API / Blogger Conference Call Transcript.
Here it is.
Bloggers on the call included
Brian Westenhaus from New Energy and Fuel,
Carter Wood from Shopfloor.org,
Gail Tverberg from The Oil Drum,
Geoff Styles from Energy Outlook,
Jazz Shaw from The Moderate Voice,
Joy McCann from Little Miss Attila,
Marlo Lewis from OpenMarket.org,
Merv Benson from Prairie Pundit,
Pejman Yousefzadeh from The New Ledger,
Steve Maley from RedState,
Tim Hurst from Ecopolitology
00:12 MS. VAN RYAN: It sounds like we have quite a few people on the call. This is Jane Van Ryan for those of you who are just joining us. And I have several people in the room with me here at API and Tim Considine, the author of a new study on the Marcellus shale, who also has dialed in. And I think John Felmy is dialing in as well, who is traveling in Houston.
Many of you have talked to John in the past. He is our chief economist here at API. Let’s start the call today by first finding out who all we have on the phone. A number of you indicated– a number of bloggers, I should say– indicated that they intended to be on the call. Let’s see if we can get a quick roll from everyone. Who would like to go first?
00:58 GAIL TVERBERG: This is Gail from the Oil Drum.
01:00 MS. VAN RYAN: Great. Thank you, Gail.
01:07 BRIAN WESTENHAUS: Brian Westenhaus.
01:08 MS. VAN RYAN: Hey, Brian. I’m glad you could join us. Who else is on?
01:12 CARTER WOOD: Here. Well, we’ve got the Ecuador trip revisited because Carter is on the line, too.
01:16 MS. VAN RYAN: Carter, hey, nice to have you on the line. Anyone else?
01:22 STEVE MALEY: Steve Maley with Redstate.com.
01:24 MS. VAN RYAN: Yes, Steve. Thank you so much for joining us. And who else do we have?
01:29 JAZZ SHAW: Hey, Jane, it’s Jazz.
01:30 MS. VAN RYAN: Hey, Jazz. Good. All right. And who else?
01:37 GEOFF STYLES: Geoff Styles, Energy Outlook.
01:39 MS. VAN RYAN: Wonderful, Geoff. Keep going. I know there are more of you.
And who hasn’t told us that they’re on line yet?
01:54 TIM HURST: This is Tim Hurst from Ecopolitology.
01:56 MS. VAN RYAN: Great. Thank you, Tim. Nice to hear your voice. Anyone else? I’m expecting several more bloggers so maybe they’ll be joining us shortly. I think you all know the rules for our blogger conference call: Everything is recorded; everything is on the record. The audio file and the transcript will be provided online hopefully as early as tomorrow afternoon. It always takes us a little while to get the transcript provided.
We’re happy to talk about most any questions that you might have. You’ve seen a partial list of the people who are going to be participating in the call today as speakers, who can provide information. And there is another individual who just walked in that I want to introduce to you. He is not on the list that I provided to you but I think, if you’re comfortable with this, Marty, I’m going to put you upfront and you can explain what’s happening on the Hill. This gentleman is Marty Durbin. He is in charge of our federal relations initiatives here at API and of course he’s monitoring the Hill activities very, very carefully today. So Marty, why don’t we start with you?
03:10 MARTY DURBIN: Okay. Sure. Thanks, Jane. I’m just kind of being updated by the minute here– you know, literally, getting these e-mails, articles from Roll Call, The Hill and what have you. But the Senate is really where people are paying the most attention right now. Sen. Reid has been trying to determine whether they can bring a bill to the floor next week or the following week before they leave for August recess. The plan for months now has been to try to put a bill up there that would address climate and energy and, now, more recently, the oil spill issues.
They appear to have thrown the towel in on being able to put climate on the floor before the August recess. At best they can have a very narrow energy bill. And, frankly, I’m still skeptical that they can even get any of the energy provisions on the floor– which kind of leaves you with the oil spill issues and how much they can put on the floor. And we really are talking about next week.
The Democratic Caucus has been meeting now for the last hour and they’re just right now having a press conference with Sen. Reid, Sen. Kerry and Carol Browner. And we’ll know more probably in about an hour or so because then they’re going to begin another leadership meeting to determine what they’re going to do next week.
We do hear that they will– if they do get into the oil spill -- it will probably stay focused on two main areas, one being the reorganization of the Department of the Interior and then beefing up some regulations of offshore– offshore drilling and then liability that has been debated in the Senate in the Environment and Public Works Committee.
Again, that’s very fluid right now. And the Senate calendar is very clogged. They’re trying to finish work on a small business bill this week; they have a supplemental appropriations bill. There are a few other things hanging out there. And then, before they leave, they have to– they intend to approve the nomination of Elena Kagan to the Supreme Court. So that’s kind of the lay of the land right now in the Senate. That’s really what we’re paying more attention to. I don’t want to dismiss the House because they’re also scrambling, trying to get an oil-spill related bill onto the floor next week before they leave. They’re leaving next week. The Senate stays around for an additional week after, so the first week of August.
05:45 MS. VAN RYAN: That gives you a quick summary. And because of everything happening on the Hill, that’s one of the reasons why we wanted to have the blogger conference call today, this week. And, of course, I’ve sent you all a number of materials involving tax issues, oil spill liability, Marcellus shale, even some polling results that we got yesterday. So with that, I just want to open this, open the floor to your questions. You can ask anything that you have on your mind, anything that you’re interested in and we’ll do our best to answer your questions. Who would like to go first? Oh, and please identify yourselves.
06:19 MS. TVERBERG: This is Gail. I was just going to ask – you mentioned the oil-spill liability. To what extent do you think the choice or the limit is going to make a difference on which companies are willing to drill in the Gulf? I know there has been talk that having too high a limit is going to eliminate the smaller companies from play.
