A Healthy America Needs a Healthy Energy Industry
Speaker: Lamar McKay
Speech date: 25 March 2009
Venue: Howard Weil Energy Conference
New Orleans, LA
Title: Chairman and President, BP America
Speech date: 25 March 2009
Venue: Howard Weil Energy Conference
New Orleans, LA
Title: Chairman and President, BP America
Ladies and gentlemen, it is a pleasure to be with you today —especially in this great city. I grew up not that far from here, in Mississippi….New Orleans has always been very special to me.
In fact, my mother-in-law still lives here and she may be in the back somewhere.
If so, no doubt I’ll get my toughest questions from her today!
We meet at an exceptionally volatile and challenging time, not only for our nation and for the world, but for our business as well.
What a difference less than a year makes.
Nine months ago today, oil closed at $134 per barrel, two weeks away from its $147 peak on July 11.
Back then, the talk was of permanently high oil prices…
Rising global energy demand…
Tight supplies…
And how high prices were making the development of alternative energy sources more attractive.
Well, that was then and this is now.
Since last fall, the global economic picture has darkened to a degree few of us thought possible….
Every day brings the news of more layoffs and of companies struggling to survive.
Worldwide, the recession appears to be deepening, and no one is putting out confident predictions of when it might end.
Here in the United States, we have a new administration that is struggling to come to grips with an economy that hasn’t been seen in many decades.
The impact of the economic slowdown on our industry has been sudden and severe…
While American consumers welcome the recent relief they have experienced at the gasoline pump, the price collapse of the last few months presents our industry with serious challenges.
The fall in demand and the drop in energy prices are only masking America and the world’s energy challenges. It does not solve them.
When the economy recovers — and it will — demand for energy will begin to grow again….driven by world population growth and rising living standards.
Our industry must be ready when the recovery begins.
That means looking beyond today’s headlines and toward the longer term.
Every day brings the news of more layoffs and of companies struggling to survive.
Worldwide, the recession appears to be deepening, and no one is putting out confident predictions of when it might end.
Here in the United States, we have a new administration that is struggling to come to grips with an economy that hasn’t been seen in many decades.
The impact of the economic slowdown on our industry has been sudden and severe…
While American consumers welcome the recent relief they have experienced at the gasoline pump, the price collapse of the last few months presents our industry with serious challenges.
The fall in demand and the drop in energy prices are only masking America and the world’s energy challenges. It does not solve them.
When the economy recovers — and it will — demand for energy will begin to grow again….driven by world population growth and rising living standards.
Our industry must be ready when the recovery begins.
That means looking beyond today’s headlines and toward the longer term.
So today I would like to discuss three things with you.
From their peak in July, oil prices fell to as low as $34 per barrel in December — and have only just crested $50 in the last few days.
Today, OPEC production cuts of more than 3 million barrels a day have still not fully caught up to shrinking demand.
According to the IEA, global daily oil consumption is expected to decline in 2009 by another 1.2 million barrels….
That’s the largest decrease since 1982.
Turning to US natural gas, Henry Hub prices have fallen to levels not seen since 2002.
That is due in part to the economic slowdown, of course….
But prices were also affected by additional supplies of shale gas made available by the higher prices of recent years and the expected arrival of new supplies of LNG.
Investment and activity levels are responding to lower prices.
- First, the current business environment, for both oil and natural gas…
- Second, the steps we must take in response to that environment…
- And finally, how public policy decisions in Washington are likely to impact energy production, energy consumption and energy prices in the near and long terms. Our industry does not operate in a vacuum. Our environment impacts every decision we make
From their peak in July, oil prices fell to as low as $34 per barrel in December — and have only just crested $50 in the last few days.
Today, OPEC production cuts of more than 3 million barrels a day have still not fully caught up to shrinking demand.
According to the IEA, global daily oil consumption is expected to decline in 2009 by another 1.2 million barrels….
That’s the largest decrease since 1982.
Turning to US natural gas, Henry Hub prices have fallen to levels not seen since 2002.
That is due in part to the economic slowdown, of course….
But prices were also affected by additional supplies of shale gas made available by the higher prices of recent years and the expected arrival of new supplies of LNG.
Investment and activity levels are responding to lower prices.
