to go back over the last twenty years, and say if
you convert natural gas into barrel of oil equivalent terms, that
basically our use has grown by 7 million barrels a day over a twenty
year period of time. And that amount turns out to be more than either
China or Japan use in total oil and gas. So, it's just an enormous
number.

At the same time, our oil and gas supplies domestically are in decline.
Now this high-energy use might have been acceptable if we were using all
of our own resources, and for over a century America basically was
totally energy independent. But our energy picture changed once our oil
and supplies peaked. It turns out that our domestic oil peaked in 1970
at 10.3 million barrels a day and we have yet to produce anything from
Alaska. Our natural gas peaked in 1973 at 60 billion cubic feet a day or
10.6 barrel of oil equivalent, in 1973, and both events were ignored or
misunderstood for decades; caught us by surprise.

As a result, America is now the world's largest energy importer. For our
economy to work, we routinely, every day, basically have to import 10 to
10 ½ million barrels a day of crude oil, 3.6 million barrels a day, of
finished product, another 2.1 million barrels a day of oil equivalent in
natural gas. And so, importing 16 million barrels of oil equivalent per
day represents more oil and gas use than Latin America, the Middle East
and Africa together. So, it's a big number.

And at the same time, what seems to be just irreversible, our domestic
oil and gas output is still shrinking. The domestic oil picture is grim.
Alaskan oil, which used to be robust, is in steep decline. The lower
forty-eight, which peaked at this 10.2 million, 10.3 million barrels a
day in 1970, is now down to 3 million barrels a day, if you exclude deep
water, and stripper oil output, which is part of that 3 million barrels
a day, these are the wells that average 2.2 million barrels a day, per
day, now actually exceeds Alaska's oil output. And the rig shortages
that we now have are going to put real restrictions on more drilling
increases.

If that's not a grim picture, I think our natural gas picture is even
grimmer. Our conventional natural gas supply is now about 50 percent of
its peak. All the growth we have had has been coal bed methane, tight
sands and deep water associated gas. Unconventional gas is real, it
works, but it requires a vast number of new wells. Canadian gas, which
was our swing producer, is now also in decline. And L & G growth has
been slow and is extremely risky.

And to make matters slightly more uncomfortable, many of our key energy
suppliers are also in turmoil. Middle East unrest is sort of becoming a
normal event. In Nigeria we have a movement called MEND, the movement to
emancipate the Niger Delta, and that could escalate any day into real
serious trouble and so far it's only shot off between 600 and 800
thousand barrels a day of oil. Venezuela's oil industry is in turmoil.
Indonesia, who was one of the founding partners of OPEC, is now an oil
importer and their L & G exports are winding down as the supply of their
gas is critically needed at home. The North Sea peaked in 1999, is
basically down by about a third in the next six years. Mexico's Canterel
Field, which is the second largest producing oil field in the world, is
now basically perched at the edge of production collapse.

And any one of these issues have serious implications for America.
Collectively, they have an unbelievably mind-boggling implication for
America.

Then there's an issue that is very easy to forget about, and I think
basically the crude oil bay corrosion problem has brought this a little
bit into light, is that our energy infrastructure, this magical system
that allows us to zing 31 million barrels a day of oil and natural gas
around our system, is basically silently rusting away. Our refineries
are too old, our pipelines are too old, our drilling rigs are too old
and the energy executives and skilled workers are too old.

And furthermore, light sweet crude, and non-tainted natural gas, which
basically used to be the throughput of our fabulous infrastructure
system are now in serious decline and taking their place are
hydrocarbons that accelerate corrosion. The current biofuel mix works
poorly with our current infrastructure system and then our new high spec
fuels, the Arbob (phonetic) and the less than fifteen parts per million
sulfur fuels don't mix well either. And so, we've created enormous
strains or our infrastructure system and we taxing a system that's too
old, to its limit.

So, as a result, we basically are now in a situation where it would
appear to me that our use of oil and gas is now at limit. Our energy
infrastructure operates now effectively at 100 percent, the existing
logistical is too old, corrosion, leak problems abound, the refinery
system\'s too old, the Gulf Coast import system is too crowded, and it
is frankly impractical to assume, in any near immediate period of time,
an expansion of our import capacity. And this capacity constraint will
bring to a halt the growth the U.S. oil and gas use has been so
relentless over such a long period of time.

And then I would like to step back and address the most serious question
of the morning, might global oil output have already passed its peak?

