Nov09 1

1
PEAKING OF WORLD OIL PRODUCTIONWhat Are We
Willing To Risk?

• Robert L. Hirsch
• Senior Energy Program Advisor, SAIC
• Engineering Executives Forum 2006
• November 30 - December 1, 2006
• Portions of this work were supported by the U.S.
  DOE National Energy Technology Laboratory

2
Overview

• Oil is a finite, rapidly depleting resource.
• Production peaking is natural expected, often
  with little warning.
• Oil shortages can lead to serious economic
  hardship.
• Conventional oil supplies are forecast to peak
  soon. lt 20 years
• Most important world reserves data is secret
  unaudited.
• Near term, its a LIQUID FUELS problem, not an
  energy crisis.
• Mitigation requires massive implementation of
  various available technologies. There are no
  quick fixes.

3
This Presentation

• What Is peaking?
• On the road to oil peaking
• Timing
• Why is it so complicated contentious?
• One simple approach to forecasting
• Mitigation risk

4
What Might Happen at Peaking?
WORLD OIL DEMAND grows each year in a healthy
world economy

• PRICES INCREASE
• SHORTAGES DEVELOP

Supply cannot meet demand
WORLD OIL PRODUCTION
Production reaches a maximum declines (PEAKS)
Time
5
Peaking of Conventional Oil Production Is Natural
Regions Peak (Many oil fields)
Oil Fields Peak
The world will peak (All regions)
6
Various World Oil Peaking Possibilities
Geological The maximum possible
?
?
?
?
?
Political Lower investments, national
conservation, etc.
World Oil Production
?
?
?
?
?
Political Terrorism, War
Time
7
Will Politics / Investment Trump Geology?
Geological The maximum possible
?
?
?
?
?
Political Lower investments, national
conservation, etc.
World Oil Production

• The world's current energy future is
  unsustainable and is 'doomed to failure' due to a
  lack of investment
  Claude Mandil, IEA. November 7, 2006.

Political Terrorism, War
Time
8
This Presentation

• What Is peaking?
• On the road to oil peaking
• Timing
• Why is it so complicated contentious?
• One simple approach to forecasting
• Mitigation risk

9
The Task Ahead Is Daunting or Worse Oil
Natural Gas Worldwide
10
The World Has Been Consuming Much More Oil Than
It Has Been Finding.
Billions of Barrels / Year

40
Net Annual World Conventional Oil Reserves
Additions Minus Consumption

20


0


-20

1940
2000
Year
Peak production lies ahead.
11
Giant Oil Field Reserve Additions Have Dropped
Every Decade Since the 1960s
Raymond James Equity Research,
Inc. AAPG, OGJ, Rizone
1970s

• Oil prices jumped in the 1970s.
• So why did discoveries drop?
• Answer Fewer fields to find.

12
When Discovery Declines, Production Always
Declines Later - Norway
13
Peak Production Can Be Sudden Sharp
Will the world behave like this?
14
Five Year Regional Oil Decline Rates After Peaking
Texas ..12 North America....1
0 United Kingdom.... 15 Norway
.15

• 1973 - 1974About 8 total
• 1978 - 1980About 6 total

RECESSIONS
15

• Oil production is in decline Past Peak in
• 33 of the 48 largest oil producing countries.
• Chevron Corp. full page advertisements in major
  U.S. newspapers, July 25, 2005.

16
Some of Whats Happening
For the third straight year, the industry failed
to replace its oil reserves through the drill
bit. Upstream costs keeping pace with oil
prices.. (John S. Herold Inc. Harrison
Lovegrove Co. Ltd.) OGJ. Oct. 2,
2006. Output from Cantarell (the world's
second-largest oil complex) declined by 10.3
in the first half of 2006 Shields, D. Despite
falling output, Mexican Politics Keep Foreign
Operators Out. Offshore. September 2006. EU
crude oil production decreased 9 in
2005. Leblond, D. EU energy production drop
forces higher imports. OGJ. Sept. 22, 2006.
17
Technology Price Will Not Save UsU. S. Lower
48 Oil Production
Dramatic Improvement in Oil Field Technology
3.5
Production
3.0
2.5
80
PRODUCTION (Billions of Barrels per Year)
2.0
PRICE (2003 per barrels)
1.5
Price
1.0
0.5
0
0
1950 1960 1970 1980
1990 2000
Trends were not reversed.
18
Important
Peaking is maximum production, not running out.
Its a liquid fuels problem, not simply energy.
19
This Presentation

