1. Today’s Energy Reality: “We Are In A Deep Hole” Today’s Energy Reality: “We Are In A Deep Hole” 2005 POSC Annual Member Meeting & Conference The 15th Anniversary Meeting November 2, 2005 Houston, Texas Presented By: Matthew R. Simmons Chairman Simmons & Company International

2. S IMMONS & C OMPANY INTERNATIONAL Our Wake-Up Call Is Here n America (and the world) drifted into a “benign energy war.” –Demand was supposed to peak –Oil supplies were to grow cheaply –Cost of energy would steadily fall n It was simply a dream. n The alarm clock is ringing.

3. S IMMONS & C OMPANY INTERNATIONAL Everything Went Awry n Demand grew “too fast.” n Costs doubled. n New supply got steadily smaller. n Proven reserves were illusory. n Energy reserves cushion perceived as glut.

4. S IMMONS & C OMPANY INTERNATIONAL The Real Demand Story n Global demand grew by ≈15 million barrels per day in past decade: –U.S.A. –China –India –Middle East –Etc. n Highest growth: Light finished products: –Motor Gasoline –Diesel Fuel –Jet Fuel n “We missed China” was a lame excuse for lazy analysis. Hard to find countries in which demand did not grow.

5. S IMMONS & C OMPANY INTERNATIONAL AWOL: The Surge In Non-OPEC Supply n For the past decade, 4 th quarter non-OPEC supply surge was AWOL. n Too many countries peaked. n Former Soviet Union was only unplanned surprise: –Its growth was not sustainable –It now might be retreating to lower levels n OPEC had to make up the gap and used up its spare capacity.

6. S IMMONS & C OMPANY INTERNATIONAL The Real Story Of Non-OPEC Oil 170,000 barrel per day change in 2005 vs. 2004 Source: IEA

7. S IMMONS & C OMPANY INTERNATIONAL Major Regions Can Decline n Dr. Hubbert was right when predicting U.S. oil peak. n December 1970: Lower 48 states peaked at ≈ 10.5 million barrels per day. n Circa 2005: –Lower 48 states (excl. Alaska and Deepwater Oil) Peak Oil: “….It Happens” (Forrest Gump)

8. S IMMONS & C OMPANY INTERNATIONAL “The Believers Still Believe” n Demand growth is finally slowing down! n Technology is converting non-conventional oil fast! n A new glut by 2010? n The fair price of oil is: –$25? –$40? –Current price (unsustainably high) –None of the above “It is time to leave “I believe” inside a church.” Herman Franssen. September 20, 2005

9. S IMMONS & C OMPANY INTERNATIONAL We Now Have 3 Types Of Oil And Gas Reserves n Proven CONVENTIONAL oil and gas. –Light sweet crudeDry gas (methane) –Sour heavy crudeWet, sour unconventional gas –Tight gas –Sour gas –Hydrates n Proven UNCONVENTIONAL oil and gas. –Oil sands –Tar sands/Bitumen –Oil shale n CONCEPTUAL oil and gas (none has been proven). –Arctic oil and gas –Barents Sea –Undiscovered Middle East oil and gas –Other undiscovered reserves Probable Proven Possible

10. S IMMONS & C OMPANY INTERNATIONAL By August 2005 Spare Capacity Was Disappearing n Wellhead oil and gas n Processing oil and gas n Pipelines and tankers n Drilling rigs n Refinery capacity n People, people, people… All were effectively at 100%

11. S IMMONS & C OMPANY INTERNATIONAL Katrina Was Our Energy 9/11 n Katrina took away more capacity than we had left. n Full impact still emerging. n Time frame to “rebuild” is hazy. n Natural gas far worse risk than oil. n A local emergency will spin into a global issue.

12. S IMMONS & C OMPANY INTERNATIONAL Rita Finished The Job n Gulf of Mexico has been bombed. n Gulf coast facilities have been crushed. n Too many refineries are now broken. n Workforce is AWOL.

