Oil and Gas

AEI panel discusses National Petroleum Council report on availability of fossil fuels

In a recent report, the National Petroleum Council analyzed the political, economic and environmental factors that may be causing instability in the availability of fossil fuels. How big of a role will fossil fuels play in the future? Will production hit a peak or will supplies remain abundant? How will we generate energy in the future? During today's E&ETV Event Coverage, Lee Raymond, chairman of the National Petroleum Council; James Glassman, an American Enterprise Institute economist; and Kenneth Green, an AEI environmental expert, discuss the report and assess the future of fossil fuels.


Jim Glassman: Lee Raymond chairs the National Petroleum Council, which he will describe in his introductory remarks. And the NPC has put out what I think is the most clearheaded, comprehensive document on where we stand today and energy and what the future looks like through 2030. I just learned that the Hard Truths, as it's called, "Facing the Hard Truths about Energy," has already had 750,000 complete downloads on the Internet, and with good reason. Lee Raymond was born in Watertown, South Dakota. He got his Ph.D. at the University of Wisconsin. He went to work for Exxon and stayed there for 42 years. He became CEO of Exxon in 1993 and then the CEO of the merged company Exxon Mobil in 1999 and retired in 2005. I think it's safe to say, I haven't done the calculations, but I think it's safe to say that during his tenure, the increased value in Exxon's market capital is probably the greatest increase in market cap achieved under CEO of any American company, maybe possibly with the exception of the early days at Microsoft under Bill Gates. And that's probably not right, I haven't actually done the calculations, but it's an amazing achievement. Exxon Mobil is generally thought of as not only the biggest of the private companies, but the most efficiently run. And I think if you've never heard Lee Raymond talk you will understand why. He gets right to the point. So the way we're going to do this today is that Lee Raymond will speak for 15, 20 minutes, something like that and then we will take -- I will ask some questions and we'll take some questions from the floor and generally have a conversation about the state of energy today and how it looks, how energy policy looks going forward to 2030. Lee Raymond.

Lee Raymond: I hope this works, yeah. Thanks Jim. Before we get started in talking about the report I'd like two first of all make a few comments about the National Petroleum Council. I suspect it's an organization that most of you have never heard of and that probably does not bother the members that you haven't heard of us. The genesis of the National Petroleum Council is kind of interesting. It's an outgrowth of World War II. At the beginning of World War II the then Department of War, we didn't have a Department of Defense at that time, concluded that one of the most significant aspects of the Allied effort was going to be the management of petroleum supplies, both from the standpoint of making sure the Allied forces were supplied and preventing the Axis forces from having supplies. And what is probably somewhat different than it would be today, the Department of War quickly acknowledged they didn't have a clue as to how to do that. And even more remarkable, they decided the only people who did were the people in the industry. So they went to the industry and said, "We've got this problem." And the industry responded, of course, and provided some people to design the management structure of how to manage petroleum supplies. And then after that happened, well, the department said, "Well, that's OK. We agree with that. Now what we need to have you do is supply the people to make it happen." And the Department of War and the Department of Interior, who were really the two that were involved, for every job that was defined there was one person from either the Department of War or the Department of Interior and one person from the industry. The people from the industry worked for the government for a dollar a year. And the companies continued to pay for those people. Of course, when the war ended they all went home. And President Truman concluded that, well, that's fine, but I'm not sure that we still, as government, are still in the position to really understand all the aspects of the petroleum business and, therefore, what we want to do is create a federal advisory agency or organization to advise the government. And that was the genesis of the National Petroleum Council. There are, I think, that 150 members. Is that right, Marshall? Yeah? One hundred and eighty members. The Department of Energy of course now has been created and that's the contact. To become a member and of course the NPC membership suggests to the Secretary of Energy who the members might be, but it's the Secretary of Energy who makes that decision. And the only thing the National Petroleum Council does is it responds to questions from the secretary of energy. And he can ask questions, request studies, and the NPC, at least in theory, can decide whether it wants to do them or not do them. And it is self funding. It has no funding from the government. It's the individual members that, so to speak, pay the bill. Historically, it does a study every maybe two or three years. Some studies have turned out to be very lengthy and probably, frankly, belong in a file cabinet. There are other studies that have been very useful. The last one of significance, I think, was one that was done on natural gas about five years ago. And if you go back and look today at what was said five years ago, it was amazingly accurate, right on the money. This current study was started back a little over two years ago, at a request from Secretary Bodman to the NPC, and a copy of the letter in the report of course. But basically, what it asks is if you look out about 25 years, what's the outlook for energy? And this study was put together in response to that. It had participation of about a thousand people. The majority were not from the oil and gas industry. Many members of the National Petroleum Council are not in the oil and gas business per se, but they're in the superstructure that of course supports the oil and gas industry, contractors like Fluor, Bechtel, General Electric, the automobile industry. Any industry that basically impinges on the oil and gas industry is involved in the National Petroleum Council. And in this study there was a real effort for outreach and the involvement also of the academic community. I think if you stand back and that you were to talk to all of the people who were involved in the study, I think there are two I would call over-arching perspectives that this study would offer. One is that there are very few people, if any that understand the magnitude of the energy industry. It's immense in everything that it does. It's obviously pervasive in a sense that it's involved in everybody's daily life, but it is very, very difficult to get your head around the magnitude of the petroleum industry and the magnitude of the energy industry, which are really overwhelming. A perspective, as we talked a lot about it, just to give you kind of a gee whiz perspective, the United States consumes 150 billion gallons every year of gasoline. Now I think I can say, without fear of contradiction, there's nobody in this room that has a clue what 150 billions gallons looks like. And there are many people, frankly, in the petroleum industry that don't understand it either, because they've never thought about it that way. But when I don't was growing up in this little town in South Dakota, well, it was a big town in South Dakota, but it's a little town, I used to have to mow the lawn. And that's a whole nother subject, but there wasn't a lot of debate about that I had to do it. And at that time, and probably for most of you, you can remember that you used to go buy gasoline in a gallon can about that high, about a foot high. It had a little handle on the top. It had a spout in it, that whenever you turned the spout upside down the can leaked. That's the thing you remember because the cork was always dry. But the point is, if you take that one gallon can and you think about 150 billion of those cans laid end on end, the first thing you decide is you ought to be in the can business, but that's -- that line of cans would go around the world a thousand times. Now that's what 150 billion gallons is. And the point is that if you're going to have a significant impact on the energy industry and the energy outlook, or if you want to make a significant change in the composition of energy supply, it's going to have to be huge to move the needle. Now, that doesn't mean you shouldn't do a lot of things, but if you really want to significantly alter what's going on in the energy industry, it's going to have to be big. The second thing that I think comes out of this study for the people who thought about it at the end, is people don't relate to the timeline. In order to do these large things the amount of time that's required from inception to completion of big projects in the energy industry is long by any scale, which, when you put those two together, gives you a perspective in terms of the kind of game we are in in the energy industry. It's big. It's capital intensive. It takes a long time to get things done. That's another way of saying there are no quick fixes. There are no quick changes. If you want to have a substantive change, you have to adopt a policy and pursue it rigorously for a long, long time. Now, with that as a background, Jim?

