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PEAKING OF WORLD OIL PRODUCTION: IMPACTS, MITIGATION, RISK MANAGEMENT

PEAKING OF WORLD OIL PRODUCTION: IMPACTS, MITIGATION, RISK MANAGEMENT. Robert L. Hirsch, SAIC Roger Bezdek, MISI Robert Wendling, MISI Presentation to ASPO May 2005 Based on a Study for the U.S. Department of Energy. THIS PRESENTATION. THE PROBLEM LEARNING FROM EXPERIENCE

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PEAKING OF WORLD OIL PRODUCTION: IMPACTS, MITIGATION, RISK MANAGEMENT

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  1. PEAKING OF WORLD OIL PRODUCTION:IMPACTS, MITIGATION, RISK MANAGEMENT Robert L. Hirsch, SAIC Roger Bezdek, MISI Robert Wendling, MISI Presentation to ASPO May 2005 Based on a Study for the U.S. Department of Energy

  2. THIS PRESENTATION • THE PROBLEM • LEARNING FROM EXPERIENCE • TRANSPORTATION FLEET LIFETIMES • MITIGATION OPTIONS • THREE MITIGATION SCENARIOS • PRUDENT RISK MANAGEMENT SAIC / MISI

  3. THE PROBLEM: PEAKING OF WORLD CONVENTIONAL OIL PRODUCTION(Not all of the latest forecasts) • ProjectionSource • 2006-2007 Bakhitari, A.M.S. • 2007-2009 Simmons, M.R. • After 2007 Skrebowski, C. • 2008 Campbell / ASPO • Before 2009 Deffeyes, K.S. • Before 2010 Goodstein, D. • After 2010 World Energy Council • 2010-2020 Laherrere, J. • 2016 EIA nominal case • After 2020 CERA • 2025 or later Shell • ---------------------------------------------------------------- • No visible peak Lynch, M.C. 2000 2010 2020 2030 SAIC / MISI

  4. LEARNING FROM EXPERIENCE • North American natural gas • U.S. Lower 48 states oil production • Economic impacts in 1973 & 1979 SAIC / MISI

  5. EXPERIENCE: NORTH AMERICAN NATURAL GAS • Expertsoverestimated North American natural gas reserves & future production as late as 2001. • National Petroleum Council - 1999 • DOE EIA - 1999 • Cambridge Energy Research Associates - 2001 • U.S. natural gas production is now flat / in decline. • Natural gas & oil geology have similarities. • If wrong on natural gas, what’s the risk on oil? SAIC / MISI

  6. EXPERIENCE: U. S. LOWER 48 OIL PRODUCTION Dramatic Improvement in Oil Field Technology 3.5 Production 3.0 2.5 80 PRODUCTION (Billions of Barrels per Year) 2.0 PRICE (2003 $ per barrels) 1.5 Price 1.0 0.5 0 0 • 1950 1960 1970 1980 1990 2000 High prices & advanced technology did not reverse trends! SAIC / MISI

  7. EXPERIENCE: MAJOR OIL INTERRUPTIONS • Impacts of world oil production peaking are exemplified by the 1973 & 1979 oil interruptions. • + Inflation + Recession • + Unemployment + High interest rates • 1973 & 1979 were relatively brief. • World oil peaking impacts could last a decade or more. • The world has never faced a problem like oil peaking. SAIC / MISI

  8. TRANSPORTATION EQUIPMENT • U.S. 2003 consumption: ~20 MM bpd • ~25% of world oil demand • ~Two thirdsused in transportation • The U.S. transportation fleet • + Very large • + Huge investment • + Evolves slowly Details SAIC / MISI

  9. U.S. TRANSPORTATION FLEETS • Fleet Size Median Cost to Replace • Lifetime Half the Fleet • (Years) (2003 $) • Automobiles 130 million 17$1.3 trillion • Light Trucks, 80 million 16$1 trillion • SUVs,etc. • Heavy Trucks, 7 million 28$1.5 trillion • Buses, etc. • Aircraft 8,500 22$.25 trillion SAIC / MISI

  10. TRANSPORTATION EQUIPMENT CHANGES • Large efficiency improvements possible in some fleets, smaller in others. • Some fuel switching possible in the short term, more longer term. Change is slow & expensive. Fuel must be provided for existing fleets. SAIC / MISI

  11. THREE MITIGATION SCENARIOS • Scenario I - No action until peaking occurs • Scenario II - Mitigation started 10 years before peaking • Scenario III - Mitigation started 20 years before peaking Assumptions: • All mitigation initiated immediately • Crash program implementation Optimistic limiting case SAIC / MISI

  12. MITIGATION OPTIONS Commercial or near-commercial technologies to impact LIQUID FUEL MARKETS • Vehicle Fuel Efficiency • Gas-To-Liquids (GTL) • Heavy Oil / Oil Sands • Coal Liquefaction • Enhanced Oil Recovery (EOR) SAIC / MISI

  13. OPTIONS NOT INCLUDED OptionReasoning • Nuclear • Wind ……….. ELECTRIC / NOT LIQUID FUELS • Solar • Shale Oil……………... Not commercial • Biomass……………. Not economic • Hydrogen……………Neither ready nor economic SAIC / MISI

