E&C companies improve life while oil, gas to peak

Natural gas isn't the only resource that's peaked, Matt Simmons of Simmons & Co. International said during the 6th annual E&C Forum at Rice University.

Natural gas isn't the only resource that's peaked, Matt Simmons of Simmons & Co. International said during the 6th annual E&C Forum at Rice University.

Simmons said it's become clear to him that Saudi Arabia's huge resources have also peaked. Exploration successes ended decades ago in the Middle East, he said. Saudi Arabia, which exports a huge amount of oil, will soon need to hold onto some of that resource to meet demands of a growing population. Add to that the tremendous lifting costs associated with producing hydrocarbons in and offshore Saudi Arabia, he said.

"It's beginning to take 'fuzzy logic' to plan for Saudi Arabia's future," he said.

Simmons expects natural gas prices to continue to rise, believes oil and gas might both be peaking.

"Peaking doesn't mean you run out," he said, "but it does mean you don't grow."

While natural gas was peaking, the US built an abundance of gas-fired plants. This, he said, was a mistake.

"Natural gas really is in trouble because it really is in decline," Simmons said, adding that many still believe the peak is yet to come.

Energy infrastructure is "one of the most serious problems the world is going to have to face," he said. "Energy is not just another commodity. Energy is the earth's most precious resource."

And as such, the image he closed with was somber.
"If Saudi Arabia's peaked, the world has peaked," Simmons said.

Other topics in the forum offered plans for improving life as an E&C company.

Engineering and construction companies that cannot adapt will not survive as the industry continues to change, KBR CEO Randy Harl said.

He told attendees that the only way of the "road to disaster" is for the E&C companies to begin bidding responsibly for contracts.

"We have to get risk and reward back in balance before it ruins the whole thing," Harl said.

The trick, then, is adaptability in four areas: doing business in a global world, people development, rebalancing risk and reward, and sustainable development.

Of these, Harl said, sustainable development is an issue that must be addressed as it becomes more certain that large remaining hydrocarbon deposits lie in developing countries. The national oil companies are demanding more than just a share of the profits from hydrocarbon developments, including jobs and training without losing out on the country's culture or harming the environment, he said.

"Some may see this as a soft issue, as another example of political correctness taken to the extreme," he said. "That is not how the governments where we want to do business see it. It is not how the national oil companies see it.

"They are our new stakeholders, and we ignore them at our own peril," he said.

Finally, he said, the margins in the engineering world are razor thin now that operators view engineering as a commodity.

Don Cruver of Cruver and Associates said engineering should not be viewed as a commodity. For companies to remain competitive, they must understand they do not have to sign the company's "standard" contract, re-establish personal relationships, and openly challenge "worst" practices, he said.

Otherwise, Cruver said, a continuation of the consolidation will lead to an oligopoly in the E&C world.

"That will be bad news for everybody," he said.

09/09/03

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