NAS NAE IOM NRC BEESWorkshop on Trends in Oil Supply and demand and Potential for Peaking of Conventional Oil Production

A Global View of Oil PeakingBy

Herman T. FranssenPresident

International Energy Associates Inc.

Washington, DC, October 20-21, 2005

…If world oil use goes up 10 million barrels a day by 1985,producing countries will be unable to to meet worlddemand…

…world oil production will begin to turn down when itreaches 66 million barrels a day….which will come before1985…

…The only country in the world able to increase productionis Saudi Arabia, which could raise output from today’s 9mbd to 15 mbd by 1985 and 20 mbd by 1990. But not eventhat increase would meet world needs…

…By 1985, oil production will no longer match demandincreases…

Excerpts from CIA Report April 1977

Concept of Oil Peaking is not New

“ Within a decade the world is going to have to switch from supply, which grew at 5% per year over the past 50 years to 1973,to a supply, which will decline. The amount of oil available in the1980’s is not expected to greatly exceed that of 1978 because fewerlarge fields are discovered and decline rates are accelerating and, bythe 1990’s oil production is actually expected to decrease”.

BP,Oil Crisis Again! 1980What Happened post 1980?

• Low demand growth (about 0.6 mbd average for 20 years) and the development of known oil provinces in Alaska, the North Sea and later deepwater, saved the day.

• 2000-2004: Large increase in Russian production from known fields and Saudi spare capacity saved the day.

• 2004-2005: No more saviors – world at capacity upstream and downstream – emergence of China and India.

A World in Doubt About Future Oil Supplies

• 1960’s until 1990’s : steady growth in Non-OPEC Oil Production• Late 1970’s second oil crisis – oil price explosion – rising fear

about global oil peaking in 1990’s• Reaction: oil demand growth from 5-6% annually to about 1-2%

annually – IOC supply response Alaska, North Sea, deepwater. Concern about oil peaking in and outside industry vanished

• First half of this decade – slow supply response to higher prices –puny growth in incremental non-OPEC (ex FSU) supply.

• 2000-2004 Massive increase Russian production/exports but, slowed significantly in 2005 – uncertain future – technical peak or due to Russian resource nationalism? IOC access reduced!

• 2004-2005: IOC CEO’s alarmed about access to oil under reasonable fiscal, legal, political conditions. Concerned about new oil finds. “We are no longer finding the elephants; insteadwe are finding the prairie dogs”. J.S. Herold: IOC’s to peak?

Changing Perceptions of Medium Term Oil Prices

A Wall Street Oil Price Outlook (US $/bbl Brent)

2003 2004 2005 Nymex 10/19/05

2003 $ 26.0 - $ 28.0 28.5 28.52004 $ 20.5 - $ 24.0 38.0 38.02005 $ 19.0 - $ 21.0 34.5 40.0 Dec. 05 $ 612006 $ 19.5 - $ 21.5 28.0 35.0 Dec. 06 $ 612007 $ 20.0 - $ 22.0 25.0 30.0 Dec. 07 $ 582008 $ 21.0 - $ 22.5 25.0 30.0 Dec. 08 $ 56

Manageable Supply Problems with Oil Prices at $ 27 - $ 35 a barrel by 2025 (in $ 2002). How do we get there?

Demand Supply2002 2015 2025 2002 2015 2025

US 19.7 24.2 27.3 9.3 9.7 9.3Europe 15.2 16.1 17.0 7.3 6.5 5.7Japan 5.4 5.4 5.3FSU 4.1 4.9 5.5 11.2 15.3 17.6China 5.2 10.7 14.2 3.0 3.6 3.5India 2.2 3.7 4.9M.East 5.7 8.0 9.2 20.7 30.8 39.3

World 78.2 103.2 119.2 80.0 105.4 122.2

-4 -2 0 2 4 6 8 10 12 14 16 18 20

Power Generation

Industry

Domestic / Commercial

'Other' / Non-Energy

Feedstock Use

Transport Sector

Million b/d

Projected Changes in World Sectoral Oil Demand(2005 - 2025)

