SAN FRANCISCO, September 21, 2006 - Thank you for inviting me to appear before your renowned forum this evening. The Commonwealth Club of California is widely respected for its role in pioneering public discourse about the challenges facing your community, our nation, and the world. I am honored to speak about one of those challenges this evening.
As president and CEO of API, the major national trade association for the U.S. oil and natural gas industry, I represent 400 member companies active in all phases of the industry. Also with me is my counterpart, Joe Sparano, of the Western States Petroleum Association (WSPA), with whom we work closely.
These past few years have been a time of almost unprecedented energy impacts – catastrophic hurricanes; volatile energy prices; job losses in natural gas-dependent industries like chemicals, paper, plastics and fertilizers; large increases in oil demand from China, India and the U.S.; and worsening turmoil in the oil-producing Middle East. Congress produced energy policy legislation last year. It was a good start, but it included little addressing oil and natural gas, particularly access.
Historically and for decades, energy policy hasn’t led events, it’s followed. It typically doesn’t initiate, it reacts. Energy realities have changed dramatically since the oil embargo days of the mid-1970s and their accompanying long gasoline lines. Unfortunately, much of our nation’s energy policy is still focused on that long ago, very different era.
What is it about us as a nation that allows us to seek safe refuge in a less relevant past, while turning our back on global energy realities that are unlike anything we have encountered before? It is time that we as a nation square our energy corners and grapple with the real energy challenges facing us.
To most outside observers, the oil and natural gas business looks breathtakingly simple – a street-corner service station with an omni-present, highly visible price sign to attract customers. However, the facts speak otherwise. Ours is the world’s largest, most complex industry - one that is global in scope and supplies roughly two-thirds of the world’s energy. Most energy experts forecast that oil and natural gas’s contribution in meeting future, global energy demand will remain in that range for decades to come.
Forty years ago, world oil reserves were largely the domain of the public, investor-owned oil and natural gas companies, based principally in the United States, and referred to as international oil companies. Oil reserves in the ground are viewed by some as the equivalent of inventory in other industries, providing an important measure of a company’s ability to service its present and future customers. Most people assume that international oil companies and their industry are little changed from decades ago, still sitting astride the bulk of these world oil reserves. However, that’s no longer the case.
Today, world oil reserves are almost 80 percent owned by the national oil companies of foreign governments - many formed during the past 30 years. Only 6 percent of world-wide oil reserves are now held by investor-owned, international oil companies.
To compete, these investor-owned oil companies elected to scale up within this new world -- principally through mergers and acquisitions -- by creating ever larger efficiencies, greater technological and project management prowess, and substantially broader competitive access to capital markets to meet the advantaged competition arising in such places as Saudi Arabia, Russia, Venezuela, China, and India. The rationale and added value for this scaling up was largely missed by most observers -- both in and outside of government. Some observers, still unaware of this necessary evolution, view the industry in exaggerated, adversarial and negative terms for taking a logical path forward. Energy policy proposals are too often focused on marginalizing and constraining investor-owned oil and natural gas companies. Instead of working with these companies, too many in government argue for needlessly burdensome regulations and punitive taxes.
Approaches that penalize investor-owned oil and gas companies are counter-productive for the American consumer and for our nation’s national and energy security. Given global energy demand pressures, these are the very companies that must go out and compete globally for the oil and natural gas our nation’s economy must have to help meet its energy needs. If these companies are rendered non-competitive through punitive public policy measures, whom else can we rely upon to meet our nation’s energy needs?
The federal government has already tried in the 1970s and ‘80s and failed. So, left standing are the national oil companies owned by foreign governments. How does putting them in the driver’s seat here at home enhance our nation’s energy or national security? How is the U.S. consumer better assured that his or her energy-related needs are going to be met at competitive prices under this scenario?
U.S. oil and natural gas companies are large, because they must compete in a huge, highly competitive global marketplace. They must rely increasingly on efficiencies and state-of-the-art technology to find, produce, and transport oil and natural gas. This is the value proposition they must possess, in order to be sought after as valued partners in the production of oil and natural gas by the national oil companies and others. It is, after all, how these companies obtain the oil they need to refine in order to bring home to you essential products like gasoline and diesel fuel, as well as the thousands of petroleum-derived products like chemicals, pharmaceuticals, plastics, fertilizers, motor oil, and adhesives to name a few.
Keep in mind that crude oil and natural gas are oftentimes sourced from some of the most remote and inhospitable areas of the globe. One such area is the ultra-deepwater Gulf of Mexico, where highly advanced deepwater technology made possible the recent Jack discovery in 7,000 feet of water and another 20,000 feet below the earth’s surface by home-state operator Chevron, along with Devon and StatOil. Jack, 175 miles offshore, is potentially the largest discovery in the U.S. in a generation and could rival Alaska’s Prudhoe Bay as the largest oil field in the U.S. This discovery underscores the fact that substantial domestic oil and natural gas resources remain within our nation’s borders. However, many onshore and most offshore areas with the most potential for major new oil and gas discoveries in the U.S. are off-limits. In the case of offshore, more than 80 percent of our coastal waters out to 200 miles are off-limits – even though our industry has the technology to safely produce these vast resources. If we are to increase our energy security here at home, change will be needed. In part as a result of government restrictions on domestic exploration and production, we must now import 60 percent of the crude oil we need to refine in order to meet U.S. consumer demand.