Kenneth Green: I'd ask you please to turn off your Blackberries. My apologies for not being here on time, but my attempt to save energy this morning by taking Metro ran afoul of Metro. So check your Blackberries please. They're having interference out in the recording area. Please make sure they're actually off, not just silent. Thank you.

Jim Glassman: Thank you, Ken. Lee, you've been in this business for 40 years. What surprised you about this study?

Lee Raymond: Well, that's a good question. I think the thing that was a surprise, well, I'll make two comments that I think was kind of a surprise, how the study was conducted and how people participated is one I'll call a surprise. And then another surprise was in looking back coming to some conclusions about things that people never really think very much about in the petroleum industry and the public doesn't at all, and that relates to infrastructure. But I think what we deliberately tried to put together, a disparate group of people, in terms of some of their outlooks and perspectives, to try and to a lot of people involved. As a matter of fact, I'll just make a comment about we spent a lot of time at the beginning of the study organizing the study. And that may sound a strange thing to say, but unfortunately I've been involved in a lot of NPC studies over a long period of time, and what you conclude is that you need to do a lot of work on the front end to get a clear outline of what you're going to do and how you're going to get it done for obvious reasons, but some not so obvious. And that is the study is staffed by people who volunteer. And you find if you go to companies and ask them to provide people for the study, and presumably you want to get their best people, they're always reluctant to do that for clear reasons. But they're also very reluctant to do it if you can't be specific in terms of what people are going to do and how long you're going to need them to do it. They tend not to want to give you an open-ended pass to some of their best people, which I would be very sympathetic with. So by being reasonably rigorous on what you want to do and how you want to do it, it turns out you can get access to a lot of the best people and that started with the organization of the study. From the technology side we had Andy Gould, who runs Schlumberger, and on the upstream side we had David O'Reilly, who runs Chevron, and on the demand side we got Dan Yergin from CERA. And we also concluded early on that a major element of this whole study was going to be political. And international politics is really what we were focused on. And so we got John Hamre from CSIS. Well, just trying to recruit that group took a while. But of course, once you do that, then you can do a lot of other things. And I think what is surprising to me, Jim, is as we tried to outreach beyond that and go to the academic community, we went to a lot of organizations, environmental organizations, went to people who are focused totally on energy efficiency, the response, in terms of willing to participate and enter into what in hindsight I would say is very constructive dialogue, was surprising. Because one would have thought many of the people who we eventually involved, you would've thought from things you had read that their views were entrenched. It turns out that wasn't the case at all. Now, on the other side, people have asked me what's the most surprising result? And I would say the most surprising result, which is, I won't say hidden, but it's embedded in the report, is the huge demands on infrastructure that are going to have to be met. People don't worry about infrastructure very much, but the reality is, this country in particular, has a huge task ahead of it in infrastructure, no matter where we go in energy from where we are right now. The investments are going to be immense and how they are going to happen I think is very, very unclear.

Jim Glassman: Specifically that's, what? Refineries, pipelines, carbon sequestration?

Lee Raymond: You name it, you just keep going. And people who talk about, for example, cellulosic ethanol, if you really think about that on a very big scale, the amount of solid material you're going to have to move around is just enormous. Well, you're going to have to put it on a road somewhere and a truck is going to have to take it somewhere and a truck is going to have to take it away somewhere. And there are is no one who has spent any time at all thinking about how that could be done and how the money would be invested and who would invest the money. Because normally speaking, the return on infrastructure is not very attractive.

Jim Glassman: Where does your study come down on the question of peak oil?

Lee Raymond: Well, you know that was the subject of a lot of discussion, and I think we were as clear as we could be that the problem the world has, at least at this point, 50 years from now someone else will have to look at it again, is the world isn't short of resources. That's not the problem. The question of access to resources, timeliness, and being able to develop them, a lot of the political issues, the industry that's required, to the service industry to support and build all these projects in a timely fashion. I mean you probably read in the paper every week about a major project in the oil and gas industry running into difficulties, either in construction or some argument with some government on a tax issue or some issue like that. And that's particularly true when you're in a high-priced environment, where we are right now. So Jim, I think the study is pretty clear on it's not a resource question. It's an availability and timely development of resource question, which is really what drives a lot of the conclusions in this study.

Jim Glassman: You talk in the study a fair amount about conservation and efficiency. You know Peter Hubert has pointed out that efficiency doesn't actually reduce the use of a particular commodity. It actually increases it, that if it's more productive people want to use more of it.

Lee Raymond: Right.

Jim Glassman: And that certainly has been the history with the energy. So if the objective is to -- I guess some people have an objective of decreasing the use of energy, why would you put on CAFE standards for example?

