HAVE WE “PEAKED?”

OTC 2009 Topical Luncheon

Houston, Texas

By:

Matthew R. Simmons, Chairman

Simmons & Company International

May 6, 2009

“Peaking” Has Become Controversial Topic

■ “Peak Oilists” deemed “pessimistic cult.”

■ Peak oil demand gaining favor among economists.

■ Peak oil price now

commonly accepted view.

■ Peaking often confused

with “running out.”

■ Peaking facts hard to find.

■ Peaking beliefs abundant.

“Peaking” Means “We Peaked!”

■ Peaking does not mean

“running out.”

■ It does mean we reached

the “top.”

■ Peaking sometimes leads

to “undulating plateaus.”

■ But then, you start down

“the other side.”

Source: IEA World Energy Outlook 2008

■ Mountain climbers know false peaks.

■ Only when one reaches true peak, does it become visible.

■ Some peaks are steeper than others.

■ Downward slopes vary, too.

■ Lewis & Clark expedition

falsely assumed they

reached peak many

times.

Seeing A Peak Is Difficult

Final Proof Of Peaking:

Rear View Mirror

■ Many peak events only understood/appreciated years

after they happen:

– Great Depression‟s peak

– Spanish „flu pandemic peak

– Dot.com boom peak

– Japan economic boom

miracle peak

■ Bubbles always peak but

are rarely predictable.

Offshore Technology Conference 2008:

“Everything” Seemed To Be Peaking

■ Rampant labor shortages.

■ Dwindling iron ore and copper

supplies.

■ Record high oil and gas prices.

■ Oil supplies not growing.

■ Record high drilling rates.

■ Record high cost for new

drilling rigs.

■ China/India consuming last of

“everything.”$0.00

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Did The Boom End In Summer 2008?

■ Oil prices set all-time record(July 2008).

■ Prices then moderated for 2.5 months.

■ Between 9/22/08 and 12/22/08,oil prices plunged 74%.

■ Natural gas prices fell even further.

■ Iron ore, steel, copper, etc., all saw demand and prices plunge.

■ Many keen observers chuckled at this now obvious bubble bursting.

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My Timing Was Impeccable!

■ In summer 2008, various

publications chronicled my

controversial Peak Oil views.

■ My price predictions were

deemed “whacko” by some

friends and most critics.

■ Many still wondered when I

would publicly admit “I woz

wrong!”

May 2009: A New Wave Of “Peakists”

■ Many keen observers of energy/economics now believe:

– Oil demand peaked

– Stock market peaked

– Global economy peaked

– Drilling rig shortage peaked

– Oil field inflation peaked

– Equipment shortages peaked

Were all these peaks

simply bubbles?

Was the systemic

shortage we had in first

half of 2008 an illusion?

Was Last Year A Classic Bubble?

No!

■ 12 months ago, we had run out of too many key components

of the world‟s energy system.

■ Global oil demand had grown too

fast.

■ Demand for rigs used up even

marginal oil rigs.

■ People shortages were getting

serious.

■ India, China, Middle East all

booming too much.

■ High oil prices stimulated this boom.

Indian Economy

High Oil Prices Were Not High Enough

■ Oil prices from Jan - July 2008 were between $100 - $147 per barrel.

■ Prices failed to dampen demand.

■ It did not budge flat to falling oil supply.

■ World economy was in great shape.

■ U.S. economy good, too:– Texas recorded best economic year ever– Rocky Mountain economy best ever

■ Western Canada boom best ever.

■ U.S. oil demand in 2006/2007 unsustainably high.

■ High oil price did not create sub-prime mortgage crisis.

$150 Oil Was Actually Still Cheap

■ Sticker-shock made $150/Bbl

oil price seem high.

■ This translates to ≈$0.30/cup.

■ In Turkey, gasoline prices were

$11/gallon (or $0.70/cup).

■ Prices not high enough to:– Attract hordes of new hires to

the industry

– Add new rigs…fast

– Begin to replace “rusting assets”

$150 Oil Not High Enough To

Begin Creating OPEC Middle-Class

■ OPEC‟s population has soared.

■ 2/3rd of ≈600 million people live below poverty line.

■ Unless host countries get “fair economic rent”, these

societies will drift into chaos.

■ Would $600 be high enough

oil price?

■ As economies grow, will

they use up all oil exports?

OPEC Nations Population Growth

Case For Oil Passing Peak

Almost Air-Tight

■ Hard evidence now argues that global crude oil peaked.

■ May 2005 was likely peak oil month (4 OTC‟s ago).

■ Latest EIA/IEA data strongly confirms peak.

■ Possible Middle East surge in 2nd-3rd Q-08 has not shown up in IEA member country imports (+1.8 MMB/D).

■ If this output “burst” not real, oil has peaked. Still estimates

Peak Oil Flow Data Not Perfect, But…

■ It is strong enough to “convict”

(beyond reasonable doubt).

■ If world enacted key field-by-field

data transparency reform, courts

could “convict and execute.”

■ “Execute” means rapidly adopting

“Plan B.”

■ Plan B: How world rapidly shifts to using far less oil.

USA Also Does Not Have

A Natural Gas Glut

■ Mania over prolific shale gas/Bakken

Shale/Utah/Cob oil shale created sense

of “gas glut” that will allow U.S. to

become almost energy independent.

■ The hype is incredible.

■ The harsh truths:– Shales do contain hydrocarbons or kerogen

– Enormous amounts of energy and water

needed to break open the impermeable

rocks

– Flows come out fast and then decline at

record rates

– Presumed “rig” pumping service needs are

enormous

Why The Shale Gas Glut Is Not Real

■ EIA (U.S. DOE) supply models assumed U.S. natural gas started

growing by 9% year-over-year in January 2008.

