• Jeff Matthews

Cellulosic Ethanol to the Rescue?

Shell said total oil and gas production fell 9% to 3.5 million barrels of oil equivalent a day from 3.84 million a day a year earlier.—Wall Street Journal

How the mighty have fallen.

During the last oil crisis—1980—when I was putting together the data to be used in the “Monthly Petroleum Review” for my boss in the equity research department of a large and fondly-remembered brokerage firm whose name rhymes with “Feral Winch,” Royal Dutch Shell was probably the best-managed of the seven international oil companies.

Exxon in those days was dealing with, among other things, a failed diversification program into, believe it or not, integrated circuits (I am not making that up: Exxon had purchased Zilog for some bizarre reason), while British Petroleum was still partly owned by the UK Government, which was not exactly a value-added board-member, and also managed to top-tick the entire 1970’s inflation cycle by buying Kennecott Copper in 1981.

Royal Dutch, meanwhile, was focused on gaining control of its U.S.-based affiliate, Shell Oil, which was the best-run of the domestic majors, and building a mind-boggling worldwide portfolio of oil and gas assets—all based on its original 1890 franchise: exploiting Sumatra oil fields in the Dutch colony of the Netherlands Indies.

But that was then, and this is now, as reported in today’s Journal:

The company [Royal Dutch] said it expects its closely watched reserve-replacement ratio – the rate at which a company finds new reserves of oil and gas to replace the energy it pumps out of the ground each year – would be between 60% and 70% in 2005. Companies typically try to achieve 100% reserve replacement…

Yes, no kidding oil companies “try to achieve 100% reserve replacement”: anything less and they are a depleting asset.

Meanwhile, the best our current administration can come up with is something called “cellulosic ethanol.”

I don’t know about you, but even my dog Lucy knows that “cellulosic ethanol” is not the answer to anything in a world demanding 84 million barrels of oil each day.

Back when I was crunching those numbers for the “Monthly Petroleum Review,” China was a net exporter of oil while Indonesia—which two years ago followed China’s example and started importing oil products—was a major oil exporter and key OPEC member…and the entire world consumed a modest 55 million barrels a day.

A 60-70% reserve replacement ratio is not, for any extraction-dependent company, a good thing. For an oil company as large and important as Royal Dutch, it is a bad thing.

And for the world at large, it is a terrible thing.

Jeff Matthews I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

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The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. The content herein is intended solely for the entertainment of the reader, and the author.

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