ISSUES IN ASSESSING ISSUES IN ASSESSING LONG-TERM LIQUID FUELLONG-TERM LIQUID FUEL

AND NATURAL GAS SUPPLIESAND NATURAL GAS SUPPLIES

Presented at the 2007 EIA Energy Outlook, Modeling, and Data Conference

March 28, 2007, Washington, D.C.

Roger H. Bezdek. Ph.D., President

Management Information Services, Inc.

www.misi-net.com

04/21/23 2

THIS PRESENTATION

• Is peak oil “nonsense”?• Oil supply and demand trends• Oil supply forecasts• Oil peaking and natural gas• Natural gas forecasts: Past and current• Future natural gas shortfalls? • New paradigm for natural gas pricing?• Summary

04/21/23 3

• World oil demand is huge & growing

• Peaking is maximum production of conventional oil, not “running out;” beware of red herrings

• Most past peaking predictions were wrong.- Hubbert was right on the U.S. Lower 48- Recent predictions may be right- Wrong isn’t forever

• Why reconsider peaking now?- World oil consumption outstripping new discoveries- CAPEX for new energy projects is large and growing- Extensive drilling worldwide - large database- Advanced technology: Modern geology, 3D seismic, etc.- Many experts are pessimistic- The economic consequences are huge

IS PEAK OIL THEORY “NONSENSE”?

04/21/23 4

WHY WILL CONVENTIONALOIL PRODUCTION PEAK?

Time - Decades

Pro

du

ctio

n

1945 2000Year

Oil fields peak

Pro

du

cti

on

U.S Lower 48 States

The world (All regions)

will peak

Regions (Many fields)

peak

04/21/23 5

WORLD IS CONSUMING MORE OILAND FINDING LESS

Past discovery by ExxonMobil

0

10

20

30

40

50

60

1930 1950 1970 1990 2010 2030 2050

Bil

lio

ns

of

Ba

rrel

s

0

10

20

30

40

50

60

Past

Future

Production

“GrowingGap”

04/21/23 6

WORLD OIL DISCOVERY HISTORY & THREE PATHS FOR USGS RESERVES ESTIMATES

04/21/23 7

WHEN DISCOVERY DECLINES, PRODUCTION ALWAYS DECLINES LATER -- NORWAY

04/21/23 8

1967 1969 1971 1973 1975 1977

2.9

3.0

3.1

3.2

3.3

3.4

3.5

Da

ily

Pro

du

cti

on

- M

M b

/d

100%

90%

85% Per

cen

t o

f M

axim

um

95%

Texas

O

Peak in

1972

1980 1982 1984 1986 1988 1990

14.4

14.6

14.8

15.0

15.2

15.4

15.6

Da

ily

Pro

du

cti

on

- M

M b

/d

100%

98%

Per

cen

t o

f M

axim

um

North America

96%

94%

Peak in

1985

1994 1996 1998 2000 2002 2004

2.4

2.5

2.6

2.7

2.8

2.9

3.0

Da

ily

Pro

du

cti

on

- M

M b

/d

100%

90%

85%

Per

cen

t o

f M

axim

um

95%

United Kingdom

Peak in

1999

1994 1996 1998 2000 2002 2004

2.9

3.0

3.1

3.2

3.3

3.4

3.5

Da

ily

Pro

du

cti

on

- M

M b

/d

100%

90%

85% Per

cen

t o

f M

axim

um

95%

Norway

Peak in

2001

PEAK PRODUCTION CAN BE SUDDEN & SHARP

Will the world behave like this?

04/21/23 9

TECHNOLOGY & PRICE MAY NOT SAVE USU. 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

Trends were not reversed, and continued decline is forecast

PRICE(2003 $ per

barrels)

04/21/23 10

WHEN MIGHT PEAKING OCCUR? Different Approximations Lead to Different Forecasts

Forecast Source

December 2005 Deffeyes (U.S.)

2006-2007 Bakhitari (Iran)

2006-2007 Simmons (U.S.)

2010 +/- Skrebowski (U.K.)

2010 Campbell (Ireland)

Before 2010 Goodstein (U.S.)

After 2010 World Energy Council

2012 Weng (China)

2016 Doug-Westwood (U.K.)After 2020 CERA (U.S.)

2030 or later EIA (U.S) / Exxon Mobil

5 years

5-15 years

> 20 years

Already

04/21/23 11

PEAKING FORECAST RELATIVELY INSENSITIVE TO RESOURCE ESTIMATES

Already consumed worldwide: ~ One Trillion Barrels

Some estimates of remaining world reserves = One Trillion Barrels

Others estimate remaining world reserves = Two 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.”

04/21/23 12

Time

Production

History :

1 Trillion barrels already consumed

Some Forecasters: 1 Trillion barrels

already consumed peaking about now

EIA: Add 900 Million barrels, Gain 10 years.

ADDING ALMOST A TRILLION BARRELSGAINS ONLY 10 YEARS

04/21/23 13

PEAK OIL AND NATURAL GAS

• Peak oil – properly defined – must be seriously considered• Prices, technology, and new supplies are important, but world demand

is simply outstripping supplies of conventional oil• Even an additional 1 trillion barrels of oil only buys us 10 years• Mitigation options (transportation efficiency, alternate fuels, etc.) will

require decades and trillions of $• Consequences of failure to anticipate peak oil can be severe

NATURAL GAS TO THE RESCUE?• Some analyses rely on natural gas to fill the gap• Many have erred on U.S. and North American NG production, and

past NG forecasts have been revised downward• More recent NG forecasts need to be assessed• Estimating techniques have improved, but difficulty of estimating

future supply & demand has increased• Adverse impacts could be severe

04/21/23 14

20.021.0

22.023.24.025.026.027.028.0

29.030.031.032.033.034.0

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

’06

Tcf

/Yea

r

’02’03

’04

’05

0

RECENT NG SUPPLYFORECASTS REVISED DOWN

DOE EIA Forecasts of N. American Natural Gas Supply to U.S.

