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Simmons Says World's Energy Infrastructure Needs Big Fix

Oil and natural gas "rust" is an "evil worse than depletion," and in the next seven years, $50-100 trillion should be earmarked to rebuild the world's aging infrastructure, according to energy guru Matthew R. Simmons.

Simmons, who has chaired Houston-based Simmons & Co. International since 1974, spoke to an overflow crowd last week at the Offshore Technology Conference (OTC) in Houston. He called for the establishment of an "energy czar" within the coming year to oversee the rebuilding process.

"In human life and industrial life there is no eternal youth," Simmons said. "Bodies and assets age. Preventative maintenance only temporarily masks the aging process." The world's energy infrastructure has become a spider's web of rusting steel, he said. "Had the world appointed an energy czar, he would have ordered a global census on the age of the rusting oil infrastructure. A mandate would have forced abandonment when leaks became too toxic."

In a worst-case scenario, Simmons estimated that oil and natural gas output worldwide could drop 10-20% by 2013 if old pipes, subsea structures and platforms are not replaced or repaired. The average age of offshore rigs is 25 years, and subsea systems may be even older.

"No census has been carried out on the age of infrastructure. The industry's toolkit for corrosion is old, and painting over rust creates an illusion..." Without a massive rebuild, "we can find ourselves in a situation of 100 million barrels per day demand, wellhead capacity at 60 million and the capacity to deliver just 30 million barrels. The rest may have rusted away."

Simmons' interest in the world's aging energy infrastructure piqued in 2006 following a series of oil leaks from BP plc pipes that flow from the Trans-Alaska Pipeline System in Prudhoe Bay. The leaks were attributed to maintenance problems related to budget cuts, and more than 200,000 gallons of crude were lost. A subsidiary of BP last year pleaded guilty to a misdemeanor violation of the Federal Water Pollution Control Act and agreed to pay $20 million in fines and restitution.

Because he knew that the Trans-Alaska system was part of some of the "newest infrastructure in the industry," Simmons wondered how well the older oil and gas infrastructure worldwide was performing.

"This isn't just BP, it's the whole industry," he said. For instance, he cited the U.S. Minerals Management Service (MMS), which monitors the structural integrity of more than 3,800 offshore structures in the Gulf of Mexico. The MMS estimates that around 2,000 structures are operating beyond the life of the original design.

The energy industry's focus has rightly been on increasing reserves, but declining oil and gas fields also have accelerated rust on the equipment, he said.

"Peak oil is a reality," said Simmons. "In 2005 we had peak production, and this fell by 265,000 b/d in 2007. There is a high likelihood that production will continue to fall."

Rebuilding infrastructure may have been delayed in part, he said, because of high maintenance costs. However, today is an opportune time to begin the revamp -- while commodity prices are skyrocketing, he said.

"Current prices are high enough to start priming the pump," he said. "As prices keep surging ahead, the wellhead windfall revenue can pay the piper who rebuilds the steel infrastructure. But there is no blueprint or master plan in place, and this is a global problem. The longer the blueprint is postponed, the more acute the crisis will become."

According to Simmons, only a handful of energy giants are repairing old infrastructure. BP plc, he noted, was forced to repair its Alaskan oil operations after pipelines from the Trans-Canada oil pipeline sprung leaks.

A lack of raw materials and rising prices for building materials could tamp rebuilding efforts, Simmons noted. However, he said "it is time to stop scrambling and start organizing the world's most serious redevelopment construction project. Triage management needs to prioritize which links in our chain are the weakest. A Marshall Plan needs to be created by OTC 2009 at the latest."

The Marshall Plan, named for then-Secretary of State George Marshall, was used by the United States to reconstruct allied countries in Europe following World War II.

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