Oil Shale Development Economics

May 16, 2007

Khosrow BiglarbigiINTEK, INC.

INTEK

EFI Gas-to-Market ConferenceThe Westin Edmonton

14-16 May 2007

2

Economic DiscussionEconomic Discussion

• Part I - Project Economics

– Project costs

– Economic price

– Cash flow

• Part II – A new oil shale industry

– Potential size

– Economic hurdles/solutions

– Benefits on U.S. economy

3

National Oil Shale Model

4

Resource Base AnalyzedResource Base Analyzed

• Industry nominated tracts

• 79 Billion Barrels of resource in place

• Detailed geologic & petrophysical data

Western Oil Shale

5

43Step 1

Create Void by MiningStep 2

Rublize shale by explosionsStep 3

Initiate combustion

Virgin

Shale

Free oil movement

Combustion Front

Retorted Shale

Mined Shale

Mined Shale to surface retorts

Shale oil to refinery

Step 1Create Void by Mining

Step 2Rublize shale by explosions

Step 3Initiate combustion

Virgin

Shale

Free oil movement

Combustion Front

Retorted Shale

Mined Shale

Mined Shale to surface retorts

Shale oil to refinery

Modified In-Situ

Technologies ConsideredTechnologies Considered

1 2

Conveyer Retort Plant

Mining

Partial Upgrading

To Market

Conveyer Crusher

Waste Disposal

Shovel Trucks

Oil Shale

Overburden

Oil Shale

Overburden

Surface Mining / Surface RetortCrusher Conveyer Retort Plant

Mining

Partial Upgrading

To Market

ConveyerSlope Mine Crusher

Oil ShaleOil ShaleOil ShaleOil Shale

Waste Disposal

Underground Mining / Surface Retort

True In-Situ

6

Project CostsProject Costs

First Generation Projects

*Inclusive of mining, retort, & upgrading

*

*

Item Unit Range

Capital Cost K$/SDB 40-55

O&M Cost $/Bbl 12-20

Canadian Oil Sands

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

1981 1984 1994 1998 1999 2001 2003 2005

Pro

du

cti

on

Co

st,

20

04

US

$

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Alb

erta

Oil

San

ds

Pro

du

ctio

n,

MM

Bb

l/D

ay

Production Costs: Oil & Gas Journal, July 14, 2003, V. 101.27Production Volumes: Canadian Association of Petroleum Producers, Historical Statistics

O & M Costs

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

1981 1984 1994 1998 1999 2001 2003 2005

Pro

du

cti

on

Co

st,

20

04

US

$

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Alb

erta

Oil

San

ds

Pro

du

ctio

n,

MM

Bb

l/D

ay

Production Costs: Oil & Gas Journal, July 14, 2003, V. 101.27Production Volumes: Canadian Association of Petroleum Producers, Historical Statistics

O & M Costs

Canadian Oil Sands

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

1981 1984 1994 1998 1999 2001 2003 2005

Pro

du

cti

on

Co

st,

20

04

US

$

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Alb

erta

Oil

San

ds

Pro

du

ctio

n,

MM

Bb

l/D

ay

Production Costs: Oil & Gas Journal, July 14, 2003, V. 101.27Production Volumes: Canadian Association of Petroleum Producers, Historical Statistics

O & M Costs

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

1981 1984 1994 1998 1999 2001 2003 2005

Pro

du

cti

on

Co

st,

20

04

US

$

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Alb

erta

Oil

San

ds

Pro

du

ctio

n,

MM

Bb

l/D

ay

Production Costs: Oil & Gas Journal, July 14, 2003, V. 101.27Production Volumes: Canadian Association of Petroleum Producers, Historical Statistics

O & M Costs

7

However, the Capital Costs are IncreasingHowever, the Capital Costs are Increasing(Source: CAPP, March 2007)*(Source: CAPP, March 2007)*

0

20 000

40 000

60 000

80 000

100 000

120 000

Suncor -Millenium

Albian Syncrude- Aurora 2& UE 1 *

Nexen-OPTI

CNRL -Horizon

Shell -Muskeg &Scotford

Cap

ital

$ p

er b

bl/

day

ProductionStart Date 2001 2003 2006 2007 2008 2010

Capital Cost of 100,000 bbl/ day project$3.3 billion $10 billion

*Presented at the 2007 EIA conference, Washington. D.C.

8

Economic Price for Oil Shale TechnologyEconomic Price for Oil Shale Technology

Generic Projects (Price: $/Bbl)

TrueIn-Situ

SurfaceMining

UndergroundMining

ModifiedIn-Situ

$35.00$43.00

$52.00$57.00

0

10

20

30

40

50

60

70

2004

Dol

lars

Rate of Return – 15%

9

Cost of Capital$8

Operating Costs$17

Risk Premium$4

Taxes$8

0

5

10

15

20

25

30

35

40

45

Transfer Payments$6

Breakdown of Economic Price for Generic Breakdown of Economic Price for Generic Surface ProjectSurface Project

$/B

bl

$43/Bbl

10

Cashflow of a Generic Oil Shale Project

-1000

-800

-600

-400

-200

0

200

400

600

800

1000

1200

5 10 15 20 25 30 35 40

After Tax

Before Tax

Year

Cu

mu

lati

ve D

isco

un

ted

Aft

er T

ax C

ash

flow

(M

M$)

Room for Government Action

11

Impact of Incentives on Generic Cashflow

-1000

-800

-600

-400

-200

0

200

400

600

800

1000

1200

5 10 15 20 25 30 35 40

After Tax

Before Tax

Year

Cu

mu

lati

ve D

isco

un

ted

Aft

er T

ax C

ash

flow

(M

M$)

$10/Bbl Production Credit$5/Bbl Production Credit15% investment Credit10% Investment CreditAccelerated Depreciation

12

Projected Production Potential (BOE)(Shale Oil in the U.S.)