13. S IMMONS & C OMPANY INTERNATIONAL Katrina and Rita Were Merely Matches n The streets were knee-deep in kerosene. n The hurricanes were the match that caused the explosion. n Lessons learned: –“Just-in-time inventory” – a mistake –Concentrating America’s energy engines into epicenter of hurricane alley – a mistake –Energy ignorance became bliss Newsweek Magazine – October 3, 2005

14. S IMMONS & C OMPANY INTERNATIONAL The Bigger Picture Problem n Global oil and gas demand needs to grow: –120 million barrels per day by 2020 –Electricity and natural gas growth far higher n Supply is supposedly “No Problem.” –“We have 3 trillion barrels of usable oil left” –“Saudi Arabia has another 200 billion of proven reserve soon to be added” n If all were true, great!!

15. S IMMONS & C OMPANY INTERNATIONAL 2020 Is “Nearly Here” n 15-years is not “years from now.” n Most major projects take 5 – 7 years to complete. n Any new frontier takes 10 – 20 years. n To meet 120 million barrels per day by 2020: –Saudi Arabia needs to produce 20 to 25 million barrels per day –Rest of the world production needs to grow from 72 million barrels per day to between 95 and 100 million barrels per day

16. S IMMONS & C OMPANY INTERNATIONAL Oil Supply Is Peaking n Peak oil means sustainable, safe production. n Too many key areas of world have now passed peak “conventional supply.” –Russia –Iran –Kuwait –Iraq –North America –North Sea –Venezuela –Indonesia

17. S IMMONS & C OMPANY INTERNATIONAL Dr. Sadad Al-Husseini Spoke The Truth (9/20/2005) n Currently Middle East oil capacity: 21 – 23 million barrels per day. n Best case Middle East capacity by 2025: 25 million barrels per day. n Saudi Arabia can reach 12 million barrels per day but should not exceed this. Photo by Charles Coates

18. S IMMONS & C OMPANY INTERNATIONAL Shedding Light on Saudi Arabia’s Oil n 5 super giant oilfields made up 90% of oil output. n 3 giant oilfields made up 8%. n These oilfields are between 40 and 60 years old. n All are reaching point of decline. n Half of “proven reserves” are “questionable.” n Remaining oil is harder to produce.

19. S IMMONS & C OMPANY INTERNATIONAL The Old Royal Family Of Saudi Arabian Oil Collectively the 7 super giant oilfields account for 7.4 million barrels per day (92%) of 8.1 million barrels per day of 2004 crude output Shaybah Lord Year Discovered Abqaiq Queen I Ghawar King 1951 Safaniya Queen II 1948 1940 Berri Lord 1964 Zuluf/Marjan Lord/Lord 1965 / 1967 1968 Peak Production [MB/D] / Year 5,800 930 1,500 586658 500 (1980) (1972) (1981) (1978) (1981) (2004)

20. S IMMONS & C OMPANY INTERNATIONAL Saudi Arabia’s Oil Faces Challenges n Current production base in decline. n 800,000 barrel per day addition by 2009 to offset “declines” (2% per annum decline). n 4 “new” projects that add 2 million barrels per day are all old fields which never produced high oil flows. n 35 years of exploration unearthed only 1 large field and several satellites. BusinessWeek Online April 5, 2004

21. S IMMONS & C OMPANY INTERNATIONAL Does Saudi Arabia Have Ample Reserves? 1979:Proven reserves total 110 billion. Probable reserves add 67 billion. Possible reserves add 68 billion. 1988:Proven reserves total 260 billion. 2005:Proven reserves total 260 billion, with another 200 billion to soon be added. Sept. 2005:Over 50% of 260 billion from 8 key fields. Remainder from fields which have barely produced. n USA had 29.6 billion proven reserves in 1970. n USA has 22.0 billion proven reserves in 2005.

22. S IMMONS & C OMPANY INTERNATIONAL Rolling The Dice On Saudi Arabia’s Oil Future *5% net decline per annum 20 – 25 MMB/Day 15.0 MMB/Day 12.0 MMB/Day 9.6 MMB/Day 4.5 MMB/Day* 9.611 FUTURE (2020)

23. S IMMONS & C OMPANY INTERNATIONAL Once Saudi Arabia Peaks… n The world will pass sustained peak oil when Saudi Arabia’s oil output peaks. n Peaking might now be “past tense.” n The higher an “oil system” produces, the faster it peaks and declines. n “Conservation production” is best insurance policy.

