North American Oil and Gas Supply

Dave Russum, PGeol.

AJM Petroleum Consultants

30th January, 2006

Conference Board of Canada,

Ottawa, Ontario,

Canada

Who We Are

• AJM provides Engineering, Geology, Geophysics and Economics to the Oil and Gas Industry

• Evaluations– Corporate Reserves– Acquisitions & Divestitures– Due Diligence, Special Studies

• AJM is a Leader in providing predictive tools to the Oil and Gas Industry (eg. PetroCube, Well load)

• Areas of Expertise Include:– All areas of Canada with a very strong Western Canadian Presence– Most Hydrocarbon Basins in the US– International Projects– Unconventional Gas – especially Natural Gas From Coal

This expertise gives a unique perspective of activity, results and expectations in the WCSB.

Energy Consumption, 2004 (BP, 2005)

Canadian Energy Consumption

32%

26%

10%

7%

25%

Oil

Natural Gas

Coal

Nuclear Energy

Hydro electric

307 Million Tonnes Oil Equivalent

• N. America (Canada, USA, Mexico): 27% of World Energy Consumption, 6.8% of World Population, 6.7 Tonnes/person

• Canada: 3% of World Energy Consumption, 0.5% of World Population, 9.9 Tonnes/person (USA: 8.2Tonnes/person, Mexico: 1.4Tonnes/person)

• World Average: 1.7 Tonnes/person

• Oil and Gas – other industries: Petrochemicals, Fertiliser, Asphalt etc.

United States Energy Consumption

40%

25%

24%

8%3%

Oil

Natural Gas

Coal

Nuclear Energy

Hydro electric

2332 Million Tonnes Oil Equivalent

The Current Reality

• World fixation on oil price – Getting close to World peak oil production?

• North America’s situation is more critical– Canada: the ‘swing producer’ for North American gas 1990-2000– Peak of Alberta gas is likely the peak in Canadian gas production

(2001)– Likely the peak in North American gas production

• Flat or Declining gas production– Supply/Demand tight – high prices – Good news for the oil and gas industry– Bad news for consumer North American economy

Resource Triangle

ObviousTraps

SubtleTraps

HeavyOil

SourGas

TarSands

TightGasCBM

OilShale

GasHydrates

ConventionalResources

UnconventionalResources

Small ResourceHigh QualityDifficult to findEasy to developLow costHigh margin

Large ResourceLow Quality‘Easy to find’Difficult to developHigh costLow margin

Basin MaturityBetter Technology(Higher prices)

Shale Gas

Canada’s Resources and Reserves Natural Gas

Resources

RemainingReserves

?10,000+Tcf

55 Tcf

Rate of Conversion:

AccessibilityTechnology

PriceMotivation

Total Conventional + Unconventional

Discovered

Raw Gas

Sales Gas

Unproduced

500Tcf ?10,000Tcf

OIL Review

World Oil Reserves (BP, 2005)

Africa9%

FSU10%

M . East62%

N. America5%

S. & Cent. America

9%

Asia Pacific3%

Europe2%

1.2 Trillion Bbls reserves38 Years supply?

The Alberta tar sands 1.7 Trillion Bbls resource

North American Oil Production

USA

Canada

Mexico

0

5000

10000

15000

20000

25000

30000

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

mb

bls

/Da

y

US PeakOil Production

Source: BP, 2004

North American Oil Production + Imports

USA

Canada

Mexico

Imports to North

America

0

5000

10000

15000

20000

25000

30000

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

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1987

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1995

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2003

mb

bls

/Da

y

Oil Consumption

US PeakOil Production

‘Cold’War

Energy dominates World Events

Oil Production

>10MMBO/Day

9MMBO/Day

Canadian Oil Production

0

500

1,000

1,500

2,000

2,500

3,000

1947

1950

1953

1956

1959

1962

1965

1968

1971

1974

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1983

1986

1989

1992

1995

1998

2001

2004

Oil

Pro

du

cti

on

MB

bls

/da

y

East Coast

In Situ Bitumen

WCSB Mined Bitumen

WCSB Heavy Oil

WCSB Light Oil

Condensate +Pentanes+

PeakConventional

WCSB Oil

NATURAL GAS

Review

FSU

Mid East

Africa

SE Asia

Europe

S&C America

Can USA MexTotal 6206Tcf

World Gas Reserves (BP, 2004)

Canada: 1% of ReservesNorth America:4% of Reserves

29% of Production30% of Consumption

Currently a landlocked resource, LNG could make gas a world commodity

North American Natural Gas Production + Imports

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

1970

1973

1976

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2003

Pro

du

cti

on

Bc

f/d

LNGMexicoCanadaUSA CBMUSA Other UnconvUSA Conventional

LNG

USAPeak

USA Unconventional

N. AmericaPeak?

US Unconv.

