API

BLOGGER CONFERENCE CALL

MODERATOR:
JANE VAN RYAN,
NEW MEDIA ADVISOR,
AMERICAN PETROLEUM INSTITUTE

SPEAKERS:
RED CAVANEY,
PRESIDENT AND CEO,
AMERICAN PETROLEUM INSTITUTE

JOHN FELMY,
CHIEF ECONOMIST,
AMERICAN PETROLEUM INSTITUTE

JIM HOSKINS,
GROUP PRESIDENT,
GOVERNMENT AND FINANCIAL SERVICES,
HARRIS INTERACTIVE

TUESDAY, JULY 15, 2008

Transcript by
Federal News Service
Washington, D.C.
 00:00:15 JANE VAN RYAN: Good morning, everybody. This is Jane Van
Ryan at API. I‟m sorry we‟re joining you a couple of minutes late. We had an
interesting issue we had to deal with here with the conference call. I hope none of you
had any difficulty joining us.

00:00:30 MR.: No problems here.

00:00:34 MS. VAN RYAN: Okay, good. It sounds like we‟ve got a full house
today. Let me first of all start by basically calling the roll. If you all could identify
yourselves and your blog, I‟d appreciate it.

00:00:45 THE BEAR: This is the Bear at The Absurd Report.

00:00:48 MS. VAN RYAN: Good, thank you, Bear. Who else do we have
today?

00:00:52 DAVE SCHULER: Dave Schuler.

00:00:54 ROPERT RAPIER: Robert Rapier here with Oil Drum and R-Squared.

00:00:56 MS. VAN RYAN: Got it. Great, thank you both, Dave and Robert.
And who else do we have?

00:01:00 GAIL TVERBERG: This is Gail Tverberg from the Oil Drum.

00:01:02 MS. VAN RYAN: Great. Thank you, Gail.

00:01:04 JEFFERSON POOLE: This is Jefferson Poole with Bluegrass Redstate.

00:01:10 MS. VAN RYAN: Wonderful, Jefferson. I‟m glad you were able to
pull yourself away from work long enough to join us. Anyone else?

00:01:14 GEOFFREY STYLES: Geoff Styles, Energy Outlook.

00:01:15 MS. VAN RYAN: Good, Geoff. Thank you so much. And who else
do we have?

00:01:19 CARTER WOOD: Hi, Jane. It‟s Carter from ShopFloor.org.

00:01:22 MS. VAN RYAN: Great. Thanks, Carter.

00:01:24 DOUG LAMBERT: This is Doug Lambert from GraniteGrok.com.

 00:01:28 MS. VAN RYAN: Great. And I‟m glad you could join us again. Who
else do we have at the moment?

00:01:34 MR. SCHULER: Dave Schuler, Outside the Beltway and the Glittering
Eye.

00:01:38 MS. VAN RYAN: Yep, got you, Dave. And I‟m sorry we missed
someone else there who started to speak.

00:01:43 NATE HAGENS: Nate Hagens, the OilDrum.com.

00:01:45 MS. VAN RYAN: Great. Thanks, Nate. I‟m glad you could come on
board, too. Anyone else at this point that we‟ve missed? I know we‟re going to have a
few other –

00:01:56 BRUCE MCQUAIN: Bruce McQuain, QandO. Sorry about that.

00:01:57 MS. VAN RYAN: Oh, great. Not a problem. Thank you, McQ, glad
to have you, too. All right, I think some others will probably join us during the call. If
you‟ll remember how we do this, we‟re going to start with, in this case, an opening
statement from Red Cavaney, who‟s in the room with us. Red is our president and CEO.
We also have John Felmy with us, who is our chief economist. And Jim Hoskins, are you
online?

00:02:22 JIM HOSKINS: Yes, Jane, I am.

00:02:23 MS. VAN RYAN: Good. Jim Hoskins is from Harris Interactive. He
is the one who helped to conduct the Energy IQ poll. So those are your three main
speakers today. When we start in a moment, we‟ll start with an opening statement from
Red. I ask you after the opening statement to go ahead and ask questions. Please just
identify yourselves when you ask a question. That way, we‟ll be able to turn around the
audio recording of this call and the transcript much faster and there‟ll be no guesswork
then as to who asked what question. And that will be helpful to you when we post the
audio file and the transcript online as quickly as we can get these turned around.

All right, Red. We‟ll start with you.

00:03:03 RED CAVANEY: Well, good morning! Thank you very much for
joining us today. I just want to go over very quickly what we‟re going to do. The main
purpose for at least initiating the call was to talk about our second edition, if you will,
coming on the first anniversary of our first report of what we call our Energy IQ and then,
as has been the case with these calls before, we‟ll be glad to answer any calls you may
have on any subject related to energy.

As Jane had mentioned, I‟m joined here by John Felmy, our chief economist.
And for those of you that are becoming devotees of John Felmy, you can tune in
tomorrow morning at CNBC on Squawk Box. It‟s the 7:35 to 8:00 slot and John will be
able to be viewed there, too. So without going much further, I just want to mention again
one of the things that we have been encouraged about in this second edition of our
Energy IQ was the fact that we now see that U.S. adults recognize that the United States
is going to need more energy going forward, particularly over the next 20 years. And
another couple of things that we‟ve noticed that have been changes was, number one, that
the restrictions that are placed by current U.S. government policies have impacted the
development or the lack of development of the U.S.‟s own resources. There have been a
number of polls that have been in the national news that have been out there that carry
this line.

And then, also, another thing is, there is an increased understanding of some of
the competitive disadvantages that the international oil companies now bear at the hands
of the foreign government-owned oil companies, the national oil companies, if you will.
Otherwise, a number of the other metrics pretty much stayed the same and, as I said,
we‟ll be glad to give you as much insight – we have Jim Hoskins on here, as was
mentioned earlier. And he can talk about any methodologies or probably really bear
down on the details, if you want to get more.

So, Jane, with that, shall we go ahead and open her up for any questions?

00:05:19 MS. VAN RYAN: Absolutely. Who would like to ask the first
question?

