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How Oil Will Invigorate Coal Robert L. Hirsch, Ph.D. Senior Energy Advisor

How Oil Will Invigorate Coal Robert L. Hirsch, Ph.D. Senior Energy Advisor Management Information Services Inc. (MISI) Coal Club October 21, 2009. Overview. World oil production is at or nearmaximum .

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How Oil Will Invigorate Coal Robert L. Hirsch, Ph.D. Senior Energy Advisor

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  1. How Oil Will Invigorate Coal Robert L. Hirsch, Ph.D. Senior Energy Advisor Management Information Services Inc. (MISI) Coal Club October 21, 2009

  2. Overview • World oil production is ator nearmaximum. • When production decline begins, shortages will develop &increase each year until mitigation takes effect more than a decade from now. • Oil prices will escalate & economic damagewill increase. There will be no quick fixes. • Physical mitigation will be essential. Coal-To-Liquids will play a critical role.

  3. Oil peaking & decline are unavoidable. Oil fields peak / plateau & then decline. Two profiles Production Countries peak / plateau & decline (Many oil fields) Time - Decades Production U.S Lower 48 States 2000 1945 Year The world will peak / plateau &decline (All countries)

  4. Liquids can be removed from a bucket at any rate. Inventory can be removed at almost any rate. Oil production is fundamentally different than inventory drawdown or empting a bucket. Oil fields peak / plateau, & then decline. Two typical production profiles Production Time - Decades

  5. 1.8 1.6 1.4 1.2 Production (MM bpd) 1.0 0.8 0.6 0.4 0.2 0 2006 1978 1982 1986 1990 1994 1998 2002 Reserves & Production - Rough Numbers The Prudhoe Bay Field Example ~ Half produced before decline ~ Half produced after decline ~ 13 billion barrels of reserves yielded maximum production of ~ 1.5 MM bpd.

  6. Big & Small Numbers • The world now consumes ~ 85 MM bpd. • Bringing a 10 B bbl oil field into full production can take roughly a decade. • A 10 B bbl can provide roughly 1 MM bbl/day for 10-15 years at plateau. • Giant oil fields are important but a few will not impact dramatically.

  7. Small numbers can be misleading. • 5% decrease in U.S. oil supply Recession (1973) • 1% of world oil production is huge ~ 850,000 barrels/day

  8. Royal Swedish Academy2005: 54of the65most important oil-producing countries are past peak. Add Mexico / maybe Russia Oil is a finite, non-renewable resource that is being rapidly depleted.

  9. World oil production stopped growing in 2004 & has been on a fluctuating plateau since then. 92 88 5% fluctuation band 84 World Liquid Fuel Production - MM bpd 80 76 EIA Data 72 2008 2002 2003 2004 2005 2006 2007 Year

  10. Maintaining flat world oil production requires new production to make-up for losses from the many oil fields worldwide whose production is declining. Production New production to make up for declines Time Decline Rate Estimates: IEA, CERA, Hook, Exxon, others...4-6% per year

  11. Production Time World oil production expansion requires additional production. CERA has forecast 10 year growth to 112 MM bpd Decline of Existing Production 10 years To reach 112 MM bpd in 10 years at a 4.5% decline rate would require75 MM bpd of new capacity = 8 new Saudi Arabia's. IMPOSSIBLE!

  12. A 5% per year on-going decline requires roughly 4 Million barrels per day (MM bpd) of new production each year to just maintain constant production. 92 88 World Liquid Fuel Production - MM bpd 84 Since 2004, world production gains balanced losses. Those gains required huge investments. 80 76 72 2008 2002 2003 2004 2005 2006 2007

  13. European oil production increased, plateaued, then declined. Fluctuating plateau 8.0 7.0 ~ 6% / year decline 6.0 5.0 Production (MM bpd) 4.0 3.0 2.0 1.0 1984 1990 1995 2000 2005 0 More lost than produced Additions = losses More added than produced

  14. If world oil production follows the European pattern, the result might look like this….. 92 88 ? World Liquid Fuel Production - MM bpd 84 80 Decline 76 Delay 72 2008 2002 2003 2004 2005 2006 2007

  15. Organizations & People Expecting World Oil Production Peaking and/or Decline Based on Geological Studies • IEA • Chevron • Shell • Total Oil • Statoil • Hess Oil • Toyota • Volvo • James Schlesinger • Boone Pickens • Matt Simmons • Sadad al-Husseini • Corps of Engineers • CIBC (Canada) • Raymond James & Associates • EWG (Germany) • ASPO Organizations • Many retired oil geologists Deniers include ExxonMobil, BP, CERA, senior people in both political parties, & others

