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The U.S. Energy Revolution

Remarks by Greg Leveille, ConocoPhillips Technology Program Manager
San Diego City & Rotary Clubs
San Diego – Nov. 7, 2013
Speech as prepared for delivery.

San Diego has changed a lot. Gotten bigger – and become a high-tech center – which is exciting for a techie like me. I was at my alma mater this morning encouraging geosciences students to focus on science, technology, engineering and math. And I still have other ties to California. My son lives in L.A. and my wife is from San Francisco. So California remains very important to me, and to ConocoPhillips.

We operated three refineries in state before spinning off our downstream businesses last year. So we have history here, as does the entire industry. This is still the third-largest oil producing state. You're essentially tied with Alaska behind Texas and North Dakota. Seventeen of the 100 largest U.S. oilfields are here. Generations of industry people have worked here. This is the second-largest U.S. gasoline market, and home of the automotive culture. Besides, you are a bellwether state. You're vital in national elections, and an incubator of trends that shape the entire country. We know that we must look to California to see the future.

In doing so, we also see a strong desire for clean and affordable energy. As well as the need for job creation and economic development. This due to 8.9% unemployment – 2 points above the U.S. average – and 5th highest in the nation. That's a change. The California of old was a leader in job creation and innovation.

All these factors come together in my topic today – "The U.S. Energy Revolution."

To give you an idea of its scale, let's turn back the clock to the year 2000. Not that long ago – but what a difference in outlook. Back then, we assumed that the U.S. was running out of natural gas. So we were building huge import terminals to bring in LNG to meet rising demand. Meanwhile, after peaking in 1970, U.S. oil production had fallen by half – and was still heading down. We were importing more and more oil – ultimately reaching 60% dependence. It was an era of energy resource scarcity.

Now, let's jump back to the present. A lot has changed. Natural gas production has climbed. It's up from less than 50 billion cubic feet per day in 2005 to nearly 70 billion today. A huge increase. The U.S. is now believed to have over a century of supply, thanks to new resources. And rather than importing more gas, we'll soon become a big exporter. In fact, we've regained our ranking as the world's leading gas producer.

Now, what about oil and other liquids production? After bottoming out at less than 7 million barrels a day in 2008, it's also rising fast. We now produce 10 million a day – and rising. Imports are down to 35% of supply. And together, the U.S. and Canada are expected to become net liquids exporters by 2020. Our energy security is vastly improved. And last month the Union-Tribune reported that the U.S. has replaced Russia as the world's #1 producer of oil and natural gas together.

This flood of new production has stabilized or even cut energy prices for consumers. It's also reduced the threat of price volatility. This has all been made possible by our new ability to produce from shale rock. Shale is the most common sedimentary rock – meaning it was formed in ocean or marine environments. It can hold vast amounts of natural gas and oil.

We had known this for decades. But we didn't have the technology to produce from shale until the past dozen years or so. But after we developed that ability – right here in the U.S.A. – development really took off. Our performance since has been the envy of the world. And our expertise and technology are now being applied in other countries. We don't know the results in these other places yet. But overall, we now live in a new era of energy resource abundance.

That's a total change in the landscape – an energy revolution. One that has immense benefits, at a time when our national economy needs them most. For example, the energy revolution has become a tremendous engine of job creation and economic stimulation. It's helping bring the U.S. economy back from the global recession.

Further, energy development and environmental stewardship are not mutually exclusive. We can have both, particularly with natural gas. It's nature's simplest fuel – CH4 – one carbon atom, and four hydrogen atoms. And it's a cleaner-burning fuel, as I'll explain shortly.

Natural gas is of course vital to California. It provides nearly 28% of your total energy, behind only oil. It generates about half of your electricity. It supplies heat and cooking fuel to 7 out of every 10 of your homes. It serves as a feedstock in producing the fertilizer that helps make California a leading food producer. It provides energy for manufacturing – which supports 1.2 million jobs in California. It heats the steam used to recover the state's heavy oil resources. It powers fleet vehicles like buses, service and delivery trucks, and the 18-wheelers that work the Long Beach docks.

Together, natural gas and oil power every aspect of modern life. In so doing, they support 183,000 direct jobs here in California – or nearly 900,000 jobs in total. That's better than 4% of the state workforce. These jobs generate nearly $62 billion annually in labor income. And nearly $132 billion in total economic stimulation. This is despite the fact that California has very little natural gas within its borders. As a result, 90% of your supply must come from other areas. Like the Southwestern states, the Rockies and Canada. In fact, California is a key market for ConocoPhillips. We produce gas in New Mexico, Wyoming and Western Canada, and ship much of it here.

Nationwide, oil and gas support 9.8 million jobs, and generate $1.8 trillion a year in economic output. That's 8% of U.S. gross domestic product. Big numbers. This job creation extends far beyond the traditional producing states. Shale gas now comes from at least 15 states, including in the Midwest and Northeast.