00:05:23 MR. RAPIER: Robert Rapier. I‟ve got a question about – there seems
to be an amazing disconnect here regarding the renewable energy question. The EIA
projects less than 10 percent will be supplied in 2030. So if one in 10 respondents chose
this answer, which doesn‟t surprise me when the current administration is trying to
mandate 36 billion gallons [of ethanol] by 2022. But that seems to be an amazing
disconnect to me. Comments?

00:05:53 MR. CAVANEY: Having been in the sort of public-policy side of

business for almost three decades, one of the things that you see is what I might call –
and I‟m not trying to be derisive here – but the flavor of the month. Oftentimes, when
there are attractive alternatives that are set forth to address a meddlesome problem, they
get very, very rapidly embraced. There‟s a great deal of fanfare and the public only
catches a mere smattering of it. But because it gets a disproportionate amount of the
news and the reporting and mention, it tends to float up.

As little ago as like six years, early in the Bush administration, the flavor du jour,
if you will, you know, was the whole issue of fuel cells and how – you might recall there
were the hydrogen highways that were being promoted in California and a lot of things
like that. And what we see, again, is, over time, you get a cooling effect as people
realistically begin to understand that these may be viable, but they‟re not going to come
on tomorrow and it‟s going to take time.
 And so it wouldn‟t surprise me for us to see somewhat the same kind of trend here
on this particular matter that you‟ve raised. So to us, it doesn‟t come as a startling
finding. It‟s just something that we‟ve learned to encounter.

00:07:17 MR. LAMBERT: This is Doug from GraniteGrok.com up here in New

Hampshire.

00:07:22 MS. VAN RYAN: Go right ahead, Doug.

00:07:23 MR. LAMBERT: Okay. Earlier this week, I had a chance to ask a
question of one of our senatorial candidates who‟s been really kind of lacing Senator
Sununu, our present senator, hard for his ties to big oil, et cetera. And so, I asked her – I
told her that I‟ve just bought a new vehicle. It‟s traditional in engine and all of that. I‟ll
be paying for it for five years; I need it for business. So I said to her, if you‟re opposed to
drilling, what does that do for me with my vehicle? I can‟t put a windmill on my car. I
can‟t put pinecones in the tank or water or anything. I‟m stuck with the traditional
gasoline.

And she gave me the standard answer and I‟m reviewing – there‟s another
politician up here, Congressman Paul Hodes, who has filed legislation, and both of them
are on the same track. And they‟re saying that we have a 14-year supply just waiting on
68 million acres of land that they have present leases that, quote, “big oil just won‟t drill
on.” Could you provide some kind of a talking-point-type answer that I can come back
with when somebody tells me that because that seems to be – to a person, anybody who‟s
opposed to expanded drilling or exploration – is that it seems like that they are all singing
from the same playbook now. And that‟s – the oil companies have leases; they‟re just
not using them.

00:09:02 MR. CAVANEY: I think we can help you here. First of all, these are
arguments that are put forth by people who don‟t understand how the industry operates.
First of all, and I think this is sort of commonsensical, the Creator or evolution,
whichever you want to tag, didn‟t put hydrocarbons – oil and natural gas, specifically –
every place on the globe. History would show you, if you went back and looked at the
leases that the federal government has let over a period of time, that, far and away, the
large, large majority of leases have proven not to contain hydrocarbons in sufficient
commodities that you could commercialize it.

So it is a – very specific examples. We‟re just getting data out right now. If you
go back to the ‟96, ‟97 time period – and I choose that because that‟s a 10-year spread
and we‟ll be talking about the OCS – if you look at the leases that were granted during
that period, there were – the lease payments, in other words, the companies bid $2.3
billion to obtain about 3,200 leases. The lease term is typically 10 years, which means, at
the end of 10 years, if a lease is not producing, then the company is obligated to turn it
back to the federal government, forfeiting not only its original lease bid, but the annual
lease payment it makes plus all of the expenditures it incurred in the exploratory phase to
determine that there wasn‟t sufficient oil and gas available in commercial commodities to
go ahead and extend the funds to put a production facility in place and to ultimately
produce.

Ninety-three to 95 percent of the leases from those two years were expired,
terminated, or they were relinquished, in other words, given back to the government even
before the 10-year term ran. That gives you a bit of a sense that most of the leases don‟t
end up being commercially producible oil or natural gas facilities.

Now, the other point that I would make is that companies have an idea, whether
it‟s onshore or offshore, that there‟s the potential for oil and gas in certain areas. And so
they make bids, but there‟s about a 10-step process, which I would be glad to bore you
with if you wanted, that starts with the bid being accepted, and then after it‟s been
accepted, you start with geological exploration, in other words surface work and before
you go through all the other steps that lead up to the point as to whether or not you‟re
going to produce. Probably 80 to 90 percent of the work on a lease is in this pre-
production determination phase. That period of time has been euphemistically tagged by
our critics as an idle lease, but I would submit to you, the lease in most cases is anything
but idle.

When you get to –

00:12:41 MR. LAMBERT: So, now, let me just if you would let me interrupt for
a second, so in order to even begin to determine more exactly whether the supply, before
you can study, you have to actually lease?

00:12:47 MR. CAVANEY: Yes, we – the federal government puts out a notice
of a public lease process and companies submit bids. And the government is required, as
long as they can satisfy the minimum operating requirements, they‟re required to take the
highest bid. That money is then paid before the company can do anything to go forward.
A contract is signed with all the terms; it‟s a government contract, the companies have no
input on it.

It determines the length of the lease. It determines the amount they‟re going to
pay. It determines the royalty rate that they‟re going to pay if they do get to a production
basis. So that‟s the very first step, and so a company, every company, has expended a
fair amount of money to hold what in another business would be called inventory. In
other words, this is their inventory. And it‟s a long, extended process to work through
these, and so it should not surprise anyone that they come into a certain area and they
may go pretty far on one of these particular lease tracks and determine that the geology
here doesn‟t look like it has any oil or natural gas. And then they may look at a bunch of
the surrounding tracks that are also leases and figure they‟re so much the identical that
I‟m going to now move to the next place where I think I have a chance of making a
commercial discovery of oil or natural gas.

