Russ: This is The BusinessMakers Show brought to you by Comcast Business, built for business. And for this week’s featured guest we’re sharing last week’s EnergyMakers Show guest Dr. Helen Currie, Senior Economist with Conoco Phillips. Let’s start here; give us an overview of Conoco Phillips 2015.
Helen: So Conoco Phillips is the world’s largest E & P company; we’re a pure play exploration and production company. We have production of approximately 1.5 million barrels a day of oil equivalent. We have reserves of 8.9 billion barrels around the world. We’re based here in Houston, TX.
Russ: Okay, interesting. It must be kind of an interesting time and period to be a Senior Economist with a major oil and gas company.
Helen: There are always interesting times in this industry I have found and today is certainly an interesting time. If we were having this conversation perhaps a decade ago we would be talking about probably peak oil and we would be talking about the need to import LNG into the U.S. And over the last 10 years there have been dramatic changes in the industry; the shale revolution has happened with natural gas followed by oil. We’re already on the path to exporting LNG from the United States and we’re now having this debate around crude oil exports because we have such an abundance.
Russ: The abundance, I’ve started many interviews with saying why aren’t we having a national celebration because it was such a change. But there are problems today at the price point and I think that’s all related to the topic of today which is exporting crud. Share your perspective on exporting crude.
Helen: So I think we perhaps start with looking at what was a multi-decade decline in U.S. crude oil production and U.S. production bottomed out in 2008 at approximately 5 million barrels per day of production. That grew tremendously due to the shale and tidal revolution. Last year U.S. average production was 8.8 million barrels per day so it grew 74% over just a short time period. And today U.S. output is over 9 million barrels a day. So yes, we have a great abundance of oil in this country and then that leads us into why companies such as Conoco Phillips are today advocating for a lifting of the export ban.
We would categorize our reasons to lift the export ban in 3 main groups; one would be the – what we call the mismatch between the quality of crude oil that we’re now producing and U.S. refiner’s ability to process it. The second main category would be the overall benefits to the economy of lifting the ban, and then lastly and perhaps most important to your viewers is the impact on consumer fuel prices and research shows that lifting the ban would lead to lower fuel prices; so we can talk through each of those in turn if you’d like
Russ: Sure, absolutely. In fact, particularly that first one is – that’s just sort of like a mechanical problem, isn’t it? We ended up with not enough refining capability for the type of oil that we’re producing now.
Helen: It is. And so there’s probably a two-prong way to think about that; one is if you look at prices and what prices are doing – so West Texas Intermediate is our benchmark U.S. light oil price, Brent is the global benchmark light oil price – for many years WTI was priced above Brent Crude Oil; since 2010 WTI has been pricing at a discount to Brent. So that immediately tells you the fact that U.S. prices are now discounted to global prices immediately tells you there’s a constraint somewhere in the system that is causing U.S. crude oil to be discounted relative to the global price.
Let’s then look at the configuration of U.S. refiners. For many years the industry saw the crude slate – the global crude slate – as getting heavier so companies invested many billions of dollars in being able to process heavy sour crudes. Most of the anticipated growth in heavy crude oil was expected to come from Canada – which it is, it is now – and as an integrated company Conoco Phillips in its past was one of those companies that invested in the refining equipment to be able to process heavy sour crude.
Helen: So you had over a decade of industry momentum building towards being able to process heavy sour crude very efficiently in the United States. And the United States refining system today is the most complex and very efficient at processing that type of crude. So then we look at what is the type of oil that’s coming from the new shale plays; it’s a very light quality and it doesn’t fit well in those complex, sophisticated refineries, and that is why we see it discounted so heavily. We as a company even have one example of a refiner telling us they simply could not run what we were offering to sell. So we do have examples of the fact that there are constraints in the system and the overall market would work more efficiently if crude oil could be exported and sold to the refinery best suited to be able to process it.
Russ: Okay and the basics behind that is that we’re – we’re actually producing more light crude than refiners in the United States can process, so it’s kind of backing up, it’s slowing everything down and therefore it’s at a discount. But if we had more capacity everything would be fine and it would probably be the same price, right?
Helen: Theoretically it should be, yes.
Russ: And since both types of crude produce the same kind of gasoline ours is just at a disadvantage today which would be solved by being able to export it.
Russ: So I do see a lot of positive momentum going on right now to be able to export it; am I reading that right?
Helen: I think there is. We as a company are certainly happy with the results that we’ve seen in terms of public attention and interest from Congress people around this topic. So we are optimistic on this.
Russ: Okay so back to your kind of your 3 points too; so this actually – I think people in Conoco Phillips position – point out how it even can affect the end user and lower the price of gasoline, right?
Helen: Yes, yes. And interestingly there are numerous studies that have come out from independent research institutes and various think tanks that substantiate that claim. So when you think about refined products, which would be gasoline and diesel, refined products are currently traded in the global markets. So the U.S. imports and exports gasoline and diesel everyday; those prices are set in the global marketplace. Those global refined product prices follow the Brent Crude Oil price – again, the global crude oil price – much more closely than they track the domestic U.S. price as measured by WTI.
So if we were able to export U.S. crude oil, that would put downward pressure on the global crude oil prices which would then put downward pressure on global refined product prices. And that is how we come to the result that U.S. consumers should expect to see lower prices at the pump by lifting the export ban. Yes it’s a somewhat counterintuitive result, but in very simple terms it’s a matter of putting more supply on the global market which then translates into downward pressure on prices.