06:44 MR. DURBIN: If I can – this is Marty. Frankly it will make a big difference. Essentially, the higher you put the liability limit the fewer people that are going to be economically able to continue to produce in the Gulf.
Now, it’s a – it gets a little complicated because there’s essentially two different issues: You know, there is raising the cap on liability; there has been a lot of focus around a $75 million cap on economic damages. That’s just, you know, once BP in this case has finished cleaning up everything, statutorily, as long as they aren’t found to have been reckless or negligent or what have you, there is a $75 million cap on economic damages for, you know, restaurants and everyone else that was affected.
The bigger issue for companies that are operating offshore, what they call the financial assurance requirements, where you have to get a certificate of financial responsibility. That is generally –currently, in the range of $35 million to $150 million. Even if you have a very high cap on the economic damages, yet you have a reasonable financial responsibility in that, it won’t put as many people out of play.
And, again, unfortunately, those proposals out there right now are very unreasonable. They’ll either eliminate the cap, put the financial responsibility over a billion dollars. That essentially means you’re going to be down to the largest privately owned companies and nationally owned companies.
08:25 MS. TVERBERG: Right, and the nationally owned companies could very well be somebody from overseas, of course.
08:31 MR. DURBIN: Correct.
08:35 MS. VAN RYAN: Another question, please? You’re all being too kind, too courteous of one another. Don’t hesitate.
08:53 MR. WOOD: Well, this is Carter at the National Association of Manufacturers. I’m wondering if you could give us an update on the moratorium in the Gulf. I haven’t had a chance to read up on the rally yesterday, but a sense of the mobility of drilling rigs. That’s one thing I don’t really have a good understanding of, how easy it is to just up and leave. So kind of just a general discussion of the moratorium and the effect it has on the industry.
09:20 ANDY RADFORD: This is Andy Radford with our upstream department. You know, the rigs can and some already have chosen to leave the Gulf of Mexico. We have something around 30, 33 rigs that have been impacted in deep water. I think two or three of those have already announced plans to leave. The others have been successful in working out some sort of agreements with the companies as part of a reduced rate to keep the rig in the Gulf while they wait this moratorium out, until we figure out if we can – hello?
10:07 MS. VAN RYAN: Go right ahead, Andy.
10:10 MR. RADFORD: Until we figure out if we can appease the – you know, meet the requirements set forth by the Department of the Interior to get back to work before the November 30th deadline. I think if it had been – you know, if companies get signals that November 30th is going to stretch on even after we make an earnest effort to do what’s required I think you’re going to see more drilling companies just say, we’re going to have to move elsewhere. We really can’t afford to sit idle that long.
10:41 RICHARD RANGER: This is Richard Ranger, also of the upstream group. And, ultimately, it’s really a matter of the contractual arrangements between the companies that own and operate the rigs and the oil and natural gas-producing companies that own the leases. And, as Andy says, in some cases, the companies owning the leases are at least for the time being successful in negotiating arrangements that involve some compensation to the drilling companies to keep their rigs here. But they’re in business to employ those rigs. And, depending upon the length of the moratorium and depending upon what develops in other operating areas in the world, there may yet to be some strong financial incentives for one or more of those – the drilling rig operating companies to consider relocating those rigs.
So the longer this moratorium continues, the more vulnerable our offshore industry is because there is a finite number of rigs in the world that are capable of drilling in these deep-water areas, these areas that have supplied so much of America’s domestic crude oil production in recent years.
11:57 MR. WOOD: Has API been involved in, say, an amicus brief or some function like that with the legal proceedings?
12:06 MR. RADFORD: Concerning the moratorium, we’re not involved in any legal cases of the moratorium at this point.
12:15 MR. WOOD: Okay. Do you have any sense of how quickly those might be resolved, I’m assuming every time a moratorium is announced there will be a lawsuit that will strike it down and then we’ll have another moratorium?
12:24 MR. RADFORD: Yeah, a company just filed suit I believe yesterday on the second moratorium. The first moratorium has been struck down. But the court case goes on. The legal machinations around it are a little bit complex.
12:42 MR. RANGER: And the other thing we’ve seen so far is that although the judges may rule the moratorium out of order and the administration probably turns around and issues another moratorium. So we’re in a bit of an Avalon Hill game whose outcome isn’t completely knowable just yet.
13:07 MS. VAN RYAN: Follow-up questions to that?
13:10 MS. TVERBERG: Could you just tell us where would these drilling rigs likely go? I mean, where is there sufficient demand that they really want more drilling rigs right now? Isn’t there may be a surplus of drilling rigs right now?
13:24 MR. RADFORD: Actually there’s a number of deep-water basins in close proximity to – relatively close – West Africa and Brazil are the two most obvious candidates where these rigs would go. The ones that have announced they’re leaving, one is going to Egypt and I think the other one is going to Angola.
So but Brazil has, you know, great designs on exploring and developing their deep water and have – there are a number of rigs currently under construction that plan to go to work in Brazil in the order of 20 rigs. So we’re looking at a big market there. And they could get a jump on their exploration and development program and get started a little early if these rigs move out of the Gulf.
14:12 MR. RANGER: And with Brazil, Gail, it’s important to recognize, too, that Petrobras, their national oil company, is a very significant player. So they have both a policy and domestic resource focus and operate under a bit different business rules. So they might be more inclined to mobilize more quickly to try to induce one or more of these rigs to come down to Brazil from the Gulf of Mexico. Again, that’s speculation at this point depending upon the length of the moratorium and the degree to which other players – other national oil companies, other resource nations – consider this a situation to begin to take advantage of.
15:00 ROBIN RORICK: There is actually an article in the Post today about this issue, talking about how the rig that Andy talked about is moving to Egypt and really the focus of the article is all about, really, how other countries like Norway, Egypt, Brazil are moving full steam ahead on their deep-water projects recognizing that there is now some increased [rig] supply that they could probably capitalize on. So the basic point of the article was, other countries aren’t slowing down and this is going to create a pinch here.
