API

Blogger Conference Call

Moderator: Mark Green, API Speakers:

John Felmy, Chief Economist, API Brian Johnson, Senior Tax Policy Adviser, API

Thursday, February 2, 2012

Transcript by Federal News Service Washington, D.C.

Bloggers on the call included Bruce McQuain of Questions and Observations, Carter Wood of Business Roundtable Today, Geoff Styles of Energy Outlook, Mark Perry of Carpe Diem, Norman Leahy of Bearing Drift and Robert Rapier of R-Squared. MARK GREEN: -- Good afternoon everyone. This is Mark Green at the American Petroleum Institute. Thanks for joining us today. Before we start, Id like to see whos on the line. So if you could, please state your name and the name of your blog. ROBERT RAPIER: Robert Rapier from R-Squared. MR. GREEN: Hey, Robert. MR. RAPIER: Hello. MR. GREEN: Yes. BRUCE MCQUAIN: Bruce McQuain, Questions and Observations. MR. GREEN: Great. MARK PERRY: Mark Perry, Carpe Diem. MR. GREEN: Hey, Mark. NORMAN LEAHY: Norman Leahy from Bearing Drift. CARTER WOOD: Hi, Mark. Its Carter Wood from Business Roundtable today. MR. GREEN: Hey, Carter. Good to have you. MR. LEAHY: Hi. Its Norm Leahy from Bearing Drift. MR. GREEN: OK. Hey. Good to hear you. MR.LEAHY: Thanks. MR. GREEN: Is there anybody else that hasnt chimed in yet? OK. We may have some others thatll join us in progress. Ive got my iPad with me today, so if youre having trouble getting through on the phone, dont hesitate to email me with a question or to let me know that youre just listening in. Just a few ground rules for the call, to improve the audio quality please mute your line when youre not speaking. OK? Please be open and transparent, respect others on the call. And please introduce yourself each time you speak. Well post a transcript of the call on the Energy Tomorrow Blog on Monday at the latest. Again, thanks for joining us for this call to follow up on President Obamas State of the Union remarks.

The president made a number of good points about energy, calling for more domestic oil and natural gas and recognizing the tremendous gains in producing energy from shale. But we need more than pronouncements to secure our energy future. Because most energy projects require years to develop, we need concrete steps now to turn potential energy into reality. So lets talk about what can be done and what shouldnt be done going forward. With us today are APIs Senior Tax Policy Adviser, Brian Johnson, and Chief Economist John Felmy wholl kick things off with some opening remarks. John? JOHN FELMY: Thank you, Mark. Lets make a note. (Gives queuing directions.) Good afternoon, everybody. In last weeks State of the Union message, President Obama said some good things about domestic oil and natural gas production. He said we need more of it, and hes right. He also noted the benefits coming from the production of energy from shale, which is great. Now the question is, will the president follow up his own words with action? Now, I know the conventional wisdom in Washington is that you cant get anything done in an election year. Yet on some key energy issues, the president actually could get a lot accomplished that would advance his call for more American oil and gas. First, he could change course on the Keystone XL pipeline the biggest shovel-ready infrastructure project around. Approving the Keystone XL would create thousands of jobs and be an important part of a broader energy approach that would make our country more secure. The president could take steps to reverse declining oil and natural gas activity on federal lands in the West. A recent study for API showed that numbers of leases, drilling permits and wells are all down since he took office. The fact is, increases in domestic oil and gas are due to production thats occurring on nonfederal lands. Were producing more oil and gas in spite of the presidents policies, not because of it. Next, the president could also see to it that more offshore areas are added to the federal governments five-year drilling lease plan. Until an area appears on that plan, you cant really start developing energy resources in the Gulf of Mexico or the Outer Continental Shelf and other places. Were talking about a development timeline that can stretch seven to 10 years. So areas off the coast of Virginia and California, which were omitted from the five-year plan, are probably 12 to 15 years away from production at the earliest. Lastly, the president can restrain the hand of government. Right now, eight different federal agencies are considering new natural gas regulations or trying to hold off hydraulic fracturing, the drilling technique that has revolutionized natural gas production in this country. The last thing we need is a federal regulatory blizzard that would chill investment and development of this valuable resource. And the president could prevent that. He could also end the call for increased taxes on oil and natural gas companies, which could cause the country jobs and energy, and are, ironically enough, revenues to the government.

