C
Individually Authored Summaries of Presentations

ISSUES IN THE PEAKING OF GLOBAL OIL PRODUCTION DEBATE

David L. Greene, Corporate Fellow, Oak Ridge National Laboratories


Transportation, the circulatory system of the global economy, is all but entirely dependent on petroleum fuels. In light of this fact, it should be no surprise that the possibility that world oil production will soon reach a peak and then inexorably decline is a subject of great interest and intense debate. The “pessimists,” a somewhat pejorative label given to those who are convinced that the oil peak is imminent and that its consequences will be dire, assert that world oil supply is chiefly determined by the geology of oil resources. They point to geologist M. King Hubbert’s accurate prediction of the peak in U.S. oil production in 1970 and note that many other oil-producing regions have since reached their peaks and are now in decline. Noting that world oil discoveries peaked before 1970, they predict a peak in world oil production by the year 2010. The “optimists” counter that markets and technology will determine the supply of fuel for transport, and that nearly all past predictions of resource scarcity have proven to be mistaken. Innovation guided by market signals will expand and redefine energy resources. They point to increased recovery rates, advances in the technology for exploring and developing oil in deep water, and the redefinition of oil sands as proved reserves. “The stone age did not end for lack of stones; the oil age will not end for lack of oil.”

The debate hangs on several key questions addressed in this workshop.

  1. Will geology or technology dominate?

  2. What is the oil resource, and how much is there?

  3. How much oil can and will OPEC supply?

  4. Will the demand for oil continue to grow, or will demand peak and decline?

  5. Is development of unconventional resources consistent with protection of the earth’s environment and, especially, its climate?

Change is inevitable. There will be a transition, but to what? In the most pessimistic view, the transition will be to a global depression because it will simply not be possible to develop adequate economical replacements for petroleum fast enough to keep the world’s



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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop C Individually Authored Summaries of Presentations ISSUES IN THE PEAKING OF GLOBAL OIL PRODUCTION DEBATE David L. Greene, Corporate Fellow, Oak Ridge National Laboratories Transportation, the circulatory system of the global economy, is all but entirely dependent on petroleum fuels. In light of this fact, it should be no surprise that the possibility that world oil production will soon reach a peak and then inexorably decline is a subject of great interest and intense debate. The “pessimists,” a somewhat pejorative label given to those who are convinced that the oil peak is imminent and that its consequences will be dire, assert that world oil supply is chiefly determined by the geology of oil resources. They point to geologist M. King Hubbert’s accurate prediction of the peak in U.S. oil production in 1970 and note that many other oil-producing regions have since reached their peaks and are now in decline. Noting that world oil discoveries peaked before 1970, they predict a peak in world oil production by the year 2010. The “optimists” counter that markets and technology will determine the supply of fuel for transport, and that nearly all past predictions of resource scarcity have proven to be mistaken. Innovation guided by market signals will expand and redefine energy resources. They point to increased recovery rates, advances in the technology for exploring and developing oil in deep water, and the redefinition of oil sands as proved reserves. “The stone age did not end for lack of stones; the oil age will not end for lack of oil.” The debate hangs on several key questions addressed in this workshop. Will geology or technology dominate? What is the oil resource, and how much is there? How much oil can and will OPEC supply? Will the demand for oil continue to grow, or will demand peak and decline? Is development of unconventional resources consistent with protection of the earth’s environment and, especially, its climate? Change is inevitable. There will be a transition, but to what? In the most pessimistic view, the transition will be to a global depression because it will simply not be possible to develop adequate economical replacements for petroleum fast enough to keep the world’s

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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop economy moving. Optimists seem to be of two minds. Some note that for the past 150 years the world’s energy system has been “decarbonizing” as it switched from wood to coal to oil, and now to natural gas. These optimists see an inevitable, technologically driven migration to a hydrogen economy. Other optimists note that the world’s resources of unconventional oil (heavy oils, oil sands, shale oil, and even coal) are vast in comparison to conventional oil and gas, and point out that the heavy oil of Venezuela and the oil sands of Canada are already being economically developed. In effect, they see a “recarbonization,” since these unconventional resources are either more carbon intensive or will require far more energy to produce and refine. WORLD OIL DEMAND: KEY TRENDS AND UNCERTAINTIES Nicola Pochettino, Senior Energy Analyst, International Energy Agency1 The International Energy Agency’s World Energy Outlook 2004 paints a sobering picture of how the global energy system is likely to evolve from now to 2030. If governments stick with the policies in force as of mid-2004 (Reference Scenario), the world’s energy needs will be almost 60 percent higher in 2030 than they are now. Fossil fuels will continue to dominate the global energy mix, meeting most of the increase in overall energy use. Oil will remain the single largest fuel in the primary energy mix. Among the fossil fuels, demand for natural gas will grow most rapidly, mainly due to strong demand from power generators. The share of coal will fall slightly, but coal will remain the leading fuel for generating electricity. Nuclear power’s share will decline during the Outlook period. Global primary oil demand is projected to grow by 1.6 percent per year to 2030, continuing to grow most quickly in developing countries. Most of the increase in world oil demand will come from the transport sector. Oil will face little competition from other fuels in road, sea, and air transportation during the projection period. Huge investments will be needed. If current government policies do not change, energy-related emissions of CO2 will grow marginally faster than energy use. CO2 emissions will be more than 60 percent higher in 2030 than now. Transport will consolidate its position as the second-largest sector for CO2 emissions worldwide. More than half the increase in the sector’s emissions will occur in developing countries, where car ownership is expected to grow rapidly. These trends, from our Reference Scenario, are, however, not unalterable. More vigorous government action could steer the world onto a markedly different energy path. This Outlook presents an Alternative Scenario, which analyses the global impact of environmental and energy-security policies that countries around the world are already considering, as well as the effects of faster deployment of energy-efficient technologies. In this scenario, global energy demand and CO2 emissions are significantly lower than in our Reference Scenario. Dependence on imported energy in major consuming countries is also 1   OECD/IEA, 2005. This summary is used with permission from the IEA, an autonomous agency of the Organization for Economic Cooperation and Development.