Lee Raymond: I think the focus of the study is driven almost totally by the notion of efficiency. I think you're correct in a sense that when you become more efficient in using something, it tends to increase the demand for it. And I think if you look at the energy world, the fundamental driver has always been economic growth. There's an element of population growth too, but it's really economic growth that's driven the energy industry. And it's very difficult, I think, for us to conceive that the objective of the world is to no longer have economic growth. And I've made the comment many times and believe it very strongly that I'm not sure the world can handle all of its issues even with economic growth, but I'm pretty certain without economic growth it can't handle all of its issues. So consequently, if you look at all these demand outlooks that we did, over the next 25 years all of them assume that there will continue to be a reasonable level of economic growth on a worldwide basis, which, by definition, means that there would be an increase in energy demand. Because I mean if there is one correlation in this whole business that has always stood the test of time it's been the relationship between economic growth and energy demand. Now, in terms of becoming more efficient in how we use it, I think that should always be the objective. But at the same time, we have to realize that as the standard of living increases, which comes from economic growth, the demand for energy by itself is going to continue to increase. I mean all you have to do, and probably some of you have done it, if anybody went to China 15 years ago and then goes to China today, all you have to do is just use your eyes and you can see what's going on. And the energy demand is going to skyrocket just simply because people have more money, they have a higher standard of living, and they're going to continue to have access or want to have access to those things which ultimately depend on energy. And if we continue to have economic growth in the world, that's going to continue to be the case. Now, in that context however, I think everybody has the view that we should become more efficient in how we use energy. As a matter of fact, I could digress, Jim, and make the comment we should become more efficient in how we do a lot of things. Like we're not very efficient on how we use water. Frankly, we're not very efficient on how we use people. So if you put it in that context, that's why I think many of us have had the view that conservation, I think particularly for somebody of my age or older, conservation, if you're not careful, tends to have a negative connotation to it. It tends to have a view that we're going to try and conserve what we have. It reminds me of building shelter belts to retain the land in South Dakota when the wind blew. I mean that was conservation. That's a different concept than trying to use everything we have much more efficiently, such that society can continue to grow and progress. And I think that's where the study comes from.

Jim Glassman: I'm just going to ask two more questions and then we'll go to the floor. Ken will conduct the Q&A and then we'll come back and I'll have some more questions. But I just want to follow that up. What's the best way to achieve these efficiencies? I mean there kind of is an implication in this study that there are let's call them command and control elements that might be important, such as CAFE standards or standards for energy efficiency for refrigerators and all that. I mean what's the best way to get there? Isn't it through a carbon tax for example? So if you raise the cost of energy, people will then use it more efficiently as they do anything else. And right now the cost may be too low for them to really even bother with worrying about what their refrigerators doing.

Lee Raymond: Well, again, I think you have to be a little careful on the command and control. On the other hand, I think you could at least argue, at least in the short term, that we have carried on a laboratory demonstration over the last three years, in the short term, how demand responds to an increase in price. And it doesn't seem to have responded very much to an increase in price. Now, the problem with that of course, as you know better than I, is that it's a kind of comparison what the demand is given the price versus what it would have been. And we'll never know what it would have been. So it's just speculation in a sense. But on the other hand, it's pretty hard in the data to see that there has been a significant change in energy demand. I had a friend actually here at AEI who used to tell me all the time that what we needed to do was put a dollar a gallon gas tax on. And I saw him not too long ago and I said, well, we did your experiment. And he said, "Well, it didn't work out too well, did it?" And I said, no. And that's the point. Now, that doesn't mean over the long haul that that won't have an impact, I mean I wouldn't suggest that. But the immediate reaction doesn't seem to be anything that people really anticipated to the degree that it really hasn't had a significant impact on demand. On the other hand, let's talk about refrigerators and buildings as opposed to CAFE, which is a little different subject. I think, for a whole host of reasons, to have standards with regard to the construction of buildings is a little different issue. And I wouldn't really even put that quite in the command and control as much as I would in the concept of just I call it sound practices. Because you can set up standards for building buildings in California for earthquake too and you could argue, well, why should we do that? I mean so what if a bunch of buildings fall down in an earthquake? Well, that's great if you're not standing under the building, but if you're standing under the building you have a little different view on that, at least for a minute. Now CAFE to me is a little different in the sense that -- the first comment I'll make about CAFE is it's difficult for me to believe, and I am no expert, I wouldn't suggest to be, that whatever we did in the mid-1970s to try and improve vehicle efficiency, that that same system is what we ought to use in 2007. You know, in 30 years it would seem to me somebody has probably -- should have been able to figure out that there may be a better and more effective way to do that. But I'm not in that business, so I just make that observation. It's very difficult, if you think about it on a broad basis, that anything we devised 30 years ago is the way we would approach that same problem today. I mean I would hope we wouldn't, so that would be my observation. On the other hand, as I say, when you get into vehicle, and there's a whole section in the report on vehicle efficiency and there's a whole bunch of papers that you can also have access to, many of them written by the automobile industry interestingly enough. The technology to have an advanced internal combustion engine that is significantly more efficient than we have today is already there. So it's not something that has to go be found. The question of how that gets put into the marketplace and what incents it to go into the marketplace is really the question. And I don't think it's command and control as much, Jim, as it is trying to find the platform that will get that technology into the marketplace. You know there are a couple of dirty little secrets on this whole vehicle thing that are kind of interesting, if you look at it over a 30 year period. The one thing that is absolutely clear in the data is every time a car becomes more efficient people drive farther. So when you get all done you've run in place. Now, in addition, they probably want them to be air-conditioned and they want them to be a little bit heavier because they think they're safer and they probably are. So when people say why haven't we made any progress in the last 30 years? It's because the consumer has decided how that efficiency is going to be used. And when you come down to it, we're still a market-driven society and I think anybody who reads this report who doesn't assume that the fundamental philosophy behind it is a market-driven philosophy is wrong. This is a market-driven philosophy behind the report.

Jim Glassman: I've often thought that the best way to get people to use less gasoline would be to have CAFE standards that require cars to only get 5 miles to the gallon, so people wouldn't use their cars as much. Last question, from me, for now, where does this study come down on energy independence?

