Are We Entering The 21st Century’s First Crisis: Peak Oil?

1. Are We Entering The 21st Century’s First Crisis:Peak Oil? ASPO USA Denver World Oil ConferenceDenver, ColoradoNovember 10, 2005Presented By:Matthew R. SimmonsChairmanSimmons & Company International

2. Could We Be Entering The 21st Century Energy Crisis? • Does the 21st century need abundant energy growth? • Can this growth be met through technology and hard work? • If not, will demand for more energy understand and cease? • Could a gap between demand and supply become “A CRISIS?”

3. What Constitutes A Crisis? • Crisis [kri’sis] A crucial or decisive situation : TURNING POINT (Webster’s II Dictionary) • “Turning point…when it becomes clear a patient will recover or die…” • “A time of great danger or trouble.” A crisis is a series of problems ignored until they become terminal.

4. Crises Do Happen The 20th Century was… • A century marked by unattended problems that became awful crises: • The great war and it non-resolution • The “Roaring Twenties” which become “Great Depression” • “Peace In Our Times” became “World War II” • Bolshevik Revolution which evolved into Stalin/Mao and 100 million deaths • The greatest century of enlightenment and innovation.

5. Would Reaching Peak Oil Create A Crisis? If the world passes peak oil (and natural gas): • Is this a crisis or a surprise? • If demand peaks, it is a surprise. • If demand continues to soar, it will be a crisis. • If the world needs 100 units and supply is only 60 units, prices go up, disappointment sets in or rationing become mandatory.

6. Will Peak Oil And Gas Happen? • No…if neither are finite (aerobic oil?) • No…if demand peaks. • Not for ages if… • Technology is embraced • We drill many more wells • Conceptual reserves are found • No…if history of energy cycles occur. • Yes…if all of the above are wrong.

7. Analogy Peaking Is A Fact, Not A Concept • All finite resources have their “limits to growth.” • The faster a resource is used, the sooner its use peaks. • Peaking does not mean “running out.” • Peaking means further growth is over. • Post-peaking generally sees supply declines. Identifying the date is the only unanswered question

8. Peaking Of Oil And Gas Is Reservoir Specific • Production from oil and gas-bearing reservoirs ultimately peaks. • As reservoir pressures ebb, water and gas cap crowd out oil from each well. • Adding more wells can postpone peaking or reduce declines. • Tertiary recovery and enhanced technology can “manage the tail.”

9. Oil And Gas Basins Also Peak • Most key basins have a “royal family” of giant fields: • King • One or two Queens • Six to Ten Lords • Thereafter, remaining fields are all small (peons) All usually found within two decades • Once King and Queen decline, the end game begins. • Aging royalty is how basins peak and decline.

10. Peaking Is An Event Easy To Miss Track record of ignoring regional peaking of oil and gas is nearly perfect! • USA’s oil peak = 1970 • USA’s gas peak = 1973 • Venezuela’s peak = 1970 • Iran/Kuwait’s peak = 1974/1972 • FSU = 1988 • North Sea’s peak = 1999 • Indonesia’s peak = 1977 • Argentina’s peak = 1998 Conventional wisdom missed every case!

11. USA Peaking: Case Study A • Dr. Hubbert’s 1956 prediction was accurate. • Predicting peaking decimated his reputation. • Natural gas pundits missed USA’s conventional gas peaking for more than 3 decades: • NPC Study in 2000: Gas supply can easily grow • NPC Study in 2003: Gas supply can stay flat • Non-Alaskan/deepwater oil supply: 3 million barrels per day by mid-2005. • Conventional natural gas supply:30 – 32 bcf per day by mid-2005.

12. North Sea Peaking: Case Study 2 • By 1995,I thought it was easy to see peaking just ahead. • 1995: Major operators told IEA that UK/Norway would produce over 7 million barrels per day by 2000 and not peak until 2010. • 1999: North Sea peaked. • Summer 2006: UK/Norway estimated to produce 3.6 million barrels per day. • Field-by-field data was visible. • Few experts looked at the real numbers.

