Caspian Oil Gas Challenges and Opportunities International Institute

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Caspian Oil & Gas - Challenges and Opportunities International Institute for Caspian Studies Tehran,

Caspian Oil & Gas - Challenges and Opportunities International Institute for Caspian Studies Tehran, May 24, 2004 Franz B. Ehrhardt, CEO, CASCA Consulting, L. L. C. Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved

CASCA Consulting, L. L. C. Or. . . how to best employ the energy

CASCA Consulting, L. L. C. Or. . . how to best employ the energy assets of the Region to achieve significant sustainable economic growths and to support reliable regional stability! 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 2

Thinking Frame Work … Presented Issues are: 1) Repetitions and validations of accepted wisdom,

Thinking Frame Work … Presented Issues are: 1) Repetitions and validations of accepted wisdom, facts, and situations 2) Accepted. . but viewed from different perspectives 3) New and unconventional views, aspects, and approaches … and they are the views of a Conceptual Strategist, Futurist, Lateral Thinker, and Student of History 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 3

Agenda I. Geographic Definition II. Part I - The Bigger Picture 1. Demand Growth

Agenda I. Geographic Definition II. Part I - The Bigger Picture 1. Demand Growth – Spike or Continuous 2. Supply – Fact or Fiction 3. Price Level – Blip or Real III. Part II - The Caspian Scenario 1. 2. 3. 4. 5. 6. The Fundamentals of the Assets Economic Development - Value Chain Issues Market Links Export Routes Environmental Issues Refining Issues IV. Conclusions 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 4

Geographic Definition How to define “Caspian Region”? § Many interpretations, many views, many differing

Geographic Definition How to define “Caspian Region”? § Many interpretations, many views, many differing concepts about the term “Caspian Region” § For this presentation, geographic history, trade relations over millennia, energy production, transit, and use, and many other factors have been utilized to propose a multi-beneficial notional “union” § A core model for discussion was found in the Economic Development Organization* to which Georgia, Armenia, and the Russian areas bordering the Caspian Sea have been added. *Turkey, Azerbaijan, Iran, Kazakhstan, Turkmenistan, Uzbekistan, Kyrgyzstan, Tajikistan, Afghanistan, Pakistan. 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 5

Geographic Definition § Examples of other “Unions” that were created out of turmoil, ashes,

Geographic Definition § Examples of other “Unions” that were created out of turmoil, ashes, and economic needs for mutual benefit and stability: § European Union 454 MM People § United States 285 MM People § “Caspian Energy Impact Union”* 350 MM People * Benefactors from Oil & Gas Production, Energy Product Transit, Product Value Upgrades, and Energy Supply Security 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 6

Definition of “Region” (E. C. O. +) 1/10/2022 Copyright© 2005 CASCA Consulting, L. L.

Definition of “Region” (E. C. O. +) 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 7

Part I The Bigger Energy Picture 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C.

Part I The Bigger Energy Picture 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 8

Demand Growth – Spike or Continuous? Some Issues to be Considered: • Between 1980

Demand Growth – Spike or Continuous? Some Issues to be Considered: • Between 1980 and 2000 the world population grew by 1. 5 billion, as many we had in total in 1890 • 2. 0 billion (1/3) out of 6. 0 billion people still live without any form of modern energy • Global demand slowdown in the 90 ies was caused by the collapse of the Soviet Union, the rest of the world continued to grow at previous paces • The recovery of the FSU started to add to global demand expansion again from mid 1990 onwards • China’s energy demand is rapidly growing 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 9

Demand Growth – Spike or Continuous? Some Issues to be Considered: • Car ownership