15:35 MS. VAN RYAN: That’s Robin Rorick, by the way.
15:37 MR. RORICK: Oh, I’m sorry.
15:38 MS. VAN RYAN: No problem.
15:41 MS. TVERBERG: Thank you.
15:44 MS. VAN RYAN: More questions? You all saw the tax information that we sent out. I think you have all probably seen the tax briefing paper. There are plenty of reasons to suspect that – in fact it’s written in some of the proposals – that taxes would be raised on the oil industry to pay for – we’re not sure what exactly. But I’ve got Stephen Comstock here, who can certainly address any issues about energy taxes.
16:16 MR. HURST: This is Tim Hurst from Ecopolitology. And I suppose my question is sort of tangentially tax-related. It’s really more about climate. So since it looks like there isn’t really going to be much in the way of climate action coming out of the Capitol this – at least before August and probably not until, you know, late this year, you know, it’s no secret that API has been opposed to a cap-and-trade and I believe opposed to the upstream cap-and-dividend, although I’m not entirely sure about that. Where does API sit on this sort of utility-only provision that’s kind of being kicked around right now? And is there – what does an API kind of deal look like?
17:11 RUSSELL JONES: This is Russell. I have to say that we don’t have a flat opposition to cap-and-trade. We did very much very clearly oppose the Waxman-Markey bill because of the way it was written. Looking forward at other bills, you know we’ve been interested in – you know, if the Senate could actually create a utility-only bill. But, not having seen one, we can’t react to one since we haven’t even seen one. But we’ve looked at a variety of approaches. We have members that support cap-and-trade. We have members that support a carbon-tax approach. So it really, for us, we need to look at whatever – we need to look at specific language to understand how it operates.
One of the issues that we’ve had with the structures of the bills like Waxman-Markey is the treatment of the petroleum consumers compared to other sectors of the economy like the electricity consumers. The Hill – the bills that have been written have very aggressively tried to protect electricity consumers from the impacts of higher prices caused by the allowances by giving them away for free, which is one of the great ironies of this in that all of the studies indicate that the cheapest way to reduce the emissions is in the electricity sector.
But, on the other hand, they have no interest, apparently, in offering similar protection for petroleum-product consumers. So we would think a level playing field is important. And that includes a level playing field for all consumers.
19:05 MS. VAN RYAN: Does that help, Tim?
19:07 MR. HURST: Yeah, that does. I actually had a little technical difficulty at the very beginning of that. What – how about cap-and-dividend? Did you comment on that? I actually fell off the call for a second.
19:19 MR. JONES: We haven’t – we don’t have a specific position on cap-and-dividend. I mean, we do have the Cantwell-Collins bill that’s out there. We’ve looked at it. Our members have looked at it. But until the Senate really starts looking at something like that seriously, again, it gets down to, how is a bill like that written? And we’d prefer to wait to see what the actual structure of a bill is.
19: 47 MR. HURST: Okay, thanks.
19:54 MS. TVERBERG: I have a different question. This is Gail, again. In terms of the prior, let’s say, I’m not sure exactly, regulation of companies that are drilling in the Gulf, I understand API has set standards, that they also do some things with monitoring. And how do you see this changing going forward? I know they’re still looking at new legislation, but what kind of things do you see as changing?
20:28 MR. RADFORD: I mean – this is Andy, Andy Radford, again. When you say “monitored,” as far as the government or API does that?
20:36 MS. TVERBERG: I didn’t think they did but there was one news report I saw that said something about so-and-so inspectors. And I thought they were talking about API. And that struck me as strange. I thought it would be government inspectors. Your involvement was in standards.
20:53 MR. RADFORD: Yes, we have our standards and recommended practices; some of them are incorporated into the regulations. The inspection function is carried out by the Minerals Management Service and now the BOEMER. (Laughter.)
21:12 MS. TVERBERG: They could have found something simpler, couldn’t they have?
12:15 MR. RADFORD: Yeah, but some of the changes we’ve seen so far have come in the form of Notice To Lessees that MMS has issued. There is the NTLO. There was an O4, an O5 and an O6. The one on NTLO5 contains some – basically in the areas of inspection and third-party verification of blowout preventer and well-control equipment, some new recommendations for secondary control systems and also new equipment, recommendations for new configurations of equipment, that will come and form.
A little down the road they’re going to be issuing interim rulemaking; we expect that in the next month or two. And that will set forth some new recommendations, new regulations for drilling equipment and practices.
And then, following that, there will be some more lengthy formal rulemaking once we – once they get the benefit of the investigations that are ongoing.
22:27 MS. TVERBERG: So this is what the agency that is succeeding MMS is going to be doing, right?
22:32 MR. RADFORD: Yes.
22:34 MS. TVERBERG: Thank you.
22:36 MS. VAN RYAN: Gail, one other thing: And I don’t know that you all have seen this. I ran out of time this morning myself and I could not send this out to you. But if you go to the blog, the “Energy Tomorrow” blog, you’ll see a blog posting put up maybe a couple of hours ago about this. One of the Notices To Lessees and operators deals with how you protect against blowout. And, interestingly enough, four of the major oil companies have gotten together and they’re planning to build and deploy a new containment system. They’re committing $1 billion to developing this system.
It’s pretty impressive. The idea is to have it basically in standby mode, from what I am reading, to keep it in the Gulf in the event that something like the Deepwater Horizon accident ever occurs again. That’s highly unlikely that something like that would happen, but at least the equipment then would be in position and deployable.
So that’s one way that the industry is trying to address some of the issues that have been brought to bear since the accident. So if you guys want to check that out, take a look at – I think it was a blog post that went up this morning and they’ve put one on top of it since then already but you can at least get some information and a diagram there.
