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Energy In The

21st

Century:A Rough Ride Ahead

Energy In The

21st

Century:A Rough Ride Ahead

byMatthew R. Simmons

ChairmanSimmons & Company International

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Ladies Home Journal 1900:

Predictions For A New Century

Ladies Home Journal 1900:

Predictions For A New Century

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Halfway Through First Decade Of A New CenturyHalfway Through First Decade Of A New Century

1.6 billion people with a life-span of

40 50 years. Railroads golden age.

The horse is here to say. Automobilesa novelty.

Andrew Carnegie: Wealthiest man inthe world.

Wright brothers take to the sky.

Harley motorcycles hit the road.

Montgomery Ward suppliers for everytrade and calling in the world.

Einstein invents Theory of Relativity.

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20th

Century The Age Of Energy : Part I20th

Century The Age Of Energy : Part I

Spindletop: Era of big oil begins (1901). Discoveries in Los Angeles Basin, East

and West Texas: USA oil era comes intofull bloom.

WW I & II perfect energy as finestweapons.

1938 1965: Middle East oil era comeof age.

Natural gas captured by pipelines:

World War II.

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20th

Century The Age Of Energy :Part II20

th

Century The Age Of Energy :Part II

Electrification of free world:TVA: Texas Dams, Columbia River, Colorado River

Atomic energy era begins (1950s).

Interstate highways and suburbia (1950s 1960s). Modern energy facilitated miracles.

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First Chinks In Energys Miracles:

The Cheering Fades

First Chinks In Energys Miracles:

The Cheering Fades

USAs oil peaks (1970).

USAs natural gas peaks(1973). First oil shock (Oct 1973):

prices triple by Christmaseve.

1977/1978 winter shutsdown mid west.

Fuel Use Act bans use ofnatural gas.

1979 Three Mile Island shutsdown atomic energy era.

1979 oil shock sends oil to$102 (in 2005 prices).

1982 2002: 20 year oil field depression.

1990s price collapses: 1992, 1993, 1998, 1999.

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First Five Years Of 21st Century:

Flashing Red Light

First Five Years Of 21st Century:

Flashing Red Light

Crisis or aberration debate begins.

Natural gas prices rip through $3 on way to $10.

Oil price rises from $10 in January 1999 to $37 in

October 2000. Blackouts in summer of 1999 led to explosion of new

power plants.

Enron blows up power industry.

9/11 destroys energy demand; the last big pricecollapses.

The August 14, 2003 blackout.

$30 oil becomes $50 oil.

Natural gas rises to $10 - $12 level.

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2005: The Year Of The Crow2005: The Year Of The Crow

Nothing good happened to

energy. Exploration success dismal.

Cost overruns astonishing.

Where have all the peoplegone?

What happened to the rigsand refineries?

China was the big surprise.

The hurricanes finished thejob! Katrina/Rita took awaymore then world had left.

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Might This Become A Winter Of Discontent?Might This Become A Winter Of Discontent?

Winter weather creates peak

energy demand: January March is seasonalglobal oil use

Winter blizzards create recordelectricity and natural gas use

Energy stocks are low.

Energy supply is flat or indecline.

We have no Empty on ourglobal fuel tank.

Running short creates surge indemand.

Source: DOE

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The Big Issues As We Head Into 2006The Big Issues As We Head Into 2006

Are we in a crisis?

Do free markets, technology andingenuity work?

Do high prices usher in era ofalternative energy?

Will normal energy prices soonreturn?

Is there a new generation on theway?

People Energy assets Projects that add capacity

Is the cupboard and blackboard bare?

FE

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Where Does Fixing The Problem Begin?Where Does Fixing The Problem Begin?

For lack of a nail, the war was lost:Important concept.

The fix beginsAt home (where is home?).

Plan 3 timescut once (where to beginplanning?).

Digitized oil fields still need people and iron.

Conceptual energy is a great concept.

Usable energy is a physical reality.

Demand can grow.

Use equals supply.

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Is The World Entering Peak Oil And Gas?Is The World Entering Peak Oil And Gas?

What does peak oil mean?

How do you know when it happens?

Is peak oil crying wolf?

Peak oil debate growing exponentially.

The debate has 2 strong sides.

The arguments are theological(I believe, I believe).

Leave I believe inside a church.

We need factual data to prove the issue

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Peak Oil IssuesPeak Oil Issues Can non-OPEC oil begin to grow

again?

Why did growth peter out?

Do oil reserves appreciate?

Does modern technology find andproduce more oil?

What is average decline rate today?

What will it become by 2010?

Does Middle East have plentiful oilleft?

Are there still new oil frontiers?

Is non-conventional oil now comingof age?

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Depletion Does Not Mean Run OutDepletion Does Not Mean Run Out

All supply questions anchoredon need to understanddepletion. When does an oil field peak?

How fast does it then decline?

Do all fields ultimately decline?

Do light oil fields decline fasterthan heavy oil fields?

Can intense drilling modify rateof decline?

The furor of depletion isastonishing.

The ignorance about depletionis amazing.

Analogy

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Questions Are Easier Than AnswersQuestions Are Easier Than Answers

Serious energy questions

inexhaustible. Lack of solid data prohibits

answers.