Gas incentives

North America - Change in Gas Reserves 2003 vs 1981 (BP 2004 Data)

14.7Tcf

58.7Tcf

184.8Tcf

USA

Canada

Mexico

–7.4%

–35.2%

Total 258 vs 365Tcf

-80%

North American Natural Gas Production

• Trend lags oil by about 30 Years• Demand increasing at same time that production is

declining• Solutions:

– Consume less– Promote energy alternatives– Import more Natural Gas (LNG)– Unconventional Gas

• All four will become vital to sustain the North American economy

• What can Canada deliver?

Canada:

• 3rd Largest Natural Gas Producer

• 2nd Largest Natural Gas Exporter

• <1% of World Natural Gas Reserves

• >20% of World Drilling Rig Count

• Large Resources of Unconventional gas

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0194

7195

0195

3195

6195

9196

2196

5196

8197

1197

4197

7198

0198

3198

6198

9199

2199

5199

8200

1200

4

Bcf

/d

E Canada

Rest WCSB

Alberta

Canada’s Natural Gas Production(Bcf/d Adapted from CAPP Data)

Peak ?

Production Growth controlled by pipeline capacity

>50% of Canada’s production is exported to USA

Alberta Natural Gas Drilling and Daily Sales Gas Bcf/d (CAPP Data)

High activity, high price and flat production = Red Flag

0

3000

6000

9000

12000

1500019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

05E

Ga

s W

ells

Dri

lled

0.000

2.000

4.000

6.000

8.000

10.000

12.000

14.000

16.000

Dai

ly

Sal

es G

as B

cf

Alberta Natural Gas Drilling vs. Gas Price

Alberta Gaswells Drilled vs. Gas Price

0

3,000

6,000

9,000

12,000

15,00019911992199319941995199619971998199920002001200220032004

2005E

We

lls D

rille

d

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

AP

MC

Ave

rag

e A

nn

ual

Gas

Pri

ce$/

mcf

Wells Drilled

Gas Price

Activity driven by price rather than production

Reserve Replacement Cost 2002 $US/BOE (Adapted from:John S. Herold / Harrison Lovegrove & Co.)

$2.50$3.10

$5.30

$6.50$7.10

$8.40

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

Asia-Pacific

Africa &M.E.

S&CAmerica

Europe UnitedStates

Canada

W.C.S.B. 2005 Estimate $19.09Cdn/BOE (First Energy, 2005)

Comments

• As pass peak: gas price vulnerable to fluctuations in supply and demand

• Canada’s long term position as a natural gas producer/exporter is weakening – has significant political and economic implications

• Washington has a far clearer understanding of the implications than Ottawa

• Vital that we accurately predict future supply

• Have developed a model that improves future prediction

Predicting the Future(From: Dave Russum, Geo-Help Inc., 2003)

Natural Gas In Canada –Where are we going?

SUPPLY: Exploration,

DEMAND: Production,

Exports

GLOBAL FUTURE?

Kyoto?El Nino?NAFTA?OPEC?LNG?

Politics?Terrorism?

N.Am Economy?

Energy alternatives

?

Prices

Time

Understanding Remaining Gas Resources – Accessible and Economically Available

Accessible with Restrictions

InaccessibleAccessible

Source: Russum, CSEG Recorder, June 2003

Can apply this approach to Conventional and Unconventional Resources

Unavailable ResourcesFuture Available

ResourcesPresently Available

Resources (Reserves)Available at

current prices

Unavailable ResourcesFuture Available

ResourcesFuture Available

Resources

Available at higher prices or new technology

‘Orphaned’ Conventional Resources (Skipper, 2001)

?