Lee Raymond: Well, I can open up the page and read to it, but I think the use of the word independence with energy is a non sequitur. Energy independence, if by that we mean we're not going to import energy into this country, and I don't mean to say that all of you are going to die soon, but it's not going to happen in your lifetime. And it's sure not going to happen in my lifetime and I hope to live a long time. That's a lot different concept from energy security. The notion that you have to have independence in something, there are a lot of countries in the world that never have had energy independence so to speak and never can have. As a matter of fact, nearly all of the developed countries in the world are not energy independent. There are very few that are right now, Norway I guess is one, Holland is probably one, and then we'd probably kind of run out of -- maybe Canada I guess if you add it all up. But the vast, vast majority of the developed countries of the world have been energy importers for a long time. As a matter of fact, this country is a major importer not only of energy, but of many, many commodity raw materials. It's a fact that the American people don't even realize that's the case. We import nearly all the chromium, palladium, and all kinds of metals. We're a huge importer of copper. We can't produce all the copper we use in this country. So the whole notion that there's something sacred about being independent, the problem with it is Jim, that it's an attractive concept to Americans and it is fighting with the realization of globalization. And it's an issue that's not only here in the energy industry, it's a much broader issue in the country of how we continue to view ourselves in the world, recognizing that the world is globalized, and how we're going to have those two things match. And the energy industry is front and center because it touches everybody so clearly, but there are just as many other things that aren't energy where that same challenge is out there.

Kenneth Green: ... take some questions from the floor, two requests, the first being that we have AEI staff in the corners here with microphones. After I select you, please wait until they get to you with the microphone and then speak into the microphone so that this can all be recorded outside. And the second request is remember the Jeopardy rule, please try to ask your question in the form of a question. So with that, we'll take a few questions and then I guess Jim will take it back.

Lee Raymond: No questions.

Kenneth Green: We have one over here.

Question: Have we peaked in the production of light, sweet crude and will we see an increase in the use of heavier and synthetic crude in the future?

Lee Raymond: I'm not sure I know the answer to the first part, but the answer to the second part is clearly yes. I mean obviously, the world would like to find more light, sweet crude, but if you've ever spent any time talking with explorationists, and if you tell them, you know, I want you to go out and just find light, sweet crude they don't know how to do that. That's a chance exercise that you get into. And I can tell you every explorationist would like to find it, but odds are they're going to find gas or heavier crude. Synthetics, if by that you mean things like from the tar sands and the heavy oil and the Orinoco, the answer to that will be, yes, that it will continue. But I guess I would also make another observation that I think kind gets into the peak oil in a broad way. And that is one of the reasons that the study has the view that the resource base is still significant and still out there to be developed is because of technology. The idea of what I would call conventional resources, say 30 or 40 years ago what we thought was a conventional resource, today, or what we thought was unconventional at that time, we would probably consider conventional today because of the ability we have that we didn't have then. I mean I tell the story, it's actually true, I worked in the mid-60s in Creole, Creole in Venezuela. And Creole was the leading deepwater technology company in the world. We produced in Lake Maracaibo two million barrels a day, almost as much as the whole country produces now, maybe more if you knew the truth. But we were working in 50 feet of water and we were the leading deepwater technology company in the world and today we produce in 5000 feet of water and consider that to be conventional. Now, what it will be 20 or 30 years from now I don't know, but I can tell you that technology will continue to move, develop, and give us access on an economic basis to resources that today we can't even conceive of. And that's how the industry works, and it's technology driven and it will continue to work.

Kenneth Green: A third request, please identify yourself before asking your Jeopardy question. You had your hand up.

Question: Hi, I'm Jim Lucier, formally with Prudential, now with a new research company called Camp Alpha Partners. I was intrigued by your example of the 150 billion gallons of gasoline, because I did some back-of-the-envelope calculations the other day about the scale of CO2 emitted by U.S. electric utilities. This is not transport, not commercial, but U.S. utilities alone emit 30 trillion cubic feet of CO2 per year, which is bigger than our current natural gas economy of 23 percent plus, 23 DCF plus. I was wondering if you had any comments on the scale of infrastructure investment that would be needed for sequestration or, frankly, any of these other areas. Where is the pinch coming fastest? Where is it coming worst? Where do we need to be most focused for a problem in the next 10 years?

Lee Raymond: Well, let me back up. A lot of people talk about -- in fact, I need to go back farther than that. When we talk about the electricity generation in this country, again, most people have, A, no idea of where it comes from it, and, B, when you tell them over half of it comes from coal they're shocked. Now, where they thought it came from is hard to discern. You almost get the feeling they think it comes out of the wall, that somehow -- in California the comment has always made when you build a house the electricity comes with it in the walls. But what is viewed of course as kind of the Holy Grail on coal-fired power plants is carbon sequestration. And people are correct in the sense that the oil industry, for a long time, has been carrying on a form of a carbon sequestration project because we've been injecting CO2 as a secondary recovery technique in oil reservoirs for a long time. But to go from that, quickly, to massive carbon sequestration for a power plant is a whole different animal. The technology, I think most of the people who worked on it would conclude that the technology is probably there to do it, but it has never been demonstrated at scale. Secondly, if you think about that very long it will require a regulatory framework that does not exist today. And how that could be put together in this country given that you're going to get into state jurisdictions and all the other issues that we get into in this country, in a short period of time, is very, very unlikely. Now, even if you do that, if you think about it very long, A, one gigawatt coal-fired power plant, to get rid of all the CO2, I think is it 50,000 barrels a day, 150,000 barrels a day of supercritical CO2 will have to be injected into the ground. To get to your point, if you tried to inject all the supercritical CO2 that came from all the coal-fired power plants you end up moving more and liquids than the oil and gas industry moves today, just for CO2. So it is a huge, huge undertaking. And, again, people -- this gets into a lot of the infrastructure issues, people just assume that that can happen. You can't assume that's going to happen. And the cost is going to be very, very significant. You know, an interesting question that you can always ask is that everybody in this room knows what it costs for a gallon of gasoline. How many people in this room know what the cost per kilowatt hour is of the electricity that you buy in your home? Well, there's what, 4, 5, 6 hands go up. Well, you don't count Marshall, because you went home and looked after I asked you the question. But the point is, if you spend as much money on electricity as you do on gasoline, and the day will come when the electricity price starts to go up, which it will vary substantially, that people are going to say what in the world has happened to the price of electricity? Because none of these things are going to come free and, of course, why it's difficult in electricity, I come back to infrastructure again, is these are all regulated, controlled public utilities in most cases. Some of the generators are now independent, but they're largely regulated by state regulatory commissions and they do not really provide great economic incentive for the infrastructure to be built. So you have to ask yourself, who is going to show up and do all this?