The Energy Information Agency has monthly energy reports, and for the
last several months, \-- it's shown in Table 11(b), that in the crude
oil production globally, in December 2005, we set an all time high and
in the next six months it declined every single month. We now have a gap
of almost a million barrels a day from the December peak, to basically
June of 2006.

And when you look at the major new projects coming on stream to offset
the declines of many mature basins, it supports an argument that we
might well within the year look back and say with certainty, that
December 2005 we saw the global peak of oil supply. And the data reports
over the next twelve months could finally confirm this enormous debate
of when will peak oil happen, and find that it actually did, and we
missed it.

So, where does the natural gas supply stand in this picture? Well, the
North American gas data is unreliable and high quality global gas data
is non-existent. But the best data that comes out yearly, shows pretty
conclusively, that the United States of American, Canada, The United
Kingdom, Western Siberia, Indonesia, to name a few, are all basically
past their peak and in an irreversible decline. And that happens to add
up to about 50 percent of global gas supply. Proven gas reserves are
supported by very sketchy data, and most of our proven gas reserves
globally have still yet to be properly discovered. Gas happens to
deplete far faster than oil, it's a vapor. And for safety sake, I think
the world should assume that natural gas is probably also peaking too.

So, the movement to end America\'s addictions to oil, which has been
spurred by a litany of factors, geopolitical import risks, the danger of
CO~2~ and other emission growth, danger of high trade deficit and so
forth, they're all real risks, but they take on a totally different
context when we basically start to address the reality that it could
well be that our oil and natural gas supplies globally are in decline.
None of these other risks even start to impact the sort of risk this is
facing.

Now these changes could create the need for a forced march to reduce oil
and gas, versus some voluntary things that we knew we should have done
anyway. There is an urgent need for overhaul in energy data. If the risk
of oil and natural gas peaking is even 50 percent, the need to create
real data on the issue is acute. We are desperately in need of mandatory
field by field production statistics, quarterly, over the last six
months, for at least the top two hundred and fifty oil and gas fields in
the world.

If that data is available, compliance is the only question. And if
production data is real, it furnishes proof that this risk, \-- it will
furnish proof that the risk is either real or not real, and as long as
we ignore this data, we basically will argue and debate about this until
it's too late.

Our energy systems\' resiliency has been phenomenal, but in fact it's
also created an eerie false sense of security. Various risks to our
energy systems have always been overcome, which leaves too many people
to say, "*If we have a problem, we'll overcome it.*" Declining domestic
supplies, rising imports no big deal; hurricane damage, quick recovery,
no big deal. A lack of terrorist attacks on our energy infrastructure
system, both vigilance and frankly, good luck. The aging, rusty
infrastructure, leaks get plugged too fast and then frigid weather risks
end up too often having mild weather and then we basically don't realize
how close we came to a problem. And every time we have crept closer and
closer to an energy precipice and emphasized energy data has created a
real false sense of comfort. We think we have high oil stocks, maybe.
Maybe the system\'s poor. We think we have high gas storage, maybe. But
we don't know how to cope if we had cold weather.

So, all of this has lulled us into basically ignoring the fact that we
are basically entering some real energy problems. And the risk is too
high, that both oil and gas might have peaked. The issues and risks
surrounding peak oil and gas have not been well understood. The data to
quantify the risk and the timing is murky at best. The best data creates
powerful argument that the risk is real. Decline rates in all mature
basins are growing. Exploration is only replacing a small percentage of
global use of natural gas and oil. Conventional oil and gas is shrinking
fast. Non-conventional oil and gas is both costly and very energy
intensive to create and as demand continues to rise, so does the risk of
peaking. Because there's a basic rule that will never change, it's
Energy 101, use will always equal available supply.

Once we pass peak oil and gas, this world that we live in today, will
become very quickly a very different place. Peaking of oil and gas is a
global problem. Localized alternative supplies help locally, but the
easiest supply substitutes all have their own problems.

Coal, abundant, but basically high BTU coal is in decline. Low BTU,
brown coal is complex to process and often in the wrong places. Creating
clean coal gasification to liquids is technically feasible, but it is
economically very challenging.

Logical hydro sites seem to now have been used up. Nuclear, is a
fabulous form of energy, but it's very energy intensive to build. And
electricity will never be a serious transportation fuel, it just won't
work.

So, in this context renewable energy must have its day in the sun.
Accelerating new and different energy sources takes on new urgency, if
oil and gas supplies are peaking and the price of both fuels are
unlikely to fall if peaking is real. And in fact, in Canada the prices
are still unbelievable cheap and need to rise.

