Jun-15 1 PEAKING OF WORLD OIL PRODUCTION: IMPACTS, MITIGATION, RISK MANAGEMENT Robert L. Hirsch, SAIC Roger Bezdek, MISI Robert Wendling, MISI Presentation to ASPO May 2005 Based on a Study for the U.S. Department of Energy

Jun-15 2 THE PROBLEM LEARNING FROM EXPERIENCE TRANSPORTATION FLEET LIFETIMES MITIGATION OPTIONS THREE MITIGATION SCENARIOS PRUDENT RISK MANAGEMENT THIS PRESENTATION SAIC / MISI

Jun-15 3 THE PROBLEM: PEAKING OF WORLD CONVENTIONAL OIL PRODUCTION (Not all of the latest forecasts) Projection Source Bakhitari, A.M.S Simmons, M.R. After 2007Skrebowski, C. 2008Campbell / ASPO Before 2009Deffeyes, K.S. Before 2010Goodstein, D. After 2010World Energy Council Laherrere, J. 2016EIA nominal case After 2020CERA 2025 or laterShell No visible peakLynch, M.C SAIC / MISI

Jun-15 4 North American natural gas U.S. Lower 48 states oil production Economic impacts in 1973 & 1979 LEARNING FROM EXPERIENCE SAIC / MISI

Jun-15 5 EXPERIENCE: NORTH AMERICAN NATURAL GAS Experts overestimated North American natural gas reserves & future production as late as –National Petroleum Council –DOE EIA –Cambridge Energy Research Associates U.S. natural gas production is now flat / in decline. SAIC / MISI Natural gas & oil geology have similarities. If wrong on natural gas, what’s the risk on oil?

Jun-15 6 EXPERIENCE: U. S. LOWER 48 OIL PRODUCTION Production Price Dramatic Improvement in Oil Field Technology PRODUCTION (Billions of Barrels per Year) High prices & advanced technology did not reverse trends! PRICE (2003 $ per barrels) SAIC / MISI

Jun-15 7 EXPERIENCE: MAJOR OIL INTERRUPTIONS Impacts of world oil production peaking are exemplified by the 1973 & 1979 oil interruptions. + Inflation + Recession + Unemployment + High interest rates 1973 & 1979 were relatively brief. World oil peaking impacts could last a decade or more. The world has never faced a problem like oil peaking. SAIC / MISI

Jun-15 8 TRANSPORTATION EQUIPMENT U.S consumption: ~20 MM bpd ~25% of world oil demand ~Two thirds used in transportation The U.S. transportation fleet + Very large + Huge investment + Evolves slowly SAIC / MISI Details

Jun-15 9 Fleet Size Median Cost to Replace Lifetime Half the Fleet (Years) (2003 $) Automobiles 130 million 17 $1.3 trillion Light Trucks, 80 million 16 $1 trillion SUVs,etc. Heavy Trucks, 7 million 28 $1.5 trillion Buses, etc. Aircraft 8, $.25 trillion SAIC / MISI U.S. TRANSPORTATION FLEETS

Jun TRANSPORTATION EQUIPMENT CHANGES SAIC / MISI Change is slow & expensive. Fuel must be provided for existing fleets. Large efficiency improvements possible in some fleets, smaller in others. Some fuel switching possible in the short term, more longer term.

Jun THREE MITIGATION SCENARIOS Scenario I- No action until peaking occurs Scenario II- Mitigation started 10 years before peaking Scenario III- Mitigation started 20 years before peaking Assumptions: »All mitigation initiated immediately »Crash program implementation SAIC / MISI Optimistic limiting case

Jun MITIGATION OPTIONS Commercial or near-commercial technologies to impact LIQUID FUEL MARKETS  Vehicle Fuel Efficiency  Gas-To-Liquids (GTL)  Heavy Oil / Oil Sands  Coal Liquefaction  Enhanced Oil Recovery (EOR) SAIC / MISI

Jun OPTIONS NOT INCLUDED Option Reasoning –Nuclear –Wind ……….. ELECTRIC / NOT LIQUID FUELS –Solar –Shale Oil ……………... Not commercial –Biomass……………. Not economic –Hydrogen……………Neither ready nor economic SAIC / MISI