Im now glad to take have everyone on todays call. Now, Brian and Id be happy to answer your questions. MR. GREEN: Thanks, John. OK. Whod like to kick things off? Dont be bashful. MR. FELMY: (Gives queuing instructions.) MR. GREEN: Right. Well MR. WOOD: This is Carter Wood from Business Roundtable. MR. GREEN: Hey, Carter. MR.WOOD: In light of Chesapeakes recent announcement about the natural gas production and really the price the sinking price of natural gas, have we gotten to the point where the success of fracking and hydrofracking and shale natural gas is counterproductive to a broader, more logical domestic oil and gas or energy policy? MR. FELMY: Well, this is John. I dont think so. I mean, look, we have known about oil and gas prices being cyclical for the length of the history of the industry. And sometimes when you have surges in supply like weve experienced with some weak demand because of the economy, you have these cyclical swings. Each individual company has to make their own decision about what theyre doing as far as their production time frames, their outlook, what their particular position is in terms of leasing and so on. So I think that its a case of, yes, its wonderful that weve been successful in terms of bringing this stuff on line. But theres a lot thats going to continue to go forward, irrespective of the current market conditions. As many of you know, Im a native of Pennsylvania. And of course, today is Groundhog Day. And Punxsutawney Phil saw his shadow, so theyll say six more weeks of winter. But it is really exciting going back through that neck of the woods stretching across northern Pennsylvania that is not far from Punxsutawney. And you see how exciting it is for economic development and what it means for jobs and opportunities for those folks. A lot of the process of moving forward is somewhat locked in because, of course, once you developed a lease, you have to be able to develop within a certain point. And thats going to be each individual companys decision. But I think that theres also a case thats made that hydraulic fracturing has opened up the gas and gas thats rich with liquids, which will clearly continue. You know, theres also a case that you have some new pipelines being developed in Pennsylvania thatll get gas that has been found that will get to market, which would certainly help. And the prospect of developing an ethane cracker in one of the three states is equally exciting in terms of jobs and opportunity and so on. And so, yeah, it is a case that gas has dropped quite a bit. Thats been the very good news for homeowners, because if youre heating with natural gas, youre going to pay a whole

lot less than what you will if youre heating with heating oil or propane. And so its certainly been good news for consumers. But youre right. It is cyclical. But I think a lot of this stuff is something the industrys well-aware. Weve been through cycles. When I first got to API in 98, we had $8 oil and lower natural gas prices. And we weathered it through, and I think well continue to do that. MR.WOOD: Carter, again. Maybe kind of as a related question: Couldnt a policymaker make the argument why do we need expanded access to federal lands for natural gas when weve already got all of this in places like Pennsylvania and New York, et cetera? MR. FELMY: In a nutshell, for the benefits that will accrue if we open up those areas. You know, the opponents to oil and gas development regularly cite the argument that, Oh, youve got all these landholdings already that youre not developing. Why do you need more? Well, the answer is, if we have them, so what? If you open those areas to leasing, it means revenue for the federal government; it means potential economic activity; it means that firms can start working on their development plans and actually move forward. If we choose to hold back on leasing, wherever it is, it just further delays the process. And as my statement said, you know, this takes a lot of time. You know, we should continue to move forward and do that. You know, it takes some of the opponents also say, well, Why do you want to develop oil and gas? You cant do anything for 10 years. Well, by same measure, you wouldnt have planted a tree 10 years ago. And Confucius said the best time to plant a tree was 10 years ago, and the same is true of developing, leasing, and so on. Lets start the process, lets move forward. Youll generate revenue. Itll start to get the job process going forward and start us moving toward energy security. MR. GREEN: Next question. MR. RAPIER: Yeah, hi. This is Robert Rapier. Can you hear me OK? MR. GREEN: Yes, Robert. MR. FELMY: Yes, sir. MR. RAPIER: OK. Im curious if you are aware of a letter that Ed Markey sent to the EIA administrator. He made the claim that the oil and gas are not actually down 40 percent on federal lands, but the EIA is reporting royalties. And his claim was, well, because of all the leases that were screwed up during the Clinton administration, there are a lot of leases that arent collecting royalties. And so his argument was this doesnt really show that the productions been down, its just a reflection of oil and gas companies getting away with not paying for their for the royalties on these leases. Are you aware of this letter? And if so, do you have a comment on that? MR. FELMY: Yeah, Im definitely aware of the letter. This is Congressman Markeys consistent theme. You know, yes, there are leases in the Gulf of Mexico that are covered under the Deep Water Royalty Relief Act that have certain thresholds where they need to produce a