The Demand Side of the Equation

Post World War II, Western Europe and Japan recovered on anocean of cheap ($1/bbl). Oil demand in Europe grew from 2 mbd in the early 1950’s to 17 mbd in the early 1970’s. Japan’soil use grew from 0.2 mbd in the early 1950’s to 5.5 mbd in theearly 1970’s

The Asian “Tiger” economies and Thailand also witnessed anexplosion in oil consumption from the mid-1980’s until theTurn of the century corresponding with rapid penetration ofcars in their economies. Oil consumption rose from 1.7 mbd in1985 to 5.2 mbd in 2000. The more advanced economies ofAsia, i.e. Japan, S.Korea, Taiwan, Malaysia, Thailand. HongKong and Singapore now consume some 10.5 mbd (2003) orabout 13 bbls/person/year.

Magnitude of the Problem of Demand Growth is Staggering

China and India are on sustained economic growth path (China 8-9% and India 6-7% annually)

Current oil consumption of the 2.3 billion Chinese and Indian isabout 2 barrel per person per year compared with 5.4 barrelsper person per year in Thailand

Thailand GDP per capita $ 7000; China 6000; India $3100 (in ppp)

To increase China’s and India’s per capita oil use to the currentThai level would lift consumption from 9.5 to 38 mbd (28 mbd>)

South Korean Oil DemandOil Demand Maturity Curve

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1980 1985 1990 1995 2000 2005 2010

Million b/d

FLAT GROWTH

MARKET MATURITY

RAPIDTAKE-OFF

WHERE'S CHINA?

2025201520051995

120 mm b/d

80 mm b/d

100 mm b/d

60 mm b/d

40 mm b/d

+ 38.6 mmbd82 +/-

120.6Reservoir capabilitydeclines: the leaking bucket syndrome

3-5 % capabilitydecline rate

20 mm b/d

97.6 mmbd = 10 Saudi Arabias by 2025

- 59 mmbd97.6mmbd

2% increase

Reserve replacement - exploration

0

10

20

30

40

50

60

70

80

1960 1970 1980 1990 2000 2010 2020 2030

Bill

ion

barr

els

Discovered

Produced

Future exploration will still be important, but is unlikely to close the gap

The declining exploration

volumes are strongly related to reduced field

size

Exploration potential:

~ 300 billion bbl

Manageable Supply Problems with Oil Prices at $27-$35 abarrel by 2025 (in $ 2002). How do we get there?

EIA Oil Supply Scenarios: Reference and High Price CasesReference High Price

2002 2015 2025 2002 2015 2025US 9.3 9.7 9.3 9.3 10.5 11.0North Sea 6.3 5.4 4.5 6.3 5.8 4.9Canada 2.9 4.8 5.1 2.9 5.4 6.4FSU 11.2 15.3 17.6 11.2 16.6 19.6NOPEC 49.4 61.7 66.2 49.4 66.7 75.1

OPEC 30.6 43.7 56.0 30.6 35.1 40.4

Total 80.0 105.4 122.2 80.0 101.8 115.5

Manageable Supply Problems with Oil Prices at $27-$35 aBarrel by 2025 (in $ 2002). How do we get there?

EIA OPEC Production by Country: Reference and High PriceReference Case High Price Case

2002 2015 2025 2002 2015 2025 Iran 3.7 4.3 5.0 3.7 4.0 4.5Iraq 2.0 4.2 6.6 2.0 3.1 4.0Kuwait 2.1 3.5 5.2 2.1 2.9 3.5UAE 2.9 3.6 5.4 2.9 3.4 4.0Qatar 0.8 0.7 0.8 0.8 0.6 0.8Saudi 9.2 14.5 16.3 9.2 10.5 11.0Middle E. 20.7 30.8 39.3 20.7 24.5 27.8Nigeria 2.3 3.0 3.9 2.3 2.4 2.9Ven. 3.1 4.1 5.6 3.1 3.2 3.9Other 4.5 5.8 7.2 4.4 5.0 5.8OPEC 30.6 43.7 56.0 30.6 35.1 40.4

How do EIA’s Supply Numbers Compare with Others?