23:52 MR. RANGER: We’ve also set up four taskforces that address various issues that have arisen as a result of the Deepwater Horizon. There’s a taskforce study on offshore equipment and one studying offshore operating procedures. Interim reports – I say interim – new reports from those taskforces, which went to the Secretary of Interior that were almost entirely incorporated into his recommendations to the president made in late March – late May, excuse me.
In addition, there are two other taskforces, one focused on source control – control of wells and well incidents – and then another one on oil spill response. And so there’s a tremendous amount of industry effort that involves people with expertise and experience from a multitude of different companies working together to try to ascertain what practices are available, what emerging technologies may exist and what basic technologies and procedures are reliable and improving, so as to build a better playbook really for operators in the deepwater, offshore environment.
25:32 MS. VAN RYAN: Anyone else have a question either related to that or anything else you have on your mind?
25:39 MR. MALEY: This is Steve Maley with Redstate. I was hoping to get out of this call a little more conversation about the tax law changes. Specifically there’s been some discussion about how treatment of foreign taxation affects domestic producers versus offshore, foreign-based companies. And also with changes to provisions like intangible drilling costs and percentage depletion. Have you done any quantification of what the impact is going to be on the supply picture from those changes?
26:23 STEPHEN COMSTOCK: This is Stephen.
26:24 MS. VAN RYAN: Stephen Comstock.
26:26 MR. COMSTOCK: Stephen Comstock, tax manager here at API. Let me take your second point first. We have been trying to pull together some information on the impacts of repealing IDC on production and investment in the domestic U.S. oil and gas arena. Percentage depletion not as much, but certainly with respect to IDC and 199 and so we’re currently working and trying to see if we can develop something that will give a little bit of substance to the statements that these things are considered to be a significant impact on the investment and capital that can be committed to oil and gas by many of the domestic oil and gas producers.
With respect to the second – or respect to your first point with the foreign issue. There is in the President’s budget and we’ve been hearing the issue being brought up both by Ways & Means and Senate Finance Committee and what it would – what the provision would do is it would modify the current rules that are in place that allow companies, specifically the U.S.-based oil and gas companies, the ability to use foreign taxes they pay abroad to offset the residual, sort of, U.S. taxes that they pay on that same income.
The U.S. taxes on a worldwide basis and so in order to allow our companies, U.S. companies, to remain competitive on a worldwide basis, you’re allowed a foreign tax credit. So if you operate in France and you pay taxes in France on that income, the U.S. will also tax that income, but to avoid a double taxation, the U.S. tax is offset – or you’re allowed to offset the U.S. tax by the tax you pay in France. The proposal would be to essentially restrict that for oil and gas companies.
So if you want kind of a plain example, imagine that every two weeks you get money withheld from your paycheck. You go on April 15th, file your return and you calculate your full amount of tax and then you offset that by the amount you withheld to get to the amount that you need to cut a check to the government for. Well, in our case, you wouldn’t get the full amount that you withheld. You would get a portion of that.
And the only reason why they – we haven’t got any good reason why they believe that this is necessary other than the fact that they claim that we’re getting credits for royalties instead of taxes that we pay. But frankly, the rules as they exist now prevent us from doing that. If it is a royalty, we are unable under the current rules and current statutes to be able to claim that as a credit.
The way the rules are set up is that in fact with U.S.-based oil and gas companies, we have multiple sets of rules that other industries do not have with the way in which we have to – or the way in which we can calculate and use our credits. So the rules as they exist now are actually skewed in the favor of the U.S. government. And you know, I think what they’re looking at is issues or things that they’ve created to just maybe address the overall image of this and hopefully sell it. But frankly, we’re trying to fight this very strongly.
30:11 MS. VAN RYAN: Steve, I wonder if you could address this whole perception that seems to be pervasive out there among certain groups of Americans that insist that the industry receives subsidies.
30:25 MR. COMSTOCK: There’s been a lot of statements out there that the oil and gas industry is the most heavily subsidized industry around. You know, all that you have to do is look at our effective tax rate and realize that that’s not true. On the whole, our industry’s effective tax rate, at least for 2009, was around 48 percent, whereas the rest of the S&P was around 28 percent. A lot of that is due to taxes that we pay on our overseas operations, but we also pay a significant amount of taxes here in the United States on our U.S. operations.
You know, the subsidies that people bring up with respect to section 199 as being the oil and gas subsidy – well, any U.S. manufacturer gets section 199 or is eligible for the domestic manufacturing deduction. So it’s not anything specific to oil and gas; it’s available to any manufacturing entity out there.
LIFO is another thing that people have brought up. You know, anybody who has inventory and has to account for it, both on their books and tax rolls can – (inaudible) – LIFO accounting.
IDC even, if you sit and you think about a number of companies that perform research that they can expense on their tax returns and it’s used to generate an asset that’s going to have a value going out into the future? Well, IDC is the exact same thing for us. We have these labor costs that are associated with drilling. Same – essentially you need to be able to drill the well in order to make sure that there’s something there to be produced. There’s no real difference between that and R&D deduction.
So when people talk about subsidies, they portray it in a light that somehow the oil and gas industry is the only one and it’s overly subsidized. But in reality, they’re no different than deductions that everybody else is eligible for and you can certainly go through the [tax] code and pull out any industry and essentially put it in the same light.
32:37 MS. TVERBERG: This is Gail. I was wondering, has anybody put together kind of a table that would say, you know, okay, the oil and gas industry had revenues of, you know, in the year 2008 had revenues of X and they paid taxes of Y? And then the financial banks and things had revenues of X and they paid taxes of something else. And the electricity utility industry had revenue of X and they paid taxes of Y. And then add them all up and so you get the total corporate revenue for U.S. businesses or something like that. And do it for 2008, 2009, whatever years so as to have some kind of a comparison that one can look at that way.
33:32 MR. COMSTOCK: Well, the only comparison that we’ve done is the oil and gas industry versus sort of the all manufacturing or S&P companies. We haven’t specifically identified other industries as a comparable.