Worldwide, E&P spending is expected to contract 12 percent in 2009, from $454 billion to $400 billion, according to Barclay’s Capital.
That’s the first reversal in such spending after nearly six years of growth.
And the sharpest decline is expected to take place right here in the US…
E&P expenditures are expected to fall 26 percent, to $79 billion from $106 billion in 2008, ending a four-year upturn.
US capex budgets are falling twice as far in percentage terms as they are internationally….
This is due to the presence in the US of substantial numbers of independent operators, who can adjust rapidly to fast-changing market conditions.
We are indeed fortunate here in the US to have a market structure that encourages companies to make rapid adjustments to market conditions.
Of companies that spend more than $50 million per year on E&P, for example, the largest budget reductions — 37 percent — are coming among those that invest between $50 million and $100 million.
US drilling activity recently hit a six-year low, according to Oil & Gas Journal…
As of last Friday, there were 1,085 rigs operating in the U.S., the lowest level since August 2003…
From their peak last fall, the gas rig count has fallen 45 percent and the oil rig count 47 percent.
That is one of the steepest drops on record.
That’s the first reversal in such spending after nearly six years of growth.
And the sharpest decline is expected to take place right here in the US…
E&P expenditures are expected to fall 26 percent, to $79 billion from $106 billion in 2008, ending a four-year upturn.
US capex budgets are falling twice as far in percentage terms as they are internationally….
This is due to the presence in the US of substantial numbers of independent operators, who can adjust rapidly to fast-changing market conditions.
We are indeed fortunate here in the US to have a market structure that encourages companies to make rapid adjustments to market conditions.
Of companies that spend more than $50 million per year on E&P, for example, the largest budget reductions — 37 percent — are coming among those that invest between $50 million and $100 million.
US drilling activity recently hit a six-year low, according to Oil & Gas Journal…
As of last Friday, there were 1,085 rigs operating in the U.S., the lowest level since August 2003…
From their peak last fall, the gas rig count has fallen 45 percent and the oil rig count 47 percent.
That is one of the steepest drops on record.
Working from published reports, the API estimates that the slowdown has cost more than 15,000 Americans their jobs.
Service companies like Schlumberger, Halliburton and Baker Hughes have all announced reductions in force, as have BP, ConocoPhillips and many other producers.
In refining, global aggregate margins fell into negative territory earlier this month for the first time in 21 years.
Margins had risen steadily between 2002 and 2007, driven in part by tightening product specifications.
Since 2007, however, refining margins have become much more volatile, especially in the US.
And this occurred in spite of short-term support for refining margins from a very cold winter and a very high level of turnaround activity.
As spring kicks in, margins continue to be weak.
Overall, it’s not a very pretty picture.
And while oil prices may improve later in the year as inventories tighten, a quick economic appears unlikely, and ongoing volatility into next year wouldn’t be a bad bet.
But it would be a bad bet to get too gloomy.
Over a decade ago, former Fed Chairman Alan Greenspan warned about “irrational exuberance” in the stock market…
In retrospect, he was right.
Service companies like Schlumberger, Halliburton and Baker Hughes have all announced reductions in force, as have BP, ConocoPhillips and many other producers.
In refining, global aggregate margins fell into negative territory earlier this month for the first time in 21 years.
Margins had risen steadily between 2002 and 2007, driven in part by tightening product specifications.
Since 2007, however, refining margins have become much more volatile, especially in the US.
And this occurred in spite of short-term support for refining margins from a very cold winter and a very high level of turnaround activity.
As spring kicks in, margins continue to be weak.
Overall, it’s not a very pretty picture.
And while oil prices may improve later in the year as inventories tighten, a quick economic appears unlikely, and ongoing volatility into next year wouldn’t be a bad bet.
But it would be a bad bet to get too gloomy.
Over a decade ago, former Fed Chairman Alan Greenspan warned about “irrational exuberance” in the stock market…
In retrospect, he was right.
On the flip side, I would caution against irrational pessimism when it comes to our industry.
You don’t have to go back far to find a time when today’s oil prices would have looked very good indeed.
On March 25, 2004, for example, CBS Market Watch ran a story with the headline, “Get Used to High Oil Prices.”
"We are in a new era for the price of oil,” the story quoted one analyst as saying.