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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop lower. However, a truly sustainable energy system will call for faster technology development and deployment. GLOBAL OVERVIEW OF PETROLEUM RESOURCES Thomas Ahlbrandt, World Energy Project Chief, U.S. Geological Survey The World Energy Program of the U.S. Geological Survey (USGS) has been studying the volumes and distribution of potential resources of petroleum from both undiscovered fields as well as from reserve growth in discovered fields for the total petroleum systems contained within 128 provinces in 96 countries, exclusive of the United States and Canada. This global assessment, the USGS World Petroleum Assessment 2000 (U.S. Geological Survey Digital Data Series DDS-60, 2000), was released in June 2000 using known reserve data as of January 1, 1996, and provided estimates of potential new resources to be added to the total during the next 30 years. New field discoveries and reserve growth within the assessed provinces between January 1, 1996, and January 1, 2004, accounted for 18 percent of the oil resources and 27 percent of the gas resources of the total that were estimated as potential by the year 2025 for those 128 provinces. Additionally, there have been a number of discoveries in provinces other than those assessed in the USGS 2000 assessment. If these discoveries were added to those of the previously assessed provinces, the percentages represented by new field discoveries and reserve growth would increase to 23 percent of the oil and 32 percent of the natural gas of the estimated total potential to the year 2025. Reserve growth added three times the volume of reserves added by new field discoveries during the 1996 to 2003 period. During that period, 26 percent of the estimated mean oil reserve growth and 52 percent of the estimated mean natural gas volume reserve growth were realized. Results of these analyses suggest that estimates in the USGS 2000 assessment are reasonable assuming comparable rates of reserves additions for the remainder of the 1995-2025 time frame of the assessment. The USGS 2000 estimates are moderate relative to recent higher estimates from other organizations estimating recoverable reserves and resources for both oil and natural gas. Significant future potential for oil and natural gas are estimated for Arctic regions, including the United States and Canada, where approximately 25 percent of the USGS 2000 undiscovered volumes of oil and natural gas are located. These Arctic resources are thought to be gas-prone petroleum systems which should balance the oil and natural gas endowment of the world.

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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop WORLDWIDE LIQUID PRODUCTIVE CAPACITY: TIGHT SUPPLY OR EXCESS OF RICHES? Peter Jackson, Director Oil Industry Activity, Cambridge Energy Research Associates (CERA) No summary available. THE AGE OF OIL—BEGINNING OF THE END? Jeremy Gilbert, Barrelmore Ltd. After a century of exploration and huge advances in our understanding of the origins of hydrocarbons, we can describe quite reliably what we have inherited. Our estimates of the size of this resource would be more accurate still were we to have access to the records of those who control it, namely, the western oil companies and the national oil companies of the OPEC countries. Both groups have what seem to them to be good reasons to keep this data confidential, but the information available to outsiders suggests that we may be significantly overestimating remaining reserves. Many independent estimates of future world oil demand have been made. Although these have large variations, virtually all of them anticipate an increase in demand substantially above the present 80 million bbl/day. A level of about 100 million bbl/day by 2025 can be taken as representing a minimum; reputable companies predict demand of 125 million bbl/day. Analysis by a number of groups suggests that it will be very difficult for the world to significantly reduce consumption, through improved efficiency or substitution, before 2025. A detailed analysis of the world’s reserves, carried out country-by-country by the Association for the Study of Peak Oil (ASPO), suggests that world production of “conventional” oil will reach a maximum within the next 5 years at about its present level. Although the reliability of the predictions decreases with time, it is predicted that after a plateau period of just a few years production will begin to fall at a rate of about 2 to 3 percent per year. Although opinion at the workshop was divided on the realism of these predictions, there was near-consensus on the likelihood that non-OPEC conventional oil supply would indeed reach a maximum within the next 10 years and then begin a slow decline. Whether or not the OPEC countries could or would meet the challenge of filling the gap between the 60 million bbl/day from the other suppliers and possible demand of 125 million bbl/day was left unclear. There appear to be substantial technical and economic reasons to doubt that this will happen. For the world to analyze and begin to deal with the challenge posed by a possible shortfall in hydrocarbon supply, accurate data are critically needed. We must urgently enroll our politicians and policy makers in persuading those who control this data that is essential it be made available for impartial study. Without such urgent action we are dooming our children to the strong likelihood of energy deprivation and civil unrest.