Kenneth Green: All the way back in the back there.

Question: Cesar Buenos with ____ Service newswire, I wonder if you'd like to comment on this recent oil discovery in Brazil in the Tupi fields and how significant that is and whether the production from there will change the equation for the United States and Venezuela, whether that will sort of allow the United States to gain more independence if you want to say it that way from Venezuela? Thank you.

Lee Raymond: Well, I think you have to back up almost to the fundamentals of how the international oil business works. I've made the comment many times that it's misleading when people look at how much oil is imported from a specific country into the United States. You have to realize the decision to import whatever comes in, for example from Venezuela or from Saudi Arabia or from Nigeria, that government has really nothing to do with that. It's really a compilation of decisions made by private oil companies in terms of where they're buying their crude oil and how they're buying it to meet their refining needs, the kind of refineries they have and the demands that they have. And the facts are that if Venezuela tomorrow said we're not going to export any oil to the United States, but they obviously would continue to produce the oil, the international oil system will just rebalance itself. The United States will have just as much oil to refine as it did before. The cost may be slightly higher because presumably before Venezuela said they weren't going to export to the United States that was the most cost-effective thing to supply the United States. If they can't do that, it will rebalance and the cost net will go up slightly, but the international oil business will rebalance. So you have to recognize it's a commodity and the commodity system rebalances itself. And with the exception of embargoes, which can prevent you from doing something, beyond embargoes, the system itself will rebalance and take care of itself. Now, if somebody says we're not going to export to the United States and, by the way, we're not going to export at all such that the total supply is decreased, that's a different problem. But, of course, then they don't have any revenue either, so they're probably not going to do that in most cases.

Kenneth Green: We're going to get back to you in a second. Let me bring up a subject that we haven't talked about yet, which is called renewable or alternative energy sources. Let me just go through some of them and tell me your response to how important they're going to be going forward for the next 25 years. Wind and solar?

Lee Raymond: Well, I think I'll take them separately. Obviously there is some attraction to them, but, again, I think it's important, Jim, to put those in context in scale. If you're going to have a substantial amount of, by substantial I would say several percent of the total electricity demand in this country for example fulfilled by wind, you're probably going to have to take at least one major state and just have it covered up totally with windmills. I mean just the scale, again, doesn't get it. And, of course, the other problem you have is the wind does not blow all the time. And why that becomes important, and this becomes important in terms of also solar, again, dirty little secrets, and that is, if you are a utility and you have to maintain a certain reserve for peak loads, the factors that are used in that analysis for wind and solar are different than they are for stationary power plants. What that ultimately means is that if you have wind and solar in your mix you have to have additional reserve capacity beyond what you would normally have because these are intermittent sources of power. The problem with that is after you have built that additional reserve it is more economic than the alternative to begin with. So when you do all of that, and that's when I say watch your rate, because it's going to go up. It all gets rolled into the cost. And, again, there's no free lunch so to speak. And that's not to say I think in wind, but even more so in particular in very remote locations, there is some attractiveness to solar, because if you're out in the boondocks so to speak or on a mountaintop or wherever it is, there is some attractiveness to solar. But recognize the sun is only out half the day, so you have to figure out what you're going to do the other half of the day.

Kenneth Green: You were in that business weren't you?

Lee Raymond: I'm glad you reminded me of that. No, I'm serious. And Jim you raise a good point. Back in the last time that the country went through the kind of thing it's going to now, which was after 1973, Exxon at that time, well, it actually started when we were still Standard Oil New Jersey and then Exxon, we did a lot of work in the alternative business. We had a nuclear company. We invested -- spent, invested is the wrong word, we spent, I'm now talking in the 1970s dollars, we spent $500 million in looking at -- if there was an alternative form of energy we looked at it. Tidal, battery, I don't care what it was, we looked at it. And it turned out, ultimately, that none of these things could economically compete with oil and gas. And, interestingly enough, until the last three or four years from when the Shah was rolled out of Iran in 1979 and 1980, the real price of oil and gas continuously declined for over 20 years. Why that's important is because it made it more and more difficult for alternative energies to compete on an economic basis. The hurdle became higher and higher for them and that ultimately was why, back in the early 80s, Exxon got out of all those things, because they could not compete economically with oil and gas.

Kenneth Green: The report, I think anyway, gives kind of short shrift to nuclear, mainly for political reasons. Do you agree with that?

Lee Raymond: No, I think it wasn't for political reasons. I think the report was very clear on nuclear, just do it.

Kenneth Green: But what I meant was you were somewhat skeptical that it could actually get done for political reasons. That's what I meant.

Lee Raymond: That is correct. That aspect is correct, but in terms of the fundamentals of nuclear power in this country, the report is clear and it's just do it.

Kenneth Green: Just finally, hydro?

Lee Raymond: Well, hydro is very attractive. The only problem is that there aren't very many places that you can build a dam that haven't already been built. I mean largely hydro is, and it's not only true in this country, it's basically true around most places of the world, maybe not some places in Africa and maybe the interior of Latin America, but basically hydro is very attractive. The problem with it is its finite in the number of opportunities that it has.

Kenneth Green: The numbers in the study are that globally wind and solar represent about 1 percent of energy use, nuclear about 6 percent, hydro about 2 percent.

Lee Raymond: That's right. That's right.

Kenneth Green: And you don't see major changes over the next 25 years?

Lee Raymond: No, I really don't and the reason, I'll come back to the comment I made way at the beginning, if you're going to have a material impact on the energy balance it has to be very, very large in scale to have that kind of impact. Now, that doesn't mean you're not going to see more solar cells and you're going to see more windmills. I mean I'm not saying that's not going to happen, but my point is even if you do or when you do, you probably have not had a significant impact on the overall energy supply balance.

