Peak Oil update. Introducing ESOP

The EIA s view of world liquid fuel supply

Peak Oil matters because The flows matter Consumers need delivery flows Reserves are only useful as flows Peak oil is when flows can t meet the demand The oil industry is slow moving and predictable Flows can be geologically constrained e.g., the North Sea Flows can be politically constrained e.g., Russia, Saudi Arabia Flows can be physically constrained e.g., Nigeria Flows can be skills constrained e.g., lack of experienced engineers Flows can be capital constrained e.g., Mexico, Venezuela Many talk of reserves and ignore flows Others talk about access and ignore flows Peak Oil flows will occur in 2014 on current trends.

North Sea Forties field monthly production Source: UK Department of Energy and Climate Change

Alaskan North Slope Production Reserves grow Production falls

Jun 19, 1998 Oct 16, 1998 Feb 12, 1999 Jun 11, 1999 Oct 08, 1999 Feb 04, 2000 Jun 02, 2000 Sep 29, 2000 Jan 26, 2001 May 25, 2001 Sep 21, 2001 Jan 18, 2002 May 17, 2002 Sep 13, 2002 Jan 10, 2003 May 09, 2003 Sep 05, 2003 Jan 02, 2004 Apr 30, 2004 Aug 27, 2004 Dec 24, 2004 Apr 22, 2005 Aug 19, 2005 Dec 16, 2005 Apr 14, 2006 Aug 11, 2006 Dec 08, 2006 Apr 06, 2007 Aug 03, 2007 Nov 30, 2007 Mar 28, 2008 Jul 25, 2008 Nov 21, 2008 Mar 20, 2009 Jul 17, 2009 Prices reconciled lack of supply growth with demand by pricing demand out of the market but now? 160.00 140.00 120.00 100.00 80.00 60.00 40.00 Crude price Trend 20.00 0.00

Jun 19, 1998 Jun 19, 1999 Jun 19, 2000 Jun 19, 2001 Jun 19, 2002 Jun 19, 2003 Jun 19, 2004 Jun 19, 2005 Jun 19, 2006 Jun 19, 2007 Jun 19, 2008 High prices failed to draw forth new supply 160 88000 140 120 100 6 7 8 9 10 86000 84000 82000 80000 80 78000 60 76000 40 20 1 2 3 4 5 74000 72000 70000 0 68000 Crude price Trend Production 18 per. Mov. Avg. (Production)

The Megaprojects database projects starting up from 2007 and showing potential capacity gains 9000 8000 7000 6000 5000 4000 3000 2000 Total cap Net cap 4.7% Depletion Net increase 1000 0-1000 2007 2008 2009 2010 2011 2012 2013 2014 2015-2000

Thousand b/d Capacity and Demand to 2015 IEA v POCL 96000 94000 92000 90000 88000 86000 Cap 2009 Cap 2010 POCL 2010 Supply Demand 2.0% Demand 10 Hi 84000 82000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 million b/d Opec spare capacity 2007-2010 (IEA) 37.00 36.00 35.00 34.00 33.00 32.00 31.00 30.00 29.00 28.00 27.00 CrudeProdn Crude Cap Adj Cap

A bit more detail on Opec spare capacity Saudi Arabia accounts for 66% of current spare capacity Saudi, Kuwait and the UAE account for 77% of spare capacity For the moment Saudi controls the oil price Iran, Ecuador and Venezuela are all in sustained decline Iraq is the great hope but remains problematic Nigeria remain problematic and has a presidential election in 2011 Is Angola struggling a bit? Production is pretty flat. One project in 2011 Algeria and Libya have few projects and little spare capacity The Middle East three or four can control the oil price until demand catches up. If all the figures are correct the Peak price spike is in 2014 But earlier if spare capacity is much lower than claimed.

Incremental supply Million b/d Production increments 2009 to 2015 (IEA) 5.00 4.00 3.00 2.00 1.00 0.00-1.00-2.00 Iraq crude Other Opec crude Opec NGLs (cap) Total Opec incr Unconv Non-OPEC Conv non- Opec crude Total non- Opec incr

Can the world afford high cost oil?

Why worry about high oil prices? High prices drain buying power in an economy Inhibit growth producing activity Act as an import tariff Inhibit global trade Produce balance of payments challenges And/or currency valuation challenges Produce petrodollar recycling challenges Produce rapid wealth transfers of uncertain impact IF THE CHALLENGES CANNOT BE MET WE CANNOT AFFORD HIGH OIL PRICES. CURRENT PRICES ARE HIGHER IN REAL TERMS THAN IN 96 OF THE LAST 100 YEARS BUT JUST HOW HIGH IS TOO HIGH?

Why is oil so important? So dominant? Cost Historically it has been the cheapest energy source to extract and deliver to market Concentration The highest energy density of any fuel bar nuclear Portability easy to store and transport Ubiquity Anywhere there are roads there are oil products Safety Lots of experience in handling it in a safe manner Consistency Rigorous quality control means predictability No real substitutes Lubes, transport fuels, solvents, petrochemicals Oil is the energy all other energies are ranked against in terms of their utility and price. That is the real importance of oil to any economy Any alternative needs to be cheaper and better than oil. Few are.