• What Is peaking?
• On the road to oil peaking
• Timing
• Why is it so complicated contentious?
• One simple approach to forecasting
• Mitigation risk

20
The Era of Easy and / or Cheap Oil has past.
The World Oil Business Has Changed

• David OReilly, Chairman, Chevron
• Samuel Bodman, U.S. Secretary of Energy
• Jeroen van der Veer, Shell Chief Executive
• Alpha Oumar Konare, African Union Commission
  Chair.
• Viktor Khristenko, Russian Energy Minister
• Guy Caruso, Administrator, U.S.EIA

21
Recent Peak Oil Forecasts to 2011 (5 years)

• Pickens, T. Boone (Oil gas investor)
  2005
• Deffeyes, K. (Retired Princeton professor
  retired Shell geologist)..2005
• Westervelt, E.T. et al. (US Army Corps of
  Engineers)...At hand
• Bakhtiari, S. (Iranian National Oil Co.
  planner)..Now
• Herrera, R. (Retired BP geologist)..C
  lose or past
• Groppe, H. (Oil / gas expert businessman)
  ...Very soon
• Wrobel, S. (Investment fund manager)..
  .By 2010
• Bentley, R. (University energy analyst)...
  ...Around 2010
• Campbell, C. (Retired oil company geologist
  Texaco Amoco)..2010
• Skrebowski, C. (Editor of Petroleum
  Review)...2010 /- a year
• Koppelaar, R.H.E.M. (Dutch oil analyst)..
  .Around 2012
• Meling, L.M. (Statoil oil company
  geologist)..A challenge around 2011

22
Important Recent Peak Oil Forecasts Ranging From
2011 - 2021
(5 - 15 years)

• Volvo TrucksWithin a decade
• de Margerie, C. (Oil company executive)
  ......Within a decade
• al Husseini, S. (Retired Exec. VP of Saudi
  Aramco).2015
• Merrill Lynch (Brokerage / Financial)...Aro
  und 2015
• West, J.R., PFC Energy (Consultants)....20
  15-2020
• Maxwell, C.T., Weeden Co. (Brokerage)..Around
  2020 or earlier
• Amarach Consutling (Ireland).Within 15
  years
• Wood Mackenzie (Energy consultin...Tight
  balance by 2020
• Total (French oil company)....Around
  2020

23
Important Recent Peak Oil Forecasts Ranging
Beyond 2021.

• UBS (Brokerage / Financial)..Mid to late
  2020s
• CERA (Energy consulting).Well after
  2020
• ExxonMobil (Oil company)...No sign of
  peaking
• Browne, J. (BP CEO)...Impossible to
  predict
• OPECDeny peak oil theory

24
Forecasting Oil Gas Supply Is Difficult.
DOE EIA Natural Gas Forecasts With Good Data
2002 Forecast
Looks good
3
4
.
0
3
3
.
0
2003
3
2
.
0
3
1
.
0
3
0
.
0
4 years later
2
9
.
0
North American Natural Gas Supply to the U.S. -
Tcf / Year
2
8
.
0
2004
2
7
.
0
2005
2
6
.
0
2
5
.
0
2
4
.
0
0
Trouble!
2
3
.
2006 Forecast
2
2
.
0
2
1
.
0
2
0
.
0
Whats the RISK with world oil?
25
A Chinese View of Peak Oil
Gb/year
50
50
Demand Growth
WORLD OIL
40
40
GAP
30
30
Past Production
20
Forecast Production
20
10
10
0
1930
1950
1970
1990
2010
2030
2050
0
Peak 2012
China aggressively securing oil supplies worldwide
26
This Presentation

• What Is peaking?
• On the road to oil peaking
• Timing
• Why is it so complicated contentious?
• One simple approach to forecasting
• Mitigation risk

27
Data Quality

• The oil industry is unusual in the degree to
  which its statistics are plagued by
• Errors,
• Exaggerations,
• Omissions and
• Just plain deceit.
• Worse yet,
• Few people know the true condition of
  reservoirs
• Hardly any of these are talking
• The penalty for espionage can be instant
  death.
• Smith, L.L. "Wild Cards in the Oil Deck." USAEE
  Dialogue. August 2006

28
The World Must Deal With Approximations
Nobody can measure oil and gas reserves. The
numbers are estimates based on interpretation
of sparse data. Tipee, B. Reserves numbers
arent oils only market perplexity. OGJ.
September 25, 2006.
29
Its Complicated
30
This Presentation

