ASPO‟S PEAK OIL MESSAGE: SUCCESSES AND IMPEDIMENTS

ASPO‟S PEAK OIL MESSAGE:

SUCCESSES AND IMPEDIMENTS

ASPO 2009 International Peak Oil ConferenceOctober 12, 2009Denver, Colorado

ByMatthew R. SimmonsChairman Emeritus

Simmons & Company International

We Have Come A Long Way

Since 1st ASPO

■ Spring 2002: ±40 of us met in Sweden to begin studying

Peak Oil.

■ Aspirations were high that we could begin educating the

world that Peak Oil was real and would soon occur.

■ Definition of Peak Oil

often misunderstood.

■ Estimates of timing

varied enormously.

Source: TrendLines Research

But, Too Many Trees Have Been

Toppled Too Often

■ The Peak Oil scoffers still attack the

term as “pejorative”.

■ These optimists abound with simple

beliefs:

– Energy resource endowments are

boundless

– Advancing technologies make new

energy additions easy

– Massive new finds cropping up

everywhere

– Shale gas and shale oil will provide

bridge to the 22nd century

The Optimists Are Winning

The Media Battle

■ 150th anniversary of Colonel Drake

discovery brought out the optimist

heavy-hitters.

■ They rolled out a cornucopia of

theories.

■ Their views were pleasant news

to many key policy-makers and

reconfirmed why Peak Oilists

should be viewed with alarm.

Edward Morse

Michael Lynch

Daniel Yergin

Amy Myers Jaffe

Energy Optimism Is Still

A Faith-Based Belief

■ There is no solid data to bolster the optimists‟ claims.

■ Their proof based on simple beliefs.

■ It is time for data reform to end the optimists‟ claims.

Proof (From USGS) That USA

Will Always Have Abundant Oil

Auditing Giant Oil field Flows

Would End Peak Oil Debate

■ As has been said by many

savvy “experts”:

“A 3rd party audit of flow rate

history for all giant oilfields

would prove or disprove

Peak Oil reality. “

■ More important, audited

flows would create accurate

database to plot likely future

flow.

It Is Time To Trust But Verify*

■ The world seems happy to trust key oil-producing

country reports on:

– Total country oil flows

– Potential oil producing capacity

– Remaining “proven reserves”

– Quality of flows and reserves

■ There are no independent audits on origin of flow,

capacity and reserves.

■ This is like heading into WWII without radar.

* Trust, but Verify was a signature phrase of Ronald Reagan. He used it in public,

although he was not the first person known to use it. When Reagan used this phrase, he

was usually discussing relations with the Soviet Union and he almost always presented it as

a translation of the Russian proverb "doveryai, no proveryai" (Russian: Доверяй, но

проверяй) - Trust, but Verify

All vital indicators of

society‟s economic health

Global Data Reform Would Be

Easy To Implement

■ G-20 leaders must demand key field-by-field audits.

■ Enact transparency fines (≈$20 - $40/Bbl for oil imported into G-20 from non-transparent producers).

■ This would force producers into transparency within 30 days or create an enormous rainy day fund within 24 – 36 months.

Where there‟s a will, there‟s a way!

Field-by field

production data

Field-by field

production data

Why Are So Many Parties Content

To Stay In The Dark?

■ The abundance of “data” lulls too many into false sense of

security. Oftentimes, data is simply estimates:

– BP‟s Annual Review

– USGS Resource Endowment Predictions

– EIA‟s massive weekly, monthly and annual

reports

– IEA‟s OMR and other publications

– OPEC‟s Secretariat Report

■ All this data points to varying degrees

of proven oil reserves that forestall

any peaks or running out.

Ample Solid Data Is Available To Connect Dots

■ The devil is in the details. The real data is available, but takes some digging.

■ Results are not perfect, but enough for most juries to reach a verdict when properly presented.

■ ASPO has done a remarkable job of assembling the key dots (by experts with no axe to grind).

400

350

300

250

200

150

100

50

0

bil

lio

ns

of

barr

els

1930s

1940s

1950s

1960s

1970s

1980s

1990s

Worldwide Oil Discoveries by Decade

Pre

-1930s

Here Are Some Key Data Points

■ Production histories from many key non-OPEC oil fields.

■ Accelerating rates of decline in many key oilfields.

■ Diminishing flow size of most new discoveries.

■ Disappointing results by most new discoveries. (They

produce less and cost a lot more!)

■ Difficulty in converting remaining “last best hopes” into

real oil flows.

■ Rapidly declining flow of high quality oil.

Histogram Of Non-OPEC Supply Additions

■ Declines are rising.■ Each vintage getting smaller.

The North Sea Cannot Be Ignored

■ North Sea fields provide only accurate field-by-field data in the world.

■ Last major oil frontier discovered.

■ Avid user of all advanced oilfield technologies.