Kenneth Green: We'll go back to the floor. The gentleman over here, wait for the mic and then identify yourself and ask your question please.

Ron Levine: A question in the form of a hypothetical.

Kenneth Green: Could you identify yourself?

Question: Ron Levine for the Levine Group. Looking at your statement about oil always flowing despite what one particular country might want to effect in terms of its exports for political reasons, for domestic political reasons, isn't it possible the public demand politically expressed for energy independence or energy security might lead the U.S. government to attempt to lock up a guaranteed supply with a foreign supplier by agreements to pay more per barrel than the market would otherwise require?

Jim Glassman: It seems to be with the Chinese are doing now.

Lee Raymond: Well, first of all, I guess I would be remiss if I didn't suggest to you that you use energy security and energy independence interchangeably and they're not the same concept.

Question: (Inaudible).

Lee Raymond: No. Well, that's another problem. The public is going to have to understand that they are not the same. But to go at question the way Jim made the comment about the Chinese. So long as there is adequate supply, by that I mean so long as supply slightly or greatly exceeds demand, then people who have paid this premium so to speak, whether it's the Chinese in paying far too much on an economic basis for a resource or someone who's gone out and think they have tied up a long-term contract, and I'll come back to that in a second too, have wasted some money. Now, I guess another comment I would make to you, in the world we live in today, why would you think that a long-term contract for oil supply would be viable?

Question: (Inaudible).

Lee Raymond: Well, but the United States government doesn't even honor its contracts internally to the oil industry today.

Question: (Inaudible).

Lee Raymond: Well, I think most of them do.

Question: I just want to be clear. You're saying that you think that the Chinese are kind of wasting their money by doing what they're doing.

Lee Raymond: Yeah, the only time that has value, truly, is in time of shortage. If it's not a time of shortage, I mean having the control, so to speak of, it provides them nothing in terms of their own internal economy.

Kenneth Green: And here in the middle, he handled it the last time, the yellow tie, yes.

Question: Kevin Book, FPR Capital Markets. In the past, the scarcity has been replaced by oversupply and prices come down and folks have always come back to hydrocarbons and especially petroleum. In a carbon-constrained era does this impact the way the market takes us back to oil as it has the last three cycles through?

Lee Raymond: Well, I mean who knows the answer to that? But I guess the comment I would make, it's a rather interesting chart I saw the other day, I'd never -- you always of course have to be careful about charts and how they're plotted kind of thing. But it was an interesting plot and the thesis behind it was the cyclicality of the oil industry. And if I can try and describe it to you, on the Y axis, well, on the X axis was time, but on the Y axis was -- and it was semi-log chart. So it was log scale on the Y axis. It was the multiple of the low price in the cycle. So, for example, if you said the low price in the current cycle was -- the year average base probably in 1998 it was maybe $12, $14, whatever it was, and it's currently $80 kind of number, that would have -- that kind of scale would be something like six or six and a half. So that's kind of what the chart looks like. And it took the six cycles of the oil industry, starting back in 1861, and you plot on this chart and every one of them comes out the same. You know, there are little different wiggles and that kind of thing, but it was a big up kind of an over and then a gradual slide for 15, 20 years.

Question: (Inaudible).

Lee Raymond: Well, all that does is it's going to raise the cost bases. It doesn't mean that that's still not going to be the most economic source. You may have just raised the platform so to speak.

Kenneth Green: Back here, the gentleman who's been waiting patiently back by Abby and then we'll come back to the front. Mike Rome: Good morning. Mike Rome at Exxon Mobil. Lee, could you comment briefly on the issue of the human resource issues that were addressed in the study? Specifically, the potential for shortages of professional technical engineering personnel and the impact that those might have on our ability to produce energy.

Lee Raymond: Well, again, I'd come at that I think a couple of ways. First of all, if you just look internally in the oil and gas industry and don't look at the service industry we're going to go through here in the next 10 years a significant change, in the sense that a lot of the expertise in the industry is going to retire. And that, of course, is I'll call it kind of a logical consequence of the cyclicality of the industry. Because when the industry went through the catharsis that it did in the mid-80s, of course there were huge reductions in the workforce just to accommodate the collapse in price. And now we're going to come up to 25 or 30 years later and, of course, the pipeline at that point is pretty sparse because companies didn't hire for a long, long time. That is part, I think, if you put that in context, that's true also, even -- I can't use the word truer, but my mother used to say that, it's truer of the service industry. That it had even a bigger problem as we went through the cycles. But that has to also fit into the context of, and I don't know if anybody here even ever heard of it, but there's a report put out by the National Academies called "The Gathering Storm" when I was involved in that study, which was a much broader look at science and technology people, hard science and engineering people in the country, and the lack of graduating engineers and scientists, not only in an absolute term, but in a relative term to countries like China and India, which is a huge, huge problem that the country is going to face going forward. And this is just another part of that same issue. In order to make the kind of investments that need to be made and build all the things that need to be built, we need to have a tremendous number of hard science and engineering people. And it's not clear where that's coming from at all. I'll make one other parenthetical comment that I heard just a couple of days ago that is really almost stunning. And that is today, in China and India, the compensation for hard scientists and engineers in China is now at the level it is in this country because the marketplace is working. And it got there in about three years, which is amazing.

Jim Glassman: Let me interject a question, I think Exxon Mobil has probably spent more money on studying climate change than any other company. Have you changed your mind about climate change over the last five years?

Lee Raymond: Well, I don't work for them any more, so I don't know what they're saying. But my own personal view is I guess the way I would describe it Jim, and Jim's just baiting me here, the only thing I would say is the only consensus I know of is that there's not a consensus.

Jim Glassman: Spoken like a chemical engineer.

Lee Raymond: Right, you got it.

Jim Glassman: Go ahead.

Kenneth Green: We'll go back to the floor. Any additional questions? Right over here, sorry, identify please.

Question: Hi, I'm Bob Hershey. I'm a consultant. You had mentioned about the shortage of engineers and scientists and of educating the public to the quantitative things involved in this. And I was wondering how we can do that so the public understands and can help with the problem.