Demand Growth – Spike or Continuous? Some Issues to be Considered: • Car ownership in China went from. 7 mm to 7. 0 mm in 11 years, motorcycles from 15 mm – 90 mm in 10 years • China now consumes 1. 7 BOE person, India. 7, Iran 14. 2, Japan 32. 8, Europe 50. 9, USA 64. 3 – (US uses 25% of world energy but produces also 33% of global GDP) • Only 12% of the world population use 50% of the energy • Prevailing accelerated economic and industrial development in the countries of the advancing world will generate significant additional demand beyond their historic growth rates • Without the FSU, over 10 years the global demand increased by 10 mm BOE/day … where do we find the next 10 mm BOE/day, or even more? 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 10

Demand Growth – Spike or Continuous? Gas – Just one example of a dilemma

Demand Growth – Spike or Continuous? Gas – Just one example of a dilemma … UK Supply & Demand All Import Projects UK Gas demand High Million Standard Cubic Meters per Day 700 600 OL Size Fields Ormen Lange Exxon LNG Isle of Grain Gazprom Northern European Pipeline Gasunie BBL UK Pipe (Ormen Lange) Interconnector Expansion (Phase 2) Interconnector Expansion (Phase 1) Vesterled Interconnector WOS UK Discoveries & YTF Potentially Commercial Under Development Shut In UK Prod 500 400 300 200 100 0 2003 2004 1/10/2022 UK Gas demand Low 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 11

Supply Security – Fact or Fiction? Some Issues to be considered: • Recent booking

Supply Security – Fact or Fiction? Some Issues to be considered: • Recent booking scandals have placed prevailing reserve estimates into question. . many more downward corrections expected • Major challenge to accuracy of Saudi Aramco data • Almost all major fields are in decline • Only two Super Giant fields have been found since 1975 • A few large fields have been found, none lately • Almost all new oil fields have short peak production and rather rapid declines 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 12

Supply Security - Fact or Fiction Some Issues to be considered: • No more

Supply Security - Fact or Fiction Some Issues to be considered: • No more major frontier region left, except the 2 presently cost- and riskprohibitive Polar Regions • Large incidents of field mismanagement negatively impacts field life • Non-conventional crude, like tar sands, shale oil, and super-heavy Orinoco, may become more viable with crude prices above 40$ • Recent crude oil price levels are contradicting conventional wisdom. . Do we need new wisdom? • Uncertainty if the OPEC production reserve of 3. 0 mm bdp (almost all Saudi) can actually be activated on short notice … there may be much less recoverable oil & gas than we think! Was Hubbert right? 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 13

Supply Security – Fact or Fiction? The Orman Lange Bookings Story Company BP Norsk

Supply Security – Fact or Fiction? The Orman Lange Bookings Story Company BP Norsk Hydro Shell (old) Exxon Mobil Statoil Shell (new) Equity Res. (%) 10. 34 242 18. 07 422 17. 04 398 7. 23 169 10. 84 253 17. 04 398 B’king Share 202 336 256 56 63 90 % 83. 7 79. 6 64. 3 32. 9 25. 0 22. 6 - Furthermore. . . The steep slope structure poses tremendous challenges to drilling placing commercial viability even further in question 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 14

Supply Security – Fact or Fiction? New System Required … One Option: 13 Data

Supply Security – Fact or Fiction? New System Required … One Option: 13 Data Point System per Field (Simmons Proposal) • • • Annual Production for each of last five years Annual average number of producing wells (each year) Current estimate for original oil & gas in place Current estimate for ultimate oil & gas recovery Cumulative oil & gas production Points # 1 -5 6 -10 11 12 13 – Only 2 of these points are estimates, 11 are simply facts 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 15

Price Level – Blip or Real? • Published numbers suggest 2. 0 MM bpd

Price Level – Blip or Real? • Published numbers suggest 2. 0 MM bpd crude production over demand. . where does it go? • Granted, financial traders impact prices. . still, where is the crude? • Risk premiums can only last so long. . • Unless China’s economic machine develops major problems, global demand has no way than to go up. . probably faster than new production • Reportedly, Saudi Arabia has up to 3. 0 MM bpd “in reserve”. . is it all there? And how soon available? Is it the crude the world needs? • There might be a price correction down, but the fundamentals indicate a strong probability for a sustained climb over the longer term • By the way. . the situation for gas is not much different! 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 16

Part II - The Caspian Scenario 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C.