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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop QUESTIONS REGARDING SAUDI ARABIAN PETROLEUM SUPPLIES Matt Simmons, Simmons and Company International The peak oil debate is gathering steam. Unfortunately, so far the two sides of the debate team are “snarling” at each other. One group, often called pessimists, tends to be primarily petroleum scientists. They argue that oil is a finite resource and that its use is about as high as can be sustained. Moreover, oil supply will soon peak and then begin a steady and probably irreversible decline. The other group, often called optimists, tends to be economists or social observers. They are certain that oil peaking will never happen within any relevant time frame, since demand will either peak and then decline, or technology will continue to find ways to bring on more supplies. Most optimists also argue that long-term oil prices will fall back to the very low levels they stayed at for most of the last 150 years. Lacking in the optimists’ argument is any data to support this view, other than history. A wrong interpretation of peak oil makes the debate even fuzzier. Too many peak oil skeptics assume that peak oil means that oil has “run out.” Nothing could be farther from the truth. Peaking means oil supply will no longer grow. Peak oil will occur unless, by some miraculous event, we finally prove that oil is a renewable resource. A handful of proponents claim oil is still being created but they have no explanation for why so many once prolific oil-producing regions are now far beyond peak supply. Since oil is a finite resource, the higher oil demand rises, the faster we will reach peak oil. The timing of this earth-shattering event is the only issue deserving serious debate. A major reason why people still debate whether peak oil is a serious problem or not, and the timing when peak oil might occur, is the immense and gaping hole in high-quality data to shed light on the topic. For decades, what were reported as “proven oil reserves” were blissfully accepted as “proven” until Shell Oil Company, the gold standard for high efficiency and top professionalism, suddenly found a series of gross overstatements of what had been booked as proven reserves. Ever since this bombshell event, scores of other public oil and gas companies have undergone similar proven reserve write-downs. At the same time there has been a renewed focus on the reliability of published Middle East proven reserves. Many oil observers have finally remembered that all OPEC Middle East oil producers along with Venezuela doubled or tripled their reported proven reserves within a short time span in the 1980s, adding a mysterious 300 billion bbls of proven reserves without a single significant oil discovery. Whether these numbers were real or not is a very serious question. In the past several years, “unconventional oil reserves” have also been added to the world’s proven reserve base, which raised global proven reserves by another 200 billion bbls, although these unconventional oil resources are extremely energy intensive to produce and never come out of the ground at rates more than a fraction of the volume of oil a highly pressured reservoir can deliver. I am convinced that Saudi Arabia is either nearing its peak oil output, or could even have passed its old peak supply record, set in 1980-1981. Once Saudi Arabia’s oil goes into decline, the world will also have passed peak oil.

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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop There are two ways to resolve the peak oil debate. Only one makes any sense. The smart fix is for the world to quickly adopt a new standard of energy data and insist that all key oil producers furnish the last 5 years, quarter-by-quarter, of their oil production on a field-by-field basis and the number of well bores within each field that create the oil flow. Once this reform begins, all key players must also report their ongoing production, similar to the financial transparency we presently require of all publicly held companies. The wrong way to resolve this issue is to wait until historical data make it clear that we have passed peak oil since it is so obvious that global oil production is in decline. If the world chooses what I described as the rearview mirror approach to the peak oil debate, we lose the chance to properly organize an intelligent response to how the world copes in a post-peak oil environment. The rear-view mirror solution will likely lead to a vicious battle among oil users as to who gets their fair share of a precious, high-value-added resource that is unfortunately in decline. This era will resemble the outbreak of World War I. RECENT TRENDS IN EXPLORATION RESULTS AND THE IMPLICATION FOR FUTURE PETROLEUM LIQUIDS SUPPLY Michael Rodgers, Senior Director, E and P Portfolio and Business Development Unit, PFC Energy With a few exceptions, large discoveries from 1960 to 1980, as well as sizable reserves surpluses, allowed for sustained crude market equilibrium, to which much of the world grew accustomed. However, as demand has grown and as exploration has matured in the majority of the world’s basins, production levels have begun to exceed additions of new reserves by 12-15 billion bbl/year. For each of the last 20 years, the world has been producing and consuming two to three times as much oil as it has been finding. PFC Energy conducted a detailed analysis of historical reserves growth, production, demand growth, and recent discovery trends. The study examined every country and broke out each country’s production into multiple segments: reserves already discovered (the existing base with projected decline rates, identified development projects, and reserves with no current development plans) and reserves yet to be discovered. This included a detailed assessment of field size distributions, exploratory drilling levels, and commercial threshold analysis. The analysis suggests that the world’s ability to increase liquids production outside members of the Organization of Petroleum Exporting Countries will be severely challenged in the early part of the next decade and beyond unless there are significant shifts in oil recovery factors or improved results from exploration. The average annual volume of new oil discovered after 1990 was approximately 8 billion barrels per annum while average annual demand for production outside of North America will increase from a current volume of 25 billion barrels per annum to 35 billion barrels per annum by 2020. In order to stabilize conventional crude oil depletion levels it would be necessary to triple recent exploration success as measured by annual volumes of newly discovered oil.

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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop In addition, as demand continues to grow beyond 2010 and non-OPEC production peaks or goes into long-term decline, the burden will fall on OPEC to make up the difference. When this occurs, OPEC production capacity and reserves will be strained, and models suggest that OPEC will struggle to fill the differential between non-OPEC supply and global demand beyond as early as 2015-2020. THE OUTLOOK FOR ENERGY—A VIEW TO 2030 Scott Nauman, Manager, Energy and Economics, Corporate Planning Department, ExxonMobil Corporation This presentation highlights ExxonMobil’s global energy outlook, with an assessment of supply and demand through 2030. This outlook underscores the connection between economic growth and energy consumption, and the importance of meeting key energy supply and demand challenges to improve economic prosperity around the world. By 2030, the world’s population will grow to 8 billion. Coincident with this population rise will be continuing economic growth, both in developed and developing economies. This combination of population and economic growth will lead to a primary energy demand increase of approximately 50 percent, reaching close to 335 million bbl/day oil equivalent by 2030. The vast majority (80 percent) of the increase will occur in non-OECD countries. As demand rises, energy efficiency will become increasingly important, with the pace of improvement likely to accelerate. This accelerated pace is the outcome of expected improvements in personal transportation and power generation, driven by the introduction of new technologies, as well as a myriad of other improvements which span the residential, commercial, and industrial sectors. Oil, gas, and coal will remain predominant energy sources, with approximately 80 percent share of total energy. These well-established fuel sources are the only ones with the versatility and scale to meet the majority of the world’s growing energy needs. Alternative fuels, like solar and wind power, will grow rapidly, underpinned by government subsidies and mandates. But even with assumptions of robust 10 percent/year growth, solar and wind will represent just 1 percent of the total energy portfolio by 2030. The supply outlook is also addressed in the presentation. A discussion of global oil resources highlights the long life supply that still remains. This resource estimate represents a detailed technical assessment of global supply sources. A world liquid production outlook explores the trends among OPEC and non-OPEC production. Technology advances will remain critical to successfully meeting the significant energy demand, supply, and environmental challenges ahead.

