A Quick Tip on Web-Related Oil and Gas Research

Need a Thanksgiving break from slogging through the 1,200-page Omnibus Energy Bill? Take a quiet detour to a website that contains exceptional perspective on oil and gas.

Hard to believe the Metallgesellschaft incident occurred exactly nine years ago this month. If you've never heard of it, don't feel left out. You likely remember the sudden and unexpected collapse in oil prices around the Thanksgiving holiday in November 1994. Oil prices dropped to the lowest levels since the period prior to the original Arab Oil embargo in 1973.

It wreaked financial havoc in the oil and gas industry and became part of the stimulus for majors to dump low-performing U.S. assets and reinvest overseas. Many U.S. independents saw little future in oil with its perennial threat of oversupply and began to look at a new fuel as an exploration target. That fuel was natural gas.

While there were a lot of theories regarding what caused the 1994 oil price collapse, none of them bore any semblance to the facts. There were no sudden changes in inventories, supplies, or usage. There were no unexpected geopolitical events.

Ultimately it came down to an event on the commodities market. MG Corp., the U.S. division of German chemicals conglomerate Metallgesellschaft, got caught on the wrong side of the commodities market, partially through mismanagement. As commodity traders discovered the exposure, the market re-polarized. Traders shorted oil as the Metallgesellschaft contracts came due and the conglomerate was on the losing side of a $2 billion transfer in money, the bulk of which occurred in just a couple of short weeks in November 1994.

The event was characterized by the fact that energy prices had responded to a trading event rather than global fundamentals.

The incident was a threshold moment for oil and gas. Just as the industry had settled into stability in the post-1986 energy market collapse, the bottom was knocked out once again. The event provided the first indication that commodity market speculation by traders without direct interest in energy was able to influence oil and gas pricing, a theme that was repeated in 1998-99 when anxiety over 100 million paper barrels of oil again sent commodity prices to historic low levels.

Few entities knew or reported on the event as it unfolded. However, the story was recognized contemporaneously by an energy industry investment banking firm in Houston. Today, commentaries on the MG affair can be found at the website for Simmons & Company International (see www.simmonsco-intl.com, look under the Matthew Simmons tab, and select Oldies but Goodies).

The advent of internet related information sources has been a major contribution to understanding the energy industry over the last half decade. Previously, access to comprehensive information on oil and gas was primarily a capability of the trade press or industry analysts. The internet has democratized that process. Now any reader can get timely access to similar information. It is available from news or industry forums like Rigzone and official governmental entities like the Energy Information Administration, which contains detailed studies and/or statistics on all aspects of oil and gas, both domestically and internationally.

But for anyone new to oil and gas, or for someone seeking to broaden their personal perspective in a rapidly evolving environment, a journey to www.simmonsco-intl.com is time well spent. While data can be found in multiple venues, getting it packaged in a contextual framework is much more difficult. Industry employees will understand the distinction when called to deliver a program on energy to a local service organization with limited time to prepare.

What makes the Simmons site of value is the totality of the work. Over the last 10 years, the banking firm has been involved in 336 energy industry transactions, mergers, or acquisitions, a piece of business that has totaled $41 billion. During a time when energy was a nonentity for most economic observers--computers, communications, and high-tech were all the rage in the mid-1990s—Matt Simmons, the company's Harvard-educated CEO, warned of impending energy supply shocks. As energy markets tightened in 1997 Mr. Simmons gained credibility. Some of that evaporated when the market collapsed in 1998-99. Still, Mr. Simmons stayed on message and was vindicated in 2000-01 and again last winter.

Today everyone from Wall Street to Main Street is aware of energy.

The Simmons message has always been direct. The energy industry has fundamentally changed in the last decade. It has moved from an era of excess capacity to one of constraint. That constraint includes natural gas supplies. It includes drilling rigs or other infrastructure such as pipelines. And while there is still a productive capacity cushion in oil, OPEC has provided a form of voluntary constraint, exercising global market discipline.

Mr. Simmons has a reputation for delivering jeremiad-filled speeches warning of steep challenges in front of the industry. These include replacing an aging and deteriorating infrastructure. They also warn of the need for massive capital investment in field programs to overcome the looming specter of depletion. In fact, it is possible to trace the modern recognition of depletion's roll in global oil markets and the North American natural gas business to early research by Simmons & Company International. Mr. Simmons' analysis of the depletion issue was the subject of a Washington Post column two weeks ago. While a topic like depletion may sound arcane, it has interesting implications for the global oil industry when applied to Saudi Arabia. Mr. Simmons suggests that Saudi Arabian excess productive capacity is not as great as everyone accepts, and the major Saudi oilfields responsible for the nation's reserves face seldom-publicized obstacles because of hitherto partially understood geology.

The facts and statistics are out there when it comes to energy. Perspective is a little more rare, which is why the most interesting thing about presentations at the Simmons web site is their availability with a couple quick mouse clicks to anyone interested in energy.