And so companies are constantly trying to upgrade the quality of their portfolio at
these each individual bid rounds that occur. And then as leases expire for things that
clearly don‟t have oil or gas, they give those back to the government and somebody else
may bid on them or not. So this is a constant iterative process and the quality of their
inventory, in other words, the things that they‟re working on to determine whether they
can get to commercial production, is a very important part in their competitiveness with
one another. John?

00:15:04 MR. FELMY: When you buy a lease, you effectively could be buying
what can be termed a pig in a poke. You don‟t know if there‟s oil there, but you‟re going
to pay the federal government just for the ability to be able to look. But what‟s
interesting about this argument that there‟s all this oil out there, it‟s being made by the
same people who, if you go back and check their records, will probably have said, no,
there isn‟t enough oil to justify going forward. So that‟s a delightful opportunity for
somebody to contrast what is mixed messages and trying to have it both ways by some
folks.

00:15:35 MR. CAVANEY: And the last point we would want to make on this is
if you‟ll go back and look at the language that‟s actually in statute, this “use it or lose it”
is already in current law. And a number of the people who are our leading critics actually
signed or voted for that particular piece of legislation. Let me read you the actual
language itself because this is kind of interesting in this big “use it or lose it” debate. It
says, “no bid for a lease may be submitted if the Secretary” – and they‟re referring to the
Secretary of the Interior – “finds after notice and hearing that the bidder is not meeting
due diligence requirements on other leases.” And by due diligence, they‟re referring to
this period of time when 90 percent of the effort of the work is going on.

I might remind you also that during that period, before they can do any seismic
exploration, they have to go and get through the government permitting process,
approval, and that‟s one of the stages where oftentimes, there is objections are raised.
That‟s oftentimes when suits are raised by certain people and the like, which delays the
process. Well, let‟s assume they go through, shoot the seismic; they spend the analysis,
they look at it, they get to the point where they think, all right, this is worth me putting
some more of my capital at risk to actually drill an exploratory well because regardless of
what seismic says, you never know what you‟ve got until you drill at least one
exploratory well.

Well, now you‟ve got to go and go to the government permitting process again to
get a permit to be able to drill. So this long process that‟s being considered idle is
anything but idle. And it involves a lot of interaction with the public over which the
company has no control. It‟s governed by the due process, if you will.

00:17:31 MR. LAMBERT: Now, I‟m intrigued by the “pig in the poke”
statement because that‟s my understanding as well. And I really think that for you guys
to get the message out, that it‟s a tremendous gamble, it seems, for the company to even
get involved because you‟re basically guessing on a tract of land, until you actually lease
it, whether it‟s going to be viable. Is that a good sound bite to describe your present
situation?
 00:17:59 MR. CAVANEY: Yes, it is, absolutely.

00:18:02 MR. HAGENS: This is Nate Hagens. I think most people, or many
people including myself, don‟t know what a pig and a poke is, so you might want to
explain that if you write that up.

00:18:11 MR. CAVANEY: (Laughter.) Wait, that‟s an economist talking so this

can be fairly sophisticated. I‟ll have John speak slowly on this.

00:18:17 MR. FELMY: It‟s the old, actually medieval, expression that when you
were buying animals at a farm, you never knew what was in that burlap sack. It could be
a pig or it could be nothing. So it‟s just an ancient expression that I love using at times.

00:18:37 THE BEAR: This is the Bear over here at The Absurd Report. I‟ve got
a follow-up question for you regarding these leases that everybody‟s talking about “use it
or lose it.” It is my understanding, and correct me if I‟m wrong, that under the lease
terms, if you have a productive field, well, et cetera, you used the word “royalties.” Are
you talking about dollars and cents that must be paid on per barrel of oil as it is extracted
from the ground?

00:19:08 MR. CAVANEY: That‟s correct. There‟s two ways that we can pay
that. One is to literally make a cash payment to the government equivalent to what that
royalty is, and the other, and you see a lot of this in the Gulf of Mexico, is called royalty
in kind. It was adopted a number of years ago because it greatly simplifies the auditing
process. And of course, when you‟re handling money with the federal government, they
need an extensive auditing process. So in some jurisdictions we do, if the royalty is, let‟s
say, right now I think with the deep water, it‟s 18.75 percent, is what we end up paying in
a royalty. So we would give the equivalent percent of oil that would go into, let‟s say,
the Strategic Petroleum Reserve, or would go to the government for resale and then they
would get their money there. Or the other way is quite literally we report the amount of
volumes; they do the math and we send the check off to the government for it.

Now, there‟s another issue that has come up here because all that money flows to
the federal government. In 2006, at the behest of several senators – in particular Mary
Landrieu, Democrat senator from Louisiana was a leader of this effort – along the Gulf of
Mexico, they asked that should not those states that have heavy interaction with offshore
activity be the beneficiaries of some of those royalties that come back to the government
to help offset a lot of the infrastructure expenses they have to incur. And that legislation
did give those four states specifically a part of the royalty that went fully to the federal
government before. And you might notice that several people who have been talking
about lifting the moratorium, only if a state chooses to do so, some of them mentioned the
idea that states that choose to do so ought to also be in a position to receive part of the
moratoria as did the other states. So in other words, there‟s a bit of a carrot or an
incentive to making the capital investments necessary to be able to support the offshore
work if your state so chooses to do so.

00:21:33 MR. FELMY: Just to add one quick thing, if you aren‟t producing on
the lease and paying the government, you have to pay rental fees. So you‟re not getting it
for free in any way, shape or form in terms of maintaining the lease.

00:21:45 THE BEAR: I‟m sitting here laughing about it because royalties or
whatever you want to call it, the bottom line is it is a tax, a tax on a barrel of oil that
we‟re all paying for. And my gauge from what you‟re telling me is that at $140-a-barrel
price, you‟re talking about a $30 tax or something like that on a barrel of oil that the
consumer ends up paying for. Is that not correct?

00:22:17 MR. CAVANEY: That‟s absolutely correct. As a matter of fact, the oil
industry is the largest single discrete group other than individual taxpayers who pays
revenue to the federal government. And that‟s principally in the term of these royalties.

00:22:32 BEAR: Well – (inaudible) – windfall profits tax to Uncle Sam.

(Chuckles.)

