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Policy Implications of the Energy Revolution

Ryan Lance, ConocoPhillips Chairman and CEO

Remarks by Ryan Lance, Chairman and CEO
Columbia University – Center on Global Energy Policy
New York – April 24, 2013

Speech as prepared for delivery.

I appreciate the opportunity to address such a knowledgeable audience.

 

The speakers today all have decades of energy experience. So I couldn’t help thinking about all the major events – the inflection points – they’ve seen. The booms and price spikes, the downturns, the geopolitical upheavals, even the occasional hurricane disrupting production.
All these events brought change to the energy market – and requisite shifts in policy. But many of them didn’t last long before the next event.

We’re at a new inflection point now. The U.S. is experiencing an energy revolution. One that offers potential for fundamental long-term changes. So this is a fortuitous time for the Center’s founding. There are profound policy issues to be addressed. You’ll certainly play a role.

Before discussing those policy implications, I’ll describe the revolution from our standpoint as a leading producer.

The North American Energy Transformation

North America’s energy landscape has been transformed. We’ve moved from long-perceived resource scarcity, to abundance. That’s a big change. In fact, the U.S. leads the world in growth of oil and natural gas production.

In North America, we’ve seen technical innovation in three areas:

  • First, our new ability to economically produce oil and natural gas from shale rock.
  • Second, our success at operating in water over a mile deep in the Gulf of Mexico. The Gulf is now the world’s premier destination for deepwater development.
  • And third, rising production from the Canadian oil sands – one of the largest hydrocarbon deposits in the world.

Let’s look closer at the transformation.

As recently as the early 1990s, U.S. natural gas production, reserves and demand were falling. No longer. Since then, proved reserves are up nearly 90%. The Potential Gas Committee estimates our recoverable resources at nearly 2,400 trillion cubic feet. That’s the highest in the Committee’s 48-year history – and nearly a century of supply. Production is up one-third just since 2005 – with another 60% rise expected by 2030. The U.S. no longer needs to import liquefied natural gas. In fact, we could soon become an exporter – something once thought impossible.

The U.S. oil outlook has also been transformed. Our production and reserves peaked back in 1970. By 2008 they’d both fallen by half. Since then reserves are up 22% – and crude oil and liquids production are up almost 30%. That’s the first meaningful growth in 20 years. And more is expected. Thanks to shale – and the Canadian oil sands – and the deepwater Gulf – North America will no longer need oil imports by 2020. In fact, long before then it will need to export some surplus oil. Again, this was once thought impossible.

The shale revolution is also spreading. Dozens of countries have potential. But development elsewhere won’t be as fast as here. We have some big advantages. A large drilling rig fleet, skilled workforce, established legal and regulatory systems, proven environmental and safety record, and privately owned mineral rights available for leasing. Few countries have this combination.

Even so, some are having their own energy revolutions. For example, world trade in LNG is booming. Australia’s production is growing from conventional offshore resources. Also from unconventional resources onshore – coal seam gas. Its shale looks promising too. New offshore discoveries are being made in East Africa and South America, and the Mediterranean Sea. And the Arctic offers potential.

I’ve never seen so many development opportunities. Companies with scale and technical expertise have much to choose from – deepwater prospects, onshore shale, the oil sands, coal seam gas, some conventional oil and gas, and LNG.

Benefits of the Energy Revolution

All of this has produced real benefits. The two dozen shale trends under development in the U.S. have created 1.75 million jobs. So our industry now supports 9.6 million U.S. jobs, directly and indirectly. It could add a million more by 2020.

The industry contributes over a trillion dollars to gross domestic product. And billions in government revenue through taxes, royalties and lease bonus payments.

The U.S. and Canada have gained serious competitive advantages from their affordable natural gas. Energy-intensive manufacturers are building new factories. And foreign manufacturers are coming here now. Low-cost energy is helping revive industries like petrochemicals, fertilizer, steel, aluminum, forest products, and others.

Meanwhile, consumers are seeing lower bills for home heating – and for electricity from utilities with gas-fired plants.