13. North Sea Peaking Was Easy To Understand Source: Development of UK Oil & Gas Resources 2001

14. North Sea Peaking Was Easy To Understand (2)

15. North Sea Peaking Was Easy To Understand (3)

16. North Sea Peaking Was Easy To Understand (4)

17. Initial booked reserves sufficient to cover cost to begin production Reserves appreciate once development starts Reserve Appreciation Might Be Real, But Irrelevant • In 1940 – 1960 era, reserves did appreciate significantly. • By mid-1970s, large fields were generally assessed within 120% of 2005 estimates. • When appreciation occurs, it generally extends “the tail.”

18. Prudhoe Bay: Case Study C • Initial recoverable reserves: 10 – 10.5 billion barrels. • Initial production estimate: 1.5 million barrels per day until 1989. • Latest recoverable reserve estimates: 13 billion. • Prudhoe Bay’s decline began in 1989. • Current output ≈±300,000 barrels per day.

19. Source: EIA 1990 – 2005: 85% of USA’s Proven Reserve Additions Were Reserve Additions • Remainder all came from reserve appreciation. • USA’s oil output fell from 7.5 million barrels per day in 1990 to 5.5 million barrels per day in 2005. • Deepwater growth of 1.5 million barrels per day kept this from being 4 million barrels per day • This anchors USGS “proof” that reserve appreciation is real. • Newly discovered oilfields and extensions amounted to only 15% of last 15 year’s reserve additions. Domestic Production

20. New Oilfield Technology Will Not Save The Day • “Rapidly changing oilfield technology” will accelerate. • This is BUNK! • All major advances began experimental phase in 1970s. • It took 30 years to commercialize globally. • No game changing technologies are being pursued. • Oilfield technology is not same as Silicon Valley technology.

21. Middle East Oil Is “The Final Exam” • Middle East proven reserves might be conservative. • “Undiscovered” Middle East oil might someday be found. • This might be the last great energy illusion. • The era of cheap, boundless Middle East oil might be over. • Dr. Ali Sam-Sam Bakhtiari (Iranian oil expert) might be right. • Dr. Sadad Al-Husseini (Saudi Arabian oil expert) might be correct.

22. Dr. Sadad Al-Husseini Spoke The Truth (9/20/2005) • Currently Middle East oil capacity: 21 – 23 million barrels per day. • Best case Middle East capacity by 2025: 25 million barrels per day. • Saudi Arabia can reach 12 million barrels per day but should not exceed this. Photo by Charles Coates

23. Shedding Light on Saudi Arabia’s Oil • 5 super giant oilfields made up 90% of oil output. • 3 giant oilfields made up 8%. • These oilfields are between 40 and 60 years old. • All are reaching point of decline. • Half of “proven reserves” are “questionable.” • Remaining oil is harder to produce.

24. GhawarKing SafaniyaQueen II Zuluf/MarjanLord/Lord BerriLord ShaybahLord AbqaiqQueen I Year Discovered 1940 1951 1948 1968 1964 1965 / 1967 Peak Production[MB/D] / Year 930 586 658 5,800 500 1,500 (1978) (1981) (1972) (2004) (1980) (1981) The Old Royal Family Of Saudi Arabian Oil Collectively the 7 super giant oilfields account for 7.4 million barrels per day (92%) of 8.1 million barrels per day of 2004 crude output

25. Saudi Arabia’s Oil Faces Challenges • Current production base in decline. • 800,000 barrel per day addition by 2009 to offset “declines” (2% per annum decline). • 4 “new” projects that add 2 million barrels per day are all old fields which never produced high oil flows. • 35 years of exploration unearthed only 1 large field and several satellites. BusinessWeek Online April 5, 2004

26. Does Saudi Arabia Have Ample Reserves? 1979: Proven reserves total 110 billion. Probable reserves add 67 billion. Possible reserves add 68 billion. 1988: Proven reserves total 260 billion. 2005: Proven reserves total 260 billion, with another 200 billion to soon be added. Sept. 2005: Over 50% of 260 billion from 8 key fields. Remainder from fields which have barely produced. • USA had 29.6 billion proven reserves in 1970. • USA has 22.0 billion proven reserves in 2005.

27. FUTURE (2020) 15.0 MMB/Day 20 – 25 MMB/Day 12.0 MMB/Day 9.500 9.5 MMB/Day 4.5 MMB/Day* Rolling The Dice On Saudi Arabia’s Oil Future *5% net decline per annum

28. Once Saudi Arabia Peaks… • The world will pass sustained peak oil when Saudi Arabia’s oil output peaks. • Peaking might now be “past tense.” • The higher an “oil system” produces, the faster it peaks and declines. • “Conservation production” is best insurance policy.