00:22:37 MS. TVERBERG: This is Gail Tverberg of The Oil Drum. I was just
going to comment on your choice of questions with respect to imports, where you‟re
talking about Canada being the single largest importer. I think it kind of gives a false
impression for a variety of reasons, one of them because the total amount of imports is so
important, or total amount available for oil for imports is so important, one of them too
because Canada itself depends on imports. So if they don‟t get their imports, there‟s
going to be a problem with our getting imports from them. And of course, the total
amount of imports we‟re getting from them, at least on a gross base, is about 18 percent,
so it‟s not that big a percentage to begin with. And of course we still have to pay
currency to Canada, so it is an external purchase, whether it‟s Canada or any place else.
So it seems like you could‟ve chosen a better question to represent what the import
problem is.

00:23:48 MR. CAVANEY: Well, I think I‟ll comment while John takes a look
at this, Gail, one of the key points that this underscores, that most people don‟t fully
understand, is the interconnectedness we all have to what happens in the global
marketplace. There is a cascade effect in almost each aspect of our operations and
obviously, what happens upstream, so to speak, in that cascade, it‟s going to have a
downstream effect. John, do you want to comment on the –

00:24:18 MR. FELMY: Well, your points are all accurate, Gail. The reason we
chose this – and a lot of it was because the interaction that I have with a lot of folks that I
talk to, whether they be rotary clubs or chambers of commerce, or reporters or so on – is
that uniformly, I would get the statement from people of, you know, we‟re importing all
our oil from Saudi Arabia, that‟s horrible. And just when I said no, that‟s not accurate;
you know, Saudi Arabia is not the largest supplier; Canada is. Last year, Mexico was
number two, although they‟ve declined now. And so the point was there just to, one,
reaffirm what the broad public thought was accurate. And you can see, from this
statement, that we still have what, 59 percent think it‟s Saudi Arabia and only 11 percent
– so this is part of our educational effort, just to inform people of really where our energy
supplies come from.

00:25:10 MR. HOSKINS: I would add, if I could, that we do have a couple of

other questions. Question 19 – that talked about the percent of oil and natural gas
consumed and produced in North America, and then how much energy – or rather
number 20, what percent of our oil was imported. So we do have a couple of other
questions to try and get at it, to provide perspective, but John‟s correct. The question
about Canada really was a focus more on it not being Saudi Arabia.

00:25:47 MR. HAGENS: This is Nate Hagens. If I could ask a related question,
on your podcast with Harris Interactive, you distinguish between Americans being
misinformed in addition to being uninformed about energy. But the, quote, unquote,
“answers” to many of the questions were made by projections of IEA and EIA future
forecasts. And as many of you are aware, these agencies have been wrong about both
price and production forecasts for eight of the last nine years. So I find it a bit worrisome
that we can articulate with certainty anything about 2030 as an answer in Energy IQ type
of test.

00:26:28 So other than painting a clear picture that we‟re heavily dependent on
fossil fuels for the foreseeable future and that we need to expand domestic drilling, why
doesn‟t at least some part of the national Energy IQ quiz show how high a standard
deviation there is about future energy availability, due to both a lack of data
internationally and the conflation that all oil and gas are created equal, in terms of
financial, environmental extraction costs? In other words, is there any place for
admitting that even the experts are flying blind in some respects, with regards to these
critical issues?

00:27:07 MR. CAVANEY: You raise a good point. I think we all would agree
with you that, you know, there is variation from these forecasts. One of the things that
we found in discussions with the general public, there‟s more credibility if you use a
government statistic as a base than there is almost with anything else, particularly when
you‟re doing an audience like this. And I think we all recognize that these things are
imperfect, and if we try and put too fine a twist on them, it might become too complex for
the kind of surveys that we‟re conducting. These are not intended, from our standpoint,
to be highly precise tools that we use; we don‟t represent them as such. And we are
going to – as we did – this was our second one of these things – we are going to produce
them on a regular basis. What we‟re looking for is are there – is there significant
movement in understanding one way or the other, or in ways we didn‟t anticipate, and so
we‟re looking at a relative basis, I think, more than absolutes here. John, do you want to
weigh in?
 00:28:17 MR. FELMY: Well, your point is well taken, that there are no facts for
2030 because it is a projection. But if you look at EIA‟s forecast – (audio interference) –
whether it be the IEA or OPEC, for example, or the National Petroleum Council study,
these are not out of the mainstream in any sense. And the broad categories are what we
were trying to focus on, in terms of really how big are these relative magnitudes for
renewables in this question.

00:28:46 MR. HOSKINS: I would add that – you know, I‟d say that they‟re both
uninformed and at least we would judge them, in some cases, to be misinformed. In
terms of uninformed, you noticed that there was an “uncertain” category they could
choose. And actually, a large portion of Americans picked that: on any question, at least
25 percent typically and as high as 45. So a large portion just – couldn‟t even make a
good estimate.

00:29:10 In terms of the misinformed, even though the projections might be off,
what we‟re finding is that they‟re probably not going to be off to the extent that the
answers are skewing very far away from the projection. So it seems to me that there is
this tendency to think the worst about an issue, to be farthest away from what the best
guess is by government or other sources are, and we interpret that to be misinformed
about the issue.

00:29:39 MR. STYLES: This is Geoff Styles. I‟ve got a question that ties this
issue of forecasting accuracy together with the whole question of expanded drilling
access. In addition to this red herring about idle leases, the other principal argument that
I keep encountering, relative to the question of opening up more acreage to drilling
onshore and offshore, is that DOE has done some studies, both for ANWR and for the
offshore, suggesting that even if access were provided to these areas, that the quantity of
oil that would come out and the time at which it would come out would essentially render
it too little, too late, and so that it‟s really immaterial to what Americans are paying for
oil not only today, but into the future as well.

And I have to say I really struggle with that. I mean, my own experience in the
market trading oil suggests that these studies reflect a deep misunderstanding of the way
that the price is set in the world market; they reflect a misunderstanding of the dynamics
within OPEC. Basically, they‟re saying that whatever extra we produce, OPEC will cut
back to negate the price stays the same or maybe drops a penny or two. So, you know,
I‟d like some help with that and particularly, if there are any studies that apply, you
know, a more common-sense, real-market kind of approach to this question, than the
studies from the DOE, the EIA, that are essentially saying it doesn‟t matter.

