THE OUTLOOK FOR UNCONVENTIONAL FUELS

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1 THE OUTLOOK FOR UNCONVENTIONAL FUELS Roger H. Bezdek, Ph.D. Management Information Services, Inc. Presented at the Conference Integrating Energy Policy and Climate Policy Sponsored by the Association for Energy Economics and the Johns Hopkins University School of Advanced International Studies Washington, D.C. April 22, 2008

2 No, we re facing a liquid fuels crisis 2

3 WORLD HAS BEEN CONSUMING MUCH MORE OIL THAN IT HAS BEEN FINDING The Growing Gap 60 billion barrels Past Discovery Future Discovery Production Past discovery according to ExxonMobil

4 ARE UNCONVENTIONAL FUELS THE ANSWER? Eliminating U.S. oil imports by 2030 Southern States Energy Board, Trans.Efficiency Transportation Effiiency 16% Biomass 24% Coal-to- Liquids 29% Oil Shale MMbpd Import Gap EOR Oil Shale Biomass CTL Enhanced Oil Recovery 15% 16% 5 Conventional Oil Production

5 OIL SANDS Immense resource No exploration costs No decline curve Capital access Politically stable 40 yrs. development Challenges -- Capital costs -- Labor -- Natural gas -- Water -- Climate -- Environmental 5

6 GLOBAL CRUDE OIL RESERVES BY COUNTRY Includes 175 billion barrels of oil sands reserves Canada, with 175 billion barrels in oil sands reserves, ranks 2 nd only to Saudi Arabia in global oil reserves billion barrels Saudi Arabia Source: Oil & Gas Journal Dec Canada Iran Iraq Kuwait Abu Dhabi Venezuela Russia Libya Nigeria United States 6

7 TWO EXTRACTION METHODS: MINING & IN-SITU Extraction Upgrading Refining Mineable In-Situ 7

OIL SANDS CURRENTLY PRODUCING 1.1 MMBPD But it Has Taken 40 Years to Reach This Level! 3,000 2,500 2015 Forecast is 2.

8 OIL SANDS CURRENTLY PRODUCING 1.1 MMBPD But it Has Taken 40 Years to Reach This Level! 3,000 2, Forecast is 2.8 MMbpd Is This Feasible? Thousand bbl/day 2,000 1,500 1,

9 OIL SANDS CAPITAL COSTS INCREASES But Cost Increases are Global for all Energy Capital $ per bbl/day, 2006$ 120, ,000 80,000 60,000 40,000 20,000 0 CAPEX increased 3-fold, and still escalating rapidly Suncor - Millenium Albian Syncrude - Aurora 2 & UE 1 Nexen- OPTI CNRL - Horizon Shell - Muskeg & Scotford Production Start Date

10 LIQUID FUELS FROM COAL U.S. Could Be the New Middle East 1.55 Trillion Barrels of Coal Synfuel Old Middle East Saudi Arabia: Billion Barrels Iraq: Billion Barrels UAE: 97.8 Billion Barrels Kuwait: 96.5 Billion Barrels Iran: 89.7 Billion Barrels Qatar: 15.2 Billion Barrels Oman: 5.5 Billion Barrels Yemen: 4.0 Billion Barrels Syria: 2.5 Billion Barrels TOTAL 686 Billion Barrels U.S. Domestic Coal Recoverable reserves 0.55 T Bbls Demonstrated reserve base (oil equivalent) 1.0 T Bbls TOTAL 1.55 T Bbls Equivalent 10

GASIFICATION Coal is converted into syngas

11 COAL-TO-LIQUIDS TECHNOLOGY A Proven Technology Currently in Use World-Wide 1 GASIFICATION Coal is converted into syngas FT CONVERSION 2 Syngas passes through an FT catalyst and is converted into an hydrocarbon ultra-clean liquid UPGRADE 3 The FT liquid product produced is is upgraded to into ultra ultra high clean purity synthetic fuels fuels 11 11

12 ESTIMATES OF U.S. CTL POTENTIAL 6 5 National Energy Technology Laboratory 2027 Southern States Energy Board 2030 Million Barells/day Unconventional Fuels Task Force 2030 National Coal Council Bottom Line: All studies indicate huge potential for CTL 12

13 BARRIERS TO CTL Technical: Integrated operations of advanced CTL technologies Economic: Uncertainties about future WOP High capital and operations costs Investment risks Competition for equipment and engineering skills Environmental: CO 2 and criteria pollutants emissions Expansion of coal production Water requirements Social: NIMBY & public resistance to coal use 13