33:48 MS. VAN RYAN: Pretty interesting thought, though, Gail. One of the charts that we have shows the earnings by industry. And you can find that in the primer that is updated frequently at energytomorrow.org. It’s called “Energizing Life.” And I think if you take a look at that, one of the pages has a graph on it that would show you the first quarter earnings of the oil industry as compared to a number of other industries.
Basically oil and gas made about seven cents on the dollar – kind of the middle of the pack in terms of earnings. And a lot of other industries made significantly higher earnings than that. That chart might be helpful. But I don’t think we have one that shows both earnings and then taxes paid.
34:36 MR. COMSTOCK: Not by industry. No, we don’t.
34:37 MERV BENSON: This is Merv Benson. Does that 48 percent include the tax at the pump?
34:44 MR. COMSTOCK: No. That’s the actual – you mean, the motor fuels excise tax?
34:37 MR. BENSON: Right.
34:38 MR. COMSTOCK: No, that does not include that. That is just income taxes.
34:55 MR. BENSON: Okay, so that’s on top of the income tax.
34:58 MR. COMSTOCK: Correct. The way the – you know, in addition to all the other taxes that we pay on our income or even severance, there’s the $30-some-odd billion that we collect and remit to the state that’s on the – from the motor fuels excise tax.
35:16 MR. BENSON: So I guess the government is actually making more on a gallon of gas than the oil companies are? (Laughter.)
35:25 MR. COMSTOCK: Well, they take out a substantial chunk and from the primer, earnings primer that Jane just alluded to, there is, I think, a dollar graphic which shows how much is allocated to raw material, how much is essentially margin for refining and then how much of, sort of, the dollar from a sale of a gallon of gasoline goes to excise taxes both at the state and federal level. So they certainly make a substantial amount.
36:01 MR. BENSON: And they don’t have any risk of production or finding oil and gas?
36:02 MR. COMSTOCK: They don’t need a return on their investment. There’s no ROI – (laughter) – issue with them.
36:18 MS. VAN RYAN: Other questions regarding taxes or any other issue for that matter? Don’t be bashful.
36:23 PEJMAN YOUSEFZADEH: A non-tax question. This is Pejman Yousefzadeh from The New Ledger. In addition to the federal government’s reaction to the Deepwater Horizon event, there have also been reactions on the part of the state governments, including Florida, which is, of course, colored in large part by the Senate race that’s going on there and the fact that the governor is involved in the Senate race. Has API taken any particular reaction to efforts in Florida to, I believe, ban offshore drilling via constitutional amendment? I think that’s what they’re trying to do.
37:02 MR. RANGER: This is Richard Ranger, Pejman. We have not specifically. We have been tracking carefully the activities in the different states and have been working and following developments in Florida closely for really a few years prior to the Deepwater Horizon incident.
And prior to the Deepwater Horizon incident, public opinion in Florida was moving toward acceptance of or support for drilling in areas in waters closer to Florida. It depended how you phrased the question and it depended, you know, what the responder was saying in terms of distance from shore.
But Florida public opinion had been moving out of recognition of the importance of energy to the economy of a state that depends so heavily on tourism and so heavily on fuels to get the tourists to the state and on energy to supply the air conditioning and the utilities to keep them comfortable once they’re there when they’re not out by the pool or on the beach.
That’s obviously changed in significant ways in Florida since the Deepwater Horizon incident. And I think you’re right: The existence of a very competitive Senate race down there and I think just normally vigorous politics in the Sunshine State has provoked a lot of concern among Floridians for the potential risk to their beaches and to the value of their tourist economy because of the Deepwater Horizon incident and the risk of pollution.
Over the long term, you know, assuming that we’re close to a final plug and stoppage of flow from the Deepwater Horizon well, with Florida as with the rest of the United States, our energy picture doesn’t change. We continue to demand energy to support the economy we have and the way of life we have. To take Florida as a specific example, Florida’s economy, Florida’s dependence on energy doesn’t change. And the importance of assurance of energy supplies, affordable energy supplies to Floridians, to Florida businesses, to Florida homeowners doesn’t change.
We have obviously got a long hill to climb to reestablish our industry’s credibility with many residents in the Gulf and, significantly, Floridians. But it’s worth noting that in the Gulf of Mexico, there has been strong objection from the other Gulf states to the moratorium – this is within the States and indeed among people who are closest to the Gulf living in the counties or parishes that are along the coast.
And so we simply see that we have a strong information-providing task ahead of us, but the primary arguments don’t change. We have an economy that depends on energy. We have – (inaudible, background noise) – Gulf Coast, a Gulf of Mexico resource that strongly supports jobs, strongly supports spending, generates taxes and revenues for the states in the Gulf. We think the work can be done safely. We will plan to make our voice heard both nationally and in the region to support safe and responsible development of the Gulf Coast resources.
41:00 MS. VAN RYAN: Questions?
41:02 MR. WESTENHAUS: Hi, this is Brian Westenhaus. Has anyone else seen the hydrocarbon man ad that Occidental put out a day or so ago?
41:11 MS. VAN RYAN: I know that Gail has and Gail in fact posted it.
41:13 MS. TVERBERG: I’ve got it up on The Oil Drum. (Chuckles.)
41:16 MR. WESTENHAUS: Oh, do you? (Chuckles.) I got it in an e-mail last night.
41:18 MS. TVERBERG: Well, I got it like a week or so ago from somebody and we put it up. It may have been out for a while. I don’t know. But anyhow, I put it up last night on The Oil Drum.
41:31 MR. WESTENHAUS: The point I wanted to make was that in lieu of, you know – in view of taxes and the river of money that flows to the federal and the states from the oil industry, you would think they would be smart enough not to try and throw dams into the river. Are there any other plans that the API or any other companies to come up with something a little more educational, such as the hydrocarbon man that might help people understand the gravity of the damage that’s done by government policy?