• What Is peaking?
• On the road to oil peaking
• Timing
• Why is it so complicated contentious?
• One simple approach to forecasting
• Mitigation risk

31
Production History In the U.S. In Many Other
Places Fits A Logistic Distribution
U.S. Lower 48 States
32
Peaking of World Conventional Oil Production Will
Likely Occur Near 50
of Ultimately Recoverable World Reserves
Production
Peak at near 50
History People controlled production increased.
Post Peaking Geology controls production
declines.
Time
The curve is smoothed
33
Some Numbers
Already consumed worldwide One Trillion
Barrels
Some estimates of remaining world reserves One
Trillion Barrels
If so, world oil peaking is about now.
50 of total
EIA (Our) results are remarkably insensitive to
alternative resource base estimates adding 900
Bbbl more oil only delays the estimated
production peak by 10 years.
Others estimate remaining world reserves Two
Trillion Barrels
34
Adding Almost a Trillion Barrels Gains 10 Years
EIA Add 900 Million barrels, Gain 10 years.
Production
History 1 Trillion barrels already consumed
Some Forecasters 1 Trillion barrels already
consumed PEAKING ABOUT NOW
Time
The curve is smoothed
35
One Logistic Model Has Shown That a Very Complex
Situation Maps Into a Straight Line.
U.S. Lower 48 States Oil Production
Annual Production / Cumulative Production
L 48 total about 200 billion barrels
Cumulative Production
Ref Deffeyes, others
36
The Impact of the Jack Discovery, If Its 10
Billion Barrels Recoverable
Previous Ultimate
The U.S. is here now
0.08 0.06 0.04 0.02 0.00
Add Jack
Annual Production Cumulative Production
Previous Data Trend
0 50 100 150 200
250
Cumulative Production
37
The Logistic Model Indicates Early World Peaking
Annual Production / Cumulative Production
World total about 2.2 trillion barrels
Cumulative Production
Ref Deffeyes, others
38
Past World Conventional Oil Reserves Fit Roughly
1) The Logistic Extrapolation 2) The USGS 95
Estimate.










USGS 95 2000


C
a
m
p
b
e
l
l

1
9
9
5
M
a
s
t
e
r
s

1
9
9
4
C
a
m
p
b
e
l
l

1
9
9
2
B
o
o
k
o
u
t
1
9
8
9
M
a
s
t
e
r
s

1
9
8
7
M
a
r
t
i
n

1
9
8
4
N
e
h
r
i
n
g
1
9
8
2
H
a
l
b
o
u
t
y
1
9
8
1
M
e
y
e
r
h
o
f
f
1
9
7
9
N
e
h
r
i
n
g
1
9
7
8
N
e
l
s
o
n

1
9
7
7
F
o
l
i
n
s
b
e
e
1
9
7
6
A
d
a
m
s



K
i
r
b
y

1
9
7
5


0
0.5
1
1.5
2
2
.5
Trillions of Barrels
39
But
Many Are Basing Their Forecasts on the USGS Mean
Estimate







F
o
l
i
n
s
b
e
e
1
9
7
6
A
d
a
m
s



K
i
r
b
y

1
9
7
5

0
0.5
1
1.5
2
2
.5
3
3
.5
4
Trillions of Barrels
USGS Mean Case Later Peak

40
The USGS Mean 5 Cases Would Require A Dramatic
Change in Previous Trends
The world is here now
USGS Mean Case
USGS 5 Case
Annual Production Cumulative Production
Previous Trend Line
Cumulative Production
It could happen.Is it likely?
41
This Presentation

• What Is peaking?
• On the road to oil peaking
• Timing
• Why is it so complicated contentious?
• One simple approach to forecasting
• Mitigation risk

42
Mitigation Is a Bridge to Sustainability

• We must mitigate because it will require decades
  to massively modify or replace the worlds
  end-use equipment.
• Light, medium heavy duty vehicles
• Airplanes
• Ships, Trains, Etc.
• Sustainability requires choices, still not made
  e.g., conservation, renewables, nuclear, etc.
• Mitigation movement to a sustainable future
  will smoothly phase over time.