Base

Tax Incentives

RD&D

Measured

Accelerated

13

Potential Influence of Oil Shale Potential Influence of Oil Shale DevelopmentDevelopment

Oil Shale Direct and Indirect Jobs

Effects on Consumer Spending

Drilling Rigs

Skilled Labor

Steel Pipes

Power

Heaters

World Demand

OPEC

World Supply

Local, State,Federal

Treasuries

Contribution toGDP

ReducesImports

Reduces Call on OPEC

Impact on National Economy

Shale OilProduction

Oil ShaleDevelopment

Oil Shale Investments

Change In Oil Price

14

Favorable Fuel Prices Will Increase Consumer Favorable Fuel Prices Will Increase Consumer Discretionary Spending, Non-Petroleum Jobs, And GDPDiscretionary Spending, Non-Petroleum Jobs, And GDP

Oil Price

Fuel Price

ReducesImports

Reduces Call on OPEC

Change In Oil Price

Oil Shale Investments

Oil ShaleDevelopment

Shale OilProduction

Local, State,Federal

Treasuries

Drilling Rigs

Skilled Labor

Steel Pipes

Power

Heaters

Oil Shale Direct and Indirect Jobs

Effects on Consumer Spending

Impact on National Economy

World Demand

OPEC

World Supply

Contribution toGDP

ReducesImports

Reduces Call on OPEC

Change In Oil Price

Oil Shale Investments

Oil ShaleDevelopment

Shale OilProduction

Local, State,Federal

Treasuries

Drilling Rigs

Skilled Labor

Steel Pipes

Power

Heaters

Oil Shale Direct and Indirect Jobs

Effects on Consumer Spending

Impact on National Economy

World Demand

OPEC

World Supply

Contribution toGDP

Non PetroleumContribution

to GDP

Non PetroleumDrivenJobs

ConsumerDiscretionary

Spending

IndustrialEnergy

Spending

15

Impact of Increased Production on Future PricesImpact of Increased Production on Future Prices

(8)

(6)

(4)

(2)

0

2005 2010 2015 2020 2025 2030 2035

$/B

bl

Base Case

Measured Case

Accelerated Case

Reductions from Reference Prices

$-$10$20$30$40$50$60$70$80$90

$100

$/B

bl

EIA High Price

EIA Reference Price

$0

16

0

100

200

300

400

500

600

700

800

900

1,000

2005 2010 2015 2020 2025 2030 2035Year

Bil

lion

200

4 D

olla

rs

Base Case

Measured Case

Accelerated Case

Savings to U.S. ConsumersSavings to U.S. Consumers

(Cumulative)

$200 to $900 Billion

17

0

200

400

600

800

1,000

1,200

1,400

2005 2010 2015 2020 2025 2030 2035Year

Bill

ion

2004

Dol

lars

Base Case

Measured Case

Accelerated Case

Contribution to GDPContribution to GDP

(Cumulative)Up to $1.2 Trillion

18

0

50

100

150

200

250

300

350

2005 2010 2015 2020 2025 2030 2035Year

Tho

usan

d L

abor

Yea

rs

Base Case

Measured Case

Accelerated Case

New JobsNew Jobs

Up to 250,000

19

0

50

100

150

200

250

300

350

2005 2010 2015 2020 2025 2030 2035Year

Bil

lion

200

4 D

olla

rs

0

500

1000

1500

2000

2500

Oil

Sha

le P

rodu

ctio

n (M

BO

E/D

ay)

Base Case

Measured Case

Accelerated Case

Savings on Foreign ImportsSavings on Foreign Imports

Up to $325 Billion

20

0

10

20

30

40

50

60

70

80

90

2005 2010 2015 2020 2025 2030 2035Year

Bil

lion

200

4 D

olla

rs

0

500

1000

1500

2000

2500

Oil

Sha

le D

aily

Pro

duct

ion

(MB

OE

/Day

)

Base Case

Measured Case

Accelerated Case

Direct Local, State, And Federal Revenues Will Direct Local, State, And Federal Revenues Will Increase by $25 to $85 Billion by 2035Increase by $25 to $85 Billion by 2035

(Cumulative)

21

SummarySummary• Provide Long Term Sustained Production

• With Substantial Benefits to the U.S. Economy:

– Contribution to GDP: up to $1.2 Trillion

– New Jobs: 250,000– Reduction in Foreign Imports: $325 Billion

– Consumer Savings: $900 Billion

– Additional Investments: $145 Billion (Stimulated)

– Public Revenues: up To $85 Billion

• Concerted Efforts by Government and Industry Needed to Capitalize on this Opportunity

22

AcknowledgementsAcknowledgements

Office of Naval Petroleum

Office of Petroleum Reserves

U.S. Department of Energy

& Oil Shale Reserves