00:31:17 MR. CAVANEY: There are a couple factors that are working here, and
I invite you to just take a minute to touch on each of those and then I‟ll turn it over to
John. John, can give you some specific examples – which I think will help go to the
point that you‟re talking about.
 First of all, there‟s the increasing issue and concern that we are sending many of
our dollars and our jobs and everything abroad as we increase our reliance on more and
more imports, and that‟s a function of the lack of quality of opportunities that are here in
the United States, whether it‟s the OCS or onshore. So in one sense, there are people
who feel better if the – if you have less of an impact on the price but you‟re getting a
larger percentage from domestic production because of the energy security aspect.

00:32:15 The other thing that I think impacts this discussion is if you look at
commodities broadly, essentially commodities are – they put downward pressure on
prices when the volumes increase, and the volumes typically are not expected to increase
all in one fell swoop from one location. So they are an accumulation of a number of
additions to both, in our case, replace a depleting resource and then also build for the
future. The argument that, gee, if you opened ANWR you‟d only be doing this or that,
they‟re comparing, you know, the potential total recoverable oil forecast as though it
were the only oil that were consumed in the United States. It‟s just the same if you
transferred that over to the agricultural community and talked to a farmer about his crop,
and said that 1,000-acre field you‟ve got there, that‟s not going to feed our city so
therefore, we‟re not going to allow you to plant that.

00:33:27 Commodities are additive and they‟re accumulative, and the most
important thing is if you changed the government policy with regard to access, and it
wasn‟t just for ANWR, one specific location and that was it, but more broadly, when you
look at the futures contracts that are out there – I think 2016 is the last one – I think that
people will see a major change in policy opening up more opportunities that are already
attractive to the industry, things like the most classic example is Destin Dome in the
eastern Gulf of Mexico, off Florida‟s coast, where we know there is a lot of dry gas
because that‟s been done with very sophisticated seismic and the like. So what we want
to do is look at realistically, again, how the industry operates, recognizing it‟s a
commodity, and you have to get started and if you don‟t start, the problem only gets more
and more difficult going forward. So these projections that isolated on one individual
thing, I don‟t think, give you a full picture. And John, you want to talk about some of the
other things.

00:34:38 MR. FELMY: Yeah, a couple things, Geoff. You know, yes, DOE‟s
study, for example, of ANWR showed relatively small impacts, but it wasn‟t – if memory
serves me, in terms of looking at the total potential size of ANWR, it wasn‟t the full kind
of area beyond 10-02. You know, the whole area is estimated at 10 billion barrels; if you
produce that over 30 years, on average you‟ll get a million barrels a day. That‟s 20
percent of our existing crude production right now. So one has to say, you know, is that
an impact.

Now, your point on OPEC is well taken. I mean, will OPEC respond to that or
will they go after market share? I mean, that‟s what we experienced in the „80s, when
Alaska peaked at that point. So you know, that‟s an open question. But even if there is
no world price impact, which I‟ll say I don‟t know the answer to that, but you still have
the economic impacts that are positive to the U.S.: jobs, reduced trade deficit, as Red
mentioned. And so it‟s not a justification not to do anything, in my opinion.

So, yes, you know, supply takes longer, there‟s no question. But you‟ve got to
start something.

00:35:45 MR. CAVANEY: Yeah, John mentioned earlier sometimes, you know,
you‟ll hear our political leaders say one thing in one context and another thing in another.
If you look at many of the people who don‟t want to provide additional access, they are
many of the very same people that say, you know, we have to reduce our reliance on
imported oil and natural gas. The two just don‟t, at least over the next couple of decades,
just can‟t be mapped together. And so the energy security thing definitely plays a part
there; it‟s just hard to measure.

00:36:20 MR. LAMBERT: This is Doug again from GraniteGrok.com. Now, do

you think that public opinion – I went through the quiz, and I feel as though, based on my
knowledge of the news cycle, since we‟ve had the spike in energy prices, I‟ve somehow
been forced into learning and knowing more about this, or it could be these conference
calls. But do you see that in general people are trending in the right direction, and is that
what we saw manifested with President Bush‟s lifting of the moratorium that apparently
his father put in place on offshore drilling?

00:37:01 MR. CAVANEY: I can‟t speak as scientifically as maybe Jim would

like to in a minute. But one of the things that you clearly see is notionally we just don‟t
use the metrics of a tests like this; we use a number of different metrics to try and
examine whether or not people are beginning to understand and get a grasp of the energy
world as it exists today. We look at news coverage. We look at blog discussions and
things of this nature, and it‟s very clear that the knowledge base is increasing, obviously
at a slow pace because it‟s very clear that the knowledge base is increasing, obviously at
a slow pace because people have a lot of different things that are competing for their
attention. But you see a lot of terms and phrases that you wouldn‟t have seen, let‟s say,
two years ago or so that start to come up more commonly than would otherwise be the
case.

I can cite, for example, when people talk about the impact of taxes and various
things like that, that‟s something if you had talked about five years ago, people just
couldn‟t find an answer to it. But if you talk about the impact of taxes and how they flow
and what happens, you get a much, much more informed debate about that, and that‟s just
one of many examples.

So Jim Hoskins, do you want to weigh in from your perspective on this?

00:38:21 MR. HOSKINS: Well, I would just say that, you know, not necessarily
based on this survey, but we do a lot of other internal polling as well. And I think one
thing you could say is that there is a growing understanding by the public and those that
are more educated, especially among the public, that with our needs growing in the
future, all sources of energy are going to be needed. And so there seems to be a greater
understanding that we shouldn‟t be doing anything to hurt the total portfolio of energy.
That seems to be a growing thing.

The other thing I would say is that while the results here were pretty flat for the
public in terms of these specific questions, when we do surveys with groups that are in a
higher position – they all hold jobs that might be more influential to forming policy,
better-educated groups – we are seeing somewhat more improvement. But they start in
the same pattern with a lot of lack of knowledge about issues. But we do see the trends
improving there.

00:39:32 MR. LAMBERT: And do you – do you attribute that as the “why?” I
mean, does this apply pressure, obviously, on the president to bring them to this change?