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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop LOOKING IN FROM THE OUTSIDE: EXPLORING THE EVIDENCE OF PEAK OIL PRODUCTION Kjell Aleklett, Uppsala University, Sweden, and the Association for the Study of Peak Oil and Gas Since 2001, when the Association for the Study of Peak Oil and Gas was founded, we have tried to tell the world that there will soon be a problem supplying the world with crude oil while demand continues to rise. The estimated peak-production year is 2010. The exact year for peak oil depends very much on future demand, and we will not know when we have peaked until we have crossed the threshold. It will certainly happen before 2020. Fifty years ago the world was consuming 4 billion bbl of oil per year, and the average discovery rate (the rate of finding undiscovered oil fields) was around 30 billion bbl per year. Today we consume 30 billion bbl per year and the discovery rate is dropping toward 4 billion bbl per year. (By discovery, I mean only new oil fields. Some analysts include reserve growth newly accessible oil in old fields as new discoveries). If we extrapolate the downward discovery slope from the last 30 years, we can estimate that about 134 billion “new” barrels of oil will be found over the next 30 years. The USGS has 649 billion bbl as a mean discovery rate of new oil fields (not growth) for the period from 1996 to 2025. According to available databases the world has found 100 billion bbl during the first 10 years of the period. For the next 20 years we estimate from existing trends that we will find another 100 billion bbl, in total 200 billion bbl. This is far from 649 billion bbl. Today many use scenario numbers from the IEA base scenario as future production. Since IEA uses the USGS mean data as a resource base, we think that that these numbers are too high. This is just one of several indications that we are facing peak oil in the near future. THE FUTURE OF OIL: WILL DEMAND MEET SUPPLY? DEMAND IMPLICATIONS OF PEAK OIL AND THE GEOPOLITICS OF THE MIDDLE EAST Herman Franssen, President, International Energy Agency For the first time since the late 1970s and early 1980s, the issue of peak oil has moved from academic discussions among a few dedicated believers, to debates and investigations by national academies of science (Sweden, United States), the oil industry (Chevron ad campaigns), and governments (Secretary Bodman’s request to the National Petroleum Council [NPC] to make a study of peak oil). There is little doubt that like in the late 1970s, when oil prices reached record post-World War II highs, the recent steep oil

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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop price increases and the immediate modest supply response have heightened concern about the ability of the global oil industry to maintain, let alone expand, conventional oil production. The perception that global oil production could very well peak in the 1990s was genuine among many oil industry senior geologists and petroleum engineers in the late 1970s. The timing of peak oil, however, was predicated on oil demand growth of 5 percent plus annually. Many oil experts believed that oil demand was fairly inelastic and would not respond to higher prices. Events since the late 1970s proved otherwise, and at $30 plus oil (1970 dollars) much of the oil used as a boiler fuel was replaced by other, cheaper fuels. High oil prices and government policies (ranging from taxes to CAFE standards) also resulted in major efficiency gains in the transportation sector. Perhaps by coincidence, the burst of postwar OECD economic growth came to an end during the oil price shocks of the 1970s, but it is difficult to quantify the role of energy and oil in this. On the supply side, a combination of high prices, loss of assets in OPEC oil-producing countries, and the development of new cost savings and deepwater technologies led to a large increase in E&P expenditures in the upstream sector, resulting in major expansion of non-OPEC production. By the mid-1980s, OPEC’s market share had declined sharply and half of its capacity was shut in. What is different today from the late 1970s? On the demand side, most of the oil used as a boiler fuel has already been substituted by other fuels, and oil in the industrialized world is largely used in the transportation sector and as feedstock. There is still room for further substitution, but it is limited and will take more time, in particular, in the transportation sector. On the demand side, some 80 percent of the global population uses on average 2 barrels per person per year, compared with close to 15 barrels for Europe and Japan and 26 for the United States. As shown in the recent growth in Chinese oil demand, pent-up demand for oil is huge in the developing world, and demand growth is directly linked to economic activity. Assuming long-term global economic growth at 3-3.5 percent per year, most long-term energy demand projections show global oil consumption rising from about 84 million bbl/day in 2005 to 120 million bbl/day by 2025, and most of the demand growth is projected for the developing countries. To achieve 120 million bbl/day of oil production by 2025 and assuming a modest depletion rate in producing fields of 3-5 percent annually, some 98 million bbl/day of oil production in 2025, must come from other than current proved reserves, i.e., from new discoveries or extensions of producing fields. This seemingly impossible task would only raise the annual consumption in the developing world from an average of 2 to an average of about 4 barrels per person per year over the next two decades (Europe’s consumption level in the early 1950s). Already high oil prices are having a deleterious effect on economic development in the poorest countries, and it is not yet clear how much of an impact it will have on medium-income countries. High prices lead to improved efficiency and fuel substitution where possible but can also cut into economic growth and reduce living standards. There are too many as yet unknown and speculative parts of the global peak oil puzzle to expect early agreement among experts and policy makers on the timing of peak oil. Perhaps it is less important to speculate on when conventional oil will peak than to focus on timely mitigation strategies. Since there are certain synergies between peak oil