Green-Amber-Red Resource Assessment

CanadianShield

Resource Development Model (RDM) – 8 Stages

1. Discovery

2. Evaluation

3. Development

4. Growth

5. Peak

6. Decline

7. Reality

8. Abandonment

Time

Pro

duct

ion

Knowing current stage of project can better predict future

1 2 3

4

5

6

7

8

Stage 6: Decline

• “Denial” - Companies, workers, politicians, regulators and consumers expect continued growth in production

– “Current decline is temporary”– “Hockey stick” predictions of future

• Future predictions disconnected from current reality (often based on old data)

• High Spending based on unrealistic expectations

• Costs to maintain production increase

Alberta’s Conventional Gas Production is at this stage

T im e

Pro

du

cti

on

6

Canada’s Hydrocarbon Stages - Gas

$$$West Coast Gas

8

Abn

$$

$$$

$$?

$-$$$

$$$

$$$

$

$$

$

Cost

Shale Gas

Gas Hydrates

Coalbed Methane

Liquefied Natural Gas

Mackenzie Gas

??East Coast Gas

Saskatchewan Gas

British Columbia Gas

Alberta Gas

7

Real

6

Dec

5

Peak

4

Grow

3

Dev

2

Eval

1

DiscStage

Canada’s Hydrocarbon Stages –Oil

$$$Tar sands – in situ

Other Fossil Fuels:

8

Abn

$$

$$$

$$

$

Cost

Coal

Tar sands - surface

AB Oil - Heavy

AB Oil - Light

7

Real

6

Dec

5

Peak

4

Grow

3

Dev

2

Eval

1

DiscStage

Predicting the future

Resource Development Model+

Current Production*+

Decline Analysis* +

Investment/Exploration/Drilling/Technology trends=

Accurate prediction of future production

* Data from PetroCube© a new product from AJM Petroleum Consultants

Forecast of Canada’s Future Gas Production (Russum/AJM, 2005)

0.0

2.0

4.0

6.0

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2000

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Gas

Pro

du

ctio

n B

cf/d

Unconv Wedge 2

CBM Wedge

E Coast

Territories

Sask

BC

Alberta Conv

$$$$

The Shopping List - ExamplesOILOil sands extraction Mined: $5 - $7.5Billion/100,000bbls/d, Lead time: 5 years

– Issues: Environmental, energy and water supply, manpower, transport of product to market, operating costs

Oil Sands extraction Insitu: $3 Billion/100,000bbls/d, Lead time: 2 years+ can be staged– Issues: Environmental, energy and water supply, manpower, transport of product

to market, operating costs

White Rose: $2.35Billion/100,000bbls/d, On production 2006 – Issues: Environmental, discovered 22 years ago

NATURAL GASMacKenzie Valley Pipeline: $7Billion, 1.2Bcf/d, Lead time: 5 years?

– Issues: Environmental, Governments/First Nations, manpower, first drilling in Arctic in 1961.

LNG: $1 Billion/Bcf/d for landing terminal, Lead time: 3+ Years – Issues: Lack of liquefaction terminals (5 year lead time), Global competition for

source and transport of gas, NIMBY

Our Challenges in Canadian Oil and Gas Industry:

• ‘Just in time’ Industry focused on short-term results

• We have become risk averse

• Not investing in enough research for exploration and extraction

• Escalating COF&D

• Governments have taken a hands-off approach to energy (no overall energy management or plan)

• Obligations to Kyoto and NAFTA

• Increased demand for energy to extract oil

Solving the Future Energy Shortfall

1. Develop a more accurate, flexible and current model for predicting energy production

2. Determine realistic levels of production and export for Canada

3. Educate the Public on the implications of a change from low cost to high cost energy

4. Substantial reduction in North American energy consumption

5. Make Energy R&D the #1 priority of Governments

Summary• Canada (North America) is not running out of oil and gas

resources

• Depleted our low cost oil reserves, rapidly depleting our accessible, low cost gas reserves

• Alternatives exist – take research, time and considerable investment

• We need to be very conscious of costs and economic viability of energy in relation to a North American and World market

• Vital that Canada develop an energy plan

Welcome your feedback

Contact Dave RussumEmail: daver@ajma.net

More Information: www.ajma.net

Thank You