certain amount of oil before they pay a royalty. That was the Deep Water Royalty Relief Act. It was one of the best energy policies thats ever been implemented in the United States. It jumpstarted the deep water. Its led to a million barrels of production. And on that, the federal government is going to gain more revenue from it than what they gave up because of the initial royalty declines the initial lack of collection of royalty on that. In terms of his letter, he accurately cites a table in one of the Annual Energy Review (AER) publications. But its factually inaccurate to say that production has not declined. We have not used the data from that one particular table, which I think was 1.14 in the AER. Weve looked at production in other things, and theres no question about it that it has declined. The royalty issue is something that you know, look, the law was passed; the intent was very clear. The Supreme Court affirmed the law that said that this was what was meant. And to suddenly go back the way Mr. Markey wants to do and rewrite the law because he doesnt like it is simply in violation of the rule of law here in the United States. So if you look at the data directly from EIA without going to the AER, you can very clearly confirm that youve had a decline in production. And even if you do want to look at it from a counterfactual way, go back to, for example, the previous Annual Energy Outlooks before this administration and look what their estimates for the Gulf of Mexico were going to be, and you get the same type of story. You know, hes right that he found this one table that EIA has now pulled from their website and looking at that. But its it doesnt change the argument along that weve had a loss of production, clearly. MR. GREEN: Robert, do you got a follow-up? MR. RAPIER: Follow-up just, you know, I may send a note to Mark just to make sure, because Im in contact with some of Markeys people MR. GREEN: Mmm hmm. MR. RAPIER: -- and I want to be sure that at first, I wasnt sure quite how to respond to that. But Id like to see data that shows, you know, whether royalties are included or not, that production has actually fallen, because the arguments theyre making is, its just not a factual argument. And Id just like to have data thats clear of these royalty issues that just shows, you know, production. period. And their claim was that they dont have it. Theyre just reporting whats what royalties have been paid. MR. FELMY: Well, we have that data, and wed be happy to share it with you. We did not consult that one particular table thats been pulled. And wed be happy to share it with you the data we have that shows this case. MR. RAPIER: OK. Thank you. MR. GREEN: OK. Somebody else got a question? MR. PERRY: Mark Perry, Carpe Diem blog. Can you hear me?

MR. GREEN: Yes. Go ahead, Mark. MR. PERRY: John, Im wondering about super fracking. I mean, now we talked about how oil I mean, the gas prices are so low. So maybe this will be kind of a counteracting force if the cost of production come down with super fracking. So Im just wondering where that stands now in terms of its current development, if its being used, and then in terms of any environmental impact, if that will be better or worse in terms of the environmental concerns compared to regular fracking. MR. FELMY: You know, Im not really the most conversant person on super fracking. I of course read a little bit about it. Its a you know, an evolution of what theyre trying to attempt in terms of continued development of technology on industry. I think theres no question that if we can continue to reduce the cost of producing oil and gas by any mechanism, it means that you can bring oil and gas profitably to the market and the way. But in terms of super fracking, Ill have to get to back to you in terms of one our geologists, to be able to give you some specific trends on that. Its just something that Im aware of, but I cant give you any real detail on it. MR. GREEN: OK. Mark, do you have another question? MR. PERRY: No. Thats fine for now. Thank you very much, John. MR. LEAHY: Yes, this is Norm Leahy with Bearing Drift. MR. GREEN: Hey, Norm. Go ahead. MR. LEAHY: I have a question. I got this note from Eric Cantors office yesterday about uh, only Congress could come up with this the American Energy and Infrastructure Jobs Act, especially the transportation bill. But embedded within that are things like requirements for the administration to build the XL pipeline, to open a portion of ANWR theyre drilling, and some other things; also to, I guess, allow for offshore leases. And apparently that passed the Energy and Resources Committee, I think it was yesterday. How does this change any of the equations? Is this advanceable? Is this a good thing? Or is it because its transportation bill is it no big deal? MR. FELMY: Well, you know, in Washington, things move in mysterious ways. And I would only say were not, as an organization, going to be getting specific on developmental things that we see in terms of bills that have moved along and so on at this point. Clearly, anything thats done to move forward the Keystone XL pipeline, to move forward development of resources either onshore or offshore is a good thing for America. And recent surveys that weve done confirm that. And so I suspect thats, you know, part of some of our legislators are recognizing what their constituents want, and theyre acting on it. Now you still have to have full votes on the House before you have something just out of committee, and then it still has to go to the Senate, and it still has to be signed by the President.