Marginal and fully built up oil production costs versus capacity 120 Oil Production Costs versus Global Capacity 100 Build 100 Burj Dubai Towers per year or re-cycle 400bn petrodollars per year 80 60 The 100 Burj Gap 40 20 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 100 million b/d Investment cost Marginal cost Oil price now Oil price low Oil price high

Rising energy import dependence (2010 BP data) Country Oil imports Gas imports Coal imports Japan 99.9% 99.9% 99.4% South Korea 99.9% 99.8% 98.4% EU 25 85% (70% +Norway) 62.8% (40.8%+Nor) 39.4%(61% -Poland) India 76% 24.3% 16.2% USA 61.5% 8.3% Exports 7.8% Total OECD 59.5% 21.7% 6.1% China 56% 4% Exports1% Australia 39.5% Exports 39.2% Exports 74.2% Brazil 15.5% 41.4% 83.8% Canada Exports 31.6% Exports 41.3% Exports 19% Russia Exports 73.1% Exports 26.1% Exports 41.1%

What are our options? What policies might work? Leave it to the market and hope high prices will improve supply and reduce demand. This popular policy led to the 2008 crash. Hope Opec sees our welfare as their priority. Hmmn. Keep activity at low levels and accept little growth and high unemployment Or we could: Maximise efficiency in use Maximise use of economic alternatives (The economic bit is the rub) Maximise the use of alternative fuels (Shale gas is exciting but realistic?) Start taking the oil out of transport (Not easy but probably the best policy) Reduce the energy needed in our economies (Note - moving production overseas only moves the location of demand) All these can and to some extent are being done but will it be fast enough to avoid the next price spike and its economic consequences?

Peak Oil is a transport fuel challenge

Fuel mixes change slowly due to capital investment inertia.

Global Oil Consumption 1965-2009 trended to 2015 100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 TOTAL WORLD Trend 1965-73 Trend 1974-79 Trend 2005 on EU 25 OECD FSU EMEs

The reason demand will not slow right down

Can the world afford the financial transfers of $100 oil -- the price needed to develop high-cost reserves At $100/barrel the price needed to develop arctic, deepwater and tar sands as well as virtually all other alternatives The US would spend $1.0-1.2 billion/day on oil imports Europe would spend $1.0-1.2 billion/day on oil imports China would spend $400-500 million/day on oil imports Japan would spend $300-350 million/day on oil imports But... Saudi would earn $700-800 million/day Russia would earn $750-850 million/day And collectively Opec would earn $2.8-3.3 billion/day Collectively the world would spend over $8.5 billion/day on oil Can this work? Can the $1.0-1.5 billion/day of petrodollars be recycled?

Have high oil costs killed growth?

Douglas-Westwood analysis Oil price and recession

Annual Percentage GDP growth Douglas-Westwood analysis with additional GDP growth rates 8% 6% 4% 2% 0% -2% -4%

There is hope The world will not stop turning after Peak Oil Perhaps we need to worry more about the price of oil The world will need to find smart solutions to the problems it previously solved with cheap oil More engineers, scientists and creative thinkers will be needed Solutions exist already to meet many of these challenges Key solutions are electrification of surface transport, biofuels, biogas and massive improvements in efficiency The future is already here. It's just not very evenly distributed. William Gibson

Many thanks for your attention Chris Skrebowski cs@peakoilconsulting.com

Latest BP statistics (2010) show Peaks are already happening in areas you d like to invest in OECD production peaked in 1997 and has now declined by 3.3 million b/d (-15.1%) Non-Opec, non-fsu production peaked in 2002 Has now declined by 2.10 million b/d (-6.13%) North America/Mexico peaked in 1997 now down 879,000 b/d (-6.16%) North Sea - UK/Norway/Denmark peaked in 2000 now declined by 2.32 million b/d (36.4%) Around 28 significant producers in decline (accounting for over 40mn b/d) About 50% of global production from decliners For how long can the other 50% outrun depletion and meet demand?

Is the wild card gas? Many countries have quite low utilisation of gas for primary energy supply others are already up to 50% Gas sales grew at 3.3%/yr 1998-2008 Expectation of return to 2%/yr growth by 2010 continuing to 2030 Rapidly increasing supplies of shale gas/tight gas Plentiful supplies of stranded gas Floating LNG solutions becoming economic At price of $6-8/MM BTU supplies of both LNG and pipeline gas would be abundant. (roughly double current price levels or $36-48/boe) King Abdullah s target price is $75/b that is equivalent to $12.50MM BTU King Abdullah s price should cause a gas supply boom Low relative cost of gas should lead to considerable utilisation increases

Biofuels 1.5mn b/d Opec output 36mn b/d Discovery rate: 9bn b/yr or 24.6mn b/d Opec proved reserves 635 bn b Extra claimed reserves 300bn b Non-Opec output 33.5mn b/d FSU output 12.8mn b/d 1.4mn b/d Non-Opec, Non FSU proved reserves 175bn b FSU proved reserves 128bn b Canadian tar sands proved reserves 174bn b Consumption 85.2mn b/d Road Fuels 55.8mn b/d (65%) Air & sea 9.4mn b/d (11%) Heat 10.2mn b/d (12%) Non -fuel 10.2mn b/d (12%)

Peak Oil occurs when the loss of capacity to depletion equals or exceeds the volume of new production capacity Depletion acts as a negative flow IEA claims 6.7% average decline for post peak fields I estimate 75% of the world s production capacity is post peak Global depletion is now around 5.0%-5.5% of crude flows or around 3.7mn-4.0mn b/d/yr It is larger than all current tar sands, biofuels and heavy oil production. It is the equivalent of losing all Iran s production in one year Or all of the North Sea s production in 14 months Or the peak production of 16 Thunder Horse field s a year It is not split equally but roughly 1.5mn b/d/yr for Opec production and 2.5mn b/d/yr for non-opec production How do we know? IEA Medium Term Report, WEO 2008, own work Is depletion accelerating? Yes maybe 0.1-0.2mn b/d/yr Can it be ameliorated? Only by slowing production flows down Recession slows demand but restricts palliative and offsetting investment