Part II - The Caspian Scenario 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 17

The Fundamentals of the Assets • Key Energy Producing Region, significant reserves • Considerable

The Fundamentals of the Assets • Key Energy Producing Region, significant reserves • Considerable share of the reserves in land-locked locations posing transportation challenges and impacting well-head netback prices • Various rotes of sustained conflict, political instability, and unresolved disputes • Challenging investment, business, and bureaucratic environment • Inadequate state of sustainable and integrated economic development • Insufficient regional collaboration frame work to jointly drive the effective conversion of energy assets into a strong competitive position 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 18

Value Chain Issues - Economic Development • Historically, the highest added values are generated

Value Chain Issues - Economic Development • Historically, the highest added values are generated by the processors of imported raw materials into finished products • Raw material exporters usually do not enjoy a sustainable strengthening of their composite economic base • Therefore, far more internalization of direct and indirect value upgrading along the energy value chain should be a national priority for all countries of the Caspian Region • Those countries have abundant low cost (net back) energy, especially gas, other raw materials, sufficient labor resources, and plenty of land to develop a competitive industrial base for inland consumption, contract processing, and, even more important, for export of the finished products • Many countries have already been very successful with this model, even without a similar energy base, … China, Korea, Japan, Taiwan, India, etc. 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 19

Value Chain Issues - Economic Development Crude Oil Production Pipelines Shipping Refining (Export) Bottom

Value Chain Issues - Economic Development Crude Oil Production Pipelines Shipping Refining (Export) Bottom Upgrading Refining (Operating Efficiencies) Petro. Chemical Plastics, etc. Retail Marketing Commercial Marketing Production Pipelines Conversion to LNG Transportation Distribution Gas Processing Power Generation Gas-to-Liquids Secondary, i. e. : Fertilizer Industrial Use Gas 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 20

Favorable Logistics to Major Markets 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All

Favorable Logistics to Major Markets 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 21

Major Crude Routes 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved

Major Crude Routes 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 22

Export Routes – Crude Oil The (non-political) Potential of the Iran Buy-Sell Hub -

Export Routes – Crude Oil The (non-political) Potential of the Iran Buy-Sell Hub - Baku-Ceyhan Pipeline versus Iran Hub (or future pipeline) - • Simplified preference calculation formula for Caspian crude producer/shipper: – FOB selling price minus all transportation and transfer expenses (including losses), and time/value factor (working capital) = netback price at the wellhead for each of the options • Since the Iranian swap fee is not based on actual cost, Iran has the strategic advantage to optimize the volume of swaps by offering the economically most attractive option 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 23

Gas Export Routes 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved

Gas Export Routes 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 24

Export Routes - Gas One more word on Gas … – Look at netback

Export Routes - Gas One more word on Gas … – Look at netback value of gas exported as LNG to determine alternative uses – 25% consumed by the time it is liquefied, another 10% to ship and re-gasify (Qatar example, quoted by Simmons International) – Pipeline Gas uses only 4 – 8 % of wellhead gas – Strategic long term option … much longer pipelines to serve high volume locked-in markets • e. g. : 1950’s Soviet Gas to Western Germany – For example, an Iran – Pakistan – India pipeline offers much better economics then LNG, and Pakistan and India alone can easily take the majority of available gas 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 25

Innovative Export Option. . Just economics! – Why not a Common Carrier Pipeline? –

Innovative Export Option. . Just economics! – Why not a Common Carrier Pipeline? – Energy-independent Infrastructure Company (Consortium, i. e. : Japanese, Korean, etc. ) – Independent Promoter like Worldbank – Energy-based Economic Development Corridor, “Right-of way” development – Free Trade Zone Manufacturing and Industrial Hub Centers* * Thailand, Eastern Seashore – Sri Ratcha; Dubai, Jebel Ali; Malaysia, Penang, etc. 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 26