So Id say, you know, any actions that help us move forward in terms of developing the resources which will generate jobs, revenue and energy security is a good, positive sign. Now how the logistics of it happen on Capitol Hill, you know, Im not going to comment on that. But, you know, perhaps Brian could make a comment on that in terms of how these process because hes more familiar with Capitol Hill procedures than I am. MR. JOHNSON: Yeah, this is Brian Johnson, and were following the highway bill really closely. I mean, one of the issues you have is, obviously the House has recognized that they need more money than the Senate bill does. They need 250-some billion dollars for a fiveyear bill, and they understand, in passing these proposals out of committee, that as John said, its a surefire way to generate revenue, put people to work and increase energy security without raising the industrys taxes. And, you know, were certainly supportive of that effort. You know, with respect to the Senate, their bill is a much smaller price tag only 13 billion (dollars). So, you know, were certainly watching these issues. And, you know, as a first glance at the committee process, theyre certainly taking things in the in the right direction. MR. LEAHY: Yes, because I have seen that Governor McDonnell issued another press release saying, oh, this is great; this is offshore drilling in Virginia. He, at the same time, today approved leases for wind-power generation (chuckles) off Virginias coast. So how do those two things blend together, oil and gas exploration and wind power? MR. JOHNSON: You know, I think were for an all of the above energy approach. I mean, the companies that we represent invest billions and hundreds of billions of dollars and, you know, trillions of dollars since the year 2000, in zero-carbon emission, clean technologies, new developments in technology. And so as an industry, you know, were investing in these technologies on our own, without government support and without government intervention. And I think that, to the extent that legislators of any stature support an all of the above energy approach so long as it does not penalize one group of energy to pay for the other you know, we really would be supportive of that, or at least, you know, certainly supportive of an all of the above energy approach. MR. FELMY: You know, if you look at the portfolio of energy that we have, you know, the things like wind and solar and geothermal the green technologies that we talk about are about 1 percent of our energy supplies. And those intermittent technologies also need natural gas as a backup. And so theyre consistent; they move together on that. The only concern I will say is that, as a resident in the state of Maryland, Im a little concerned about what itll do with the prices that I have to pay for power, because these are higher-cost sources of energy. And so youve got to balance that with the with the cost aspects and so on. But, you know, were for all of this. And theres a theres clearly a role for everything. Were going to need oil and gas for the foreseeable future. Were going to need certainly oil because of the transportation system.