Our rising production enhances energy security. It also eases pressure on world energy markets and prices. By importing less, we’re leaving more energy available to meet demand in the developing countries. And our stronger position reduces the leverage of exporting countries whose interests may differ from ours.

There are also environmental benefits – particularly from use of natural gas in electric power generation. Gas produces little of the nitrogen and sulfur oxides and particulates that cause acid rain and smog. And only half as much carbon dioxide as coal-fired plants. As a result, U.S. energy demand-related carbon dioxide emissions are at their lowest in two decades. In fact, using gas instead of coal is the fastest and lowest-cost way to reduce emissions.

The environmental community fears that lower oil and natural gas prices will slow the transition to zero-carbon fuels. Instead, it should view our resource abundance as a way to meet both energy and economic needs. While also providing time for innovation that will reduce the cost of alternatives.

Challenges from the Producer Viewpoint

As great as the energy revolution has been, our industry does face serious policy concerns. I’ll mention some of them, starting with those derived from market challenges.

First, in natural gas. The shale revolution has created a surplus in North America. Current demand cannot absorb all our capacity. So prices are at such a major discount to other markets, that they undermine investment. Dry gas development has slowed to a crawl. But we can help keep the shale revolution going by exporting surplus gas, in the form of LNG.

This would improve the balance of trade, and create jobs and income – both here and in the importing countries. We live in an interconnected, mutually dependent world. One that benefits from free trade. And U.S. LNG exports could help other countries reduce their emissions.

There are critics who want to keep the gas here. But there are ample resources for both domestic use and exports. And a DOE study found that exports offered substantial benefits, with little impact on domestic prices.

Second are concerns in oil. The shale revolution has created a surplus of light oil in the U.S.
But many of our refineries, particularly on the Gulf Coast, were configured years ago to run on heavy oil from Venezuela and Mexico. Production in those countries is falling. We need a replacement. The Canadian oil sands hold similar-quality oil. So they pose a potential solution.

But this raises the issue of infrastructure permitting. The U.S. needs more capacity to move light oil from the new shale fields in the Upper Midwest. As well as bitumen from Canada’s oil sands. Yet the fate of the Keystone XL pipeline remains uncertain. Meanwhile, some bitumen is moving by rail – not the most efficient alternative. One of the objections to the oil sands is carbon dioxide emissions during production. But new technology is continually reducing those emissions per unit. And more innovations are under development.

Meanwhile, light oil is piling up. The refining and processing sectors can absorb only so much. Again, the solution is free trade. We should export surplus light oil – and import heavy oil for our refineries to convert into gasoline and diesel fuel. Otherwise, if we limit markets for our production, the industry cannot sustain its high capital investments. U.S. production will lag – and so will job creation and economic stimulation.

Third is taxation. Here in the U.S., our industry faces ongoing proposals singling us out for higher taxes. Our critics associate our billions in revenue and earnings with high profits. But our earnings reflect our scale as a capital-intensive industry. For example, a deepwater development might cost 5 billion dollars or more. And it could take 10 years of work before earnings begin – much less reach payback.

The real story of our profitability is that the oil and gas industry earns 6 cents per dollar of sales. Compared to 8 cents for manufacturers in general. Or 20 cents for pharmaceutical, tobacco and beverage manufacturers.

Our effective global tax rate last year at ConocoPhillips was 51.5%. Piling on new taxes would cut our cash flow, and make U.S. investment less attractive. That in turn would reduce our ability to provide job creation and economic stimulation. Also, exposing our industry to double taxation on foreign earnings makes U.S. companies less competitive globally.

We accept our societal obligation to pay taxes. But keep the long term in mind. Tax us like other industries. And recognize that we compete against companies based outside the U.S. Set competitive tax rates that will encourage ongoing investment, job creation and prosperity.

Fourth is increased regulation. Regulations are necessary. But they should be smart – and based on science, and not supposition. They should be cost effective. And government should avoid creating regulatory duplication – or overlap between federal and state agencies.

In the case of shale development – specifically, hydraulic fracturing – regulation is performed through federal, state and local authorities. Air emissions that can cross state lines are governed by the U.S. Clean Air Act – which the states implement with primacy. State regulations also cover well integrity, water withdrawals, ground water protection, fracturing fluid disclosure, permitting, and reporting. Many of these rules are similar from state to state.
Those that aren’t, tend to reflect variations in hydrology, geology and other local factors.