Environmental Issues • Well documented significant regional challenges, mainly resulting from long periods of

Environmental Issues • Well documented significant regional challenges, mainly resulting from long periods of neglect, especially Caspian Sea. . Today, just a few specific energy linked issues • Adequate availability of potable water is rapidly becoming a global top priority equal in significance as energy security • The adequate domestic energy sources of the Caspian Region will favor affirmative action in high energy-intensive water purification processes. • The abundant availability of regional gas could be utilized as clean burning transportation fuel (CNG) for trucks, buses, and taxis as successfully demonstrated in other countries • Essential – A region-wide and concerted introduction of regulatory standards and laws and the linked application of existing practices and technologies for a stepped reduction of oil & gas-related emissions into the water, air, and soil 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 27

Regional Issues - Refining • Conversion and operational efficiency of regional refineries is substantially

Regional Issues - Refining • Conversion and operational efficiency of regional refineries is substantially below global best practices • Wide gaps between actual production versus name plate capacity (low utilization rates) • High share of un-economic bottom (heavy ends) • Insufficient refinery and petrochemical plant capacity to take advantage of upgrading the crude oil value chain (export refineries and plants) 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 28

Regional Issues - Refining Example: Value of a gap closure between prevailing operational practices

Regional Issues - Refining Example: Value of a gap closure between prevailing operational practices and global best practices - No/minimal CAPEX case CASH OPEX REDUCTION: $ MM (per year) Energy Costs Non-Energy Total 5 - 8 14 - 19 19 - 27 Yield Improvements & Capacity Creep 16 - 20 Improve Uptime (Reduce lost profit opportunities): 13 - 19 - Reduce Scheduled Rate Reductions & Downtime - Reduce Unscheduled Rate Reductions & Downtime TOTAL IMPROVEMENT OPPORTUNITIES 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 48 - 66 29

Conclusion • The Caspian Region has a tremendous potential to transform into a strong

Conclusion • The Caspian Region has a tremendous potential to transform into a strong major economic entity effectively employing the combined energy assets to achieve that objective. • Critical steps towards this state would include: – Creating a win-win situation with all desired investment and cooperation partners – Engage those international partners in the economic and infrastructure development in the countries of the Region – Pursue affirmative and pragmatic engagement for close cooperation with all major economic powers for mutual benefit 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 30

Conclusion – Allow mutually beneficial economic cooperation to proceed in spite of possible ideological

Conclusion – Allow mutually beneficial economic cooperation to proceed in spite of possible ideological differences – Maximize the internalization of the energy value chain upgrades to strengthen economic growth and to create full employment – Pursue the enhancement of pipeline grids (Gas & Crude) – Grow mutually beneficial crude oil swaps – Promote value adding upgrade processing inside the Region – Pursue any visionary cross-boundary cooperative initiatives that provide commercial enhancements while limiting political implications 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 31

Conclusion – Target highest wellhead netback values through innovative approaches but not through inflexible

Conclusion – Target highest wellhead netback values through innovative approaches but not through inflexible formulas – Rigorous pursuit of options that create sustainable competitive advantages – Develop strategic concepts to participate in the “out-sourcing” trends of highly industrialized countries – Create a transparent regulatory, legal, and administrative investment and operating environment that is competitive with other key growth regions – Foster regional cooperation to effectively resolve the environmental challenges and secure international support 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 32

Thank you very much for listening Innovative Energy Perspectives Helping to Create a Sustainable

Thank you very much for listening Innovative Energy Perspectives Helping to Create a Sustainable Competitive Advantage 1/10/2022 Copyright© 2005 CASCA Consulting, L. L. C. All rights reserved 33