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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop mitigation and reducing CO2 emissions, some of the mitigation strategies to cope with peak oil will also lower CO2 emissions without reducing prospects for global economic growth. OIL OUTLOOK, CHALLENGES, AND OPPORTUNITIES Adnan Shihab-Eldin, Acting Secretary General, OPEC This reviews the oil outlook, challenges, and opportunities in the early 21st century. It provides assurances of supply security at a time when there has been much market volatility and rising prices and unprecedented demand growth. There are six sections: current oil market assessment, medium- to long-term outlook, outlook beyond 2010, reserves/resources, uncertainties, and technology. The current market is characterized by resilient economic growth and high oil demand growth, in particular from large developing countries with low consumption per capita. Supply chain tightness, particularly downstream, has contributed to a loss of market confidence. OPEC has increased production significantly to help stabilize the market, resulting in global supply exceeding demand for the last 3 years and rising oil inventories. But geopolitical tensions, hurricanes, and other unpredictable events, together with increased activity in futures markets, have translated into significant volatility and rising prices. In the medium term, OPEC is committed to continuing upstream capacity expansion at an accelerated rate, and this is expected to rise cumulatively by 5.5 million bbl/day to 38 million bbl/day by the end of 2010, and other liquids by 1.5 to 1.8 million bbl/day. OPEC will also add downstream capacity well in excess of 2 million bbl/day. Oil supply is thus forecast to stay well above demand, whereas the downstream situation may only improve in 2007, when product demand and refinery capacity expansion could come close together. Beyond 2010, demand growth will continue rising steadily. OPEC, with nearly four-fifths of proven global reserves, will supply increasingly the incremental barrel. But, despite the upstream investment challenge having been not too dissimilar to the past, ensuring market stability will be complicated by considerable uncertainties, such as consuming countries’ energy policies. The global reserve/resource base can easily meet forecast demand growth for decades to come. Estimates of ultimately recoverable reserves (URR) have increased over time, with advancing technology, enhanced recovery, and new reservoir development. For example, according to an established industry source, reserve growth from improved recovery alone in existing fields amounted to 175 billion bbl in 1995-2003; combined with new discoveries of 138 billion bbl, total reserve growth was therefore well above the cumulative production of 236 billion bbl for that period. Moreover, technology continues to blur the distinction between conventional and non-conventional oil, of which there is also an abundance, as well as with other fossil fuels. We expect the world’s URR to continue to increase in the future. Therefore, the real issue is not reserve availability, but timely deliverability, and here enhanced cooperation and dialogue among all parties is essential to ensure security of demand, as well as security of supply.

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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop PEAKING OF WORLD OIL PRODUCTION AND THE MITIGATION CHALLENGE Robert L. Hirsch, Science Applications International Corporation The peaking of world conventional oil production will subject the world to its first ever discontinuity in energy a sudden limit on the supply of a commodity that is essential to the functioning of all economies. Oil peaking represents a liquid fuels problem, not an “energy crisis” in the sense that term has often been used. Motor vehicles, aircraft, trains, and ships simply have no ready alternative to liquid fuels. While many possibilities exist for the long-term future, in the next 20-40 years it is essential that we adequately provide for the enormous worldwide fleets of vehicles and for chemical processes that can only function on liquid hydrocarbons. Accordingly, mitigation must be narrowly focused, at least in the near term. Currently viable, potentially high-impact mitigation options include (1) increased vehicle fuel efficiency, (2) enhanced recovery of conventional oil, and (3) substitute liquid fuels from heavy oil/oil sands, coal, and remote natural gas. A scenario analysis of a hypothesized worldwide crash mitigation program utilizing related commercial and near commercial technologies determined the following as the most optimistic possible outcomes: (1) Waiting until world oil production peaks before embarking on crash program mitigation on all options simultaneously leaves the world with a significant liquid fuel deficit for more than two decades; (2) initiating such a crash program 10 years before world oil peaking helps considerably but still leaves a liquid fuels shortfall roughly a decade after the time that oil would otherwise have peaked; and (3) initiating a mitigation crash program 20 years before peaking offers the possibility of avoiding a world liquid fuels shortfall for the forecast period. If mitigation is too little and too late, world supply/demand balance will be achieved through massive demand destruction (shortages), which would translate to heretofore unimagined economic hardship; think of the aftermaths of the 1973 and 1979 embargos lasting 10-20 years instead of the brief periods that were actually involved. Indeed, the rapid rise in world oil prices in the 2004-2005 period may likely appear modest in comparison to the price escalations that could accompany the peaking of world conventional oil production. The world will thus be faced with a liquid fuel supply risk management problem beyond anything yet experienced by modern civilization. However, with adequate, timely mitigation, the worldwide economic costs of oil peaking can be minimized.