00:39:41 MR. CAVANEY: I think one of the things that – people who are
elected officials – those that successfully get reelected, almost always keep a very close
ear on what the folks back home are saying. And when you see the kind of shift that
we‟ve seen of basically since the beginning of the year on the topic of, you know, we
should have more use of our domestic resources here than sending our jobs and our
dollars abroad, that‟s pretty dramatic. And I think it‟s enough to take notice. I would
also comment that the – when you saw people come back from the 4th of July recess, I
think that was the sharpest contrast. I didn‟t find anybody who talked publicly about
what were the issues they were doing – where were people‟s minds. Everybody said it
was on oil and gas and the need to do more here at home and the like.

And I think that‟s why today you see bipartisan groups in both the House and the
Senate, Democrats and Republicans alike, who are trying to fashion some type of
compromise that can actually get enacted. They are doing somewhat the same kind of
thing I think the president did, which is responding to a significant shift in public opinion
that has occurred over a relatively short period of time.

00:40:03 MR. LAMBERT: Thank you.

00:41:03 MS. TVERBERG: This is Gail Tverberg from The Oil Drum again. I
have a question that really has nothing to do with the Energy IQ. I was wondering if you
could talk a little bit about the refinery situation. It looks to me like what‟s happening is
that we have kind of a surplus of some kinds of refineries and a shortage of other kinds of
refineries. The “crack spread,” as they call it, is quite low for gasoline right now. And a
lot of the independent refineries look like they‟re in financial difficulty. Could you talk a
little bit about what you see is the cause of this, and how you see it coming to an end?

00:41:44 MR. FELMY: Well, those are very good points, Gail. And my quick
assessment of it – it‟s what‟s happening with demand that is driving this. What we‟ve
seen so far this year is that demand for gasoline is down. Demand for diesel, however, is
up. And so if you happen to be, you know, a refiner that has more of a capability in
gasoline with your types of processing, and so on, you‟ve gotten squeezed very badly
because of how expensive crude oil is.

On the other hand, the margins for diesel are better. So what we‟re seeing is
because of a sudden shift from what was demand growth of gasoline in excess of one
percent for quite a significant period of time, to a decline, but at the same time, a
continued growth in diesel. And then when you marry that with a lot of excess gasoline
on world markets in the sense of the world shifting to more and more diesel, we‟ve been
able to import about the second-highest level, I believe, of gasoline so far, but yet our
diesel imports – (audio interference).

So it‟s all of those kind of factors of supply and demand, and then when you
combine it that we run the refinery system so far this year at record amounts of distillate
production and near-record amounts of gasoline. So it‟s the mix of one – a soft market
for gasoline and a tight market for diesel.

00:43:12 MR. CAVANEY: John, let‟s –

00:43:12 MS. TVERBERG: Well, but you look at the refinery percentage
utilization, if you look at the graph of that, we‟re down a fair percentage when you look
at the graph, the 2008 refinery utilization is down.

00:43:27 MR. FELMY: Yes, but their utilization is a little bit of a misleading
figure because that‟s also in hand in hand with an increase in capacity. And so you don‟t
see that the inputs to distillation following that same trend, but what you do see is also the
refineries squeezing the yields wherever they can to produce certainly as much diesel as
they can, and they‟ve done that – distillate so far – with a softer gasoline market. It‟s
near record, but still it‟s substantial.

00:44:02 MR. HAGENS: This is Nate Hagens. I guess this is a somewhat-

related question, and I asked a similar one last time. John, I guess this is mainly for you.
But has there been any in-house sensitivity analysis in how the deterioration in national
and regional banking system might impact future exploration and production due to a
combination of lower oil prices, less availability of loans for oil and gas companies, less
lines of credit, less availability to debt financing, especially with respect to the more
speculative kind of higher-hanging fruit of remaining domestic oil and gas reserves?

00:44:37 MR. FELMY: Well, we have certainly been paying close attention to
the overall credit situation because that potentially affects the entire industry. You know,
obviously the exploration side because of the cash flow that you have to deal with; [and
it] could affect the refining side of course. So it‟s something we‟re paying close attention
to because, you know, just mathematically, if you have a credit line of X and you‟re
buying oil at $70, you‟re not able to buy as much oil when oil is $140. So we‟re
following it carefully and trying to monitor it in terms of published reports and things like
that. But we haven‟t done any in-house detailed studies on it.
 00:45:21 MR. MCQUAIN: This is Bruce McQuain with QandO. I‟ve got
probably an impossible question, but I‟d like to ask. The opponents of drilling seem to be
inclined to take a particular area and focus on how long it would take to bring oil into the
system, ANWR being the most obvious. And today, I think it was Senator Salazar in The
Washington Post who was talking about the oil shale and 2015 being the earliest that
anything could be done there.

Did you possibly scale or phase the, you know, how we would bring these resources
online if we were to get the okay from Congress today to go offshore and elsewhere?

00:46:11 MR. CAVANEY: I think the first thing that people need to understand
is that the Department of Interior would need to essentially prep up. They don‟t have all
of the due diligence done on their part to put these up for an announced lease sale. So
that will take some time for them to do that due diligence. And then that goes up into the
queue for bid, and then individual companies would be assessing – as I mentioned earlier
in our conversation today, they would be assessing the quality of the leases that they
would be granted as a result of their competitive bidding.

00:46:53 MR. MCQUAIN: If I could interrupt, how long, ball park, would that
sort of process take?

00:47:01 MR. CAVANEY: I‟m going to guess it‟s probably no less than one
year, certainly, and probably a couple of years out to go through that process. And then
what happens is it‟s a matter of the high grading with a company‟s portfolio of
opportunity. If they bid a high bid and got a very attractive property, they may well
immediately move that to the top of their list because it looks so good, and then they
could start processing. If it was an OCS effort, you‟re probably looking at a good five
years before you got first oil. Now, if it was in an area where there was a potential
tiebacks that were easy and a few other things that could be done, you could shorten that
period of time. But the point, when we get into these discussions, is if it is a long lead-
time business, and our politicians want short-term answers, the two will never come
together if you don‟t –

00:48:02 MR. MCQUAIN: Well, I think that‟s a red herring. And that‟s what
I‟m trying to figure out how to get around. I mean, you know, the bottom line is had we
started 10 years ago, ANWR would be online. You know, everyone knows that. But
what they‟re looking for is some specificity here on when somebody starts throwing dates
around or when something is going to come online. What does that mean and how do
they know?