You can't bring on enough, fast enough, becomes not something we've
hoped for, but an imperative. And for decades renewable energy suffered
and languished under the cloud that we would have cheap energy forever,
belief and this mirage quietly faded away.

So, then the question becomes changes, to can the current renewable
slate get the job done? Let's just remind ourselves what the current
renewable slate is, it's wind, it's solar, it's biofuels, it's hydrogen
and fuel cells. And the easy answer is, as a group, no, if peaking of
oil and gas is real. All of these are real, all of these are important.

Wind and solar are intermediate electricity sources and don't really
address the oil market. Most current biofuels are too energy intensive
and don't mix well. Cellulosic biofuels need to happen fast. Fuel cells
and hydrogen are important, but they take years to implement. Making a
dent on simply starting to replace the United States, 30, 31 million
barrels a day of equivalent oil and gas, is a daunting task.

So, reducing the use of oil and gas is the single best invention that we
can create, reducing the use. Oil turns out to be primarily a
transportation fuel. So, we need to basically start to transport fewer
things.

The single biggest change that we could actually see in our society in
the next five to seven years is liberating our workforce and start
paying people by productivity, so that we allow people to work when they
want and where they want. And that is the single best thing we could do
to significantly curtail energy use.

Transporting goods: We basically now bring too many goods in from
overseas and too often they all arrive on the west coast and we clog our
highways with semi-trucks for taking the goods around, we need to
basically go to avoiding transporting goods by long distance, by trucks,
ASAP and take goods by rail to water and then water to rail is the next
best thing for energy savings.

And then finally, getting use to consuming and using both foods and
products locally has an enormous impact on the transportation use of
oil.

Using less natural gas is actually a far more complicated issue, because
gas turns out to be our only efficient and instant heat source. We need
to use heat efficiency. Electricity is not an efficient way to heat.
Natural gas is an inefficient source of electricity.

And so gas per kilowatts, create wasteful energy use, \-- is probably
the worst way we're using natural gas. And using gas at the burner tip
to create heat, should replace, as fast as possible, all ways we now use
natural gas to create electricity to create heat. And then our home and
building designs need a huge overhaul to start basically making heat a
more efficient and less energy efficient process.

The issue also, is not U.S., it's global. America cannot ignore the
global energy scene. Too many other key countries are just as vulnerable
or more vulnerable to these same energy risks and as the largest
consumer on earth we need to lead in the solution. And the global focus
makes solving the problem actually four times larger.

So, where are the next frontiers for non-fossil fuel energy? Frontier
number one, in my opinion, is better knowledge. The need for vast
improvement in the scientific understanding of the real energy issues is
crucial. There's an acute need to create some place, a Bureau of Global
Energy Standards, so that we start measuring every energy product we're
talking about and get an accurate energy in versus energy out, and make
sure that some of our solutions aren't net energy losers.

There's an acute need for a better sense of what each energy form is all
about. What's the trade off between a quart of natural gas are a quart
of oil, or is there a trade off? There's an urgent need for a global
institute. We need it to study all aspects of energy demand. What are
our biggest energy wastes? What reductions, energy intensive, would be
easiest to implement? And what role does price play in creating and
moderating energy demand?

What might be just over the horizon? I would offer three ideas, space
energy, where solar becomes king and where satellites beam solar down in
massive panels and superconductivity grids become the 21^st^ Century
source of efficient electricity.

I think the area of water energy is probably our least understood and
maybe the easiest nut to crack. We harness all aspects, \-- by
harnessing all aspects of power to water and creating by wave energy,
current energy, tidal energy, thermal energy, these events, the
oceanographic biomass, water also turns out to be by far, the most
efficient way to transport people and things.

And then the center of the earth, it's interesting. Every where in the
world the deeper you dig the hotter it gets and might energy tunnels
create the future for steam? And might harnessing geothermal, basically
end up far more effective than trying to find more oil?

Let me finally wind up by just reminding all of us a lesson that
basically anyone that studied history should easily know, crisis has
always shaped history. History is derived from faith-crises, and how we
have responded has created enormous winner and loser lists. And
ingenuity is not the mother invention; invention is driven by panic and
proper reaction. And how we cope with peak oil and gas could easily be
the pivotal event of whether the 20^th^ Century works or does not and
the urgency of the problem could not be more acute, thank you.

**CONCLUSION: MR. SWISHER**

Thank you Matt Simmons, for giving all of us a better understanding of
the nature of the global oil markets.