And, you know, solar and wind will play a growing role. But it also demonstrates that there that the federal government has been able to move the permitting process and so on for example, for wind offshore fairly quickly. And so they have the ability to do the same thing in terms of oil and gas, either onshore or offshore. MR. LEAHY: Great. Thanks, guys. MR. GREEN: Next question. MR. RAPIER: Rapier again. You know, I used to ask this of Jane, and I dont know if you guys attempt to engage or not any of the groups that are contrary to your positions I mean, that really are out there lobbing grenades like, you know, the NRDC and the Center for American Progress. Do you ever invite any of their people on these calls, because I you know, you see them saying one thing, and you guys are saying another. Id like to see you both discuss it. I mean, that I think thatd be very interesting discussion, to get right down to the heart of the matter. MR. JOHNSON: Well, from a tax perspective, you know, weve spoken on panels at the Bipartisan Policy Center. We certainly, you know, participate in their briefings as well. And, you know, were very open to having a public and transparent dialogue about these issues. You know, theres some things were certainly not going to agree on; but some things we may be able to find common ground on. And so Id say that, you know, as an industry were certainly engaged with anyone whos influencing policymakers. And, you know, we dont ever shy away from having an opportunity to educate anyone on our issues be it a legislator, a Senator, a voter. So, short answer, Id say yes. You know, Id say we are engaged with these groups. MR. FELMY: And we Im regularly on TV debates with folks from that side. Were invited to panels; we just got an invitation to a panel to be on with somebody from the Consumer Federation. The only hesitation Id say is, a lot of the discussion has turned into more street theater has turned into, you know, people show up at our building wearing referees things and so on. And that type of discourse is not helpful in terms of going forward. So were more than willing to have open discussions, open formats with anybody. I think the our facts will clearly carry the day. And I have no problem Im a former Penn State debater, so I welcome the engagement. MR. RAPIER: Yeah, Im just thinking, you wouldnt see so much street theater I think on these calls here. Maybe we could just get down to a little bit more of the you know, the meat that, you know, theyre not performing for an audience here. And maybe you know, some of these questions, like this Markey issue, Id really like to drill down and hear their response to that. And, so thats what Ill do. Ill go out of here, and Ill go back and say, OK, according to the guys at API, this is what the data show. And theyll but theyll come back and say something else. So I think itd be really productive to have that conversation here.

MR. GREEN: Robert, thats a great point. Well certainly take it under advisement for including people on the other side on one of these calls. At least other bloggers, although Im sure they have their own calls dont they? MR. FELMY: We also have had instances where they have called in on our lines surreptitiously (laughter) in the past. MR. GREEN: OK, whos got the next question? Well, Ive got one, John. I was going you know, we both sat in on a call earlier today about particularly that zeroed in on the drilling in the Western lands. What are some concrete things that could be done to change policy to reverse the trend that weve seen that we saw in that Western-state study? MR. FELMY: Well, I think if you look at the study, you have things like environmental impact statements that have been delayed for seven years that need to be resolved. I think you have cases where multiple agencies are involved and are not coordinating the activity. So, you know, whether you have things like BLM and EPA and so on just simply not working together and so on, its helpful. I think that the whole process of recognizing that we do need to develop more resources and that weve already had a case where, you know, weve had permitting, leasing and drilling slowdowns that have resulted in lower leasing, lower productions and so on that otherwise we would have had I think just the commitment that we want to go forward, and we recognize that oil and gas will play an important role in the future, and that the country will benefit from developing it I think, for all of the participants involved, thats really the kind of the core idea of what we need to we need to do a commitment that it is part of a resource. But the administration came in with a focus solely on green energy, stopping the fiveyear plan that was through a part of the process for 2010 to 2015 was not helpful in terms of moving the ball forward. And it basically set us back many years. Its good to see the president talk about the need for oil and gas, a need for all energy, a need for all-in. Its not helpful, however, to be calling for increasing taxes the way he did. Its being you know, the political rhetoric of it, its taking our subsidies away, which simply has no validity. We dont get subsidies; we get tax treatment like all other industries. And were just being singled out in the political spin to be able to do it, because people dont support increased oil and oil and gas taxes on the oil and gas industry. They understand that its repeating Jimmy Carters mistakes, where they raised taxes on the industry, reduced production, increased imports, reduced jobs and then poured the money down the drain on things that didnt work. So, you know, in general both in terms of the West and in terms of everything lets first of all not repeat the mistakes of the past. MR. GREEN: Somebody else got a question? Well, maybe we can segue very quickly as were as were nearing the end of this Brian, John mentioned the president again renewed the call for taxes, although its a little more muted than he has in the past but taxes on energy companies. Why you know, why arent why arent these subsidies? I mean, thats the term that always gets used.

