EEnneerrggyy IInn TThhee 2211sstt CCeennttuurryy:: AA RRoouugghh RRiiddee AAhheeaadd

by Matthew R. Simmons Chairman Simmons & Company International LLaaddiieess’’ HHoommee JJoouurrnnaall 11990000:: PPrreeddiiccttiioonnss FFoorr AA NNeeww CCeennttuurryy

SIMMONS & COMPANY INTERNATIONAL HHaallffwwaayy TThhrroouugghh FFiirrsstt DDeeccaaddee OOff AA NNeeww CCeennttuurryy

¢ 1.6 billion people with a life-span of 40 – 50 years. ¢ Railroads’ golden age. ¢ “The horse is here to say.” Automobiles a novelty. ¢ Andrew Carnegie: Wealthiest man in the world. ¢ Wright brothers take to the sky. ¢ Harley motorcycles hit the road. ¢ Montgomery Ward “suppliers for every trade and calling in the world.” ¢ Einstein invents “Theory of Relativity.”

SIMMONS & COMPANY INTERNATIONAL 2200tthh CCeennttuurryy ““TThhee AAggee OOff EEnneerrggyy”” :: PPaarrtt II

¢ Spindletop: Era of big oil begins (1901). ¢ Discoveries in Los Angeles Basin, East and West Texas: USA oil era comes into full bloom.

¢ WW I & II perfect energy as finest weapons. ¢ 1938 – 1965: Middle East oil era come of age. ¢ Natural gas captured by pipelines: World War II. SIMMONS & COMPANY INTERNATIONAL 2200tthh CCeennttuurryy ““TThhee AAggee OOff EEnneerrggyy”” ::PPaarrtt IIII

¢ Electrification of free world: – TVA: Texas Dams, Columbia River, Colorado River ¢ Atomic energy era begins (1950s). ¢ Interstate highways and suburbia (1950s – 1960s). ¢ Modern energy facilitated miracles.

SIMMONS & COMPANY INTERNATIONAL FFiirrsstt CChhiinnkkss IInn EEnneerrggyy’’ss MMiirraacclleess:: TThhee CChheeeerriinngg FFaaddeess

¢ USA’s oil peaks (1970). ¢ USA’s natural gas peaks (1973). ¢ First oil shock (Oct 1973): prices triple by Christmas eve. ¢ 1977/1978 winter shuts down mid west. ¢ Fuel Use Act bans use of natural gas. ¢ 1979 Three Mile Island shuts down atomic energy era. ¢ 1979 oil shock sends oil to $102 (in 2005 prices). ¢ 1982 – 2002: 20 year oil field depression. ¢ 1990’s price collapses: 1992, 1993, 1998, 1999. SIMMONS & COMPANY INTERNATIONAL FFiirrsstt FFiivvee YYeeaarrss OOff 2211sstt CCeennttuurryy:: FFllaasshhiinngg RReedd LLiigghhtt

¢ Crisis or aberration debate begins. ¢ Natural gas prices rip through $3 on way to $10. ¢ Oil price rises from $10 in January 1999 to $37 in October 2000. ¢ Blackouts in summer of 1999 led to explosion of new power plants. ¢ Enron blows up power industry. ¢ 9/11 “destroys energy demand”; the last big price collapses. ¢ The August 14, 2003 blackout. ¢ $30 oil becomes $50 oil. ¢ Natural gas rises to $10 - $12 level. SIMMONS & COMPANY INTERNATIONAL 22000055:: TThhee YYeeaarr OOff TThhee CCrrooww

¢ Nothing good happened to energy. ¢ Exploration success dismal. ¢ Cost overruns astonishing. ¢ “Where have all the people gone?” ¢ What happened to the rigs and refineries? ¢ “China was the big surprise.” ¢ The hurricanes finished the job! Katrina/Rita took away more then world had left. SIMMONS & COMPANY INTERNATIONAL MMiigghhtt TThhiiss BBeeccoommee AA WWiinntteerr OOff DDiissccoonntteenntt??

¢ Winter weather creates peak energy demand: – January – March is seasonal global oil use – Winter blizzards create record electricity and natural gas use ¢ Energy stocks are low. ¢ Energy supply is flat or in decline. ¢ “We” have no “Empty” on our global fuel tank. ¢ Running short creates surge in

demand. Source: DOE SIMMONS & COMPANY INTERNATIONAL TThhee BBiigg IIssssuueess AAss WWee HHeeaadd IInnttoo 22000066

¢ Are we in a crisis? ¢ Do “free markets, technology and ingenuity” work? ¢ Do high prices usher in era of alternative energy? ¢ Will “normal energy prices” soon return? ¢ Is there a “new generation” on the way? – People E F – Energy assets – Projects that add capacity ¢ Is the cupboard and blackboard bare? SIMMONS & COMPANY INTERNATIONAL WWhheerree DDooeess ““FFiixxiinngg TThhee PPrroobblleemm”” BBeeggiinn??