41:56 MS. VAN RYAN: To be fair, Brian, I’m not sure anybody here in the room has seen that yet. Gail mentioned it to me in an e-mail, I think it was just this morning or perhaps very late last night. And I haven’t had a chance to look at it yet. But we’ll take a look at it and see.
42:09 MR. WESTENHAUS: It will knock your socks off. It’s a good piece. (Laughter.)
42:12 MS. VAN RYAN: Okay.
42:13 MS. TVERBERG: The fellow ends up in his underwear after they take away the things that come from oil.
42:20 MR. WESTENHAUS: It’s really quite clever.
42:23 MS. VAN RYAN: Well, speaking of that and of the kinds of things that you all are seeing, let me ask you a question: So what do you need from us based on everything that’s going on right now, what kind of information do you need from API that helps you with your blog posts or helps you just understand the industry better? I’d love to get some feedback from you.
42:25 MR. WESTENHAUS: Thirty- and 60-minute videos like the hydrocarbon man that have educational value that the average dope can get in a little bigger than a spin or a sound bite kind of size. You know, a thousand-word blog post does one thing, but you never reach that many people.
43:00 MR. YOUSEFZADEH: In addition to that, just sort of a long view concerning the history of offshore drilling. I mean, all of us have internalized things like one airplane accident doesn’t mean that you stop flying on airplanes or even one car accident means you stop driving in cars. But this issue has not been internalized. And the Deepwater Horizon event is being seen as the norm, as opposed to a deviation from the norm. So that perception needs to be changed radically on the ground level before any sort of palliative political changes end up taking place
43:49 MR. RANGER: This is Richard. If I can kind of follow on your question, Jane. And I appreciate that response. One of the things that I think we’d always struggle with – and I don’t know if we were alone in industry – is the challenge of presenting information about what is a highly technical industry, an industry that depends upon science, on geology, on engineering. You know, a lot of what we do is not exactly work or processes or equipment that can quickly be explained to second graders at a show-and-tell. And so that’s – we’ve wrestled with that, recognizing that we have a need, as I think you’ve described, to tell our story to the public.
One of the things I’d be interested in feedback from you all is whether, you know, a number of weeks of the Deepwater Horizon of stories of various kinds in print and broadcast media about offshore operations has kind of brought public awareness and even a level of public knowledge up to where we could probably talk a bit more techie than we have in the past because people have a better understanding of there’s such a thing as drilling mud, there’s such a thing as a blowout preventer.
If we would have used those terms back, say, in December, we might have had a few sets of eyes glaze over. But I think we’re probably at the point where we could afford to speak in a bit more concrete terms about what we do to help present information that we need to present to the public. What do you all think?
45:45 MR. MALEY: This is Steve from Redstate. I work for a Gulf of Mexico operator and one of the issues that I’ve tried to educate people about is the difference between our shallow water operations, which are essentially not incident-free, but if you look back over the 40 years up until March of 2010, an acceptable risk, I think most people would say from an environmental and human safety standpoint. Offshore environment was relatively pristine until the BP thing.
Our operation is orders of magnitude less risky than what BP was engaged in due to water depth, due to drilling depth, due to pressures, due to oil versus gas. There’s a multitude of things that make it much less risky. But the people that don’t know and don’t want to know anything about our business lump them all together and equate them as the same thing.
46:55 MR. WESTENHAUS: Brian Westenhaus again. You asked what advice one could give headed your way? Well, everybody on this call is very intelligent. But out there in the real world, half of those people have IQs under 100 and they vote too.
Well, I know it’s funny. It seems funny, but they vote too. I mean, watch Obama and who goes to watch him talk? Look at the faces in the crowd. It’s scary, you know. You got to get it simple.
47:29 JOY MCCANN: This is Joy McCann and I actually agree with Brian very, very much. I think that there’s – I think that you really do need – I hate to say this, but you need bright colors, you need oversimplification. You need to use the least techie-sounding terms and I think it would be a terrible mistake to go too techie in stuff that’s actually gauged to the average person because the average person just isn’t that smart.
48:02 MR. YOUSEFZADEH: And the average person is geared at this point not to believe you. I mean, you’ve – part of the problem is you could have the most sellable message out there, but if no one’s listening, then what’s it worth? And part of what you have to do is to, I guess, sort of wave your hands and say, hey, over here, we have a story to tell. And that’s going to be a process entirely independent from actually refining that story and having the chance to tell it.
48:41 MS. MCCANN: Which is why I think a lot of the people in Louisiana have a lot to say. I mean, I think it’s really, really important that the shrimpers in Louisiana are very much in favor of getting, you know, their relatives who work on the rigs back to work. I think it’s really important.
49:00 MR. YOUSEFZADEH: Yeah, quite frankly, I mean, that’s one of the best things you can do is you could – when people talk about stopping offshore drilling, a great many of them, the image they have in mind is that already-rich oil executives don’t get a chance to line their pockets any further.
I think it’s exceedingly important – and it has the virtue of being true – to point out that there are people who are never going to be millionaires whose livelihoods depend upon getting operations back into order. And these people are just getting killed. And that’s the most important thing you can do in terms of turning around public opinion.
And once public opinion’s turned around, in order to have the – in order to be geared to listen to your story, then you can start talking a little bit more about the technical side, about things that you’re doing in order to make sure that offshore drilling operations go safely.
50:02 MS. MCCANN: One more little thing that I think has to be concentrated on a little bit more is that a lot of the overseas operations are done at a much, much higher environmental cost. I think we really, really need to be talking more about what happens when the drilling occurs overseas – you know, what’s going in Nigeria, what’s going on elsewhere. What happens when the risks are higher and the impact to the environment is much, much worse, when this stuff leaves America’s shores?
50:38 MS. VAN RYAN: And you’d be able to use that kind of information, you think, or if we provided videos of people who have on their hard hats and their boots and they’re simply explaining what they do in the industry and putting a human face on the industry, is that the kind of thing you could use?