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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop THE ROLE OF EXPLORATION AND PRODUCTION TECHNOLOGIES Donald Paul, Vice President and Chief Technology Officer, Chevron Corporation The debate over the potential peaking of the world’s conventional oil production takes on one of the most important questions being raised by governments, societies, and industries on a global scale. The success of the workshop was its embrace of the diversity of views on the issue. While all would agree on the inevitability that a maximum of both conventional oil production and ultimate recovery exists, the views on both the timing of the onset of the maximum and its magnitude are at significant variance. I suggest that several key dimensions shape the debate and the major differences in positions being taken: The size of the total conventional oil “endowment”; The role played by reserve additions and the potential for substantial increases in recovery factors; The scale of the opportunity for and effectiveness of major additions from frontier exploration; The growth capacity in OPEC production and the state of the reserves underpinning production; The scale and timing of significant additions from unconventional feedstock, such as GTL, oil sands, shale oil, coal, and biofuels; The timing, scale, and feasibility of the massive investment capital calls required; and The role that will be played by significant technological advances, as outlined in my presentation. Here are some general comments on the discussion: Although the total energy system, including electric power production, is involved in the issue, the central issue is about fuel production capacity, not conventional oil production alone. The USGS study, arguably one of the most comprehensive reviews of global oil resources, estimates the endowment at about 3 trillion barrels. This is consistent with estimates by several of the largest global energy companies. In contrast, critics argue that the realizable endowment is significantly smaller, yielding a prediction of a much earlier and lower production maximum. The lynchpin of this debate centers on the effect of reserve additions and increases in recovery factors. History has shown that the industry, through continued technological advancement, has increased both. While there was relatively little discussion of frontier exploration, most global majors support the belief that opportunities for significant new finds are supported by geological knowledge. Critics argue that the past 20 or so years have shown this not to be the case. However, since the oil price collapse in

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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop 1986, the driving business force in the industry has been about consolidation, reserve conversion, and cost performance, not about major frontier exploration. The supporting R&D activities, with the notable exception of deepwater E&P, also reflected this business focus. One of the most significant wild cards is the size and timing of fuel production from unconventional resource conversion. While not directly addressing the issue of the peaking of conventional oil production, the role of synthetics could be critical in responding to the rising demand for fuel. While the scale of the potential resources are in the trillions of barrels equivalent, critics correctly point to the enormous challenges for technology, capital requirements, and perhaps most importantly, timing. The history of the industry and technology has always been to deliver lower capital and operating costs, extend access to new resources (e.g., deepwater and extra-heavy oil), and increase the recoveries from existing producing assets. Most in the industry do not believe we are anywhere near the end of this process. For example, the industry has always been at the forefront of applying advances in digital technology and this will continue as a new level of automation and robotics comes to the oil field. This will both increase overall recovery performance, but will expand opportunities by improving economic outcomes. The opportunity to ride the wave of advances in molecular science also bodes very well for our fuel supply diversification options as new resource conversion technologies are developed and applied at scale. The issues of timing, scale, and capital demands remain, but history is on the side of technology to enable solutions to even the most challenging problems. I would like to thank Dr. Ramage and the organizing team for bringing together a very knowledgeable and diverse set of participants. I look forward to continuing to participate in the debate. THE ROLE OF HEAVY OIL IN THE PEAKING DEBATE: HOW MUCH, HOW FAST, HOW BEST? Robert F. Heinemann, President and CEO, Berry Petroleum Company All the participants in the peak oil debate appear to converge on the near-term challenge that 45 to 50 million bbl/day must be produced from new sources over the next 10 years. This challenge is extremely daunting and is based on relatively conservative projections of demand growth and base decline of existing fields. Heavy oil and bitumen production are expected to fill a considerable portion of this gap, because of the vast amount of resources available. Enormous accumulations of heavy oil and bitumen exist around the globe. In-place estimates have been reported of up to 6 trillion bbl, with over 65 percent of this total located in the Western Hemisphere. Venezuela holds approximately 225 billion technically recoverable barrels in the Faja belt of the Orinoco. Canada has the largest

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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop bitumen resource estimated at about 525 billion technically recoverable barrels located in the Alberta tar sands. Applying more standard reserve definitions to these resources reduces the numbers to 77 billion bbl in Venezuela and 177 billion bbl in Canada. Both of these are truly significant when compared with Saudi Arabia’s reserve estimate of 262 billion bbl. In fact, the heavy oil recoverable estimate of 1,085 billion bbl around the globe now exceeds the comparable light oil estimate of 965 billion bbl. Global production of bitumen and heavy oil today totals about 3 million bbl/day. In addition to the mining of tar sands, there are four commercially proven technologies used today. Cyclic steam injection, steam flooding, and steam-assisted gravity drainage all use thermal injection to lower the viscosity of the hydrocarbons in situ and improve the displacement efficiency of these processes. Cold heavy oil production with sand is the fourth technology and involves the primary production of heavy oil and formation sand using progressive cavity pumps. To achieve higher recoveries, these techniques are being implemented with dense well spacing and complex horizontal and multilateral well architectures. While examples of recovery factors exceeding 50 percent in specific reservoirs are not uncommon, recovery estimates on a basin-wide average rarely exceed 20 percent. Heavy oil production can increase over the next 10 years to about 6 to 7 million bbl/day and will therefore close about 10 to 15 percent of the production gap facing the world over this period. Given the enormity of the world’s heavy oil and bitumen resources, these estimates are often viewed as conservative. However, the pace of heavy oil development faces a number of challenges, which include: Light oil production is more profitable for companies with diversified portfolios; Applicability of today’s technology beyond the “best” reservoirs is unknown; Industry is currently experiencing capital, people, and equipment constraints; The political situation in Venezuela is uncertain; and Price volatility discourages sustained investment over the longer term. CANADIAN OIL SANDS: DEVELOPMENT AND FUTURE OUTLOOK Eddy Isaacs, Managing Director, Alberta Energy Research Institute It is estimated that there are 8 to 9 trillion bbl of heavy oil and bitumen in place worldwide, of which potentially 900 billion bbl of oil are commercially exploitable with today’s technology. Canada alone has 175 billion bbl of bitumen reserves that can be processed with today’s technology, making it second only to Saudi Arabia in proven oil reserves in the world. It is important to assess what impact unconventional oil will have on the world oil supply and in what time frame. The past 20 years have witnessed several major successes for the Canadian oil sands industry, all triggered by technological innovations. The current production of bitumen and synthetic crude oil from the Canadian Province of Alberta averages 1 million bbl/day, and oil sands production is expected to triple to 3 million bbl/day by 2018 and to 5

