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by Ryan Lance, Chairman and CEOColumbia University – Center
on Global Energy Policy New York – April 24, 2013
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
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:
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
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
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
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
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
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
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
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
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
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
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
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:
I look forward to our discussion.
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