For example, in Pennsylvania alone the Marcellus trend now supports more than 200,000 jobs. The entire trend covers seven states. It has so much potential that there's talk of reversing some cross-country pipelines to bring more gas to the West Coast.

So the natural gas supply situation has improved dramatically in 10 years. Which means California's supply looks far more assured than it did back in Y2K.

There are other benefits. The use of natural gas can help us meet both short- and long-term environmental and climate goals. For example, it produces very little of the nitrogen, sulfur compounds and particulates that cause acid rain and smog. It requires 1/20th the land footprint of equivalent wind energy. Electric power plants fueled by natural gas use 60% less water than coal plants of equal capacity. And they do it without producing soot or fly ash. Using gas to replace less clean-burning fuels is the fastest and lowest-cost way to cut carbon dioxide emissions – and benefit the climate. In power generation applications, gas produces only half the carbon dioxide of coal.

We've seen this capability translate into results. You may not know that annual U.S. emissions of carbon dioxide – one of the key greenhouse gases – have fallen to early 1990s levels. This came primarily from electric utilities switching from coal to cleaner-burning natural gas. A warm winter and lower transportation emissions also helped.

Beyond these benefits, natural gas can actually facilitate the use of renewable energy. Gas-fired generation plants are very flexible, making them ideal sources of backup power for wind and solar power. They can ramp up quickly when the wind doesn't blow, or the sun doesn't shine. And if electric vehicles really catch on, we could recharge their batteries with gas-fired electric power – more cleanly and efficiently. There's also growing use of natural gas in fleet vehicles, like delivery trucks and long-haul trucks. As well as rising interest in powering trains and off-road equipment with natural gas.

The energy revolution also extends to liquids. So states with liquids-rich shale trends are booming. Like Texas with the Eagle Ford and Permian trends, North Dakota with the Bakken Trend, and a few others. In fact, North Dakota now has the nation's lowest jobless rate.

Incidentally, California has its own undeveloped potential. Some is in the state's conventional oilfields – which can date back a century or more. And more exists in the Monterey and Santos shales in central and southern California. They may hold more oil than any other U.S. shale trend – and also contain natural gas.

ConocoPhillips isn't active in them, so I really can't speak to their future prospects. That's yet to be decided in terms of the technology, and the political and public acceptability of development. You'll help determine that.

But USC has studied the benefits of developing California's shale. They concluded that by 2020 it could create 2.8 million jobs, increase state economic output 14%, raise aggregate personal income 10%, and generate nearly $25 billion in new state and local tax revenue.

Wow. That's some potential. It would really help because California is the nation's 2nd-largest oil consuming state. Only 37% of your crude oil comes from within your borders. 12% comes from Alaska. And just over half comes from foreign sources. Development of the shale could rebalance your supply and bring a lot of jobs home.

Every job created by energy development helps the entire economy. It adds to the customer base for every product our country produces. It generates governmental revenue. And the new abundance of natural gas – and its low cost – represents a major U.S. competitive advantage. Very few countries can match our energy resource base.

For example, the energy revolution has revived the U.S. chemical industry. It uses gas as both a feedstock in making chemicals and as an energy source. Some of the manufacturing sectors are reviving as well. Every few days we see a press announcement of new plant construction or an expansion made possible by low-cost natural gas. Some are by U.S. companies returning from overseas. And others are by foreign companies coming here because of our lower energy costs. Our natural gas supply is a real weapon in the competition for global business.

I mentioned that shale production is a relatively new capability. It was made possible during the 1990s when we started combining two proven technologies in an innovative way. One was hydraulic fracturing. This is pumping water down under high pressure to create microfissures in the rock. These fissures are tiny – they extend a few dozen to a few hundred feet. We prop them open by injecting sand along with water. The fissures provide pathways through which oil and gas can flow.

Fracturing isn't new. It was developed in the 1940s – then used safely on more than a million U.S. wells since then. More on its safety in a moment. But in the case of shale, fracturing wasn't enough to yield oil and gas in economic volumes. We also had to use horizontal wells. Horizontal drilling was commercialized during the 1980s. To do it, we start with a vertical well, and drill down thousands of feet. Then at bottom we curve it out to the side – sometimes for a mile or more. We carefully steer these wells to keep them in the target formation – which may be only a few dozen feet thick. Then we perforate holes in the well casing pipe, and then fracture the rock. By using horizontal wells, we also reduce the surface footprint of development. That's because one well replaces the need for many.

So the energy revolution gives us a powerful machine for job creation, economic stimulation and emissions reduction – if we put it to work. But in capturing the full potential, we face challenges.

First, our industry recognizes that we must always continue innovating – minimizing our environmental impact – and enhancing safety and efficiency.