24. S IMMONS & C OMPANY INTERNATIONAL Natural Gas Is Next Big Surprise n Too many key areas have passed peak supply: –USA –Canada –Russia –Netherlands –Indonesia n Most “stranded gas” has never been discovered. n Gas depletes faster than oil. 65% of current production

25. S IMMONS & C OMPANY INTERNATIONAL Non-Conventional Oil Is Very Real But Hard To Use n Tar sands require massive energy to convert into heavy oil. n Oil shale is far more energy intensive to produce. n Neither creates easy substitute for natural gas and light oil.

26. S IMMONS & C OMPANY INTERNATIONAL Atomic Energy Needs A Big Comeback n Five pellets create annual electricity needs for average home. n Nuclear energy is clean. n Waste can be minimized. n Security of small amounts of waste is the only “con.” This nuclear pellet is equal to one ton of coal!

27. S IMMONS & C OMPANY INTERNATIONAL When Oil Age Ends….Renewable Era Begins All create electricity n Some hope oil curse ends as it ushers in clean or renewable energy. n “Renewables” now work: –Wind –Solar –Geothermal –Waste –Hydro n Oil creates transportation fuel and petrochemical feedstock. n Natural gas creates heat.

28. S IMMONS & C OMPANY INTERNATIONAL Even Coal Has Some Limits To Growth n High quality black coal supplies are getting scarce. n Low quality brown coal is next generation supply. n Proven coal reserves have no “quality differential.” n Most reserve estimates are “volumetric estimates.” n Using coal requires intensive energy.

29. S IMMONS & C OMPANY INTERNATIONAL We Dug A Deep Energy Hole n Getting into this mess took decades. n The deeper we dig, the higher the risk the hole collapses. n Grasping the magnitude of the problem is urgent.

30. S IMMONS & C OMPANY INTERNATIONAL How And Why Did We Dig Such A Deep Hole? n Two decades of poor data. n Even worse analysis of poor data. n The Generals were fighting the last war. n Low prices created wrong signal. n Strong opinions overruled fundamental facts.

31. S IMMONS & C OMPANY INTERNATIONAL What Is Our “Next Step?” n Rule #1: Stop digging. n Step #2: Reform energy data. n Step #3: Go to “energy war footing.” n Today is when Plan B needs to begin. n September 1939 – August 1945: We created war machine. n June 1947 – August 1951: We created the Marshall Plan.

32. S IMMONS & C OMPANY INTERNATIONAL Plan B Can Be Achieved n Transportation energy use must be reduced. –Movement of goods: by trains and boats –Movement of people: stop long commuting –Distribution of food: eat local produce/goods –Globalization: manufacture things closer to home n Natural gas problems are not easy to fix. n R&D explosion must occur (Tuxedo Park).

33. S IMMONS & C OMPANY INTERNATIONAL Can The Job Get Done? n It has to. n Ingenuity is the by-product of panic. n The alternatives are too bad. n The longer we wait the deeper the hole becomes. n TODAY is when Plan B should begin.

34. S IMMONS & C OMPANY INTERNATIONAL A 1935 Oil Prediction (When Global Oil Usage Was 3.5 Million Barrels Per Day) “Oil has become more and more necessary to everyone. At first it was used for medicine, for lamps, and for lubrication. Now, if the supply of oil were cut off, our manner of living would change completely until something to take its place was found.” ( Written in 1935 by Maud and Miska Petersham when the world used 3.5 million barrels of oil each day )

35. S IMMONS & C OMPANY INTERNATIONAL InvestmentBankers to the E nergy Industry For information and/or copies regarding this presentation, please contact Laura Russell at (713) 546-7351 or lrussell@simmonsco-intl.com This presentation will also be available on our website www.simmonsco-intl.com within seven business days.