50:56 MR. YOUSEFZADEH: Yes, absolutely. I mean, this is an election year and economic issues are prime, especially unemployment. And this all just feeds in and it feeds in very, very strongly. And you absolutely need – this has to be an economic and employment issue. Because it is an economic and employment issue, it has to be presented that way.
51:30 MR. WESTENHAUS: Someone in the oil business has got to pull a Ross Perot about the giant sucking sound of Washington, D.C. They suck up jobs; they suck up cash; they suck up taxes. They suck up everything. You know, the little ad that Occidental runs is funny, but it’s highly instructive. It works for people that are highly intelligent every bit as well as it works for the people with an IQ under 100.
These things are hard to do, I grant you, but it’s important to get them done because the ad’s true. You take oil out of our economy and we’re sunk. You can’t support 300 million people without oil; it won’t work.
51:59 MS. TVERBERG: Yeah, that’s right. The problem with the ad is it’s in kind of an obscure format. And if it were in, you know, just a standard thing that people could pass around on the Internet a little more easily, I think it would be even better – you know, that they could share on Facebook.
52:18 MR. WESTENHAUS: It sounds almost evil for an association to do, but you almost need a library of stuff for people to call on, you know, specifics. You know, trying to have the stuff on YouTube; that’s Greek for me. I don’t have the time.
52:32 MR. RANGER: There’s something I could call your attention to because we are, you know, constantly updating our website. We have information, we have our ads accessible on our website, we just posted – what was it, yesterday – a new primer on hydraulic fracturing, which, of course, has continued to be a significant issue, particularly with respect to development of onshore natural gas resources.
We also have on the website – and I don’t know if Jane has sent you the link, but she can do so -- e have a couple of video productions on drilling, one of which involves real people employed – you know, wearing hard hats, working in the oil industry, explaining the basics of what goes on at a drilling operation from field locations in Texas and in Colorado. So we’ve got a couple of things like that. What you’re saying is very helpful and I really, really appreciate the feedback you’re providing.
53:41 MS. VAN RYAN: And speaking of hydraulic fracturing, I think all of you received links to a study on the Marcellus shale and the economic impact there. Because you’re talking about jobs and economic benefits and so on. You should have all received that study and Tim Considine, who’s the author of that study, should still be on the phone with us. Are you still there, Tim?
54:01 MR. CONSIDINE: I am.
54:02 MS. VAN RYAN: Good. I don’t know if any of you have any questions about his study. The study deals with the potential economic, very positive economic impact of the Marcellus shale in Pennsylvania, New York and West Virginia. And Tim, correct me if I’m wrong, but isn’t it 280,000 jobs and about $6 billion in government revenues?
54:26 MR. CONSIDINE: Yeah, that was the forecast I made under a high-development scenario for the year 2020. Currently, the industry in West Virginia and Pennsylvania is creating over 57,000 jobs and that’s based on direct employment in the industry and all the supply-chain spending that it stimulates and the induced spending by households and landowners of lease and bonus payments and royalty income.
55:00 MR. WESTENHAUS: Have you got a map with a bright dollar bill, green spot over where that money ought to get spent?
55:07 MR. CONSIDINE: Pardon?
55:08 MR. WESTENHAUS: Need a map with a dollar bill, green spot on where that money’s going to be spent. Well, it’s got to be visual. I mean, you know, I like lots of traffic. I also like high-end traffic because they click on the ads pretty good. With these numbers, you’ve got to get down, you got to – you know, you’ve got to come down off your high horse and talk at their level. The second-grade thing works and I’m sorry it works. (Chuckles.) They hang around longer, too.
55:33 MS. VAN RYAN: Very helpful, this is all very helpful information.
55:38 MR. STYLES: This is Geoff Styles. You got time for a question on a different topic?
55:41 MS. VAN RYAN: Of course.
55:43 MR. STYLES: First, let me just offer an observation that might be helpful to this conversation, which is that, you know, it seems to me that what the industry is currently facing is an epidemic of fear, uncertainty and doubt, similar to what the nuclear industry faced after Three Mile Island. And that may be the only relevant analogy, to TMI. But it might be helpful to look at what other industries have done to counter those sorts of things.
I’m not sure the nuclear industry is necessarily the one to look at. But you know, other industries have gone through things like this and found ways to try and guide folks out of it. The question that I’ve got actually relates to ethanol, a totally different thing. I know that the industry has generally stayed relatively neutral on ethanol policy, but there’s a couple of big things coming up that could have a very significant on the industry, both in terms of investment cost and in terms of potential liability.
I’m referring to, first of all, you know, as we approach the blend wall, you’ve got this pending decision relative to increasing the blend percentage of ethanol from 10 percent up to 12 percent, or maybe even as much as 15 percent.
I have a hunch that, at the end of the day, if that happens, the folks that are going to be stuck with the liability when cars stop working are not going to be the ethanol producers who, I believe, have actually been indemnified under some of the recent legislation. But it’s going to be either the auto industry or the oil and gas industry or both.
And then the other issue relates to the very interesting proposal that’s just come out of Growth Energy which, I think for the first time, fragments the way that the ethanol industry is trying to go on its policy stuff. You’ve got the 45-cent-a-gallon, volumetric ethanol excise tax credit ending at the end of this year and there’s proposals to extend it, but Growth is saying, wait a minute, don’t extend that tax credit. Shift that money into tax incentives for putting in E85 infrastructure, gas stations and blender – they call it blender pumps.
I guess the idea is you have a tank of ethanol in the ground and you blend some arbitrary amount of ethanol into every gallon of gas at the consumer’s request, or whatever. Do you have any thoughts on all of this? Because I think, you know, this is about to start having a serious impact, not just as Hamburger Helper, but as something that’s going to really cause potential operational issues and costs.
