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 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.

1945 2000Year

Prod

uctio

n

U.S Lower 48 States

Countries peak / plateau &

decline(Many oil fields)

The world will peak / plateau

&decline(All countries)

Oil peaking & decline are unavoidable.

Oil fields peak / plateau & then decline.

Time - Decades

Prod

uctio

n

Two profiles

Liquids can be removed from a bucket at any rate.

Oil production is fundamentally different than inventory drawdown or empting a bucket.

Inventory can be removed at almost any rate.

Oil fields peak / plateau, & then decline.

Time - Decades

Prod

uctio

n

Two typical production profiles

~ 13 billion barrels of reserves yielded maximum production of ~ 1.5 MM bpd.

Reserves & Production - Rough Numbers The Prudhoe Bay Field Example

00.20.40.60.81.01.21.41.61.8

1978 1982 1986 1990 1994 1998 2002 2006

Production(MM bpd) ~ Half

produced before decline

~ Half produced

after decline

• 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.

Big & Small Numbers

5% decrease in U.S. oil supply Recession (1973)

1% of world oil production is huge ~ 850,000 barrels/day

Small numbers can be misleading.

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.

88

84

80

76

72Wor

ld L

iqui

d Fu

el P

rodu

ction

- M

M b

pd

92

2002 2003 2004 2005 2006 2007Year

2008

World oil production stopped growing in 2004 & has been on a fluctuating plateau since then.

5% fluctuation

band

EIA Data

Maintaining flat world oil production requires new production to make-up for losses from the many oil fields worldwide whose production is

declining.

Decline Rate Estimates: IEA, CERA, Hook, Exxon, others...4-6% per year

Time

Production

New production to make up for declines

Time

Production

World oil production expansion requires additional production.

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!

CERA has forecast 10 year growth to

112 MM bpd

Decline of Existing

Production

10 years

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.

88

84

80

76

72

Wor

ld L

iqui

d Fu

el P

rodu

ction

- M

M b

pd

92

2002 2003 2004 2005 2006 2007 2008

Since 2004, world production gains balanced losses.

Those gains required huge investments.

1984 1990 1995 2000 2005

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0

Prod

uctio

n (M

M b

pd)

European oil production increased, plateaued, then declined.

~ 6% / year decline

Fluctuating plateau

More added than produced Additions = lossesMore lost than

produced

13

88

84

80

76

72

92

2002 2003 2004 2005 2006 2007 2008

?

Wor

ld L

iqui

d Fu

el P

rodu

ction

- M

M b

pdIf world oil production follows the European pattern, the result might look like this…..

Delay Decline

• 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

Organizations & People Expecting World Oil Production Peaking and/or Decline Based on

Geological Studies

Deniers include ExxonMobil, BP, CERA, senior people in both political parties, & others

“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

Warnings Related to Recession Impacts on World Oil Exploration & Production

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.”

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.

Time

World oil production

Oil Price

Oil prices rise dramatically

Oil production drops at a

significant rate

A few years of relative world GDP stagnation after which

the recovery is crippled

by oil shortages

My View

Now FuturePast

Two types of oil shortage mitigation: Administrative & Physical.

Administrative options for rapid implementation include……..

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

• Rationing• Speed limits• Telecommuting• Carpooling• Limiting air travel• Other

All useful but limited compared to the magnitude of expected shortages

All are ready for DEPLOYMENT& capable of large scale impact

0 5 10 15

5

0

15

25

Years After Crash Program Initiation

Impact(MM bpd)

20

35EOR

Coal Liquids

Heavy Oil

GTL Efficient Vehicles

Under a crash program scenario (best possible) it will take much more than a

decade to significantly impact growing world oil shortages.

A time lag, followed by a buildup.

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.

Oil is fundamental to economic well-being. World GDP growth & world oil production growth have tracked each

other for decades.

19860

1.0

2.0

3.0

4.0

Perc

ent

Chan

ge

World GDP growth

Oil production growth

5.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

6.0

The two oil shocks of the 1970s suddenly & sharply reduced U.S. GDP

1973 Embargo 1979 CrisisU.S. Oil Supply Drop - 4 % - 5 %U.S. GDP Drop - 3 % - 3 %

% Change in U.S. GDP% Change in U.S. Oil Supply

~ 0.8 ~ 0.6

% Change in U.S. GDP% Change in U.S. Oil Supply ~0.6-0.8

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.

Years

Perc

ent o

f ini

tial

40444852566064687276808488

Prod

uctio

n (M

M b

pd)

Mitigation

5% decline rate

Years

0 2 4 6 8 10 12

Oil decline including

mitigation

GDP decline

A 15 – 20 % world GDP decline in 10 years is conceivable.

0 2 4 6 8 10 120.6

0.8

1.0

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.

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.