A dominant concern over the past several years has been the volatility of energy prices. It has been caused by a number of factors, principal among them the very small amount of spare crude oil production in the world – about 1.5 million barrels per day in a world market with demand exceeding 85 million barrels per day. Other significant factors can include geopolitical risk, seasonality, operational outages in refineries and pipelines.
The price of oil is determined by world markets, and its price is very transparent. At present, the prices of crude oil and gasoline are falling like a rock due to improved outlooks in several of the factors I just mentioned. Gasoline has declined 53 cents per gallon nationally since August. And the cost of crude oil – the most important component in the price of gasoline – has declined 36 cents a gallon.
In fact, the declining prices prove, once again, that markets work. The gasoline market has softened, with increased supply and reduced demand. There is more supply because of record refinery production of gasoline so far this year, accompanied by record gasoline imports. Demand is down because we are now out of the summer driving season, and winter gasoline is less expensive to refine. Approximately 55 percent of the cost of gasoline is attributable directly to the cost of crude oil. Another 18 percent, on average, is government taxes. Neither the world nor the U.S. is running out of crude oil. According to the U.S. government, the world possesses 1.3 trillion barrels of known oil reserves. Current known U.S. oil reserves, alone, are sufficient to run 60 million cars and heat 25 million homes for 60 years.
It’s important to note that, since 1874, when concerns about limits to oil production were first raised publicly, industry’s technological advancements have insured that additions to reserves have always exceeded consumption. Voluminous new sources of oil, like Canada’s oil sands and, potentially, U.S. shale; as well as the commercialization of gas-to-liquid processes and new technology will ensure sufficient supplies of future oil for decades to come.
Most experts agree that sustaining even modest economic growth worldwide for the next several decades will require massive new investments in oil and natural gas. World energy markets are inherently global, and no single country can exempt itself from the interdependencies of that market. While there is no ironclad assurance that cooperation in expanding oil and gas supplies globally over the next several decades will succeed, it is certain that the cost of failing to do so would be enormous.
And, speaking of capital investments brings me to another important subject – U.S. oil and natural gas industry earnings and reinvestment. This is a topic on which there is considerable misunderstanding and misinformation. Since our members are among the world’s largest public companies, it would follow that their revenues would be large, but so too are their operating costs and reinvestment demands in providing consumers with the energy they need, now and in the future.
The industry’s earnings are very much in line with those of other major U.S. industries – and often they are lower. In the second quarter of 2006, earnings for the public oil and natural gas companies were 9.9 cents per dollar of sales compared to an average of 8.1 cents per dollar of sales for all U.S. manufacturing industries And, for the six-year period 2000 through 2005, the oil and gas industry earned 5.9 cents per dollar of sales compared to an average of 5.2 cents for all U.S. manufacturing industries.
It is also important to understand that those benefiting from oil and natural gas industry earnings include numerous private and government pension plans, including 401K plans, as well as many thousands of individual American investors. Presently, pension plans own 41 percent of all oil and natural gas company stock.
What do oil and natural gas companies do with these earnings? Just what you would want them to do – reinvest them massively. Between 1992 and 2005, according to the accounting firm of Ernst & Young, our industry reinvested more than $1 trillion in long-term energy projects. This historic reinvestment level exceeded the total net income of all U.S. oil and gas companies over the same period. To succeed in reliably delivering affordable supplies of fuel to customers in the future, our industry must invest huge sums, in both good and bad economic times, oftentimes working 10 or more years before a project is operational.
Are we looking out for your energy future? You bet. Today’s oil and natural gas industry earnings are invested in new technology, new production, and environmental and product quality improvements to meet tomorrow’s energy needs. The Oil & Gas Journal estimates that the industry’s total U.S. reinvestment in 2006 will reach $124 billion, which is 21 percent greater than two years ago.
Furthermore, the industry’s future investments are not focused solely on traditional oil and natural gas projects. From 2000 to 2005, the oil and natural gas industry invested $98 billion in emerging energy technologies, including renewables, in North America alone. This investment represents 73 percent of the total $135 billion spent on emerging energy technologies by all U.S. companies, as well as the federal government.
