Koil Energy Solutions Inc. (KLNG)

[JoeSmith]

OTC: $100 trillion needed to rebuild energy infrastructure

Uchenna Izundu
International Editor

HOUSTON, May 5 -- The oil and gas industry will need to invest $50-100 trillion to rebuild its ageing infrastructure within the next 7 years and stave off a serious drop in oil and gas production, Matt Simmons, chairman of Simmons & Co. International, told OGJ May 5 at the Offshore Technology Conference in Houston.

In a worst-case scenario, Simmons said, oil and gas output could fall by 10-20% by 2013 if industry does not replace its rusting, corroded assets. Spare capacity also has run out because formerly cheap prices for oil and gas precluded upgrading and construction of new facilities .

The average age of offshore rigs is 25 years, and oil companies have ignored the problem for the past few decades because of the low energy prices, which meant that maintenance has been expensive.

However, the upward trend in prices can help pay for the rebuilding of the energy system, Simmons stated.

"There is no blueprint in place, and this is a global problem. The longer the blueprint is postponed, the more acute the crisis will get," he said.

The reconstruction problem is compounded by the shortage of skilled engineers to carry out the work and the scarcity of raw materials.

"No census has been carried out on the age of the infrastructure," he said. "The industry's tool kit for corrosion is old, and painting over rust creates an illusion. Few parts of oil infrastructure have been replaced."

Leaks, stains, oil streaks, metal fatigue, and brittle steel are all signs of ageing pipelines, platforms, wells, and other assets. Simmons said the industry's focus had been on declining production, which was important, but it failed to recognize that declining oil fields are also accelerating rust on oil equipment.

"Peak oil is a reality. 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."

Simmons forecasts that oil prices could hit $200/bbl as global demand increases. He pointed out that the industry had previously sold its best-quality grade of oil at $15/bbl and flared natural gas because it was too costly to develop.

"That was a mistake," he concluded.