¢ “For lack of a nail, the war was lost”: Important concept. ¢ The fix begins…At home (where is “home?”). ¢ Plan 3 times…cut once (where to begin planning?). ¢ Digitized oil fields still need people and iron. ¢ Conceptual energy is a great concept. ¢ Usable energy is a physical reality. ¢ Demand can grow.

¢ Use equals supply.

SIMMONS & COMPANY INTERNATIONAL IIss TThhee WWoorrlldd EEnntteerriinngg PPeeaakk OOiill AAnndd GGaass??

¢ What does mean? ¢ How do you know when it happens? ¢ Is peak oil crying wolf? ¢ Peak oil debate growing exponentially. ¢ The debate has 2 strong sides. ¢ The arguments are theological (“I believe, I believe”). ¢ Leave “I believe” inside a church.

We need factual data to prove the issue

SIMMONS & COMPANY INTERNATIONAL PPeeaakk OOiill IIssssuueess

¢ Can non-OPEC oil begin to grow again? ¢ Why did growth peter out? ¢ Do appreciate? ¢ Does modern technology find and produce more oil? ¢ What is average decline rate today? ¢ What will it become by 2010? ¢ Does Middle East have plentiful oil left? ¢ Are there still new oil frontiers? ¢ Is non-conventional oil now coming of age? SIMMONS & COMPANY INTERNATIONAL DDeepplleettiioonn DDooeess NNoott MMeeaann ““RRuunn OOuutt””

¢ All supply questions anchored Analogy on need to understand “depletion.” – When does an oil field peak? – How fast does it then decline? – Do all fields ultimately decline? – Do light oil fields decline faster than heavy oil fields? – Can intense drilling modify rate of decline? ¢ The furor of depletion is astonishing. ¢ The ignorance about depletion is amazing.

SIMMONS & COMPANY INTERNATIONAL TThhee DDeepplleettiioonn PPiiccttuurree IIss SSiimmppllee

100% Exponential Growth In Production Wells

“Conservation”

0 “The Tail”

SIMMONS & COMPANY INTERNATIONAL QQuueessttiioonnss AArree EEaassiieerr TThhaann AAnnsswweerrss

¢ Serious energy questions inexhaustible. ¢ Lack of solid data prohibits answers. ¢ Conceptual fixes are easy to theorize. ¢ Physical realities deter concepts from materializing. ¢ Ignorance can become false bliss. ¢ Reality can be harsh.

SIMMONS & COMPANY INTERNATIONAL NNoonn--OOPPEECC OOiill SSuuppppllyy MMuusstt BBee PPeeaakkiinngg

¢ Too many non-OPEC producers are in irreversible decline. ¢ Rates of decline are accelerating. ¢ North Sea is scary case study. ¢ Ignorance of USA peaking is still alarming. ¢ When non-OPEC peaks oil world is all about the Middle East.

Gannet A Gryphon Dunbar 25 30 50 20 25 40 20 15 30 15 10 20 10 10 5 5

0 0 0 4 3 2 1 0 9 8 4 3 2 1 0 9 8 4 3 2 1 0 9 8 0 0 0 0 0 9 9 0 0 0 0 0 9 9 0 0 0 0 0 9 9 0 0 0 0 0 9 9 0 0 0 0 0 9 9 0 0 0 0 0 9 9 2 2 2 2 2 1 1 2 2 2 2 2 1 1 2 2 2 2 2 1 1

SIMMONS & COMPANY INTERNATIONAL MMiiddddllee EEaasstt OOiill IIss OOlldd AAnndd FFrraaggiillee

Ghawar Safaniya King Queen II Berri Zuluf/Marjan Lord Lord/Lord Shaybah Abqaiq Lord Queen I

Year Discovered 1948 1940 1951 1964 1965 / 1967 1968 Peak Production 5,800 930 1,500 586 658 500 [MB/D] / Year ¢ Royal oilfield families get old, too. ¢ 30 – 40 super giant oil fields were the backbone of Middle East Oil. ¢ All are now reaching exhaustion stage. ¢ When the oil royal family declines, there is still lots of oil and gas left. ¢ But, it will not be easily extracted. ¢ The Middle East will become hot bed of drilling rigs. SIMMONS & COMPANY INTERNATIONAL SSaauuddii AArraabbiiaa’’ss OOiill SSttoorryy IIss TThhee OOiill SSttoorryy