  14. MITIGATION ASSUMPTIONS • VEHICLE FUEL EFFICIENCY -- 30%, then 50% LDV improvements • GAS-TO LIQUIDS -- 2x recent GTL projections (LNG competes) • HEAVY OIL/OIL SANDS -- 2-2.5x recent projections • COAL-TO-LIQUIDS -- Five new 100,000 bpd plants/year • ENHANCED OIL RECOVERY (EOR) -- Paced by CO2 availability SAIC / MISI

  15. DELAYED WEDGES APPROXIMATION Impact Barrels/ Day Prepare Produce Vehicle Fleet Fuel Saved Actual Wedge Approximation 10 20 30 0 Time - Years SAIC / MISI

  16. WEDGE VALUES Preparation Impact 10 Years Delay Later Mitigation Option(Years)(MM bpd) • Vehicle Efficiency 3 2 • Gas-To-Liquids 3 2 • Heavy Oils / Oil Sands 3 8 • Coal Liquids 4 5 • Enhanced Oil Recovery 5 3 Potential contributions vary greatly. SAIC / MISI

  17. SUM OF WEDGES 30 E O R 20 I m pac t C o a l Li q ui d s ( M M b p d ) H eav y Oil 10 G T L E ff. Ve h icle s 0 0 5 10 15 Y ea r s A ft e r Cr as h P r o g r a m I n iti a tio n SAIC / MISI • Delay, then rapid growth • Roughly 25 MM bpd at 15 years after crash program start.

  18. Production (Billions of Barrels per Year) 1980 1990 2000 1950 1960 1970 Year U.S. LOWER-48 OIL PRODUCTION PEAKED & DECLINED 3.5 3.0 Actual (EIA) 2.5 Approximation 2.0 1.5 1.0 0.5 0 A huge, complex & geologically varied oil province. Used as a surrogate for the world. SAIC / MISI

  19. 120 100 80 PRODUCTION (MM bpd) 60 40 20 0 -20 0 +10 +20 -10 YEARS BEFORE / AFTER OIL PEAK WORLD OIL SUPPLY & DEMAND:LOWER 48 PRODUCTION PATTERN & EXTRAPOLATED DEMAND GROWTH Extrapolated Demand -Growing World Economy Shortage L 48 production pattern • Assumed: • Demand @ 2% • Oil Decline @ 2% • Peak @ 100 MM bpd • (Not a prediction) SAIC / MISI

  20. SCENARIO I: MITIGATION @ PEAKING 120 Mitigation 100 Shortage 80 PRODUCTION (MM bpd) 60 40 20 0 -20 0 +10 +20 -10 YEARS BEFORE / AFTER OIL PEAK SAIC / MISI

  21. SCENARIO II: MITIGATION 10 YEARS BEFORE 120 Mitigation 100 Shortage 80 PRODUCTION (MM bpd) 60 Start Oil Decline Delayed 40 20 0 -20 0 +10 +20 -10 YEARS BEFORE / AFTER OIL PEAK SAIC / MISI

  22. SCENARIO II: MITIGATION 20 YEARS BEFORE 120 Mitigation 100 80 PRODUCTION (MM bpd) 60 Oil Peaking Further Delayed 40 Start 20 0 -20 0 +10 +20 -10 YEARS BEFORE / AFTER OIL PEAK SAIC / MISI

  23. SCENARIOS ANALYSIS CONCLUSIONSBasis: Immediate crash program mitigation I. Wait for peaking II. Start 10 years early III. Start 20 yearsearly • Oil shortages largest, longest lasting • Delays peaking; still shortages • Avoids the problem; smooth transition SAIC / MISI

  24. RAPID OIL PRODUCTION DECLINES AFTER PEAKING HAVE BEEN FORECAST EIA (Hakes, J.) ……………………………..… ~ 8% Saudi Aramco (Al-Husseini, S)…………….. 3-5% ExxonMobil………………………………..... 4-6% On a base of 100 MM bpd, 3-8% declines correspond to 3-8 MM bpd annual declines. Mitigation would be much more difficult! SAIC / MISI

  25. WORLD OIL PEAKING FORECASTS • ProjectionSource • 2006-2007 Bakhitari, A.M.S. • 2007-2009 Simmons, M.R. • After 2007 Skrebowski, C. • 2008 Campbell / ASPO • Before 2009 Deffeyes, K.S. • Before 2010 Goodstein, D. • After 2010 World Energy Council • 2010-2020 Laherrere, J. • 2016 EIA nominal case • After 2020 CERA • 2025 or later Shell • ---------------------------------------------------------------- • No visible peak Lynch, M.C. 2000 Now 2010 Now + 10 2020 Now + 20 2030 SAIC / MISI

  26. PRUDENT RISK MANAGEMENT Cost of Error Premature Start Time - 20 Years Scenario III - 10 Years Scenario II 0 Years Scenario I SAIC / MISI

  27. SUMMARY & CONCLUSIONS • Oil peaking timing is uncertain. • It may be soon. • “Soon” is less that 20 years hence. • It’s a world liquid fuels problem. • A number of mitigation technologies are ready. • With timely mitigation, economic damage minimized. • Prudent risk management = early action, not reaction after the fact. SAIC / MISI

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