29. Natural Gas Is Next Big Surprise • Too many key areas have passed peak supply: • USA • Canada • Russia • Netherlands • Indonesia • United Kingdom • Most “stranded gas” has never been discovered. • Gas depletes faster than oil. ≈68 - 70% of current production

30. Non-Conventional Oil Is Very Real But Hard To Use • Tar sands require massive energy to convert into heavy oil. • Oil shale is far more energy intensive to produce. • Neither creates easy substitute for natural gas and light oil.

31. Conceptual Oil And Gas Resources Are Harder To Use • “Real” proven oil reserves might be ≈500 billion barrels. • Remainder are OPEC’s 1980 “paper barrels” and unconventional oil. • The 3 to 7 trillion recoverable reserves are primarily conceptual: • Undiscovered • Undrilled

32. This nuclear pellet is equal to one ton of coal! Atomic Energy Needs A Big Comeback • Five pellets create annual electricity needs for average home. • Nuclear energy is clean. • Waste can be minimized. • Security of small amounts of waste is the only “con.”

33. When Oil Age Ends….Renewable Era Begins • Some hope oil curse ends as it ushers in clean or renewable energy. • “Renewables” now work: • Wind • Solar • Geothermal • Waste • Hydro All create electricity • Oil creates transportation fuel and petrochemical feedstock. • Natural gas creates heat.

34. Peak Oil Has Become A Theological Debate • Hunches, opinions and hopes prop up the Peak Oil scoffers. • Fuzzy, unreliable proven reserve data make the pessimistic scientist’s work hard to understand. • “It is time the leave “I believe” inside a church.” (Dr. Herman Franssen, September 2005) • It is past time to reform energy data. • “Let’s abandon traffic lights and air-traffic controllers rather than spend another month in the dark.” (Matthew R. Simmons, July 2005)

35. Mandated Field-By-Field Production Data Reform Will Create A True Bible • Top 250 oilfields make up ≈85% of world’s oil output. • It would take 30 days to model next three year’s real supply. • This would prove Peak Oil. • Is this important? Sample

36. Keeping A Light Under The Bushel • Ignorance can be bliss. • Dreams are more pleasant than reality. • The data might collectively be ugly. • Ugly futures are not fun and cheery. • Great crises are created by ignoring solvable problems. • Rule #1: When you are in a hole: Stop Digging! • No data reform is accelerating the dig!

37. Could We Now Be Past Peak Oil? • Peak Oil means sustainable safe supply. • This could now be “past tense.” • Too many key countries are past peak. • Decline rates might now be ≈8 – 10%. • The world is now out of spare drilling rigs. • Finding new oil without ample rigs is a tough task.

38. “Oil has become more and more necessary to everyone. At first it was used for medicine, for lamps, and for lubrication. Now, if the supply of oil were cut off, our manner of living would change completely until something to take its place was found.” (Written in 1935 by Maud and Miska Petersham when the world used 3.5 million barrels of oil each day) A 1935 Oil Prediction(When Global Oil Usage Was 3.5 Million Barrels Per Day)

39. Nobel Laureate1943-2005

40. A Dickens Walk Through Energy MIT Enterprise Forum Of Texas January 22, 2003 Houston, Texas Presented By: Matthew R. Simmons “Christmas Past” “Christmas Present” “Christmas Future”

41. Ghost Of Energy’s Future Has Grim Message(Unless Courses Change) “Are these the shadows of things that will be, or are they shadows of things that may be?” Modern Society “If the courses are departed from, the ends will change.” Charles Dickens, 1891

42. Waking Up To Make Sure This Is Not The Way The World Ends

44. Let’s “Win One For Rick Smalley” • Richard Smalley had an energy vision. • It was rooted in fear about peak oil and natural gas. • If we win an energy victory, we avoid an energy crisis. • If we ignore the issue, we will live in a far darker world.

45. E Investment Bankers nergy to the Industry SIMMONS & COMPANY INTERNATIONAL For information and/or copies regarding this presentation, please contact Laura Russell at (713) 546-7351 or lrussell@simmonsco-intl.com This presentation will also be available on our website www.simmonsco-intl.com within seven business days.