14 HYPOTHETICAL CTL PLANT EXAMPLE (26,000 barrels/day) Expenditures: Capital (plant): $3.2 billion O&M: $114 million/yr CO 2 CO 2, $98 million/yr Revenues/Returns: Net revenues: $700 million/yr Return on investment (ROI): 16% Bottom Line: Net cash-flow is positive by year 7 of project Plant is profitable during year 13 of project CTL plant competes with oil at $61/bbl 14

; most in CO, UT, WY -- Well specified -- Extensive RD&D conducted Issues: -- Huge CAPEX -- Never

15 OIL SHALE BASICS Hydrocarbon bearing rock Enormous resource: 2.6 trillion BOE; about = world oil reserves Advantages: -- 2 trillion+ in U.S.; most in CO, UT, WY -- Well specified -- Extensive RD&D conducted Issues: -- Huge CAPEX -- Never been commercialized -- Requires huge energy input -- Environmental problems: water, waste, CO 2, etc. -- Infrastructure: roads, facilities, labor, etc. 15

16 EASTERN & WESTERN OIL SHALE RESERVES U.S. Geological Survey s s Reserve Estimate: 2.1 Trillion Barrels 16

17 OIL SHALE TECHNOLOGIES Two basic processes: Mining followed by surface retorting In-situ retorting Shell modified in-situ process (ICP) most viable However, energy input is enormous: e.g., 250K bpd would require all Colorado electricity Conversion of Oil Shale to Products (Surface Process) Resource OVERBURDEN OR LEANER GRADES Ore Mining Retorting Oil Upgrading Overview of In-Situ Conversion Process PRODUCER HEATER INLET FACILITIES GAS TREATMENT & Oil STABILIZ ATION OIL STORAGE Fuel and Chemical Markets HEATED RICH ZONE 17

18 POTENTIAL OIL SHALE PRODUCTION (Estimated by DOE Unconventional Fuels Task Force) Oil Shale Production (MMBbl/D) Year 18

PRODUCTION SCHEDULE IS REALISTIC 2.5 Achievable When Compared With Canada Oil Production (Millions Bbl/D) 3.0 Canadian Oil Sands Actual (1990-2005); Projected (2006-2020) 1 2.0 1.5 1.0 0.

19 PRODUCTION SCHEDULE IS REALISTIC 2.5 Achievable When Compared With Canada Oil Production (Millions Bbl/D) 3.0 Canadian Oil Sands Actual ( ); Projected ( ) Oil Shale Development Schedule ( ) Year 1) Canadian Oil Sands Production Source: Energy Information Administration, IEO (2006) 2) U.S. Oil Shale Development Schedule: Oil Shale Working Group (2006) 19

ECONOMICS AND COSTS DOE estimated following costs (100,000 bpd facility): -- In situ: $3.4 billion -- Retort surface: $4.4 billion -- Retort underground: $4.7 billion -- Annual O&M costs range $0.

20 ECONOMICS AND COSTS DOE estimated following costs (100,000 bpd facility): -- In situ: $3.4 billion -- Retort surface: $4.4 billion -- Retort underground: $4.7 billion -- Annual O&M costs range $0.6 $0.8 billion But these have likely escalated significantly in recent years perhaps by a factor of 2 or more Further, RAND estimates costs to be much higher (double or more) and that oil shale requires oil prices of $70 - $95/bbl Shell delaying its ICP commercialization Bottom line: Economics highly uncertain, and first commercial plant unlikely for another decade 20

21 ENHANCED OIL RECOVERY 80+ billion barrels of stranded oil in U.S. oil left after conventional extraction EOR is initiated after primary and secondary recovery Employed since 1950s Most produced via CO 2 injection Expensive; currently limited by available CO 2 and pipelines Reservoir Production Time - Decades Major opportunity: A win-win produce more U.S. oil and sequester CO 2 Normal Production Due to Primary & Secondary Recovery Production Enhanced by EOR 21

22 EOR OPERATION AND GEOGRAPHY Existing U.S. CO 2 Sources and Pipelines CO 2 EOR Operation 22

23 EOR POTENTIAL Original Oil In-Place: 582B Barrels Oil left: 390B Barrels 89 Billion Barrels with State-of-the-Art CO 2 -EOR Technology (Ten Basins/Areas) 41 Billion Additional Barrels with Next Generation CO 2 -EOR Technology (Six Basins/Areas Studied to Date) Future Challenge 260 Billion Barrels Cumulative Production 172 Billion Barrels Proved Reserves 20 Billion Barrels 200K+ bpd currently produced in U.S. Most produced by small independent companies not the Exxons New technology can significantly increase CO 2 - EOR potential 23