Lee Raymond: Well, that's a skill set far beyond where I am I can tell you that. But, unfortunately, a lot of the I'll call it lack of clear communication on the problems that we talked about here today that are talked about in this report start in this town. Why, when you think about the importance of energy security and of energy to the vibrancy of this country and its economy, why someone would not be what I call straight up in telling the American people what the issues really are is something that's difficult for me to understand. I just don't see what the value of that is to the country. Having said that, I don't have a quick answer to that.

Jim Glassman: Lee, let's talk about natural gas. A few years ago Alan Greenspan was saying that we really faced a major crisis in natural gas and yet it doesn't seem to have had occurred quite yet. And I know the council did a study on natural gas a few years ago. I'm just wondering if you could sort of summarize the situation domestically for natural gas and talk about what the situation is going forward and whether there's been a change since your last study, as far as your view is concerned?

Lee Raymond: No, I think if you look at that, Jim, in what I call a somewhat broader context, by that I mean not get caught up in the year to year or season to season issues that apply to the natural gas business. The fundamentals on supply, and by that I'm the indigenous supply, and I'm now talking about North America, so I am including Canada in that, I think are pretty much right on track where the study said they would be. And that is, with the exception of the Alaskan gas, it is a rapidly declining resource. We continue to find more gas, but the decline rates for when it's found are exceedingly high, just as that study forecasted that they would be. This country is what I would call incipient on becoming a major gas importer and we're going to go through a several year period here where we're going to cycle between what appears to be we have almost enough indigenous resource to a period of time where if it were a very cold winter we would have to be importing large, large amounts. And that's basically how you would expect it to transition to becoming a major importer.

Jim Glassman: Again, we don't have the infrastructure to be an importer.

Lee Raymond: Well, we have some and some regasification facilities have been built or are being built. But I think the comment was made several years ago when a lot of people showed up with the notion of building a regasification terminal in this country that ultimately the people who are going to have the regasification terminal are the people who control the supply and they continue to develop that. But the comment I would make in the broad context of this study is for those who say the answer to this, to the electrical generation problem is to build more gas-fired power plants, you realize all you're doing is driving yourself into becoming a major importer of natural gas. And if you come back to the arguments that surround energy security and that dreaded word independence, we're going off on the wrong -- we're going to end up being a major importer of natural gas too. Now, should not surprise anyone? No.

Jim Glassman: Actually, that raises a whole set of issues that we haven't really discussed yet, supply, domestic supply. And I know that the study talks a great deal about potential supply or even proved reserves that are not being exploited. Could you summarize that for us and tell us how critical these supplies are?

Lee Raymond: Well, I think the domestic supply, there are two dimensions to it. One of course is to try and use the latest technology to improve the recovery from those reserves that have already been discovered and developed. And secondly, there continues to be the access issue, both inland and offshore. At this point, of course we're the only country in the world that prevents exploration in many offshore areas. And I think it's kind of interesting, a lot of the same people who talked about wanting energy independence are the same people who also say you can't drill to find oil in this country. And it would seem to me, as I would say, perhaps they ought to look in the mirror and try and put that all together. I mean the facts are if it's important to have energy security the old phrase is energy security starts at home is.

Kenneth Green: I'd like to interject a quick question. Your point about the payment rate for scientists in China was interesting. I'm a scientist by training and if they're paying the same thing, should we be ...

Lee Raymond: So, you're going to China, is that it?

Kenneth Green: What I'm wondering is shouldn't we have the same multiple that they have for other jobs here, which -- but there's a serious question there, which is why is it that the market or the profit potential of energy, as the price is so high, why will that not bring forth people moving into these fields of exploration and also infrastructure development?

Lee Raymond: Oh, it will, but that takes a lot of time. You know, you're not going to wake up tomorrow and have that happen. As a matter of fact, and Marshall can comment, it was involved in the conversations when we were writing this report. Many people on this specific subject of people had used, as a basis or I'll call it a numerical example, is what has happened over the last 30 years to the enrollment in colleges and universities in geology and petroleum engineering. And I kind of objected to that. As a chemical engineer I thought that was a little narrow-minded. But it turns out, of course, that the vast majority of people that the petroleum industry hires are chemical and mechanical engineers. And so I think it's a little narrow to just look at, call it petroleum engineering or geology. You have to look at it somewhat more broadly and look at engineering in hard sciences. But even when you do that, the country faces a serious issue, not only oil and gas at this rate, it's an issue for everyone, but it comes home right now in the oil and gas industry because of the tremendous demands that the industry has for project management and project skills and all the other things so that we're trying to do.

Jim Glassman: Isn't the other problem, as far as the market is concerned, let's not talk about people so much as this capital investment, that not everyone believes that $90 a barrel oil is going to be maintained for the next 20 or 30 years. You have to make decisions about huge -- or people in the oil business have to make decisions about huge infrastructure projects where nothing is going to be produced for 20 years.

Lee Raymond: Right.

Jim Glassman: So actually, what do people in the oil and gas industry think? What's the base number that they're using in making decisions about these projects? It's not $90 or $100 a barrel, what would it be?

Lee Raymond: Well, again, I haven't been around that for a couple of years. I'm not going to get into the numbers game in that sense Jim, but I would be amazed if they used numbers that are much above $40. And they might not even be that high. For someone who I can recall in -- we're coming on right on to the time now, in 1985 when the price of oil dropped from $25 to $10 in three days, in the middle of December, which is kind of right on it, you don't forget that too quickly.

Jim Glassman: I want to pursue this. And so why would the price of a barrel of oil drop from $90 or $100 to $40 over the next few years? Is it because of more supply coming online or is it because of political risk being mitigated or because of sort of a speculative bubble letting out some here?

Lee Raymond: Yes.

Kenneth Green: We can go back to the audience if we have additional questions. Otherwise I still have one myself. Over here to the one in the green and please identify yourself first.

Question: My name is Dave Henry from the Department of Commerce. And I was just going to ask you, in your general supply/demand forecast through 2030 in this report, are there any major differences from what EIA at the Energy Department predicts for that same time period?