EIA 2005

Non-OPEC oil production to grow from 49 mbd in2002 to between 66 mbd ($27 case) to 75 mbd( $ 35 case) by 2025.

OPEC production capacity to rise from 30 mbd in2002 to between 40 mbd ($35 case) and 56 mbd($27 case) by 2025.

(Denver Post cartoon late 1970’s)

More than 60 percent of future production to come from OPECreserves and EOR.

World

0

20

40

60

80

100

120

140

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Mill

ion

BO

PD

Canada miningExplorationNew field developmentIOROuttakeNatural declineHistory

Non OPEC

0

10

20

30

40

50

60

70

80

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Mill

ion

BO

PD

OPEC

0

10

20

30

40

50

60

70

80

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Mill

ion

BO

PD

Flatten out towards 2009 and decline

0

5000

10000

15000

20000

25000

30000

CondensatesQatarIraqIranUAEKuwaitAHSaudimmbd

EIA 2005 - High Oil Price Case

An optimistic scenario does not exceed 25 mm b/d …

2324.5

27.8

Source: Saddad Al Husseini

Several oil companies and consulting companies appear to at least directionally agree with the view that non-OPECproduction will plateau sometime in the next decade.These include: ExxonMobil (2004 forecast), Statoil (2005)PFC (2004); EIG (2004); PEL (2005) and others.

EIA, IEA and some oil companies are holding on the viewthat $ 30 (EIA between reference and high price case) inreal terms will lead to vast new oil discoveries and 15 to 25 mbd of new net (net of depletion) non-OPEC productionby 2025 (non-OPEC depletion 5-8% annually in producingfields).

Much of these analyses are based on econometric supplymodels, using R/P factors and optimistic USGS resourceassessments rather than detailed field by field reservoirengineering studies and more conservative resourceassessments.

How to cope with these diametrically opposed assessments

• Past EIA and IEA assessments based on econometric analysis of global oil demand based on certain price and other assumptions with global oil supplies always assumed adequate to meet even the highest demand scenarios .

• Need to add scenarios which start with the supply side, projecting future oil production capacity (non-OPEC and OPEC) based on technical and non-technical assumptions and match those with perceived future demand. If supply proves to be considerably lower than perceived demand, the price mechanism will ration available supplies (demand and supply will always match. Like caviar, the world will never “run out of oil”. Do we want the price mechanism to ration supply?

• Rather than painting an optimistic supply future based on poor and unreliable data, it would be prudent to add some oil supply scenarios based on careful field by field analyses. Plan on a conservative outcome but hope for higher future production.

Factors Impacting on Timing of Global Oil Plateau

- Level of oil demand growth (1, 1.5, 2 % annually?)- Non-OPEC incremental supply (timing of peak)- Russia and the Caspian (opt for prod. Plateau)- OPEC outside of Middle East (plateau, pol. Dev.)- Middle East OPEC Production Policies (long plateau)

Contributing Factors Reducing IOC Access to Prospects:- Resources nationalism rising (Russia)- Tougher fiscal regimes- Legal and Political Issues (incl. sanctions)- Backward-bending Supply Curves- Long plateaus- Geopolitical issues

Actual peak is likely to be reached before technical peaking

Non-Technical Constraints of Future Oil Supplies

• Conservation policies of some high reserve, low population producers (Kuwait, UAE and perhaps Saudi);

• Rising resource nationalism made possible as a result of current high oil price environment (Russia);

• Worsening fiscal environment in some producer countries coupled with poor legal and political climate (Venezuela, Russia, Iran);

• Chinese and Indian NOC’s with their governments’active support aim at government-to-government package deals, which may not be economical (low IRR);

• Supply security threatened by internal political and external geopolitical events (from S. America to Africa, the Caspian and the Middle East);

• What will Middle East look like politically five, ten or fifteen years from now? Impact on supply.