Conceptual fixes are easy totheorize.

Physical realities deter conceptsfrom materializing.

Ignorance can become falsebliss.

Reality can be harsh.

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Non-OPEC Oil Supply Must Be PeakingNon-OPEC Oil Supply Must Be Peaking

Too many non-OPEC producers are in irreversible decline.

Rates of decline are accelerating. North Sea is scary case study. Ignorance of USA peaking is still alarming. When non-OPEC peaks oil world is all about the Middle East.

Gannet A

0

5

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1998

1999

2000

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2004

Dunbar

0

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40

50

1998

1999

2000

2001

2002

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2004

Gryphon

0

5

10

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1998

1999

2000

2001

2002

2003

2004

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Middle East Oil Is Old And FragileMiddle East Oil Is Old And Fragile

Shaybah

LordAbqaiqQueen I

GhawarKing

SafaniyaQueen II Berri

Lord

Zuluf/MarjanLord/Lord

Year Discovered 19511948 1940 1964 1965 / 1967 1968Peak Production[MB/D] / Year

5,800 930 1,500 586 658 500

Royal oilfield families get old, too.

30 40 super giant oil fields were the backbone of Middle East Oil. All are now reaching exhaustion stage.

When the oil royal family declines, there is still lots of oil and gas left.

But, it will not be easily extracted.

The Middle East will become hot bed of drilling rigs.

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Saudi Arabias Oil Story Is The Oil StorySaudi Arabias Oil Story Is The Oil Story

Saudi Arabia was the only placeoil could grow forever.

20 25 million barrels per day oilwas a concept.

Cheap oil forever was aconcept.

Neither were factual.

Facts rule the future.

Facts are that Saudi Arabias oil

fields are too old. Six decades of steady growth

took its toll.

The growth in Arabian fluid is

brine and seawater.

BusinessWeek Online April 5, 2004

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The Peaking Of Middle East Oil

Is Oils Twilight Era

The Peaking Of Middle East Oil

Is Oils Twilight Era

When Middle East oil begins to decline,oil enters its end game.

The Wolf is either:

Approaching the door

Knocking on the door

Or is now In the room

Reacting to peak oil will shape the 21st century

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Natural Gas Could Be A Bigger

Surprise

Natural Gas Could Be A Bigger

Surprise

Natural gas depletes fasterthan oil (Fact).

65 70% of world naturalgas supply is in decline.

Most natural gas future

reserves are stillundiscovered.

We flared the best naturalgas.

We sold most of the rest as waste product of oil. Natural gas is worlds finest heat source. Natural gas was misunderstood until its era faded.

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All Forms Of Modern Energy Face

Limits To Growth

All Forms Of Modern Energy Face

Limits To Growth

Black coal is depleting.Brown coal has low BTUs. Unconventional energy is

energy intensive.

Nuclear era must beginanew. Alternate energy is real but

tiny.

Both create kilowatts

Electricity is poor generator of heat. Electricity does not create efficient transportation. Electricity is not a feedstock for petrochemicals.

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Can The World Cope With Passing

Peak Oil And Gas?

Can The World Cope With Passing

Peak Oil And Gas?

World is on path to

using 120 millionbarrels per day of oil.

Projected growth inelectricity and natural

gas 50% higher. If supply starts to

decline, use will also.

If the gap is quickly understood, a Plan B works. If the crisis is ignored, we enter the dark age.

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How We Solve Peak OilHow We Solve Peak Oil

We reduce transportation

intensity of oil.Shipments of goods bytruck becomes train toboat

Liberation of employeesto work close to homeEnd 9 5 check inBegin era of pay by

productivityGrow food locally: End

era of ornamental foodReverse globalization:

make things at home

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Oil Prices Need To SoarOil Prices Need To Soar

$65 oil is $.10 a cup.

High prices do not kill economies.

What should we do with high oilprice era?

Rebuild the energy infrastructure Create an OPEC middle class

Unlock R & D era for new energysource

High energy prices are salvation.

Low energy prices are a curse.

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Solving The Total Energy Problem

Not An Easy Task

Solving The Total Energy Problem

Not An Easy Task

Electricity is the elixir of modern life.

Natural gas is the worlds best sourceof heat.

Substitute for either is impossibletoday.

A new generation of energy is theultimate answer. In meantime:

Buy time (no new supply is toolittle)

Conserve Use at highest best use

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Lets Win One For Rick SmalleyLets 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.

1. Energy

2. Water

3. Food

4. Environment

5. Poverty

6. Terrorism and War

7. Disease

8. Education

9. Democracy10. Population

HUMANITYS TOP TEN PROBLEMS FOR THE NEXT 50 YEARS

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Twilight Can Turn Into A New DawnTwilight Can Turn Into A New Dawn

Twilight creates illusion of light gettingstronger.

Twilight then fades into a dark night.

It is always darkest before dawn.

If we solve our energy crisis, the 21st

century will be our greatest dawn. If we fail, we will have a dark future.

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Investment Bankers

to the EnergyIndustry

For information and/or copies regarding this presentation, please contact Laura Russell at (713) 546-7351 or lrussell@simmonsco-intl.com Thispresentation will also be available on our website www.simmonsco-intl.com within seven business days.