Global Oil Supplies: Is Supply Constrained? Kevin Lindemer

Global Oil Supplies: Is Supply Constrained? Kevin Lindemer

Is Supply Constrained? Signposts continue to indicate a supply constrained world is possible and could emerge, not-with-standing short-term easing. Global oil spare capacity has shrunk dramatically over the past few years and is not expected to expand significantly Access to resources is getting more difficult Geopolitics and resource nationalism Incremental supplies are increasingly higher cost Aging conventional oil resource base Molecules are not in short supply capacity is. North American natural gas experiencing longterm decline Bio-fuels expected to make contribution to liquid supply Copyright 2006 Global Insight, Inc. 2

OPEC Spare Capacity and Price 25% WTI 70 OPEC Spare Capacity/Demand (%) 20% 15% 10% 5% Spare Capacity/Demand 60 50 40 30 20 10 WTI Price (Nominal $) 0% 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 0 Copyright 2006 Global Insight, Inc. 3

Incremental Global Oil Capacity Projections 5000 4000 non-opec Supply non-opec Decline Demand Growth OPEC Supply OPEC Decline Net Capacity Change Draft 3000 2000 MBOPD 1000 0? -1000-2000 -3000-4000 2003 2004 2005 2006 2007 2008 2009 2010 2011 Note: Assumes Iraqi production stays 2 MMBOPD through 2010. 2006 includes 250 MBOPD of restored GOM production Source: IEA, EIA, OPEC, Copyright 2006 Global Insight, Inc. Company Reports, Trade Press, ECG 4

Government & Energy: Will the Pendulum Swing Back? Oil prices have always been subject to political forces and concern; is that concern rising? Natural gas may be joining oil Most countries have moved to more open and deregulated markets over the past 25 years. Is that process now reversing? Perceived risks are rising in numerous hydrocarbon producing areas Accelerating production declines and low spare capacity are exacerbating perceptions of risk GLOBALLY, Government policies toward energy security, environment, and agriculture are converging A new policy environment maybe emerging over the next few years Pre-1980 s Strong Government Controls & Regulation of Markets TODAY? Open Markets Copyright 2006 Global Insight, Inc. 5

World Oil Production: ⅔ Increasing Risk or Falling Production Saudi Arabia Russian Fed. USA Iran Mexico Norway Venezuela U.A.E. Nigeria Kuwait United Kingdom Iraq Colombia Ecuador Sudan Chad Terrorism, Proximity to Iran Contract Enforceability, Expropriation Declining Production Gov t Stability, Sanctions, International Action Declining Production Declining Production Contract Enforceability, Expropriation Proximity to Iran Gov t Stability, Infrastructure Disruption, Internal Violence, Contract Enforceability Proximity to Iran Declining Production Terrorism, Internal Stability, Infrastructure Disruption Infrastructure Disruption, Internal Stability Infrastructure Disruption, Contract Enforceability, Expropriation Contract Enforceability, Internal Stability Terrorism, Internal Stability 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% Cumulative Oil Production Copyright 2006 Global Insight, Inc. 6

Global E&P Spending E&P Spend (SMM) 300000 250000 200000 150000 100000 Small-Mid Industry Lrg Industry Int'l Major NOC CAGR 2000-2006: 15% Forecast CAGR 2000-2006 10.0% 23.0% 12.0% 50000 15.0% 0 2000 2001 2002 2003 2004 2005 2006* Note: Survey methodology raises doubts about the completeness of the spending data, especially for small-mid size independents; spending data for Saudi Aramco, KOC, Iranian Oil Company was not in original survey and was estimated separately Source: World Oil, Citibank Survey, ECG Copyright 2006 Global Insight, Inc. 7

Drilling Activity Drilling activity has increased by 25% to 30% over the past 4 years Industry Activity (wells/yr) 120000 100000 80000 60000 40000 US Canada China Russian Fed. Argentina Venezuela Indonesia Mexico North Sea Oman Saudi Arabia India Thailand Egypt Australia Other 20000 0 2001 2002 2003 2004 2005 2006 Copyright 2006 Global Insight, Inc. Source: World Oil 8

Trends in World Oil Output 90,000 7.0% 80,000 6.0% Oil Rate (MBOPD) 70,000 60,000 50,000 40,000 30,000 20,000 10,000-5.0% 4.0% 3.0% 2.0% 1.0% World Oil 0.0% Non-OPEC Oil Non-OPEC less FSU Yearly change in Non-OPEC Production 1970 1975 1980 1985 1990 1995 2000 2005-1.0% -2.0% Year-on-Year Decline (%/yr) Copyright 2006 Global Insight, Inc. Source: EIA, BP Statistical Review 9

Accelerating Declines? One reason for non- OPEC production s struggle to grow has been the acceleration of decline rates Acceleration can perhaps best be illustrated in areas with relatively little new field development Aging fields, better technology and rate acceleration economics appear to be the culprits behind the acceleration of decline rates MBOPD 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 19961997 19981999 200020012002 20032004 20052006 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% Year-on-Year Decline (%) Source: EIA (USA lower 48 and Alaska), Canada Onshore-Light, Oman, Syria, Indonesia, Egypt, Australia), Copyright 2006 Global Insight, Inc. 10

Molecules appear to be there..at a price COST RANGE (Dollars per Barrel) $100 $80 $60 $40 $20 Already produced Conventional Oil Yet to be Produced Undiscovered Deepwater EOR Arctic Oil Heavy Oil Oil Shale Coal Liquefaction $0 0 547 1,096 1,643 2,192 2,738 3,288 3,834 4,383 4,930 5,479 6,026 Billions of Barrels Source: IEA, EIA, Company Websites, O&G Copyright 2006 Global Insight, Inc. Journal, World Oil, Rand Corporation 11

Potential Canadian Heavy Oil Capacity: 2002-2015 Heavy Oil Effective Capacity (MBOPD) 4500 4000 3500 3000 2500 2000 1500 1000 500 FORECAST Mining In-Situ 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Canadian Association of Petroleum Producers, National Energy Board, various industry Copyright 2006 Global Insight, Inc. and company publications, ECG 12

U.S. Domestic Sources of Supply 25 Accelerating declines of offshore & onshore conventional production Annual Production (TCF/yr) 20 15 10 5 Non-conventional Associated Gas Offshore Production Onshore Lower 48 Production 1990-99 7.6 0.5-1.3-1.9 CAGR (% per year) 2000-05 5.2-4.9-4.6-4.8 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Copyright 2006 Global Insight, Inc. Source: EIA 13

Potential Bio-fuels Contribution to Supply 3.5 3.0 Rest of World European Union U.S. 2.5 Millions of BPD 2.0 1.5 1.0 0.5 0.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Copyright 2006 Global Insight, Inc. 14

Thank You! Kevin Lindemer Energy Global Insight