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

ASPO USA Denver World Oil ConferenceDenver, Colorado

November 10, 2005

Presented By:Matthew R. Simmons

ChairmanSimmons & Company International

ASPO USA Denver World Oil ConferenceDenver, Colorado

November 10, 2005

Presented By:Matthew R. Simmons

ChairmanSimmons & Company International

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

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

Peak Oil?

SIMMONS & COMPANYINTERNATIONAL

Could We Be Entering The 21st Century Energy Crisis?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?”


What Constitutes A Crisis?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.


Crises Do HappenCrises Do Happen

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 20th Century was… The greatest century of enlightenment and innovation.


Would Reaching Peak Oil Create A Crisis?Would Reaching Peak Oil Create A Crisis?

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.

If the world passes peak oil (and natural gas):

FE


Will Peak Oil And Gas Happen?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.


Peaking Is A Fact, Not A ConceptPeaking 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

Analogy


Peaking Of Oil And Gas Is Reservoir SpecificPeaking 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.”


Oil And Gas Basins Also PeakOil 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)

Once King and Queen decline, the end game begins.

Aging royalty is how basins peak and decline.

All usually found within two decades


Peaking Is An Event Easy To MissPeaking Is An Event Easy To Miss

– 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!

Track record of ignoring regional peaking of oil and gas is nearly perfect!


USA Peaking: Case Study AUSA 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.


North Sea Peaking: Case Study 2North 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.


North Sea Peaking Was Easy To Understand

North Sea Peaking Was Easy To Understand

Source: Development of UK Oil & Gas Resources 2001

1998 1999 2000 2001 2002 2003 2004

000 barrels per dayDunbar 42 38 33 29 31 22 17Forties 80 70 55 57 53 41 54Gannet A 20 17 14 11 11 8 7Gryphon 27 22 18 19 11 9 12Harding 93 86 87 75 64 51 41Judy 15 11 9 11 12 16 3Macculloch 40 35 27 22 29 28 5Miller 69 55 41 28 19 8 26Nelson 94 91 82 58 78 66 2Ninian 44 41 35 35 30 29 45Pelican 25 22 14 9 11 7 25Piper 39 30 23 19 16 13 4Saltire 27 15 10 7 6 3 11Scapa 15 13 9 7 7 8 2Scott 91 81 56 43 38 25 6Statfjiord (UK) 47 35 24 16 14 12 23Strathspey 20 13 8 7 11 8 18Tern 46 43 36 34 28 21 9TOTAL 823 684 526 446 423 345 311


North Sea Peaking Was Easy To Understand (2)



Reserve Appreciation Might Be Real, But Irrelevant

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.”

Initial booked reserves sufficient to cover cost to begin production

Reserves appreciate once development starts


Prudhoe Bay: Case Study CPrudhoe 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.


1990 – 2005: 85% of USA’s Proven Reserve Additions

Were Reserve Additions

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

Source: EIA


New Oilfield Technology Will Not Save The DayNew 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.


Middle East Oil Is “The Final Exam”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.


Dr. Sadad Al-Husseini Spoke The Truth (9/20/2005)

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


Shedding Light on Saudi Arabia’s OilShedding 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.


The Old Royal Family Of Saudi Arabian OilThe 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

ShaybahLord

AbqaiqQueen I

GhawarKing

SafaniyaQueen II Berri

Lord

Zuluf/MarjanLord/Lord

Year Discovered

19511948 1940 1964 1965 / 1967 1968

Peak Production[MB/D] / Year

5,800 930 1,500 586 658 500

(1980) (1972) (1981) (1978) (1981) (2004)


Saudi Arabia’s Oil Faces ChallengesSaudi 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


Does Saudi Arabia Have Ample Reserves?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 beadded.

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.


Rolling The Dice On Saudi Arabia’s Oil FutureRolling The Dice On Saudi Arabia’s Oil Future

*5% net decline per annum

20 – 25 MMB/Day15.0 MMB/Day12.0 MMB/Day

9.5 MMB/Day

4.5 MMB/Day*

9.500

FUTURE (2020)


Once Saudi Arabia Peaks…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.


Natural Gas Is Next Big SurpriseNatural 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


Non-Conventional Oil Is Very Real But Hard To UseNon-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.


Conceptual Oil And Gas Resources Are Harder To Use

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


Atomic Energy Needs A Big ComebackAtomic 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.”

This nuclear pellet is equal to one ton of coal!


When Oil Age Ends….Renewable Era BeginsWhen Oil Age Ends….Renewable Era Begins

All create electricity

Some hope oil curse ends as it ushers in clean or renewable energy.

“Renewables” now work:– Wind– Solar– Geothermal– Waste– Hydro

Oil creates transportation fuel and petrochemical feedstock.

Natural gas creates heat.


Peak Oil Has Become A Theological DebatePeak 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)


Mandated Field-By-Field Production Data Reform Will Create A True BibleMandated 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?


Keeping A Light Under The BushelKeeping 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!


Could We Now Be Past Peak Oil?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.

FE


A 1935 Oil Prediction(When Global Oil Usage Was 3.5 Million Barrels Per Day)

A 1935 Oil Prediction(When Global Oil Usage Was 3.5 Million Barrels Per Day)

“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)

MIT Enterprise Forum® of TexasPlatinum Flagship Series

Rice University Professor

Richard. E. SmalleyNobel Laureate

1943-2005

MIT Enterprise Forum Of TexasJanuary 22, 2003Houston, TexasPresented By:

Matthew R. Simmons

A Dickens Walk Through EnergyA Dickens Walk Through Energy

“Christmas Past” “Christmas Present” “Christmas Future”


Ghost Of Energy’s Future Has Grim Message(Unless Courses Change)

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?”

“If the courses are departed from, the ends will change.”

Charles Dickens, 1891

Modern Society

Waking Up To Make Sure This Is Not The Way

The World Ends

Waking Up To Make Sure This Is Not The Way

The World Ends

Humanity’s Top Ten Problemsfor next 50 years

1. ENERGY

2. WATER

3. FOOD

4. ENVIRONMENT

5. POVERTY

6. TERRORISM & WAR

7. DISEASE

8. EDUCATION

9. DEMOCRACY

10. POPULATION2003 6.3 Billion People2050 ~ 10 Billion People


Let’s “Win One For Rick Smalley”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.


Investment Bankersto theEnergy

IndustryFor information and/or copies regarding this presentation, please contact Laura Russell at (713) 546-7351 or [email protected] This presentation will also be available on our website www.simmonsco-intl.com within seven business days.

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

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