Take, for example, management of produced water. It’s influenced by local population, seasonal climate, water supply near drilling sites, and availability of recycling and disposal facilities. Not all produced water can be recycled. That’s due to its volume, salt content or other impurities. Also, a central treatment facility may not be the preferred choice. It could increase road traffic, local emissions and costs. So using permitted underground injection wells is preferred in some cases.

We believe that the current system of regulation does a good job of adapting to local conditions, while accommodating advancing technology. And we feel that a one-size-fits-all approach through new federal regulations would not work.

There’s also concern over how government can keep regulations current. State agencies have reviewed environmental regulations under a cooperative process since 1988. It was initiated by EPA and the Interstate Oil and Gas Compact Commission. We support this through an organization named STRONGER. That stands for State Review of Oil and Natural Gas Environmental Regulations. It recommends regulatory improvements.

There’s debate as well on how to ensure use of best practices, and the role of government in this. We support the ongoing work by industry associations to develop and share best practices.
The industry is best qualified to determine which practices are cost effective, and best mitigate risk.

Fifth are other governmental concerns. For example, here in the U.S., the Dodd Frank financial reporting transparency rules. Although well-intentioned, they will likely make U.S. companies less competitive overseas.

In other countries, we see the need for improved contract sanctity – including fiscal terms. We’ve seen countries raise tax rates – change contract terms – and even expropriate assets. This increases risk and drives away investment. Also, some countries impose below-market pricing for production. That makes it difficult to justify investment.

We further recommend that governments create a level playing field among energy sources.
Don’t pick “winners” and “losers.” The Obama Administration endorses an “All of the Above” energy policy. We should live up to those words. Let the market choose the best ways to supply affordable energy and meet environmental standards.

Incidentally, officials from China have asked me a question that goes to the heart of government’s role. It was, “What did the federal government do to encourage the energy revolution?” Well, it funded early research and offered tax incentives. Then the private sector carried the ball.

But there’s much the federal government could do to keep the revolution going in the future.
Besides alleviating the concerns I mentioned, it could open more land for development. Thus far, the revolution has occurred almost exclusively on private land.

Government could also streamline the permitting process. For example, in Alaska, most development has been on state land, requiring state permits. Since 2005 we’ve sought to drill a well on Native-owned land that requires federal permits. As requested by the government, we worked with the Native stakeholders, and after three years agreed on a development plan. The government still denied the permit. It took two more years to get its approval.

Our sixth concern revolves around stakeholder challenges. There’s rising global scrutiny of environmental and social performance. It’s driven by increased activism in general, and genuine concern about our industry. And it’s facilitated by social media.

Opponents have latched on to hydraulic fracturing. Maybe you’ve seen the “Don’t Frack my Mother” video – or “Gasland.” If you have, be sure to see the responses. Like “Truthland,” or “FrackNation,” or “Switch.” They offer facts worth considering on environmental stewardship, job creation and energy security.

When I started out as a teenaged rig hand, fracturing had already been around 40 years. It was routinely done on hundreds of thousands of wells back then. The count is now over 2 million globally – without any confirmed groundwater contamination from the process. So it’s disappointing to see a time-proven technique demonized.

And last, we have workforce challenges. Like the U.S. in general, we face the retirement of the Baby Boomers. Roughly half of the industry’s technical workforce is at or approaching retirement eligibility. This at a time when technical skills among America’s young people are in short supply.

So even as we put “peak oil” to rest, we’re worrying about “peak engineers” and “peak geologists.” But look at the good side. We’re hiring – by the tens of thousands. Give us your bright, your ambitious. We’re open for business.

We’re determined to address all the policy issues I mentioned by:

  • First, collaborating with governments on mutually beneficial solutions to common concerns.
  • Second, emphasizing safety and environmental stewardship in all that we do.
  • Third, engaging with a broad array of stakeholders on an ongoing basis to understand their issues.
  • And last, considering their feedback as we develop our plans.

I look forward to our discussion.

Thank you.