Looks good

Trouble!

4 years

Forecasting Oil & Gas Supply Is Difficult!

04/21/23 15

ASSUMPTIONS NEED TO BE ASSESSED

• NG prices forecast to decline but: 1) U.S. production increases for next 15-18 years, then stabilizes; 2) Demand increases modestly

• Assumes that, in a tight global market for petroleum, U.S. can increase LNG imports at prices 40% below oil-equivalent

Natural Gas-Crude Oil Price Ratio ($/mmBtu), AEO 2007 vs. historical

Henry Hub Cash Price (left axis) vs. U.S. Total Natural Gas Consumption

04/21/23 16

FUTURE U.S. NATURAL GAS PROBLEMS?

• Risk that NG needed by U.S. economy may exceed forecasts• Price increases may be required to balance supply and demand

Potential Future Natural Gas Supply Gap

04/21/23 17

U.S. NG PRODUCTION HAS HIT A WALL

Past 6 years, U.S. drillers have

greatly ramped up drilling, with

little impact on production

• EIA has reduced estimate of future production every year

• Are further reductions warranted?

04/21/23 18

CANADIAN NG PRODUCTION

Canadian imports likely to decline precipitously -- single greatest problem

facing U.S. marketProduction already falling rapidly:

-- Production in Western Canada has plateaued-- Decline in Canadian drilling rate-- Increased demand for oil sands production

04/21/23 19

POWER SECTOR IS THE KEY

• U.S. dependent on gas-fired generation to meet high percentage of incremental power demand

• Are we underestimating likely growth in power sector demand?

Electric Generation Capacity Additions by Fuel Type

Dependence Upon Gas-Fired Generation Likely to Continue

to Grow

04/21/23 20

A ROSY SCENARIO?

Nearly all of incremental U.S. supply is expected to come from justtwo sources: 1) Alaskan NG pipeline by 2018; 2) Massiveincrease in LNG imports-- But there are serious risks and uncertainties to both

-- Until Alaska NG pipeline, we are dependent on imported LNGTotal Supply to U.S. from LNG

Imports and Alaska

Projected Incremental Supply from Alaska Pipeline and LNG, as

percentage of Increase in Total Projected Natural Gas Supply

04/21/23 21

DO EIA’S NG PRICE FORECASTSNEED TO BE EVALUATED?

• Beginning with AEO 2006, EIA implicitly decoupled the forecast relationship between oil and natural gas prices

• If it had not decoupled the relationship, the forecast NG prices in AEO 2006 and AEO 2007 would be much higher

• This could have important consequences for energy markets and infrastructure

• Using regression analysis and monthly data, the Dallas Federal Reserve Bank estimated the historical relationship between natural gas prices

• Use of the Dallas fed regression formula yields higher forecast NG prices

04/21/23 22

IMPLICATIONS OF DECOUPLEDNG AND OIL PRICES

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$/M

cf

(we

llh

ea

d,

20

05

$)

AEO 2005

Dallas Fed

Formula Estimate

AEO 2006

Dallas Fed Formula Estimate

AEO 2007

Dallas Fed Formula Estimate

EIA 2025 Natural Gas Prices Estimates (High Oil Price Case)Compared to Those Derived Using the Dallas Fed Formula

If prices had not been decoupled, AOE 2006 and AEO 2007 forecast NG prices would be higher

04/21/23 23

IMPLICATIONS FOR FORECAST2030 NG PRICES

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

$/M

cf (

wel

lhea

d, 2

005$

) AEO 2007 Reference

Case

Dallas Fed Formula Applied to

Reference Case

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$/M

cf

(we

llh

ea

d,

20

05

$)

AEO 2007 High Oil

Price Case

Dallas Fed Formula Applied to High Oil

Price Case

Discrepancy in Potential AEO 2007 2030Natural Gas Price Forecasts

(High Oil Price Case)

Discrepancy in Potential AEO 2007 2030Natural Gas Price Forecasts

(Reference Case)

Applying the Dallas Fed formula to the AEO 2007 reference case oil price indicates that there is a 50% difference in the implied NG priceApplying the formula to the AEO 2007 high oil price case oil price indicates that there is a 75% difference in the implied NG price

04/21/23 24

SUMMARY

• EIA work is critical: They have large resources and a huge responsibility

• Planning for our economic well being is dependent on them covering the range of variables and risks at this very challenging time in our energy development

• We cannot afford to ignore, ridicule, or downplay the possibility and the consequences of peak oil – risks are too great

• When oil does peak, there are no silver bullet solutions• Reliance on adequate future supplies of NG at moderate prices

is unwarranted and risky• U.S. NG production has peaked and this has implications

as significant as those of U.S. oil peaking four decades ago

04/21/23 25

THANK YOU!

ROGER H. BEZDEK, PH.D.

PRESIDENT

MANAGEMENT INFORMATION SERVICES, INC.

202-889-1324

rbezdek@misi-net.com

www.misi-net.com

04/21/23 26

LOCAL CONTACT INFORMATION

While in Australia through July 6,

Dr. Bezdek can be contacted via ASPO Australia

Association for the Study of Peak Oil and Gas

www.ASPO-Australia.org.au

International Australia