The Politics and Economics of International Energy (Spring 2009- E657)

1. The Politics and Economics of International Energy (Spring 2009- E657) Lecture 2 The outlook for oil: peak in sight? Prof. Giacomo Luciani

2. Proved oil reserves

3. Distribution of proved oil reserves

6. Oil production by area

7. Oil reserves-to-production (R/P) ratios

8. Oil consumption by area

9. Oil consumption per capita

10. Oil product consumption - by region

11. Oil product consumption - by region

12. Major oil trade movements

13. Changing expectations IEO 2007 edition IEO 2008 edition

14. 60 50 40 mb/d 30 20 10 0 1980 1990 2000 2010 2020 2030 OECD Transition economies Developing countries NGLs Reference Scenario:Non-OPEC Conventional* Oil Output Peak output = 52 mb/d * Crude oil and NGLS Non-OPEC conventional production peaks by around 2015, despite rising NGLs output

15. Reference Scenario:Increase in World Oil Supply, 2004-2030 25 20 Other 15 mb/d Iran 10 Iraq 5 S.Arabia 0 OPEC conventional Non-conventional Non-OPEC conventional The share of OPEC in world oil supply increases sharply as conventional non-OPEC production peaks towards the middle of next decade

20. Source: OPEC World Oil Outlook 2008

21. Source: OPEC World Oil Outlook 2008

22. Source: OPEC World Oil Outlook 2008

24. Reserves • Reserves are those quantities of petroleum which are anticipated to be commercially recovered from known accumulations from a given date forward. • All reserve estimates involve some degree of uncertainty. • Classification according to the relative degree of uncertainty: • Proved reserves • Unproved reserves • Probable reserves • Possible reserves Source: Society of Petroleum Engineers (SPE) Inc., 2000

25. Proved reserves (P90) • Quantities of petroleum which, by analysis of geological and engineering data, can be estimated with reasonable certainty (90% probability) to be commercially recoverable… • Recoverable: • From a given date forward, • From known reservoirs, and • Under current economic conditions, operating methods, and government regulations. • Proved reserves can be categorized as: • Developed, or • Undeveloped. Source: Society of Petroleum Engineers (SPE) Inc., 2000

26. Unproved reserves • Based on geologic and/or engineering data similar to that used in estimates of proved reserves; • But technical, contractual, economic, or regulatory uncertainties preclude such reserves being classified as proved. • Unproved reserves may be further classified as: • Probable reserves, and • Possible reserves. Source: Society of Petroleum Engineers (SPE) Inc., 2000

27. Probable reserves (P50) • Unproved reserves which analysis of geological and engineering data suggests are more likely than not to be recoverable. • There should be at least a50% probability that: the quantities actually recovered will be ≥ estimated proved reserves + probable reserves.

28. Possible reserves (P10) • Unproved reserves which analysis of geological and engineering data suggests are less likely to be recoverable than probablereserves. • There should be at least a 10% probability that: the quantities actually recovered will be ≥ estimated proved + probable + possible reserves. Source: Society of Petroleum Engineers (SPE) Inc., 2000

29. Speculative or Undiscovered Resources • Estimates of petroleum that might exist in a basin based on extrapolation of data on discovered resources, exploration intensity, number of wells drilled etc. • Based on geological knowledge, but no two basins are the same…

30. Reserves estimates • Reserves estimates will generally be revised as additional geologic or engineering data becomes available or as economic conditions change. • Reserves do not include quantities of petroleum being held in inventory, and may be reduced for usage or processing losses if required for financial reporting. • Reserves may be produced thanks to either natural energy or improved recovery methods.

31. Deterministic vs. Probabilistic • Deterministic approach: • The method of estimation is called deterministic if a single best estimate of reserves is made based on known geological, engineering, and economic data. • Probabilistic approach: • The method of estimation is called probabilistic when the known geological, engineering, and economic data are used to generate a range of estimates and their associated probabilities. • Because of potential differences in uncertainty, caution should be exercised when aggregating reserves of different classifications. Source: Society of Petroleum Engineers (SPE) Inc., 2000

32. Technology Optimism

33. Is oil produced or found? • Adelman claims that oil is produced, and that only when the marginal cost of producing new crude will start rising we may worry about exhaustion of oil reserves. • Oil reserves have always been underestimated, the marginal cost of producing new oil is constantly falling. • The Malthusian view is a fallacy.

34. Upstream Technology • Upstream technology has made enormous strides and considerably reduced finding and development costs. • Most important progress: • In exploration (satellite images, interpretation of seismic data) • In production (horizontal drilling, multilateral wells, intelligent wells, deep offshore) • In reservoir management

37. L-2 L-1 Main Wellbore L-3 L-5 MRC Well L-7 L-4 Total Footage Drilled = 46,614 ft L-6 L-8 Total Reservoir Contact = 12.3 km 0 500 1000 Scale: meters Saudi Aramco MRC Record • Fishbone Multilateral Well

38. MRC Cost MRC Reservoir Contact ≥ 5 Km

40. Consequently… • The recovery factor has increased • Exploration and development costs declined • Time to production for new discoveries has shrunk • Proved reserves have increased and replacement costs have decreased

41. Selected Finding & Development Costs

42. Upstream Technical Costs

43. Petroleum Reserves, different interpretations An overview of energy resources, reserves definitions and the future of energy supply. Jan Roelofsen IHS, Energy, Geneva Senior Product Manager Exploration and Production Data September 2008

44. SPE/WPC/AAPG Definition Definitions most commonly used: • Resources / In-Place Hydrocarbons • Reserves (original recoverable): • Proven – SEC reserves • Probable – P+P – 2P • Possible – 3P • Definitions based on: • Geological Knowledge • Field project Status and Feasibility • Economic and commercial viability

45. Other definitions • Russian systems requires translation into SPE/WPC/AAPG system • UNFC (UN Framework Classification)

46. Peak Oil? • What is the story behind peak oil?

47. World liquid resources • Total 2.4 trillion barrels discovered, 1.24 trillion remaining

49. World gas resources • 10,353 trillion cubic feet of Gas discovered, 7,062 trillion remaining

50. The challenge our industry is facing • Downward trend in discoveries • Problem: large fields more difficult to find Discoveries Wildcats Deepwater South Atlantic successes Move offshore 3D seismic