"Even at these high prices,” he said, “demand has not gone down. In fact, demand is increasing. Right now, I believe this summer is going to be a very, very expensive summer."
The price of a barrel of West Texas Intermediate crude on the day that story was published? $35.67.
So if anyone had said “$50 a barrel oil” to me five years ago, I very definitely would have taken it.
And I suspect that almost all of you in this room would have as well.
The point here is not that current conditions are exceptional in the history of our business….
What is exceptional is the environment to which we’ve grown accustomed in the last few years.
BP tracks the price of oil back to 1861, which is just two years after Colonel Drake drilled the first well in Titusville, Pennsylvania.
There is only one period in all that time when the price of oil went up for seven consecutive years: 2001 to 2008.
There are many reasons that that happened, of course… Rising demand in places such as China and India…
Falling production in the US…
And lack of access globally.
You don’t have to go back far to find a time when today’s oil prices would have looked very good indeed.
On March 25, 2004, for example, CBS Market Watch ran a story with the headline, “Get Used to High Oil Prices.”
"We are in a new era for the price of oil,” the story quoted one analyst as saying.
"Even at these high prices,” he said, “demand has not gone down. In fact, demand is increasing. Right now, I believe this summer is going to be a very, very expensive summer."
The price of a barrel of West Texas Intermediate crude on the day that story was published? $35.67.
So if anyone had said “$50 a barrel oil” to me five years ago, I very definitely would have taken it.
And I suspect that almost all of you in this room would have as well.
The point here is not that current conditions are exceptional in the history of our business….
What is exceptional is the environment to which we’ve grown accustomed in the last few years.
BP tracks the price of oil back to 1861, which is just two years after Colonel Drake drilled the first well in Titusville, Pennsylvania.
There is only one period in all that time when the price of oil went up for seven consecutive years: 2001 to 2008.
There are many reasons that that happened, of course… Rising demand in places such as China and India…
Falling production in the US…
And lack of access globally.
So $50 a barrel oil is a disaster?
No.
We’ve been here before and operated successfully — and we can do it again.
Our environment has changed.
We have to adapt to this change.
How do we go about it?
I am happy to say that BP was not one of those companies that took $100-plus oil as a given.
When Tony Hayward became CEO two years ago, he put in place an urgent plan for tackling the challenges our company faces head-on.
A key part of the plan is a continuing effort to increase efficiency in order to reduce costs in line with the revenues we can reasonably expect…
And we aim to do this while investing in upstream production growth and the reliability and efficiency of our refineries.
To those ends, BP began reducing spending and headcount in 2007 — even as oil and gas prices continued soaring.
As a result, last year, we succeeded in holding 2008 costs flat over 2007…
And in fact, 4Q costs were significantly below the same period the year before.
This momentum is building — partly as a result of the deflation we are now seeing in raw material costs such as steel, cement, iron ore and energy.
I’d like to say a word here about the importance of continuing to ramp up our investments in technology.
As most of you know — but many do not — ours is an extremely high-tech business.
No.
We’ve been here before and operated successfully — and we can do it again.
Our environment has changed.
We have to adapt to this change.
How do we go about it?
I am happy to say that BP was not one of those companies that took $100-plus oil as a given.
When Tony Hayward became CEO two years ago, he put in place an urgent plan for tackling the challenges our company faces head-on.
A key part of the plan is a continuing effort to increase efficiency in order to reduce costs in line with the revenues we can reasonably expect…
And we aim to do this while investing in upstream production growth and the reliability and efficiency of our refineries.
To those ends, BP began reducing spending and headcount in 2007 — even as oil and gas prices continued soaring.
As a result, last year, we succeeded in holding 2008 costs flat over 2007…
And in fact, 4Q costs were significantly below the same period the year before.
This momentum is building — partly as a result of the deflation we are now seeing in raw material costs such as steel, cement, iron ore and energy.
I’d like to say a word here about the importance of continuing to ramp up our investments in technology.
As most of you know — but many do not — ours is an extremely high-tech business.
Over the last several years, BP has been increasing investment in research and development, because investing in technology doesn’t cost — it pays.
Technology enables you to do things you couldn’t do previously…
Or allows you to do the same things much less expensively.
So if you can find more money to invest in technology by unlocking new resources…
Or by running the business more efficiently…
You are investing in your future.