43
The U.S. Light Duty Vehicle PictureIt Takes a
Long Time to Change
New Vehicles Added per Year
Existing Light Duty Vehicle Fleet
Annual Retirements
44
Mitigation StudyA 2005 analysis for the U.S. DOE

ASSUMED CRASH PROGRAM IMPLEMENTATION
THE MOST OPTIMISTIC CASE

• Scenario I - No action until peaking
  occurs
• Scenario II - Mitigation starts 10 years
  before peaking
• Scenario III - Mitigation starts 20 years
  before peaking

Transparent approximations provided robust
insights.
45
Mitigation Options Considered

• Vehicle Fuel Efficiency
• Heavy oil / oil sands
• Coal Liquefaction
• Gas-To-Liquids (GTL)
• Enhanced Oil Recovery (EOR)
• Why these? Therere liquid fuels ready for
• Implementation

Electric power of little help in the short term
46
Worldwide Crash Program Mitigation of
Conventional Oil Production Peaking
35
EOR
Coal Liquids
25
Impact (MM bpd)
Heavy Oil
15
GTL
5

Efficient Vehicles
0
0








5













10
















15
20
Years After Crash Program Initiation

• Delay, then rapid growth.
• Can mitigation overtake oil decline?

47
A Model for World Oil Supply / Demand Center on
the unknown date for peaking Assume 100 MM bpd
at peak.
Extrapolated Oil Demand -Growing World Economy
About 2 growth
Shortage (60 MM bpd _at_ year 20)
About 2 decline
Lower 48 production pattern
48
SCENARIO I MITIGATION _at_ PEAKING
120
Mitigation
100
Shortage
80
PRODUCTION (MM bpd)
60
40
20
0
-20
0
10
20
-10
YEARS BEFORE / AFTER OIL PEAK
49
SCENARIO II MITIGATION 10 YEARS BEFORE
120
Mitigation
100
Shortage
80
PRODUCTION (MM bpd)
60
Start
Oil Decline Delayed
40
20
0
-20
0
10
20
-10
YEARS BEFORE / AFTER OIL PEAK
50
SCENARIO III MITIGATION 20 YEARS BEFORE
120
Mitigation
100
80
PRODUCTION (MM bpd)
60
Oil Peaking Further Delayed
40
Start
20
0
-20
0
10
20
-10
YEARS BEFORE / AFTER OIL PEAK
51
Scenario Results For A Worldwide Mitigation Crash
Program The Most Optimistic Case

• I. Wait for peaking
• II. Start 10 years early
• III. Start 20 years early

Extremely Bad
SERIOUS TROUBLE
NO PROBLEM?
52

• 2 - 8 per year

Range of forecasts of world conventional oil
production decline after peaking
53
We Assumed a 2 / Year Decline Rate - A
Faster Decline Is Bigger TroubleExamples for
mitigation starting at the peak
2 Decline Rate
8 Decline Rate
120
120
100
100
PRODUCTION (MM bpd)
80
80
60
60
40
40
20
20
0
0
-20
0
10
20
-20
0
10
20
-10
-10
YEARS BEFORE / AFTER OIL PEAK
54
Will Decline Outrun Our Ability to Respond?
55
Some Mitigation Examples
50 Coal-To-Liquids Plants - When?
LDV Savings World Crash Program at Year 20
Canadian Oil Sands Now 2015
56
RISK
How Will Post-Peak Oil Shortages Impact?
Inflation Recession
Unemployment High interest rates

• The 1973 1979 BRIEF oil interruptions caused.

• World oil peaking impacts could last DECADES.

57
RISK
What Impact Might World Oil Peaking Have on
World GDP?
Over the last 30 years World GDP grew _at_ 3 /
Year Oil demand grew _at_ 1.5 / Year
After peaking, oil production will decline,
dragging world GDP with it - My Thinking. At
what rate?
58
Growing Oil Shortages Will Induce Growing World
Demand Destruction - My Thinking
Demand Destruction
Supply
Easy
Recession
Depression
Supply Demand in Balance
59
RISK
What factors should guide mitigation planning in
an inexact situation with numerous downsides?

• Competent concerns
• Competent optimism
• Reliance on the marketplace

THE RISKS ARE ASYMMETRIC

• Premature mitigation might misuse some resources.
• Delayed mitigation almost certainly means huge
  worldwide suffering for a long time.

60
Two Unfortunate Realities

• People are strongly influenced by current oil
  prices fluctuations, which are controlled by
  short term events.

2. Peaking is unlikely to influence the short
term market until after the reality sets in.
61
In Conclusion

• Oil production is very complex / intuition fails.
• Oil peaking will happen the timing is uncertain.
  
• Simple theory fits Implications are unpleasant.
• The consequences of getting this wrong are very
  large.
• Mitigation technologies are available for
  implementation timing is extremely important.