■ A showcase for rapid decline rates.

■ A showcase for steadily declining field sizes.

■ UK/Norway oil output peaked in 1999 (unforeseen by most).

■ A decade later, output at ≈55% of 1999 peak.

■ North Sea declines still accelerating.

Some Pictures Are Worth A Thousand Words

Snorre B

Tordis East Vigdis

Gullfaks Satellites

Statfjord Field

Ekofisk Area

Source: Saga Petroleum Report

Mexico‟s Cantarell Field

Is Classic Peak Oil Surprise

■ As Cantarell‟s output began to fall, most Pemex experts assumed it

was due to mechanical failure and only temporary.

■ As declines accelerated, fears began to confirm worst case.

■ Cantarell will soon fall to

400,000 Bbl/day.

■ Three sister fields

(Ku-Maloob-Zaap) ramped

up by same nitrogen injection

will soon also collapse.

■ This will end Mexico‟s long

era as an oil exporter.

0

500

1000

1500

2000

2500

Kb

d

Cantarell (Oil)

Too Many Other Key Oil-Producing

Countries In Irreversible Decline

■ List is long and too important to ignore:

1998 2003 2008 Est. 2009

Nigeria 2.11 2.15 1.95 N/A

Venezuela 3.12 2.36 2.35 N/A

United States 8.37 7.83 7.52 7.90

Mexico 3.50 3.79 3.16 2.94

United Kingdom 2.84 2.28 1.56 1.49

Norway 3.14 3.26 2.46 2.28

Australia 0.71 0.67 0.55 0.56

Indonesia 1.55 1.71 1.03 1.02

Argentina 0.90 0.83 0.75 0.74

Colombia 0.82 0.55 0.59 0.66

Oman 0.90 0.82 0.75 0.79

Yemen 0.40 0.45 0.31 0.27

Syria 0.57 0.53 0.39 0.36

Gabon 0.35 0.25 0.21 0.23

Egypt 0.87 0.71 0.65 0.63

Total 30.15 28.19 24.23 19.87

Source: IEA Oil Market Report - September 2009

--------------- MM B/D ---------------

Most High Quality Crude Streams

Now Mere “Trickles”

■ WTI is now blend of many imported crudes. (Cushing,

Oklahoma has become an oil-blending pharmacy).

■ Other key light crude grades now getting scarce:

– Asia‟s Tapis

– Nigeria‟s Bonny Light

– Forties Brent

■ Reason: The light oils are easiest to extract and

remnants in basins producing these grades are now

heavier and more toxic.

All now a fraction of what they

once were

What‟s Ahead Is Not Pretty

CERA‟s “Above-Ground” Risk Thesis

Is Real, Too

■ CERA blames “above ground risks” when their forecasts

are wrong.

■ Their above-ground risks include:

– Insufficient access to reserves

– Proper spending rates

– Ensuring technology advances are implemented

■ This concept is relevant, but their perceived above-ground

risks are modest.

■ The “Zombie list” is real, serious and scary.

The Zombie List

■ Rusting oil and gas infrastructure.

■ Graying oil field workforce.

■ Lack of new pool of

properly trained

engineers and geologists.

■ Diminishing oil field

technological advances.

“Jitters” Also Abound To Tip Over Oil‟s Table

■ List of “what could go wrong and hurt” is long and deep.

■ List of pleasant surprises is short and illusive.

Items on my list:

– Iran‟s Twitter revolution finally shutting down oil system

– Nigeria‟s MEND morphs into civil war

– Venezuela‟s upheavals collapse PDVSA‟s oil flow

– Violence in Amazon jungles (Ecuador/USA tipping point)

– Terrorists finally strike oil system anywhere, particularly Abqaiq,

Straits of Malacca or entrance to Galveston Bay

The Enduring Risk List Is

Aging of Key Reservoirs

■ Maturity brings on unexpected

woes:

– Quality of life diminishes

– Cost to live soars

Aging oil fields are like geriatrics:

Broken down and in ill-health.

Meanwhile, Growing Oil Demand Is

Unstoppable Without Careful Plan

■ Many optimists believe oil demand peaked in 2008!

■ This was also simply a belief, unsubstantiated with proof.

■ Rebounding 2009 economies popped this belief.

■ China, India, Brazil, etc.,

are rapidly expanding

and their thirst for oil

will grow.

■ Middle East population

is rapidly expanding

and struggling to create prosperity.

Too Many Key Oil Exporters Now

Growing Internal Oil Demand

■ Savage blow to oil export flows comes when exporters‟

internal demand grows causing flows to ebb.

■ This will happen throughout Middle East.

■ If Angola and Nigeria ever create semi-prosperity, their

internal energy demands will end their export era, too.

The Coming Surprise: Gas Has Peaked

■ Data on global gas output makes oil data look pristine.