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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop million bbl/day by 2030. There are, however, constraints that, without new technology, could jeopardize the above growth scenario. There is an increasing cost for natural gas, currently the fuel of choice for steam generation, upgrading, heat, and power. There is a significant dependence on water used for separation of oil from the sand in surface mined operations and for in situ steam generation. In addition, the amount of energy required to produce a barrel of synthetic crude oil is about a third of the energy in a barrel of bitumen. This makes oil sands operations large single-source emitters of greenhouse gases. Despite these challenges, several factors have made investments in oil sands very attractive given world oil prices above about $US 25 per bbl WTI (West Texas Intermediate crude oil). There are no “finding costs” since the oil sands are well delineated. There is ready access to the largest market in the world, the United States, via established pipelines. While nonconventional oil is emerging as a new major source of oil, even an aggressive worldwide development scenario can only capture some 15 to 20 percent of the required new oil supply in the next 20 years. Thus, there is a growing recognition that solutions to the pressing global energy needs and challenges emerge when we understand the energy industry as one interconnected system, integrated horizontally along the various energy sources and vertically along the value chain. Strategic investment in a balanced portfolio of energy innovation—with a focus on common technology platforms and points of leverage across the portfolio—has the greatest potential for returns in economic, environmental, and social terms. THE POTENTIAL FOR OIL SHALE Stephen Mut, CEO, Shell Unconventional Resources Energy Unconventional resources and especially oil shale are potentially strategic resources for the United States and the world. Oil shales are distributed around the world in over 20 countries, but by far the thickest and richest resources are in the United States in northwestern Colorado, eastern Utah, and southwestern Wyoming. According to DOE estimates, the Piceance Basin of Colorado contains approximately 1 trillion recoverable barrels of hydrocarbons locked up in the shale, roughly equivalent to all the combined proven conventional oil reserves in the world today. It is easy to see why there have been so many past attempts to unlock this potentially enormous resource. Oil shale is a tight-grained rock, rich in solid organic matter called kerogen. It is an immature source rock that has not yet generated liquid hydrocarbons, but when heated over geological time, will yield liquid or gaseous hydrocarbons. With oil shale the challenge is not in finding the prize but in learning to produce it in an economical and environmentally acceptable way. In Colorado, Shell is field testing a new technology, the In Situ Conversion Process (ICP), that accelerates the natural process of oil and gas maturation by literally tens of millions of years. ICP uses heaters drilled into the oil shale resource and slowly heats to over 500°F over a 3- to 4-year period. It produces light hydrocarbon liquids and gases with

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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop almost no heavy ends, while leaving in the subsurface a char that is extremely hydrogen deficient. A freeze wall surrounding the heated zone is used for preventing water ingress and product containment. Shell is also field testing ICP in tar sands as well as in oil shale. New technologies including ICP are advancing to the point that there is optimism that commercial oil shale production will become a reality. Tests being performed in Colorado are reducing the uncertainties associated with recovery efficiency, product composition, and energy balance. Shell hopes to be able to declare the process commercial by the end of the decade. PRODUCING LIQUID FUELS FROM COAL David Gray, Director of Energy Systems Analysis, Mitretek Systems This presentation started by giving a brief overview of the technologies used for converting coal into high-quality liquid transportation fuels and the current status of both coal to liquids and gas to liquids. This mitigation option could improve energy security and would produce ultraclean liquid fuels that are compatible with the existing infrastructure. The barriers to deployment are mostly economic and environmental. It was estimated that the potential contribution worldwide of coal-to-liquids (CTL) technology in the year 2030 could be about 4 million bbl/day. When considering greenhouse gas emissions, CTL would have slightly higher carbon emissions than petroleum. In conclusion, it will be necessary in the future to develop alternatives to conventional petroleum when world demand outstrips supply, and gas to liquids (GTL) and CTL could be used as petroleum alternatives. The cost of production of clean liquid fuels from coal is estimated to be in the range of $30-$50/bbl COE depending on coal type, plant location, and actual capital cost. Therefore, continued high world oil prices above $50/bbl would make CTL an economically viable option in the United States and worldwide. Countries with large coal reserves and little domestic petroleum are candidates for using CTL to provide fuels to supplement conventional petroleum (China, India, the United States, Australia). Continued R&D and GTL and CTL deployment will improve the economics; however, government incentives will probably be necessary for the first plants to reduce risks for investors and to encourage commercial deployment. LIQUID FUELS FROM NATURAL GAS F. Emil Jacobs, Vice President, Research and Development, ExxonMobil Research and Engineering Natural gas currently provides about 20 percent of the world’s energy, and demand for it is expected to increase in response to growing environmental concerns. While the bulk of natural gas sales are based on direct domestic usage, pipelines, and liquid natural gas (LNG) supplies, new options for chemical conversion of gas to liquid fuels are starting to materialize.

