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The New Energy Landscape

Ryan Lance, ConocoPhillips Chairman and CEO

CERAWeek 2013
March 5, 2013

Speech as prepared for delivery.

Every time I think of all my years in the industry, it reminds me how much has happened in 28 years. Energy booms – and busts. Price spikes – and declines. Huge shifts in policy. All with only occasional stability in between.

It’s like that old Bob Dylan song from the 1960s – “The Times They Are a-Changin’.” At least in our industry. We’re in a brave new world, thanks to unconventional resources. What everyone once assumed was energy scarcity, looks more like energy abundance today.

Think about that. Less than 10 years ago, supply security was the big concern. The world’s surplus production capacity was falling. Asia’s high demand growth was competing for what the perceived finite supplies. More production was concentrated in volatile regions. So the risk of disruptions was growing, and consuming countries were running scared. Geopolitics always has a way of swinging the pendulum on supply and demand – as Dan said in “The Prize” and “The Quest.”

But there’s another driving force – economic uncertainty. It was only 5 years ago that we went into a deep global recession. The developed countries have not recovered fully, in terms of economic and energy demand growth. As a result, today we don’t know which risk is greater – supply disruptions, or falling demand. This causes ongoing uncertainty, particularly for oil prices.

Meanwhile, there’s risk that society won’t see the shale revolution through to its full potential – due to misinformation and fear. We must address this as an industry – working in collaboration with government, communities and our other stakeholders. We’re taking some steps, but probably need to do more. Otherwise, we’ll leave a lot of potential economic stimulation and job creation on the table.

Taking all this into account, the new landscape is like someone picked up the energy world and tilted it. Ever since the 1990s, demand growth has shifted from the OECD countries, toward the developing nations. Now, that shift is accelerating. But the landscape tilts back the other way for supply opportunities. Toward the OECD countries like the U.S., Canada and Australia. World energy trade has also tilted. Products are flowing from the reinvented supply areas, to markets in the developing countries.

And there are other implications. Take North American energy security. The resource revolution started here not just because of geological potential. There were infrastructure advantages: a large rig fleet, skilled workforce, well-established legal and regulatory systems, a good environmental and safety record, and here in the U.S., privately owned mineral rights available for leasing. All facilitated development.

As a result production here is rising – fast. North America could become an energy exporter within a decade. Its production growth has created large price disconnects with markets elsewhere. And even between regions here, due to transportation bottlenecks.

The U.S. and Canada now have competitive advantages, thanks to their resource abundance – particularly of low-priced natural gas. The energy-intensive manufacturers certainly know it, judging from their new factory announcements.

This new energy landscape offers both challenges and opportunities. I’ll point them out, starting with our industry.

There are some fundamental changes in strategy. Take, for example, joint ventures between national and international oil companies. IOCs still want access to conventional resources held by the NOCs. But now, the NOCs are chasing the unconventional potential held by the IOCs.

Meanwhile, the multiple resources available allow IOCs the option to re-focus on organic growth – rather than or along with mergers and acquisitions. Those with scale and technical expertise can choose from deepwater opportunities, dry or wet gas, the oil sands, shale, as well as demand-driven projects, such as Asian LNG.

Investment life-cycles are also changing. Shale development requires measured, ongoing investment – but gives quick payback. By comparison, traditional mega-projects need enormous up-front investment, with payback 10 or more years out. These are entirely different investment profiles. Companies may do one or the other – or both – depending on how they diversify their portfolios.

Operational expertise is also evolving. Unconventional development demands speed, because drilling windows to hold land leases are often short here in the U.S. So the fast deployment of fleets of rigs and completion equipment is essential.

It’s like repeatable manufacturing. Hundreds or thousands of near-identical wells are drilled over many years. The focus is on continuous efficiency improvement and cost control. These are huge drilling programs that need more people to run them. So planning and execution is very different from a deepwater development with far fewer wells.

Another challenge is the fact that some of the new drilling is in areas unaccustomed to development. Our critics have focused on the hydraulic fracturing completion process. And they’ve succeeded in creating fear and rallying support. The industry is responding through community engagement, public disclosure of data and adopting best operating and environmental practices. But we’ve not fully satisfied the skeptics. It doesn’t take long for critical stories and videos to spread in today’s 24/7 twitter world. So we must always demonstrate environmental stewardship, safety and good community relations.

Government also faces new challenges. There is greater pressure to facilitate development, while mitigating local impact. But there’s opportunity as well – for economic growth, job creation and revenue generation.

To some extent, industry and government have shared goals – ensuring that society has access to affordable energy, in a sustainable and socially responsible manner. So there are opportunities for collaboration.

For example, in the Eagle Ford Field, our industry worked with government and farmers to address water use during a drought. Rather than requiring recycling – which is impractical there – we use saline water. In the Permian Basin, the industry committed nearly a million acres to help the U.S. Fish and Wildlife Service protect habitat for the Dunes Sagebrush Lizard. This helped avoid listing of the lizard as an endangered species, which could restrict access and increase costs.

We also believe that government regulations should be smart – and based on science and not supposition. New rules should be tested on their environmental effectiveness – and their cost verses benefits. Here too, collaboration helps. Our company cooperated with the U.S. Environmental Protection Agency and Bureau of Land Management during their data gathering on fracturing. We offered suggestions on alternative technologies, and they listened.

Collaboration with communities is also vital. In Australia, ConocoPhillips is building an LNG project on an island near the Great Barrier Reef. We planned to build a desalination plant to supply it with water. Instead, we worked with the community and built a pipeline to bring fresh water from shore. This eliminated 5 million barrels a year of brine discharge and reduced our land and carbon footprint.

Hopefully, there is more collaboration in our future. And there are other suggestions for government.

First, give credit where due to oil and natural gas. We refer to gas as Nature’s Gift, and shale liquids are a second gift. But producing them and getting them to market takes ingenuity, technology and investment. So recognize our industry for what we contribute – 9.6 million jobs supported here in the U.S., and economic stimulation at a time when it’s badly needed.

Second, tax us fairly. Development lives or dies on fiscal terms. Energy companies make easy targets, although we already pay higher tax rates than other industries. Government should keep the long term in mind. Set competitive tax rates that allow ongoing investment, job creation and prosperity.

Third, we believe that government should open more areas for development, and facilitate permitting of infrastructure. The U.S., for example, needs more capacity to transport oil from the new shale fields, and Canada’s oil sands. Yet the Keystone XL pipeline remains blocked.

Fourth, we recommend that government provide a level playing field. Don’t pick preferred energy sources or solutions. After all, the Obama Administration itself says the U.S. needs an “All of the Above” energy policy. It should live up to those words. Let the market choose the best ways to supply affordable energy and meet environmental standards.

And last, governments should be good international trading partners. We live in an interconnected, mutually dependent world that needs free trade. In the case of the U.S., this means allowing future LNG exports – and perhaps at some point even exports of oil. They would improve the U.S. balance of trade, and create jobs and income – both here and in the importing countries.

Before moving to our discussion, I’ll reiterate that making the most of the new energy landscape requires three elements:

  • Responsible operations on the part of our industry,
  • The creation of a favorable investment climate by government,
  • And collaboration on the part of everyone.

Thank you.