■ But, solid data argues that global gas flows have also

probably peaked:

– Western Siberian gas

– North Sea gas

– Indonesian gas

– Conventional U.S./Canadian gas

■ Middle East gas not widely abundant and too sulfurous.

All in irreversible decline

We Still Have New Supplies To Bring On

■ But, they are all either small or tough to create.

■ Kashagan (nicknamed “Cash is Gone”) just saw its latest

cost to complete soar again (now $38 billion to begin oil

production in 2012).

■ Kuwait just announced it will take until 2030 to increase

their oil flows (with third-party help).

■ Brazil is pressing edge of technical envelope to create oil

flows in Santos Basin.

Exxon Proved How Costly It Is

To Create New Oil Flows

■ On October 6, 2009,

Exxon announced

agreement to purchase

24% of Ghana‟s Jubilee

oil field being developed

for $4 billion.

■ Production system

just beginning to be

built.

■ Projected peak oil is 120,000 b/d.

■ Exxon paid $200,000/peak barrel for a tiny extra supply.

Easy Oil And Gas Additions Died Years Ago

■ Onshore oil and gas flows

peaked in late 1970s.

■ Shallow water oil flows peaked

decade later.

■ Most deepwater plays never hit

estimated peak flows and all

decline fast.

■ There are no visible large new

projects to create.

Source: Oil & Gas Middle East - April 2008

15 Years Of New Field Start-Ups Barely

Offset Declining Base

■ Between 1995 - 2009, new field start-ups grew oil flows by

≈13 MM B/D.

■ But, new fields in

previous decade

declined by 8 MM B/D.

■ Almost all new vintages

declined at higher

rates.

History Of Recent/Planned New Oil Fields

Is Startling Story

■ Only handful of new oil fields in 2006 - 2009 are estimated to produce

over 100,000 B/D:

■ Balance average ≈30,000 - 40,000 B/D.

Fields Total Peak

2006 7 1,240 62%

2007 8 1,050 61%

2008 10 1,650 56%

-------- Non-OPEC Start-Ups --------

2006 9 1,625 81%

2007 5 740 69%

2008 6 1,350 83%

-------- OPEC Start-Ups ---------

Source: SCI Non-OPEC Supply Report July 2009

Non-OPEC OPEC Total

2006 1,993 1,996 3,989

2007 1,711 1,080 2,791

2008 2,954 1,625 4,579

2009 1,696 3,310 5,006

2010 1,354 906 2,260

2011 1,291 581 1,872

2012 1,390 1,649 3,039

2013 1,298 1,530 2,828

2014 1,040 1,630 2,670

----- New Field Start-Ups -----

-------- „000 B/D -------

------- „000 B/D -------

------- „000 B/D -------

Future Large Fields Are Getting More Scarce

■ List of 200,000 B/D new fields planned is not lengthy.

- 000 B/D -

2009 Khurais 1,200

Hawijah 300

IGD Habshan 270

Shaybah 250

2010 Hassi Messaoud EOR 200

2011 Pazflor Block 17 200

2012 None

2013 Egina 200

2014 Manifa 900

Kashagan 220

■ None are easy.

■ All might never

reach full potential.

Most Recent Large Oil Field Additions

Failed To Make Target*

■ Number of start-up sizeable

oil fields which hit targeted

outflow were few.

■ Their forecast peak lasted

briefly.

■ Of 100 fields, only eight hit or

exceeded design capacity.

■ On average, 100 fields hit

54% in year two, 56% in

year three, and were down

to 47% in year four.

*For additional information please refer to closing slide for contact information

regarding form major project performance and statistics.

Peak Oil And Gas Is True Threat

To Sustainable Society

■ Global oil peaked in 2005.

■ We probably peaked in global gas soon thereafter.

■ How rapidly flows ebb is unsolved mystery.

■ Absent data reform, no one can make an educated guess.

■ Best case by 2020:– Global crude flow 55 – 60 MMB/day

– Global gas flows fall faster

– Oil and gas shocks become prevalent over next decade Source: EIA Monthly Energy Report – March 2008

Thus Far, 2005 Set Record For

Global Crude Flows

■ Four years have elapsed since global crude output set

all-time record of 73,728,000 b/d.

■ How many added years of falling supply need to happen

before we accept that oil peaked?

2003 69,433

2004 72,481

2005 73,728

2006 73,446

2007 72,989

2008 73,706

2009 71,723

September 2009 EIA

Monthly Energy Review

------ „000 B/D ------

[Record production]

[Assumes Saudi Arabia produced 9,281]

[*6 month average]*

Source: EIA Monthly Energy Review - September 2009

SIMMONS & COMPANY

INTERNATIONAL

Investment Bankersto the Energy

IndustryFor information and/or copies regarding this presentation, please contact us at (713) 236-9999 or [email protected]. This presentation

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