¢ was the only place oil could grow “forever.” ¢ 20 – 25 million barrels per day oil was a concept. ¢ “Cheap oil” forever was a concept. ¢ Neither were factual. ¢ Facts rule the future. ¢ Facts are that Saudi Arabia’s oil fields are too old. ¢ Six decades of steady growth took its toll. BusinessWeek Online April 5, 2004 ¢ The growth in Arabian fluid is SIMMONS & COMPANY brine and seawater. INTERNATIONAL TThhee PPeeaakkiinngg OOff MMiiddddllee EEaasstt OOiill IIss OOiill’’ss TTwwiilliigghhtt EErraa

¢ When Middle East oil begins to decline, oil enters its end game. ¢ “The Wolf” is either: – Approaching the door – Knocking on the door – Or is now “In the room”

Reacting to peak oil will shape the 21st century

SIMMONS & COMPANY INTERNATIONAL NNaattuurraall GGaass CCoouulldd BBee AA BBiiggggeerr SSuurrpprriissee

¢ Natural gas depletes faster than oil (Fact). ¢ 65 – 70% of world natural gas supply is in decline. ¢ Most natural gas future “reserves” are still undiscovered. ¢ We flared the best natural gas. ¢ We sold most of the rest as waste product of oil. ¢ Natural gas is world’s finest heat source. ¢ Natural gas was misunderstood until its era faded. SIMMONS & COMPANY INTERNATIONAL AAllll FFoorrmmss OOff MMooddeerrnn EEnneerrggyy FFaaccee LLiimmiittss TToo GGrroowwtthh

¢ Black coal is depleting. Brown coal has low BTUs. ¢ Unconventional energy is energy intensive. ¢ Nuclear era must begin anew. Both create kilowatts ¢ Alternate energy is real but tiny. ¢ Electricity is poor generator of heat. ¢ Electricity does not create efficient transportation. ¢ Electricity is not a feedstock for petrochemicals.

SIMMONS & COMPANY INTERNATIONAL CCaann TThhee WWoorrlldd CCooppee WWiitthh PPaassssiinngg PPeeaakk OOiill AAnndd GGaass??

¢ World is on path to using 120 million barrels per day of oil. ¢ Projected growth in electricity and natural gas 50% higher. ¢ If supply starts to decline, use will also. ¢ If “the gap” is quickly understood, a “Plan B” works. ¢ If the crisis is ignored, we enter the dark age.

SIMMONS & COMPANY INTERNATIONAL HHooww WWee SSoollvvee ““PPeeaakk OOiill””

¢ We reduce transportation intensity of oil. – Shipments of goods by truck becomes train to boat – Liberation of employees to work close to home ‹ End 9 – 5 check in ‹ Begin era of “pay by productivity” – Grow food locally: End era of ornamental food – Reverse globalization: make things at home SIMMONS & COMPANY INTERNATIONAL OOiill PPrriicceess NNeeeedd TToo SSooaarr

¢ $65 oil is $.10 a cup. ¢ High prices do not kill economies. ¢ What should we do with high oil price era? – Rebuild the energy infrastructure – Create an OPEC middle class – Unlock R & D era for new energy source ¢ High energy prices are salvation. ¢ Low energy prices are a curse.

SIMMONS & COMPANY INTERNATIONAL SSoollvviinngg TThhee TToottaall EEnneerrggyy PPrroobblleemm NNoott AAnn EEaassyy TTaasskk

¢ Electricity is the elixir of modern life. ¢ Natural gas is the world’s best source of heat. ¢ Substitute for either is impossible today. ¢ A new generation of energy is the ultimate answer. ¢ In meantime: – Buy time (no new supply is too little) – Conserve – Use at highest best use

SIMMONS & COMPANY INTERNATIONAL LLeett’’ss ““WWiinn OOnnee FFoorr RRiicckk SSmmaalllleeyy””

¢ Richard Smalley had an energy vision. ¢ It was rooted in fear about peak oil and natural gas.

¢ If we win an energy victory, we avoid an .

¢ If we ignore the issue, we will live in a far darker world. HUMANITY’S TOP TEN PROBLEMS FOR THE NEXT 50 YEARS

1. Energy 2. Water 3. Food 4. Environment 5. Poverty 6. Terrorism and War 7. Disease 8. Education 9. Democracy SIMMONS & COMPANY INTERNATIONAL 10. Population TTwwiilliigghhtt CCaann TTuurrnn IInnttoo ““AA”” NNeeww DDaawwnn

¢ Twilight creates illusion of light getting stronger. ¢ Twilight then fades into a dark night. ¢ It is always darkest before dawn. ¢ If we solve our energy crisis, the 21st century will be our greatest dawn. ¢ If we fail, we will have a dark future.

SIMMONS & COMPANY INTERNATIONAL SIMMONS & COMPANY INTERNATIONAL

Investment Bankers to the Energy Industry For information and/or copies regarding this presentation, please contact Laura Russell at (713) 546-7351 or [email protected] This presentation will also be available on our website www.simmonsco-intl.com within seven business days.