  16. Warnings Related to Recession Impacts on World Oil Exploration & Production “Oil and gas explorers postponing or scrapping deep water drilling projects are potentially reducing crude supplies by as much as 2.4 million barrels a day in 2011, Morgan Stanley said.” • Others issuing similar warnings;: • International Energy Agency • Barclays Capital, • Deutsche Bank • CIBC (Canada) • Total Oil • OPEC In March 2009, Saudi’s oil minister warned of a “catastrophic” supply crunch without prompt investment. “The painful result would effectively take the wheels of an already derailed economy.”  

  17. Fundamental Point • The cost or replacing world oil consuming capital stock is $50 – 100 trillion. Replacement will take time, especially during a deepening, oil shortage driven recession. • Electrification is possible for many applications but not all. • Oil is energy but energy is not necessarily oil. • It’s an oil crisis, not an energy crisis.

  18. Oil prices rise dramatically My View A few years of relative world GDP stagnation after which the recovery is crippled by oil shortages World oil production Oil production drops at a significant rate Oil Price Time Now Past Future

  19. Two types of oil shortage mitigation: Administrative & Physical. Administrative options for rapid implementation include…….. • Rationing • Speed limits • Telecommuting • Carpooling • Limiting air travel • Other All useful but limited compared to the magnitude of expected shortages Physical mitigation options ready for implementation include……. • More efficient motor vehicles • Enhanced oil recovery • Coal-to-Liquids • Heavy oil & oil sands • Natural Gas-To-Liquids All are ready for DEPLOYMENT& capable of large scale impact

  20. Under a crash program scenario (best possible) it will take much more than a decade to significantly impact growing world oil shortages. 35 EOR Coal Liquids 25 Impact (MM bpd) 15 Heavy Oil GTL 5 Efficient Vehicles 0 0 5 10 15 20 Years After Crash Program Initiation A time lag, followed by a buildup.

  21. Coal-To-Liquids as a Mitigation Option • We assumed Fischer-Tropsch technology as demonstrated by Sasol, but other options are possible. • Sasol III was built on a crash program basis & completed in just over three years, as a duplicate of earlier plants on the same site. • Sasol III did not have to deal with extensive permitting or other delays, so it represents the best possible. • Our 2005 study assumed 100,000 bpd plants, crash program constructed in 4 years. • We assumed five plants started each year, worldwide, over a twenty year period, totaling roughly 8 MM bpd total production in 20 years.

  22. 6.0 World GDP growth 5.0 4.0 Percent Change 3.0 2.0 1.0 Oil production growth 0 1986 1988 1990 1992 1994 1996 1998 2000 2002 2006 2004 Oil is fundamental to economic well-being. World GDP growth & world oil production growth have tracked each other for decades.

  23. % Change in U.S. GDP % Change in U.S. Oil Supply % Change in U.S. GDP % Change in U.S. Oil Supply ~0.6-0.8 The two oil shocks of the 1970s suddenly & sharply reduced U.S. GDP 1973 Embargo 1979 Crisis U.S. Oil Supply Drop - 4 % - 5 % U.S. GDP Drop - 3 % - 3 % ~ 0.8 ~ 0.6

  24. 1.0 If the world oil production decline rate is 5% & world GDP decline is of the order of 60 % of oil decline, then world GDP would decline significantly in spite of crash program mitigation. 0.8 0.6 88 84 80 76 GDP decline 72 68 Production (MM bpd) Percent of initial 64 Mitigation 60 Oil decline including mitigation 5% decline rate 56 52 48 44 40 10 12 0 0 2 2 4 4 6 6 8 8 10 12 Years Years A 15 – 20 % world GDP decline in 10 years is conceivable.

  25. Why didn’t I mention climate change &renewables? • Deepening oil shortages will lead to a long term, deepening recession. • To me the worst kind of pollution is people out of work, destitute, & with little hope. People are the first priority. • Practical renewables are not yet readytoprovide liquid fuels, and the oil shortages are liquid fuels shortages, not “energy shortages.

  26. Conclusions • The trends & numbers are very troubling. • When world oil production decline begins, the result will be a new, lengthy oil shortage-driven recession, following the current economic recession. • Both administrative & physical mitigation are viable, but physical mitigation must be carry the heavy load. • CTL will be a significant contributor to U.S. & world mitigation efforts.

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