MR. JOHNSON: I mean, he said the same line he said last year: Its time to end taxpayer subsidies for big oil. And but its just a lie. Its a its an outright lie. There Im positive that hes been educated on these issues. And by still determining to call them taxpayer subsidies, hes either lying or purposely misleading the general public. There is clear difference between a credit, a deduction and mechanisms of cost recovery. A credit we would consider a subsidy. A credit subsidizes activity; it takes money from Taxpayer A and gives it to Taxpayer B for the purposes of completing a policy objective. Our industry does not currently receive one targeted taxpayer credit in the tax code. Period, and end of end of end of story. Its thats fact. We receive this exact same deductions and cost-recovery mechanisms that any other industry does. Our ability to recover labor costs through IDC, which has been in the code since its inception, is no way a loophole or a or a special giveaway. How can it be, if it was put into the code when the tax code was created? And the concept behind that type of cost recovery is analogous to the R and E deduction that allows businesses to recover research and experimentation, exploration costs. Wed be happy to recover our costs under there, except 163(d) or 174(d) prohibits us from doing so. So, you know, you have an instance where, not only do we receive the same type of deductions and cost recovery as other industries, but were actually treated worse. And the best example is section 199. You know, many folks in the phone are familiar with that, the domestic manufacturers tax deduction. All industries get it at 9 percent; we get it at 6 percent. There is there is no tax policy or public policy justification for that, except it was a political pay-for as part of TARP 2008, that we were frozen at 6 percent. So to hear people call these targeted taxpayer subsidies theyre either uneducated or theyre purposely misleading the voter. MR. GREEN: Is there anybody else that has a question before we wrap things up? MR. MCQUAIN: I have one. This is Bruce McQuain MR. GREEN: Hey, Bruce. MR. MCQUAIN: at Q and O. I have one thats related to the State of the Union, but it may not be the sort of thing you guys would want to discuss. But during that speech, the president mentioned how government had you know, had some hand in this current gas revolution. And reading around the Net I came across a great article in the The Foundry at Heritage Foundation. MR. GREEN: Right. MR. MCQUAIN: In which they go back on the background of fracking. And they actually say that it was patented in 1949. Can you guys at all go into what he was talking about as far as government involvement in this great revolution?

MR. FELMY: Well, as near as I can tell, hes talking about some of the technology operations of oil and gas. And you do have a big technology center, primarily out at Morgantown, that does work on oil and gas issues. And they look at the variety of technology develops. And they may have actually looked at fracturing and so on. I have not been able to find any specific reference to it. But youre but its absolutely clear that hydraulic fracturing has been around since the 40s; the companies have married that with horizontal drilling to be able to get us to the point. And I dont think theres any anyone would argue that the real hero in terms of advancing this is George Mitchell out, you know, basically working hard out in the fields of Texas to be able to do to perfect it and understand how to do it. Fracturing in general not hydraulic fracturing, but fracturing in general has been around for over a hundred years. But, you know, then it was dropping nitroglycerine down a bore hole and was a lot more exciting, you know, in terms of what you were doing. So, you know, I would say that theres probably been some input that may have been helpful. I cant quantify it in any degree. But really, where the rubber meets the road is commercialization of it, so that it actually works. And I dont think theres any question that, by far, the bulk of that was done by the companies that were out there working and, you know, really started to advance it, and so on. You know, theres a fundamental role for the federal government in terms of technology development, because of companies being unable to be able to develop technology because as develop it; they cant keep it under wraps and so on. So theres really a role. But when you move to commercialization beyond that, there is less and less of a role. I and where the government has tried to move in those areas, we have seen some pretty big failures, and you all are familiar with some of those. So I think thats what they were referring to, but I you know, for some reason, he didnt the president didnt consult me on his State of the Union speech. (Laughter.) MR. MCQUAIN: Cant imagine why. (Laughter.) MR. GREEN: Bruce, do you have another question? MR. MCQUAIN: No, thats it, thanks. MR. GREEN: OK. Anyone else? All right. Well, I want to thank everyone for joining us today. If you have some questions that come up later I know Robert mentioned this please dont hesitate to give me an email, and well do our best to follow up with you. As I said earlier, the transcript of this call will be available in the coming days, probably on Monday. I hope everyone found some use in this. Thanks for joining us; have a great day. (END)