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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop Key ingredients for the successful commercialization of new gas to liquids (GTL) technologies include (1) access to a premier gas resource with sufficient reserves to provide for a 25+ year project life; (2) technically ready/economically viable technology for syngas production, Fischer-Tropsch synthesis, and wax upgrading; (3) ability to execute large-scale projects; (4) access to finance for multibillion dollar investments; and (5) global marketing capabilities to take full advantage of high-quality GTL products. In considering the overall outlook for GTL and its ability to provide for future energy needs, there are several points to consider: While GTL volumes are expected to increase in coming years, it is worth noting that even with the more optimistic DOE Energy Information Administration commercialization scenarios, these projects will make up only ~1.7 percent of the world transport fuel market by 2025. Studies show that the most effective contribution of GTL fuels to future energy markets will be as a blendstock with more traditional streams, and industry is working toward that objective. GTL will likely be pursued as a gas monetization option in addition to gas pipeline and LNG projects. It will be limited to the largest gas resources where economy of scale benefits are available and will likely be utilized as part of an overall energy diversification strategy. Synthesis gas-based technologies, which utilize coal, residual oil, or biomass feedstocks, will extend the potential capacity for liquids production via the GTL technology platform. Pursuit of these alternatives will occur, and their ultimate success will be determined by the extent to which they can compete with conventional resources. LIQUID BIOFUELS FOR TRANSPORTATION Daniel Sperling, University of California, Davis Biofuels have four large attractions: they can be produced domestically, emit few greenhouse gases, are renewable, and can be used in today’s internal combustion engines with few modifications. These attractions must overcome the challenges of scale and cost. The challenge is to reconcile large economies of scale in feedstock processing and fuel transport, with large diseconomies of scale in feedstock collection. Today’s liquid and gaseous fuel industries have squeezed costs by building on a huge scale pipelines that transport tens and hundreds of thousands of barrels per day and refineries that process up to a million barrels per day. A biofuels industry by its nature will not have that structure or scale; it will be far more diffuse. Overall production potential will be limited by the difficulty of assembling large tracts of land to offset high feedstock collection costs and higher costs of fuel distribution. The largest biofuels efforts are in Brazil, where sugar cane is converted to ethanol, and the United States, where corn is converted into ethanol. Each country produced about 150,000 gasoline-equivalent bbl/day in 2004 accounting for about 1.5 percent of U.S.

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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop gasoline consumption. About 12 percent of U.S. corn production is required to produce this quantity of ethanol. Brazilian ethanol is competitive with oil at about $30-35 per barrel. Corn ethanol is somewhat more expensive. A more land-efficient approach to producing liquid biofuels is to shift from food crops to lignicellulosic materials. The cellulose may be wood grown on tree plantations, high-yield grasses, or crop residues (such as corn stalks). With these higher yield materials, about 5 to 10 percent of all land in the United States’ 48 states would be needed to produce about 30 percent of U.S. transport fuel. The new U.S. energy bill contains incentives for cellulosic fuels, and the scientific and engineering knowledge is at hand to create a cellulosic energy industry. Cellulosic fuels are likely to have similar costs to corn ethanol but would use much less land and fossil energy and produce much fewer greenhouse gases. But where will the investment come from (given the relatively high costs), where is the political constituency that would support these risky investments, and how will the scale challenges be overcome? OPPORTUNITIES FOR REDUCING OIL DEMAND FOR TRANSPORTATION John B. Heywood, Director, Sloan Automotive Laboratory, Massachusetts Institute of Technology The worldwide demand for petroleum-based fuels—gasoline, diesel, jet fuel—is enormous. It is also growing at about 1.6 percent per year. In the United States, freight consumes about 40 percent of today’s total, and air transport consumes just over 10 percent. Light-duty vehicles (cars, pickup trucks, SUVs, and vans) consume close to 50 percent of transportation fuels. The technology used in today’s light-duty vehicles continues to improve. Internal combustion engines, transmissions, and vehicles can be improved over time to give some 35 percent fuel consumption reduction in new vehicles in about 20 years, at an extra cost per vehicle of $500-$1,000. Hybrids can improve on this by 20 to 30 percent, at an additional cost of a few thousand dollars. Prospects for the diesel in the United States, attractive from a fuel consumption and CO2 perspective, are uncertain due to the extremely stringent U.S. NOx and particulate standards, low U.S. fuel costs, and higher initial cost. Longer-term transportation energy and greenhouse gas (GHG) reduction options may require more radical technology changes. Liquid fuels from oil sands, heavy oil, and GTL are likely to increase to about 10 percent of petroleum-based supplies over the next 25 years. Biomass-based fuels will probably add another 5 or so percent. Different vehicle concepts, with substantially reduced weight and size will likely be developed. Fuel cell systems using hydrogen would result in more efficient vehicles than internal combustion engine (ICE)-based technology, but the energy lost and GHG emissions released in producing hydrogen from natural gas and other short-term options are significant and result in no overall benefit. Very low CO2-emitting transportation systems in the longer term (30 to 50 years) might be achieved with fuel cells and hydrogen from non-CO2 releasing sources. Electricity from renewables and nuclear with advanced battery electric vehicles are a potential alternative.

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Trends in Oil Supply and Demand, the Potential for Peaking of Conventional Oil Production, and Possible Mitigation Options: A Summary Report of the Workshop Reducing U.S. light-duty vehicles fleet fuel consumption substantially below the no-change continuing growth projection will take decades. Realizing as much as possible of the efficiency improvements that technology is likely to provide (especially with mainstream gasoline ICE vehicles) in on-the-road fuel consumption is critical to achieving real-world reductions in fleet petroleum consumption. Delays in realizing such on-the-road fuel consumption improvements would make future petroleum demand significantly higher. Due to constraints on the rate of buildup of new production capacity, low-emission diesels and hybrids will have only modest fleet improvement potential before about 2025.