00:48:26 MR. CAVANEY: But the one thing that you can probably feel pretty
assured would have some impact on the market is if the government announced a policy
change on access, broad policy change, that would affect the market right away, even
though not an additional drop of oil would come out of the next day. But it would be
reacted by those that watch the market. And then, the process that we just described, the
multi-year process, would begin not only in just one circumstance, it would probably
begin in multiple circumstances because people would now be able to access some of the
attractive things they‟ve had their eye on but couldn‟t touch.

00:49:05 MR. STYLES: But can I just add an interjection here? And, you know,
I‟m not of a conspiratorial mindset at all, but I think that this issue is more significant
because it relates to some of the misunderstanding that the surveys show about people‟s
expectations about how quickly renewable energy is going to ramp up. Because when
you combine these two issues, the time lags to bring on oil from areas that are currently
off-limits, whether it‟s ANWR or other parts of the offshore or whatever, when you
overlay that with an expectation that within 10 to 15 years, we‟re going to be getting
most of our energy from renewables anyway, it creates this sense among, I think
legislators and the public, that it essentially means we don‟t need this oil. It‟s game over
for the oil business. We‟re on the threshold of the next big thing. You‟re just too late
with this.

00:50:00 MR. CAVANEY: No, let‟s – I know that some people have that feeling.
But let‟s just – there are some retorts that you can come back on that. To bring almost all
of those alternative energy sources on, they‟re going to encounter some of the very same
permitting problems and not-in-my-backyard problems that you encounter in the oil
business.

For example, if you‟re going to build wind farms, they‟re typically – first of all,
they‟ve got to be permitted in remote areas, so they have to go through some of the same
kind of problems that we do when we‟re out in remote areas. But equally as important,
they‟ve got to get the energy from where it‟s produced to where it‟s going to be
consumed, which means they need to get right-of-ways, first of all, granted. And then,
they need to get the permits to go through that. So when we think of those alternative
energies, we think of them like flipping a switch and it‟s on and it happens. But they‟re
going to be on the same queue that we‟re in, going through permitting, having to go back
out to the public, and also running into some of the problems with the capacity to produce
the equipment and the material that is needed to get them from here to there.

The nuclear industry is seeing this in spades. And also, we‟re seeing that in many cases
with some of the large utilities that are trying to do things, same kinds of issues we‟ve
just talked about.

00:51:15 MR. FELMY: And if I could just add one thing, I think you‟re
absolutely right, Geoff – I think it was Geoff – that the disconnect is really profound,
because we hear constant discussions that we want to spend money on alternatives to help
the gasoline market. Well, that‟s a huge disconnect because most of the alternatives
they‟re talking about are electricity. We do not have a fleet of electric cars and we will
not have a fleet of electric cars for a significant amount of time. And so, this whole
argument is just a huge disconnect. And I share with you – I agree with you in terms of
how can we bring this stuff on, and then Red‟s points in terms of infrastructure of any
type are a challenge.
 00:51:52 MS. VAN RYAN: Gentlemen, I‟ve got a couple of questions here that
have been sent to me by e-mail by a blogger who is having a technical problem with his
telephone and can‟t get off mute. So these are kind of quick, so we‟ll see if we can go
through these. How big is a lease? Is it a standard size?

00:52:08 MR. CAVANEY: No. No, the lease – this is part of the prep that we
talked about just a little while ago. There is not a, quote, unquote “standard size.”

00:52:17 MS. VAN RYAN: Okay.

00:52:18 MR. CAVANEY: They tend to be smaller rather than larger as a

general matter.

00:52:23 MS. VAN RYAN: All right, another question is, are there OCS areas
that aren‟t off limits that are still eligible for sale?

00:52:30 MR. CAVANEY: Yes, this goes to the point we mentioned earlier also
in that oftentimes, leases that have not – are returned back, given back to the government
before the 10 years are up, and then those that go back at the 10 years, the department –
MMS – they actually recycle those. So in addition to other ones, these keep coming
back.
And what they tend to do is they tend over a period of time in their preps not take
all the leases concentrated in one area and everything else. They tend to spread them
around. So the cycle presents a slightly different look and a different pallet each time,
which reflects sometimes the capital aggressiveness of certain companies at certain times
a year and what they‟re looking for and things like this. So there is a lot there.

00:53:15 MS. VAN RYAN: Here‟s another question. Are there other highly
promising areas around the world that are off limits?

00:53:22 MR. FELMY: Well, yes, I think they happen to be in areas that are
largely controlled by national oil companies that outright forbid our participation.
Mexico, for example, being one which is a serious issue because of their plummeting
production. Mexico has fallen from our number-two supplier to number five so far this
year because of the declines in their fields. You‟ve got questions about how much access
you will be able to get in places like Russia with the changing scales there. Of course, in
Venezuela, there‟s certainly an amount of uncertainty. So that is exactly our challenge
when we‟re competing as investor-owned oil companies with national oil companies that
really hold the resources ala Saudi Arabia and so on.

00:54:09 MS. VAN RYAN: And one more question from this particular blogger:
What exactly has to take place to open up the areas that are off limits? So you‟ve got the
president lifting his executive order. You‟ve got Congress that would have to act.

00:54:19 MR. CAVANEY: Congress would have to act, yes. But that‟s the last
remaining piece is congressional action with just a little bit of detail. How they‟d
implement the moratorium in Congress is each year, during the appropriations process, in
the Interior appropriations bill, there is language that essentially says the department shall
spend no money in making ready a lease sale. Were that not to get in and an
appropriations bill pass, then that brings in a whole new regime of other activities that
needs to take place. But Congress must be involved at this stage for anything further to
happen than exists right now.

00:54:59 MS. VAN RYAN: All right, we‟ve been going for almost an hour. Do
we have any additional calls or questions rather?

00:55:06 MR.WESTENHAUS: I have a question, Jane.

00:55:07 MS. VAN RYAN: Hi, Brian. Thank you for joining us.