Lee Raymond: Well, not particularly. As a matter of fact, I think what, I would use the word distinguishes, and that's probably the right word, but this study did not do its own supply/demand balance. From the very beginning, we realized there were like 25 of those already out there and number 26 wasn't going to add a lot of value. What we did is we looked at all 25 of them which were the IEA, EIA, and everything else in the world you could think of, to see what distinguished one from the other and what really were the driving forces behind each one of these. It turns out relative to the IEA and the EIA, I think the consensus of all of these studies and the work we did, I think we were somewhat lower on demand, but not all that much. And supply was pretty much in line, but I think there was some -- we were a little more, I think, in our thinking a little more conservative on some of the elements of supply.

Jim Glassman: You know, Lee, correct me if I'm wrong, but I think that studies that were done say 10 years ago or 20 years ago there were projecting supply under estimated what supply was going to be in part because technology allowed you to extract more from wells that were thought to be pretty much played out.

Lee Raymond: Yeah.

Jim Glassman: Could that happen again?

Lee Raymond: Sure and not only -- if you really get back into those studies, Jim, you'll find out that what also happened was that the cost base that was assumed in all of these supplies turned out to be lower because of technology and we were more efficient. And this is, again, if there are Exxon Mobil people in the room they'll understand what I'm saying, but that is Exxon and Exxon Mobil does a 25 year outlook kind of thing. And it's a rolling 25 years, by that I mean you do it every year, but you go forward five years only once every five years. So it's a 23 year outlook, 22, then 26, 25, kind of thing. And I can recall back in 2002, 2003, that kind of thing, we were about to click over five years. And as they were talking about that I made the comment, I said I want somebody to go back and look, what did we say in 1980 about the year 2000? Now, everybody assumed that I was just trying to give them a hard time, but that wasn't the point at all. I mean I was really trying to understand what had we missed and what didn't we understand as we look back 20 years? It turned out that in 1980 we forecast total energy demand in the year 2000 by within one percent. Now we weren't that good. We missed the allocation between nuclear and hydro and all that a little bit. I had alluded to it earlier, the thing we did not, or the thing we really missed, was technology. And how that played into the forecast was the cost bases that would be in the forecast going forward. It turned out that the real cost of oil and gas was considerably lower than we thought in 1980 looking at the year 2000. And what that does, of course, is it puts in a whole different dynamic of alternatives and timing of a lot of these things.

Jim Glassman: I was struck in this study with how important marginal wells are, tens of thousands of marginal wells producing an average of 2.2 barrels a day in the United States.

Lee Raymond: Right, exactly.

Jim Glassman: And so the potential for this kind of production going forward is pretty big, right?

Lee Raymond: Well, that's right, but the other side of that, Jim, is when you have a price collapse like we did in 1986. These things get shut down because when you can only get $10 a barrel, and these wells that produce two or three barrels of oil a day are probably producing 200 or 300 barrels of water a day. I mean the oil doesn't come out by itself. And so what happens of course is that the cost of dealing with all the water and the separation all that kind of thing, when you get down to $10 a barrel, these things were cash negative and people just shut them down. And that was a serious problem at that point.

Kenneth Green: Thank you guys. There's a question and then we're going to ask Lee to summarize.

Question: Well, my question is about -- you mentioned to Canada earlier. I lived there for it a few years. A recent report says that their dollar went up partly on the strength of their exports of minerals, including oil from their oil sands. We have fairly extensive deposits of oil shales. How has the technology moved for that in terms of making the unconventional more conventional as a potential source of domestic oil?

Lee Raymond: Well, interestingly enough, it comes back to the early 1980s. For those who are historians, Exxon had a huge oil shale project in Colorado that we eventually shut down because when the price collapsed -- well, you have to go back. I mean everybody in 1981 was saying oil is going to go to $100 a barrel. I mean everybody! That was a true consensus. Everybody said it was going to go to $100, which of course in today's terms would be like 280 or something like that. And, of course, as soon as everybody thought that, the price went down to $10 and here we are. But the point is that I don't think, in a sense, that there's been a lot of work done on changing people's views of the technology of dealing with oil shale. Other than perhaps some catalyst work that could be done, dealing with oil shale is -- the way I would describe it is relatively brute force and requires a large heat content in one form or another to be able to generate -- to get the carriage in so you can get it so you can use it kind of thing. So I would suspect that if we thought it was economic -- you know, I was just thinking 20 years ago what the economics would be. I'm not sure the economics even today would play out. And I think one of the problems would be that a lot of the energy source is natural gas. And if you're not careful, you catch yourself coming back on the other side on that issue. I mean you kind of just go in a circle. There may be projects, but I don't think, in the grand scheme of things, that they'll move the needle very much.

Question: Just a quick follow up and then I guess you can wrap up, which is how much of those resources are actually already politically set aside in terms of policy? I mean if the technology evolved an adaptation of Canada's technology, that they'd really drastically reduced their tar sand costs, would it be available anyway?

Lee Raymond: That's a good question and I think in places like Canada they probably would be and some places in Colorado. But I think broadly through the West, if people thought that we were going to get into a major -- the industry was going to get into a major oil shale expansion, I'm not sure in the current environment that you'd be able to do a lot of those projects.

Jim Glassman: We've covered a lot of territory today, there's no doubt about that. Would you like to sum up in any way?

Lee Raymond: Well, just very quickly, the study, I think, is unique in many ways. The degree of participation I think for some of you who have seen what this book looks like, there are other papers that address specific issues that probably, if you stacked them up, would be four or five times the depth of this, 1600 pages of backup studies that have been done, section by section. I think, in my own view, it's as comprehensive a study that's been done. And, interestingly enough, it has had as much interest outside of this country as inside this country, because I guess I would say the hard truths about energy are not unique to this country. This is a worldwide issue. It's a worldwide problem. What each country has to figure out is, given the hard truths, what should they do given their resources and given where they are in the world so to speak? So the interest in the study has transcended far beyond what any of us thought when we originally did this study. And I would only hope that a lot of people in this town would read what it has to say. So thank you very much for coming today.

Jim Glassman: Thank you.

[End of Audio]



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