58:05 MR. WESTENHAUS: Buy that man a steak.
MR. JONES: Hi there, this is Russell Jones. I’m more of a climate person than an ethanol person, but I’ve listened to some things around the building, so I’ll share what I do know. API is, in fact, very concerned about EPA prematurely approving higher-grades, beyond the 10 percent and higher percentages.
We’re in a fairly extensive research program to test these higher grades. I don’t have the details in front of me, so I couldn’t tell you who it’s with. But I think there is some legitimate concern as to whether the vehicles that are on the road can take the higher grades of ethanol, especially with the older vehicles.
And we’ve been urging EPA not to prematurely do this, to prematurely approve the higher grades, for precisely the reasons that you raise. There could be a whole lot of liability issues and we don’t want to be on the wrong end of that. And we don’t think EPA ought to approve products that are going to do harm to people’s vehicles. I think the research program, I think, is supposed to be done this fall, but I don’t have the details. But I think the liability issue is a very serious one and we are concerned about that.
Interesting thing on, you know, you’re talking about the magic blend pumps, where somebody walks in and says, I want 47.25 percent ethanol today. It seems there’s an interesting an old supply and distribution guy – I spent 10 years of my life doing supply and distribution work for Texaco – I cannot imagine how that’s going to fit into the marketplace, particularly at the same time you’re trying to introduce E85.
I mean, it just seems like a total no-can-do. And yet, if you don’t have something like that, you know, there’s no way to get to 35 billion gallons a year or anything close to that.
01:03:38 MR. JONES: Well, you can – I’m being facetious here – but each service station probably has about three different tanks, some sort of regular, mid-grade– and premium. And then you have three more for an E15, grade of each. And then, you could have three more to get your E85. I mean, you’re right, it doesn’t work.
01:03:54 MR. STYLES: Yeah, I’m not sure $100,000 a station would cover that.
01:03:57 MS. VAN RYAN: No, not even close.
01:04:00 MS. MCCANN: You make them more like Starbucks bars, you know, where you want the half-caf – (laughter).
01:04:07 JOHN FELMY: This is John Felmy. If I could just add something to this discussion, because I’ve been going over it. You know, the Growth Energy proposal just is a mystery to me. The notion of it is that, oh, the blenders and the oil companies are the ones who are really getting the subsidy and the ethanol producers are not at all. Well, the best research on this issue was done by Wally Tyner of Purdue who is a very respected agricultural economist and probably one of the most prominent agricultural economists in the world.
And they clearly in their study, which is about the only one that I think was carefully done on it, says that the ethanol industry is the one that ultimately receives the benefits, you know, following kind of the analysis of incidence of taxation and subsidies. So I really am puzzled why they’ve come forward that ultimately they could end up causing themselves problems.
And finally, you know, the limitation on selling more ethanol is not the oil industry. It’s not blenders’ pumps. It’s getting consumers to understand that they have a flexible-fuel vehicle. You know, the joke is that something like 8 million folks – and this was told to me by the ethanol folks – that there are 8 million cars or so and only a million of the owners know that they’re flexible fuel. And so, a strong outreach to those customers is the best way to be able to move up that chain. And you’re absolutely right. I mean, with low gasoline demand growth or no gasoline demand growth, you’re going to hit the blend wall pretty quickly.
01:05:35 MS. MCCANN: But there’s one other P.S. on ethanol that I think just – well, actually two, one which has been touched on, which is that ethanol is very, very, very highly subsidized. And of course, when there are fluctuations in the ethanol market, it actually affects the food market. And a lot of people think that that’s – that those two should be divorced simply because of the impact it has on food prices, depending on what’s going on with ethanol.
But the other thing to keep in mind is that in the average – in the mind of the average person, the environmental costs are very, very high with oil and gas but not with ethanol. And of course, you know, we know that there is a huge dead zone in the Gulf itself because of all of the – you know, agricultural runoff from all of the extra soybean and corn that’s just being grown for ethanol production.
01:06:29 MR. STYLES: Absolutely. In fact, the CBO just put out a study on the effective cost per gallon of gasoline equivalent of the ethanol subsidies. And they come up with a number for what it costs per gallon to actually replace a gallon of gasoline with ethanol, and it’s a stunning number, like $7.00 a gallon or something or $3.00 a gallon. It’s like off the chart. (Chuckles.)
01:06:56 MS. YOUSEFZADEH: This is Pejman Yousefzadeh. The great – one of the great scandals concerning ethanol as an alternative fuel is, of course, the fact that sugar cane-based ethanol from South American countries like Brazil would work significantly better than would corn-based ethanol in terms of both price and efficiency. And of course, we stick with corn-based ethanol because various Midwestern senators and various Midwestern former senators who go onto bigger and better things like to keep that kind of domestic supply, which is essentially protectionism run amok in the energy sector going.
01:07:40 MS. TVERBERG: I’d be interested in a link to that Congressional Budget Office study on ethanol. Was it Geoff that had that?
01:07:50 MR. STYLES: Yeah, Gail, it’s actually – I did a posting on the Growth Energy thing, I think, earlier this week. And the link is in the posting.
01:07:58 MS. TVERBERG: Thank you.
01:08:00 MS. VAN RYAN: Folks, we’ve been going for over an hour now. I don’t know if anyone has any other additional questions. I must tell you, I’ve enjoyed the discussion immensely. And I appreciate your candor in giving us your suggestions on what we should do and how to try to explain this complicated and highly technologically advanced industry to John Q. Public. It’s a challenge, as you know. It’s a challenge that we’re all engaged in every day. So any other thoughts that you have, please send them to me. And in the meantime, we’re going to get the audio file and the transcript prepared. And we’ll send those out to you, send a link to those two documents to you at some point tomorrow, I hope.
So if I don’t have a chance to visit with you before the weekend, have a wonderful weekend. I’m sure we’ll be in touch. Thanks, everybody.