■ No hard data exists to support this model.

■ Hard data reported to SEC and investors is real.

■ If glut is real, thousands of small independents would have grown

their supply 2.5 times that of six superstars.

Top SuperstarsXTO EnergyChesapeakeDevonAnadarkoEOG ResourcesSouthern

Grew supply by

≈600 BCF

Top Five Laggards

Exxon Mobil

Shell

BP

ChevronTexaco

ConocoPhillips

Saw U.S. gas

production drop

by ≈600 BCF

Key Players in U.S.A. Natural Gas Production

Global Oil Demand Has Not Plunged (Yet!)

■ Biggest plunge in global oil supply occurred in USA in September-

October 2008:

– It was mostly caused by two hurricanes

– Analysts assumed it was start of global economic recession

– U.S. gasoline demand now growing

– Diesel still down

– Rest of U.S. petroleum use “flat”

■ Parts of Europe/Japan show

weak demand.

■ Korea and much of rest of world

demand still strong.

■ Developing countries‟ oil

demand still growing.

Offshore Rig Shortage Is Acute

■ Petrobras, alone, needs 2/3rds of new build deepwater fleet.

■ Deepwater field declines extremely steep.

■ New plays are in ultra-deep waters and ultra-deep vertical formations.

■ Enormous costs require careful well testing:– Many more appraisal wells– Mandatory core sampling– Extended flow tests essential

■ Meanwhile, 80% of current rigs must be replaced ASAP.

Workforce Shortage Is Acute

■ Past 4 months “downsizing”

nearing 40,000 workers.

■ Probably more than all new hires

in 2006 - 2008.

■ Will this end chance to recruit

talented new entries for another

decade? Generation?

■ When is old too old?

■ Who will turn off the last light?

The U.S. Labor Department‟s Statistics Reveal…

■ Employers expect half of current workers to retire in next

5 to 10 years.

■ Energy careers deemed

“unstable, dirty, and

low-skilled.”

■ Most training programs

scaled back or closed.

■ Energy industry needs

workers proficient in math, science, and, especially

technology.

■ Few industry-defined, portable credentials have been

developed.

“Rust Crisis” Is Real

■ Worldwide energy infrastructure too old.

■ Most far beyond original design life.

■ Rust is corroding oil and gas flows.

■ Leaks are setting new

peaks.

■ Maintenance was never

“robust.”

■ Rust never sleeps.

Onshore Oil Peaked Ages Ago

■ Global onshore oil peaked in

1980.

■ All remaining growth came

from offshore oil and gas.

■ Drilling in deeper waters

propelled industry to new era.

■ Shallow-water oil peaked by

1990.

■ North Sea oil peaked in 1999.

■ Gulf of Mexico is classic Peak Oil case study.

■ Deepwater fields peak and then almost collapse.

■ Oil is extracted of every

producing formation.

■ Most deepwater projects

never reached peak

design flows.

■ The peak output lasted

only few months.

■ Five years later, oil flows tend to be tiny.

Deepwater Oil Fields Peak Quickly

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A Picture Is Worth A Thousand Words

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Performance Of GOM Deepwater Fields

■ Not only do deepwater fields decline fast, they rarely

come close to design capacity.

■ A few notable examples:

Field Year 1 2 3 4 5 6 7

Gunnison 2003 0.6% 38% 56% 56% 37% 25% 33%

Holstein 2004 0.6% 41% 28% 31% 26% 25% -

Hoover 2000 4.5% 31% 44% 22% 18% 14% 11%

Magnolia 2004 1.0% 50% 45% 16% 14% 21% -

Production as % of Design Capacity

A Few Performed Better Than Planned

■ In recent study of 65 large fields with average

design capacity of 74,420 B/D:

– 12 reached 90%

– 9 out of 12 exceeded 100%

– Remaining 53 all came in below 90%

– Many never even reached 50%

“Other” Gulf Of Mexico Oil Fields Now Tiny

■ 50% of GOM’s 1.4 MMB/D comes from ≈600 non-deepwater

fields.

■ Many were once large.

■ All are now small.

■ Most have tiny remaining

flows (average field

production 300 Bbls/day).

■ Abandonment liability

might be 50 times remaining

value.

We Need A Peaking Audit

■ Lessons learned from

financial crisis: We need

real data.

■ Oil and gas industry needs

3rd party audit of its key oil

and gas fields.

■ This will verify when peak oil

occurred and audit can

predict future oil flows.

Field-by field

production data

Field-by field

production data

Without Audit,

We Head Toward Granite Mountain

■ We can still slow down, produce less.

■ But, if we do not, watch demand outpace supply.

■ Shortages then occur.

■ Shortages induce hoarding.

■ Hoarding creates run on the energy bank.

■ It is time to lead and time to act!

■ Time for a wake-up call.

■ Time for data reform.

■ Time to begin Plan B to live in post-peak oil and gas world.

■ Time to enact recruitment drives.

■ Time to start rebuilding infrastructure at smaller size.

■ All we have left is TIME.

■ Time is running out.

Industry‟s Leaders Now Need To Lead

Twilight‟s Last Gleaming

Unless we wake-up, we could see twilight‟s last gleaming.

When the darkness comes, the lights go out.

Justice William O. Douglas

Speaks On Twilight

“As nightfall does not come all at once,

neither does oppression. In both instances

there is a twilight when everything remains

seemingly unchanged. And, it is in such

twilight that we all must be aware of change

in the air however slight, lest we become

unwitting victims of the darkness.”

SIMMONS & COMPANY

INTERNATIONAL

Investment Bankersto the Energy

IndustryFor information and/or copies regarding this presentation, please contact us at (713) 236-9999 or lrussell@simmonsco-intl.com. This presentation

will also be available on our website www.simmonsco-intl.com within seven business days.