But investment, alone, cannot ensure a secure energy future. Government must adopt workable energy policies and engage constructively with industry. Unfortunately, a major obstacle our industry has repeatedly faced is government’s contradictory approach to energy policy. Natural gas is, perhaps, the most dramatic example of this misalignment between government actions and policy. For decades, the federal government has promoted the increased use of clean-burning natural gas, while -- at the same time -- government policies have made it increasingly difficult to access and develop U.S. natural gas resources or to facilitate the siting of liquefied natural gas (LNG) receiving terminals to bring in natural gas from abroad. But the government can’t have it both ways. They tried to, and the result was skyrocketing natural gas prices in times of increased demand. As a country, we need energy in all forms, and natural gas is one of the best. Government needs to ensure increased production on federal lands dedicated to multiple use, and to facilitate the siting of liquefied natural gas (LNG) receiving terminals.
Another example of misalignment in energy policy is the urgent effort to replace oil with renewable fuels as our nation’s dominant energy source. API’s member companies feel there is a bright future for a full range of alternatives, and we support ethanol and other biofuels. We also support the uniform national plan enacted by Congress last year that will integrate more ethanol into the nation’s gasoline pool. E-10, a blend of 10 percent ethanol and 90 percent gasoline, is the best way to meet this new mandate, since E-10 can be used in the entire U.S. automotive fleet without vehicle modifications or risk of damage to your car from higher ethanol concentrations, like E-85.
It is important we not be a party to any premature “over-promise and under-perform” commitment on ethanol. One need only look at the U.S. auto manufacturers and the painful consumer experience from the introduction of over-promoted automotive diesels in the 1970s and ‘80s to see that wishful thinking, absent merit, can end up hurting everyone.
Consumers seek value. With ethanol now selling at approximately the price of gasoline, blending 85 percent of it with 15 percent gasoline results in a fuel with no significant cost advantage over gasoline. And, currently, consumers using E-85 will pay an additional 25 to 30 percent fuel economy penalty, because E-85 contains only about 70 percent of the energy content of regular gasoline on a Btu-per-gallon basis. Consumers need to be aware of this, and it’s important they not experience disappointment in their early exposure to biofuels like E-85.
Ethanol and other bio-fuels, particularly cellulosic ethanol, will play an important role in the future of transportation fuels, but the resource is too limited to fully replace oil. Our industry does, however, have an increasingly crucial stake in the long-term success of a reliable supply of renewable fuels.
In summary, what should be our nation’s priorities in addressing its energy challenges in the 21st century? I believe we can best maximize our energy security in coming years by undertaking five essential steps:
- First, we must increase energy efficiency. Our industry is a leader in energy efficiency, and we can provide valuable information and perspective to others. More than 75 percent of our facilities that generate electricity use cogeneration – the recycling of steam and heat to produce greater amounts of energy. API member refiners are also on track to improving energy efficiency in their refineries by 10 percent between 2002 and 2012 to help address climate concerns./p>
- Second, we need to increase and diversify domestic oil and natural gas sources. To do this, government must remove obstacles to exploration and increase access to government lands. Our record of no significant production spills or leaks in the face of two Category 5 hurricanes, Katrina and Rita, testify to our expertise and environmental commitment. We do not seek development everywhere, for we acknowledge that places like national parks and other special lands need to be protected./p>
- The third step is to increase and diversify global oil and natural gas sources. We must have access to resources from around the world – the more countries from which we can source oil and natural gas, the greater our own nation’s energy security. Disruptions in one area can be more easily offset by imports from another./p>
- The fourth step is to increase the use of emerging energy technologies. Oil and natural gas companies are looking to the future and are leaders in researching and developing new, innovative energy technologies in virtually all fields. The Jack discovery in the deepwater Gulf illustrates the potential of unleashing the industry’s use of cutting-edge technology – technology best grown, leveraged and advanced in these frontier areas of exploration and production./p>
- Fifth, and finally, we must increase our transparency and interactions with the public to better gain their confidence and attract more of the best and brightest to the energy profession. Ours is a technology-laden industry, and we need inquisitive, bright minds to become the next generation of industry professionals to ensure that the U.S. and the investor-owned oil companies provide a robust and sustainable energy future for you./p>
In concluding, I want to thank you for your patience and forbearance. I know I’ve painted a picture that is likely different from what you’ve seen and heard in past discussions about energy. However, it is based on the energy realities that our nation must deal with in today and tomorrow’s world. Faced as we are, as a nation, with major energy challenges, we cannot bury our heads in the sand and hope problems will pass us over, or that miracles will occur.
We are at a crossroads of sorts. We can continue to rely on an energy policy construct based on the 1970s, or we can do what Americans have historically done when faced with large challenges. We can speak up and urge our federal, state and local policymakers to better align their public policy prescriptions for oil and natural gas with the real world of today and tomorrow. Our legislators, regulators, and other elected officials need facts and sound advice at times such as those we face. To do otherwise is to invite much greater risk in an uncertain future world. It will later be fitting of our sons, daughters and grandchildren to ask of us: “Did you do all you could in your time to ensure our energy security and enable us to continue to grow successfully this wonderful American experiment in democracy?”
I believe most will want to say “yes.” To do so, however, means that more will need to be understood about energy – a matter our industry intends to do something about. And, our nation’s public policies involving energy will need to better reflect the new world realities.
Thank you.