Non-Technical Constraints on Future Oil Supplies

US Middle East Policy: Impact on Future Oil Supplies

• US policies towards Middle East almost exclusively determined by domestic political criteria and not on enlightened self interest of US in maintaining and stabilizing future oil supplies (Palestine; changed policies vis a vis Saudi Arabia, the “kernel of all evil”);

• Some sources indicate a Neocon desire to reduce oil power of Saudi Arabia contributed to decision to invade Iraq. Ahmed Chalabi promised post-war privatization and major role for IOC’s, presumed to drastically reduce Saudi role in the oil market;

• Poor implementation of post-war Iraq policies – country now increasingly divided along sectarian lines – oil production below pre-invasion level

• Result: Saudi more dominant than ever but more distrustful of US policies and intentions.

The Impact of Geopolitical Developments on the Oil Sector

In a recent article in the Middle East foremost Englishlanguage newspaper, the Daily Star, former Chief EditorRami Khouri sums the geopolitical situation up as follows:

…”The four most important drivers of politics and publicsentiment in the Middle East –Israel/Palestine, Iraq, Iranand Arab democratic reform – are all bogged down ineither chronic violence or massive political uncertainty…Throw in Turkey’s fast changing and slightly souring relationship with the US and the EU, the persistent tensionbetween Washington and Damascus, Egypt’s increasinglystrident domestic politics, and the US-Saudi pattern ofloving and lashing out at one another, and you have aMiddle East region in an early stages of across-the-board,potentially massive changes…

The Impact of Geopolitical Developments on the Oil Sector

Khouri concludes his article as follows:…”An entire region coming untethered from its moorings isnot a pretty sight, but this seems to be the state of thingsto come in the Middle East these days, thanks in largeparts to decades of inept Arab state policies and aresurgent American unilateralist militarism. Theconsequences of this process are only now becoming clear in a Middle East region whose national and state structure have proven much easier to shock, shake and dismantlethan to rebuild on a rational basis…”

Conclusion

• Global oil discoveries peaked several decades ago• The emerging oil industry consensus is for non-OPEC to

peak by the middle of the next decade • Global oil consumption is projected to rise to between

117 and 125 mbd by 2025, with upward from 45 mbdcoming from OPEC

• The one billion people in the industrialized world now consume 60% of world oil production or an average of 18 barrels per person annually. The 5 billion people in the developing countries including China and India and the FSU consume 33 mbd or 2.4 barrels per person annually.

• Even assuming the high level of oil demand growth in the developing countries, their per capita oil use would still be no more than 5-6 barrel per person per year, leaving ample opportunity for growth post-2025. Where will it come from?

Conclusion

• There are serious doubts about the technical ability of several OPEC countries to continued expanding capacity beyond the turn of the decade.

• Aside from technical limits to OPEC capacity growth, there are other reasons why the high OPEC supply numbers in industry forecasts may not be realized. These include:- conservation calling for long production plateaus- various internal political constraints- regional conflicts and wars

• For technical and non-technical reasons it cannot be assumed that OPEC production growth will follow the smooth path projected in many long term forecasts

• Future rising rivalry between IOC’s and NOC’s over access to oil – government to government deals will increase

• Inter-Asian and intra-regional conflicts over oil and gas to increase and focus on Middle East and Central Asia

Proposed Action

• Provide clear definition of “Peak Oil” to facilitate debate• Broaden ‘peak oil’ debate to include senior oil industry

geologists, petroleum engineers and economists (NPC or NAS/NAE?)

• Urgent need to improve access to data on production capacity of producing fields

• Brief policy makers on the concept of peak oil and the uncertainty of timing when oil will peak

• Prepare independent assessments on how to cope with peak oil on both the domestic and international level

• Determine need for government policy to supplement and soften the market impact of peak oil