24 BIOMASS RESOURCE POTENTIAL OF 500+ MILLION DRY TONS PER YEAR 24

25 8000 U.S. ETHANOL PRODUCTION IS FORECAST (MANDATED) TO INCREASE SIGNIFICANTLY Actual Production Energy Bill Requirement Millions of gallons/year Source: Renewable Fuels Association

complex, difficult, & expensive than corn-based ethanol

26 OF U.S. RENEWABLES ONLY CELLULOSIC BIOFUELS MIGHT HELP Potential of corn-based ethanol is not energy efficient & created the food versus fuel problem Cellulosic ethanol is more complex, difficult, & expensive than corn-based ethanol Industrial cellulosic ethanol technology does not exist. BEWARE PROMISES VS REALITY -- REMEMBER CORN ETHANOL 26

27 CTL PLANT BENEFITS TO A STATE Volumes oil displacement Opportunity for guaranteed supplies in times of shortages Industry sales and profits Total (direct and indirect) employment created Specific jobs created by occupation & skill Good jobs that cannot be re-located or off-shored Tax revenues for state and local governments Technology development and spin-offs Revitalization of depressed regions Most States View CTL Plants as Economic Development and Job Creation Projects: It is All About JOBS, JOBS, JOBS 27

28 STATE AND LOCAL IMPACT (Example 30,000 bpd Plant) Development and Construction: Direct jobs: 2,000 total Payroll: $100 million/yr Operations & Maintenance: Direct jobs: 350 Payroll: $25 million/yr. Expenditure, job and payroll multiplier: 1.8 to 2.2 Total (direct plus indirect) annual jobs: ~ 700 State and Local Government Tax Revenues: $10 million/yr. 28

29 NATIONAL IMPACT (20 Year CTL Development Program) By 2025, U.S. GDP increases >$600 billion and 1.4 million jobs are created 1,500 1,200 Employment (Thousand Jobs) GDP (Billions 2004$) Source: Pennsylvania State University, Economic Benefits of Coal Conversion Investments,

30 ENERGY COST TREADMILL Unconventional fuels will become competitive as oil prices increase However, as oil prices have increased rapidly, so also have costs of unconventional fuels. Therefore, price of oil required to make these fuels competitive keeps increasing. Notationally: $140 $120?? $100 Oil Price $80 $60 $40 Oil Price Oil Price Required to Make Unconventional Fuel "X" Cost Competitive $20 $

31 ENERGY COST DILEMMA It is not only costs of unconventional fuels that are increasing. Costs of all energy projects worldwide are increasing rapidly: Oil & gas drilling, power plants, transmission lines, etc. Cost pressures result from increased demand from China, India, and other nations. Only a severe global recession will reduce these cost pressures. However, such a recession will also reduce oil prices at least temporarily. Thus, dilemma is that the same factors driving up oil prices are driving up the costs of all energy projects, and these demandrelated factors work in both directions. Thus, the costs of unconventional fuel X may always be too high to compete with the prevailing oil price. 31

THE FUNDAMENTAL QUESTION Question always asked is can we afford to pursue unconventional fuel alternatives This may be the wrong question Perhaps we should be asking can we afford NOT to pursue

32 THE FUNDAMENTAL QUESTION Question always asked is can we afford to pursue unconventional fuel alternatives This may be the wrong question Perhaps we should be asking can we afford NOT to pursue unconventional fuel alternatives Serious concerns over U.S. energy: Large imports, national security, foreign policy flexibility, balance of trade, vulnerability, etc. Aggressive government policies and incentives are required to develop any unconventional fuels Closing thought: Two best examples of alternative fuels development are Canadian oil sands and South African CTL, and both required massive, long term government and industry support 32

ECONOMICS, BARRIERS, AND RISKS OF OIL SHALE DEVELOPMENT IN THE UNITED STATES

ECONOMICS, BARRIERS, AND RISKS OF OIL SHALE DEVELOPMENT IN THE UNITED STATES Khosrow Biglarbigi Hitesh Mohan Peter Crawford Marshall Carolus INTEK, Incorporated 28 th USAEE/IAEE North American Conference