00:55:09 MR. WESTENHAUS: Do you guys have a response to Mr. Pickens

and Andy Grove?

00:55:13 MR. CAVANEY: Yeah, I think, as a matter of fact – I think some

people are trying to paint parts of the industry as being opposed to the Pickens plan. And
there may be individuals – but speaking for the industry, number one, we were very
pleased to see that one of Boone Pickens‟ basic points is it is very clear that we need all
the energy that we can produce, particularly here domestically. He also has said that he
supports expanded access for oil, because oil is going to have to play a critical role over
the next several decades at a minimum, even if his plan and other similar plans end up
succeeding. He acknowledges it‟s going to take several decades for the kinds of things
he‟s putting together to fully have their impact.

So from our perspective, we see Boone as somebody who is clearly respected in

the industry. He has his own aspirational vision, which he‟s put his own money behind
and he‟s made his own investment. And he‟s out there doing that. And we see, as we‟ve
talked about, we support strongly the use of alternatives. Now, whether or not his piece
about using natural gas for – to displace gasoline or diesel in mogas (motor gas), let the
market sort that out. We‟ll see. That‟s sort of our view is we‟ll see how that goes. But
in terms of a plan, you know, we think it‟s one of those pieces. And he‟s to be applauded
for his understanding of how complex the market is.

But I would say, in finishing up, on the comment, he has the same problem I
mentioned earlier. Each one of those wind farms that he‟s going to put in is going to
need to be sited, and it‟s going to have to get a permit to do that. And then, he‟s
ultimately going to have to get the rights of way and transmissions to move from the
remote areas where he is to where it is. So it‟s a wonderful visionary statement. But
until people understand the idea of permitting and giving rights away to move energy
around, regardless of what it is, you know, we‟re not going to be able to get the kinds of
energy to where it is at an affordable price that we‟re going to need when we need it.

00:57:29 MS. VAN RYAN: Okay.

 00:57:31 BEAR: I‟ve got one last thing for you. It‟s a bit of a tidbit – this is the
Bear here again.

00:57:38 MS. VAN RYAN: Go right ahead, Bear.

00:57:41 BEAR: Okay, I picked this up on talk radio. And I want to know if
there is anything truth to this item. A gentleman called in and said he and his father have
spent the last 20 years working on drilling platforms in the Gulf. And after Hurricane
Katrina hit, he said that a lot of the wells suffered some physical damage that needed
repair. We‟re not talking oil spills here. We‟re talking just physical damages on the
wells and they are no longer producing. And the reason he said was is they can‟t get
permits out of Washington to fix them. Do you know anything about this?

00:58:24 MR. CAVANEY: I‟m not aware of any permits, Bear. We could check
on that. But you‟re absolutely accurate. There are platforms that did have damage done
to them. And I know some of them have not yet been repaired that are back producing.
As a matter of fact, there was one estimate that there was dozens and dozens of them that
they did not expect to come back because the cost of rehabilitating them wasn‟t going to
be offset by the amount of production that they were getting. And this tended to be the
older, closer-in platforms. But Jane, maybe, you could check quickly with our upstream
folks and see if they‟ve picked up anything there.

00:59:03 MS. VAN RYAN: I‟ll do that. Bear, I‟ll try to get back to you with an
answer for your question.

00:59:06 BEAR: All right, thanks, Jane.

00:59:07 MS. VAN RYAN: Okay.

00:59:08 MARIA SURMA MANKA: This is Maria Surma Manka. Is there time
for one more question?

00:59:11 MS. VAN RYAN: Yes.

00:59:12 MS. SURMA MANKA: Okay, hi. I‟m sorry. I came late to the
conference. I apologize if you‟ve covered this already. But what role or do you see
efficiency – vehicle efficiency standards affecting your industry?

00:59:27 MR. CAVANEY: Well, we think vehicle efficiency standards are

going to play a very big important role going forward. And we‟ve already seen,
irrespective of whether those standards were in place that a lot of the public has been
purchasing vehicles lately have basically put mileage as one of the key parameters for
making their choice.
 When you go back and look at the legislation that was passed in the last Congress,
what it essentially did in a very different and really almost non-publicized way, the
combination of having the industry move to a lower-carbon fuel by the increased amount
of biofuels that we‟ll be using, and the increased miles per gallon that the vehicle fleet is
going to have, you get a huge – this is projected to be about a billion-ton reduction of
greenhouse gas emissions. And so, de facto, you have the first major – shall we say –
climate reduction if you will as a result of a piece of legislation that wasn‟t much talked
about in that regard.

So I think we will see benefits from that. It‟s directionally where consumers are
already headed. We‟re working on the low-carbon fuels. And obviously, we‟re going to
be able to get that thing worked out at one point in time. So I see it as an encouraging
development – doing the more energy and less greenhouse gas emissions. And that‟s got
to be a plus for all of us in the energy business going forward.

01:01:08 MS. SURMA MANKA: Does it affect any of your offshore drilling
plans?

01:01:12 MR. CAVANEY: It has not yet.

01:01:13 MS. SURMA MANKA: Okay.

01:01:14 MR. FELMY: No, even with the changes in fuel economy and the
advanced ethanol provisions in there, you still have oil demand growing. And that is
growing in total. And remember that you‟re going to have to replace the declining
production – that is, the natural decline of the existing wells. So in terms of the outlook,
we haven‟t seen any impacts. Of course, we don‟t know what everybody else is saying.
But in terms of the total demand numbers, it still shows growth in oil.

01:01:47 MS. VAN RYAN: Okay, folks. I think with that we will close down
this particular blogger conference call. I want to thank all of you for participating.
Excellent questions. We will try to get the transcript and the audio file online as quickly
as we can do it. I will send you links to those as soon as they‟re up. We also have a
couple of other things we‟re putting on the website that might be of interest to you. I‟ll
send links to those as well.

Thank you so much. Bear, I‟ll get back to you. If any of the rest of you have any
other questions you‟d like to have answered, send me an email. We‟ll be talking.

01:02:15 MR. CAVANEY: Tune in to John Felmy, tomorrow morning, 7:35,

Squawk Talk. Thanks all.

01:02:21 MS. VAN RYAN: Thank you.

(END)