Second, we must overcome some mistaken public perceptions. For example, the "silver bullet" myth. This is the belief – or hope – that there's a great new energy source somewhere out there, just around the corner. One that will be clean, cheap, and easy to deploy. Well, I have news. No single energy source can be a silver bullet. But natural gas comes close. It's here today, abundant, affordable and cleaner-burning than coal. The production, delivery and end-use infrastructure already exists.

Meanwhile oil is also here today – and far more abundant than once believed. It's ideal for powering the transportation that gives our society its mobility. And rather than merely promising jobs in the future, oil and gas are creating them now. This is not to say that oil and gas are the only sources needed. As President Obama says, we need an "all the above" approach to energy. One that uses fossil fuels, biofuels, wind and solar power, even some sources not invented yet. This will be particularly true once the national economy and employment fully recover.

And third, it's unfortunate to see a serious threat emerge to energy development through the perception that hydraulic fracturing pollutes groundwater. The record is in our favor – those million-plus wells safely fractured since the 1940s. The EPA has studied the environmental record of fracturing in the past. Each time it concluded that no additional federal regulation was required. Former EPA administrator Lisa Jackson has said multiple times that there are no confirmed instances of groundwater contamination caused by fracturing. A new EPA study is now under way. We expect the results next year.

I'm not saying public concern is unwarranted. There have been some problems, but they are rare. And they were caused not by fracturing, but faulty drilling or well completion work, or improper handling of fluids on the surface. Any risks associated with hydraulic fracturing are manageable through proper well design and safe drilling practices. It occurs thousands of feet below drinking-water aquifers, separated by multiple layers of solid rock. The wells themselves are carefully cased with steel pipe and cemented in place. This seals them off from groundwater.

But to address the public's concerns, our industry must always follow good practices. There's a role for government oversight in this. In fact the practice of hydraulic fracturing is already regulated by a combination of state and federal policies. We believe this regulation is best performed at the state level. State personnel are the people most familiar with local geology, and the techniques that work best. A one-size-fits-all federal approach to regulation is not a viable option to ensure the highest level of safety and environmental protection.

We're encouraged by the fact that California has just enacted legislation establishing regulatory standards for hydraulic fracturing. So like you, I'll be watching future development here with high interest.

Meanwhile, our industry must de-mystify fracturing, and explain what we do to the public. For example, ConocoPhillips supports disclosure of the non-proprietary substances contained in fracturing fluids. We do so on the www.fracfocus website. Incidentally, over 99% of these fluids by content are water and sand. The rest are primarily trace additives – each of which serves a purpose. Some of the same additives are in everyday products. Such as food preservatives, cosmetics, soil conditioners, detergents, table salt, anti-freeze, chewing gum, and others

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I'll close with a few observations on federal policy. Washington talks a lot about encouraging energy development. But the walk doesn't always match the talk.

For example, the energy industry faces threats of tax increases that target us alone. This despite the fact that the oil and natural gas industry pays one of the highest income tax rates among U.S. businesses.

We periodically face the imposition of new regulations that would cause unintended impacts. For example, take the requirement for ethanol in gasoline. It has increased the real cost of gasoline, driven up food costs, and some say contributed to food shortages in developing countries.

There's a legitimate role for smart regulations that protect the environment or ensure safety. But regulations should be effective and reasonable. They should be enacted thoughtfully – including assessment and consideration of their economic and consumer impact. And new regulations should not duplicate the thousands of federal and state requirements already on the books. Nor should they create conflicting requirements.

We also face stiff political resistance to opening new areas to exploration. This despite public support for domestic energy development.

And finally, many states have enacted renewable electricity standards. These require utilities to use certain levels of renewable sources. In California's case, to generate 33% of its electricity in the future. But renewable sources are typically more expensive than natural gas. So they can drive up consumer costs. We believe that governments should not pick technology winners. Instead it should let the market determine the best way to meet society's economic and environmental goals.

These are some of the challenges ahead as we strive to deliver the full potential of the energy revolution. We have work to do. We're going to have to tell our story. That's never been easy for our industry. Most of our people would far rather focus on developing energy than debating public policy.

But we're working on it. We've had a public dialogue under way for several years now. At first we focused on natural gas. Then, as the shale revolution spread to oil, we began talking about it as well.

Energy policy is always an important topic in American politics. We're hoping that future debate will recognize the role of oil and natural gas in job creation, economic stimulation, energy security and environmental stewardship.

As a major producer, ConocoPhillips has a lot of expertise and information to share. We're playing our part by engaging in open, honest and balanced conversation with government and the public. We're listening to the ideas of others while working to convey our own ideas and beliefs. We believe that as America strives to build a brighter future, domestic energy development can help light the way.

We also believe there's power in cooperation. Let's work together to help put more Americans back to work through the energy revolution.

Thank you.