Jun MITIGATION ASSUMPTIONS VEHICLE FUEL EFFICIENCY -- 30%, then 50% LDV improvements GAS-TO LIQUIDS -- 2x recent GTL projections (LNG competes) HEAVY OIL/OIL SANDS x recent projections COAL-TO-LIQUIDS -- Five new 100,000 bpd plants/year ENHANCED OIL RECOVERY (EOR) -- Paced by CO2 availability SAIC / MISI

Jun DELAYED WEDGES APPROXIMATION Prepare Produce Impact Barrels/ Day Vehicle Fleet Fuel Saved Actual Wedge Approximation Time - Years SAIC / MISI

Jun WEDGE VALUES Preparation Impact 10 Years Delay Later Mitigation Option (Years) (MM bpd) –Vehicle Efficiency 3 2 –Gas-To-Liquids3 2 –Heavy Oils / Oil Sands3 8 –Coal Liquids4 5 –Enhanced Oil Recovery5 3 SAIC / MISI Potential contributions vary greatly.

Jun Delay, then rapid growth Roughly 25 MM bpd at 15 years after crash program start.

Jun U.S. LOWER-48 OIL PRODUCTION PEAKED & DECLINED Actual (EIA) Approximation Year Production (Billions of Barrels per Year) A huge, complex & geologically varied oil province. Used as a surrogate for the world. SAIC / MISI

Jun YEARS BEFORE / AFTER OIL PEAK PRODUCTION (MM bpd) 120 Assumed: 2% Oil 2% 100 MM bpd (Not a prediction) Extrapolated Demand - Growing World Economy WORLD OIL SUPPLY & DEMAND: LOWER 48 PRODUCTION PATTERN & EXTRAPOLATED DEMAND GROWTH Shortage SAIC / MISI L 48 production pattern

Jun YEARS BEFORE / AFTER OIL PEAK PRODUCTION (MM bpd) 120 SCENARIO I: PEAKING Mitigation Shortage SAIC / MISI

Jun YEARS BEFORE / AFTER OIL PEAK PRODUCTION (MM bpd) 120 SCENARIO II: MITIGATION 10 YEARS BEFORE Mitigation Shortage Oil Decline Delayed SAIC / MISI Start

Jun YEARS BEFORE / AFTER OIL PEAK PRODUCTION (MM bpd) 120 SCENARIO II: MITIGATION 20 YEARS BEFORE Mitigation Oil Peaking Further Delayed SAIC / MISI Start

Jun I. Wait for peaking II. Start 10 years early III. Start 20 years early SCENARIOS ANALYSIS CONCLUSIONS Basis: Immediate crash program mitigation SAIC / MISI Oil shortages largest, longest lasting Delays peaking; still shortages Avoids the problem; smooth transition

Jun RAPID OIL PRODUCTION DECLINES AFTER PEAKING HAVE BEEN FORECAST SAIC / MISI EIA (Hakes, J.) ……………………………..… ~ 8% Saudi Aramco (Al-Husseini, S)…………….. 3-5% ExxonMobil……………………………… % On a base of 100 MM bpd, 3-8% declines correspond to 3-8 MM bpd annual declines. Mitigation would be much more difficult!

Jun WORLD OIL PEAKING FORECASTS Projection Source Bakhitari, A.M.S Simmons, M.R. After 2007Skrebowski, C. 2008Campbell / ASPO Before 2009Deffeyes, K.S. Before 2010Goodstein, D. After 2010World Energy Council Laherrere, J. 2016EIA nominal case After 2020CERA 2025 or laterShell No visible peakLynch, M.C Now Now + 10 Now + 20 SAIC / MISI

Jun SAIC / MISI Time Cost of Error PRUDENT RISK MANAGEMENT Premature Start 0 Years Scenario I - 10 Years Scenario II - 20 Years Scenario III

Jun  Oil peaking timing is uncertain. It may be soon. “Soon” is less that 20 years hence.  It’s a world liquid fuels problem.  A number of mitigation technologies are ready.  With timely mitigation, economic damage minimized.  Prudent risk management = early action, not reaction after the fact. SUMMARY & CONCLUSIONS SAIC / MISI