1. 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

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

3. Jun-15 3 THE PROBLEM: PEAKING OF WORLD CONVENTIONAL OIL PRODUCTION (Not all of the latest forecasts) Projection Source 2006-2007Bakhitari, A.M.S. 2007-2009Simmons, M.R. After 2007Skrebowski, C. 2008Campbell / ASPO Before 2009Deffeyes, K.S. Before 2010Goodstein, D. After 2010World Energy Council 2010-2020Laherrere, J. 2016EIA nominal case After 2020CERA 2025 or laterShell ---------------------------------------------------------------- No visible peakLynch, M.C. 2000 2010 2020 2030 SAIC / MISI

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

5. Jun-15 5 EXPERIENCE: NORTH AMERICAN NATURAL GAS Experts overestimated North American natural gas reserves & future production as late as 2001. –National Petroleum Council - 1999 –DOE EIA - 1999 –Cambridge Energy Research Associates - 2001 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?

6. Jun-15 6 EXPERIENCE: U. S. LOWER 48 OIL PRODUCTION 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 80 0 Production Price Dramatic Improvement in Oil Field Technology PRODUCTION (Billions of Barrels per Year) 1950 1960 1970 1980 1990 2000 High prices & advanced technology did not reverse trends! PRICE (2003 $ per barrels) SAIC / MISI

7. 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

8. Jun-15 8 TRANSPORTATION EQUIPMENT U.S. 2003 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

9. 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 8,500 22 $.25 trillion SAIC / MISI U.S. TRANSPORTATION FLEETS

10. Jun-15 10 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.

11. Jun-15 11 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

12. Jun-15 12 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

13. Jun-15 13 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

14. Jun-15 14 MITIGATION ASSUMPTIONS VEHICLE FUEL EFFICIENCY -- 30%, then 50% LDV improvements GAS-TO LIQUIDS -- 2x recent GTL projections (LNG competes) HEAVY OIL/OIL SANDS -- 2-2.5x recent projections COAL-TO-LIQUIDS -- Five new 100,000 bpd plants/year ENHANCED OIL RECOVERY (EOR) -- Paced by CO2 availability SAIC / MISI

15. Jun-15 15 DELAYED WEDGES APPROXIMATION Prepare Produce Impact Barrels/ Day 0 10 2030 Vehicle Fleet Fuel Saved Actual Wedge Approximation Time - Years SAIC / MISI

16. Jun-15 16 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.

17. Jun-15 17 Delay, then rapid growth Roughly 25 MM bpd at 15 years after crash program start.

18. Jun-15 18 U.S. LOWER-48 OIL PRODUCTION PEAKED & DECLINED 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Actual (EIA) Approximation 195019601970 198019902000 Year Production (Billions of Barrels per Year) A huge, complex & geologically varied oil province. Used as a surrogate for the world. SAIC / MISI

19. Jun-15 19 0 20 40 60 80 100 -20 -10 0+10+20 YEARS BEFORE / AFTER OIL PEAK PRODUCTION (MM bpd) 120 Assumed: Demand @ 2% Oil Decline @ 2% Peak @ 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

20. Jun-15 20 0 20 40 60 80 100 -20 -10 0+10+20 YEARS BEFORE / AFTER OIL PEAK PRODUCTION (MM bpd) 120 SCENARIO I: MITIGATION @ PEAKING Mitigation Shortage SAIC / MISI

21. Jun-15 21 0 20 40 60 80 100 -20 -10 0+10+20 YEARS BEFORE / AFTER OIL PEAK PRODUCTION (MM bpd) 120 SCENARIO II: MITIGATION 10 YEARS BEFORE Mitigation Shortage Oil Decline Delayed SAIC / MISI Start

22. Jun-15 22 0 20 40 60 80 100 -20 -10 0+10+20 YEARS BEFORE / AFTER OIL PEAK PRODUCTION (MM bpd) 120 SCENARIO II: MITIGATION 20 YEARS BEFORE Mitigation Oil Peaking Further Delayed SAIC / MISI Start

23. Jun-15 23 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

24. Jun-15 24 RAPID OIL PRODUCTION DECLINES AFTER PEAKING HAVE BEEN FORECAST SAIC / MISI EIA (Hakes, J.) ……………………………..… ~ 8% Saudi Aramco (Al-Husseini, S)…………….. 3-5% ExxonMobil………………………………..... 4-6% On a base of 100 MM bpd, 3-8% declines correspond to 3-8 MM bpd annual declines. Mitigation would be much more difficult!

25. Jun-15 25 WORLD OIL PEAKING FORECASTS Projection Source 2006-2007Bakhitari, A.M.S. 2007-2009Simmons, M.R. After 2007Skrebowski, C. 2008Campbell / ASPO Before 2009Deffeyes, K.S. Before 2010Goodstein, D. After 2010World Energy Council 2010-2020Laherrere, J. 2016EIA nominal case After 2020CERA 2025 or laterShell ---------------------------------------------------------------- No visible peakLynch, M.C. 2000 2010 2020 2030 Now Now + 10 Now + 20 SAIC / MISI

26. Jun-15 26 SAIC / MISI Time Cost of Error PRUDENT RISK MANAGEMENT Premature Start 0 Years Scenario I - 10 Years Scenario II - 20 Years Scenario III

27. Jun-15 27  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