Russ: Right, is there pushback right now from any kind of commercial people saying oh, that’s just not possible?
Helen: Yes, yes there are those – there are parties that don’t agree with that point of view. Our position is backed up by, as I mentioned, a multitude of independent research that reaches that conclusion as well as the logical mechanics of how markets work.
Russ: Okay. You know that it just all seems sort of crazy when you look back at it historically and when the ban kind of started and there was all the chaos and the things that OPEC did and the long lines at gasoline stations and stuff but I think all of us understood well it’s like that now because we’ve decided this stuff is really precious so we need not let any of it get out of our hands, and now it’s just spilling out all over the place with the success of the industry. It just seems so obvious that the ban should be lifted.
Helen: Well thank you, that is certainly our point of view and you’re correct that the ban started in a very different era in time in the early 1970s when yes, there was an oil shortage that was brought about by geopolitical tensions – by tensions with the Middle East – and the ban was put in place at that point in time and our view is that that was then and here we are today. We are in a new paradigm of an abundance of domestic energy resources that with appropriate government policies can be brought to market and benefit U.S. consumers.
Russ: Okay Helen, so what are the geopolitical implications of us being able to export crude?
Helen: So most points of view are that there would be positive geopolitical results from U.S. exports. That is grounded in the fact that the U.S. is a stable political environment and that our exports would not be threatened by political events within the country. So U.S. producers would export when there’s a market need, when there’s a market demand, outside the U.S. for those barrels. And that steady flow that steady, uninterrupted supply brings can bring about a reduction in price volatility worldwide. And price volatility is generally viewed as a negative thing for consumers and policy makers. So to the extent that U.S. exports reduce price volatility in global oil markets, that is generally viewed as a positive outcome.
Russ: Okay, good. Okay so early on you said there were 3 categories we were going to touch on that the difference in refining capacity, the repercussion to the end user and in the middle I think was the overall U.S. economy.
Helen: Was jobs.
Russ: Jobs, okay.
Helen: So yes again, there are numerous studies that support the point of view that a lifting of the export ban would benefit the U.S. economy broadly. So the way that works is by lifting the export ban allows for there to be more U.S. production to occur. One estimate for example is that U.S. production could be as much as 3 million barrels per day higher as soon as 2020 – so that’s not very far out – 3 million barrels per day higher if the ban is lifted versus with the ban in place, so that’s a significant volume. But more importantly on the jobs front is our sector, the oil and gas production sector, creates a lot of jobs and those are not just jobs in our sector but across the economy. So let me give you a couple of statistics if I may for that.
Russ: Sure, absolutely.
Helen: One is the oil and gas industry has been a true engine of growth for the U.S. economy coming through the Great Recession. If you look at government jobs data from early 2007 through 2015 the oil and gas sector – jobs in the oil and gas sector grew by 65% and that’s very different from jobs in the private sector as a whole grew by only 3%. So it’s a stark contrast in terms of activity in our sector.
But beyond that a recent study by IHS – an energy consultancy – documented that for each one job in oil production that creates 3 additional jobs in the supply chain and then another 6 jobs are created beyond that in the broader economy. So you get a tremendous multiplier effect in the economy in terms of jobs outside of oil and gas production that come from the supply chain as well as were general economic activity. And this benefits everyone; these are benefits that occur not just in the oil producing states, they occur all across the country. So again, lifting the export ban can lead to very positive impact for the economy as a whole.
Russ: Very impressive, so almost everything about lifting it sounds good. What’s the status of it getting lifted and how do we push that forward?
Helen: So there are hearings, there are discussions that are occurring in Washington D.C. now, beyond that it’s up in the air. It’s a matter of waiting for either Congress to take action or the White House. Another way to answer that is in the interim, current status quo is that the Bureau of Industry and Security under the Commerce Department – they have approved some applications to export processed condensate so that allows some amount of relief, but very limited.
Russ: Yeah, it’s a step in the right direction, but a small step.
Helen: Right, right.
Russ: Obviously I – it’s got to happen and we’ll certainly do our part on The EnergyMakers Show to focus on the topic. One more thing before I let you go I – when you were talking about jobs I couldn’t help but think about the incredible success of the industry over the last 10 years, but I have this concern that a significant part of the population does not understand or is not knowledgeable of how huge the role is that oil and gas companies play in the overall economy and how successful fossil fuels is at powering the economy and how dense it is and skeletal it is and efficient it is at the end of the day when I’m around economists I always like to ask them do I have that concern right?
Helen: Yes, the concern is well-founded. I think it’s important that more people understand the degree to which we are reliant on fossil fuels. And let me be clear, many energy companies are active in developing alternative types of fuels and alternative types of energy including renewable energy sources. But given our current state of technology oil and natural gas will continue to deliver probably 75 – 80% of the world’s energy needs for the foreseeable future and that’s not just my number, that is a widely cited number. And it’s based on where we are today and what we know we can deliver in the future. We would welcome changes that bring in more renewables into the mix, the caveat is simply being able to pay for those new types of energy sources and making them economic.
Russ: Well Helen, I really appreciate you sharing your perspective with us today on The EnergyMakers Show.
Helen: Thank you Russ.
Russ: You bet. All right, and that wraps up our interview with Dr. Helen Currie. We’ll be back with Laura Max’s interview with Rabbi Scott after this. This is The BusinessMakers Show brought to you by Comcast Business, built for business.
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