There’s no better example of what technology can do than the deep waters of the Gulf of Mexico.
Our Thunder Horse field, which came online only last June, is already the second largest field in the US…
It floats a mile above the sea floor and drills through three miles of ocean bottom below that…
Our team has had to contend with enormous formation pressures and temperatures.
Only the best technology — much of it developed exclusively for Thunder Horse — makes that possible.
Demand for gas is also growing, and unconventional gas found in “tight,” hard rock, coalbed seams or deep underground is an increasingly important part of the energy picture.
Technology enables you to do things you couldn’t do previously…
Or allows you to do the same things much less expensively.
So if you can find more money to invest in technology by unlocking new resources…
Or by running the business more efficiently…
You are investing in your future.
There’s no better example of what technology can do than the deep waters of the Gulf of Mexico.
Our Thunder Horse field, which came online only last June, is already the second largest field in the US…
It floats a mile above the sea floor and drills through three miles of ocean bottom below that…
Our team has had to contend with enormous formation pressures and temperatures.
Only the best technology — much of it developed exclusively for Thunder Horse — makes that possible.
Demand for gas is also growing, and unconventional gas found in “tight,” hard rock, coalbed seams or deep underground is an increasingly important part of the energy picture.
Thanks to new and improving technologies, around 40 percent of the gas we now produce worldwide is unconventional gas.
We are providing a significant part of total US domestic gas supply out of unconventional gas reservoirs in Colorado, New Mexico and Wyoming.
Our work in unconventional gas is one of 10 flagship technologies BP has identified for special investment in the coming years.
Each of them has the potential to add more than one billion barrels of oil equivalent of additional reserves.
By the way, let me add that managing costs down does not mean BP will be skimping when it comes to ensuring our operations remain safe, reliable and compliant in the years ahead.
Safety will continue to have first call on the company’s resources.
Nor am I suggesting that our approach to managing costs is “one-size-fits-all.”
The energy companies represented in this room have different business models and different priorities.
Each has to adapt to the environment in a way that fits its own needs.
But no matter how each individual company chooses to do it, the goal of this adaptation has to be the same for all…
We must work to ensure investment and activity levels continue to the extent possible.
We are providing a significant part of total US domestic gas supply out of unconventional gas reservoirs in Colorado, New Mexico and Wyoming.
Our work in unconventional gas is one of 10 flagship technologies BP has identified for special investment in the coming years.
Each of them has the potential to add more than one billion barrels of oil equivalent of additional reserves.
By the way, let me add that managing costs down does not mean BP will be skimping when it comes to ensuring our operations remain safe, reliable and compliant in the years ahead.
Safety will continue to have first call on the company’s resources.
Nor am I suggesting that our approach to managing costs is “one-size-fits-all.”
The energy companies represented in this room have different business models and different priorities.
Each has to adapt to the environment in a way that fits its own needs.
But no matter how each individual company chooses to do it, the goal of this adaptation has to be the same for all…
We must work to ensure investment and activity levels continue to the extent possible.
This will aid in meeting the energy demand challenges of the future.
That is always difficult to do in the midst of a slump…but we will be well-served if we get this right.
So oil prices go up and oil prices go down…
Our job is to ensure that we can survive and thrive — no matter what the economic weather might bring.
A wild card, of course, is not necessarily the economic weather, but the public policy weather.
That is one area that has changed dramatically since 2004.
I won’t rehearse the litany of corporate bailouts, soaring unemployment and bank failures for you…
You know all that already.
In fact, our industry — while under stress — is among those that have not shown up in Washington with its hand out.
Unfortunately, one of the side effects of being comparatively healthy is that it has once again made us an attractive place for government to look for revenue.
While we remain hopeful that the Obama administration and Congress will choose to partner with our industry, the early signals have been mixed.
On the positive side, the president, the Congress and the American public all want to reduce the nation’s dependence on imported oil.
Conservation, biofuels, wind and solar alone can’t get that job done.
President Obama has acknowledged the need to increase domestic oil production — and has said he is willing to consider opening new offshore areas to oil and gas exploration and development.
Massive spending on the stimulus and numerous bailouts will undoubtedly put enormous pressure on the public finances of the United States.
That is always difficult to do in the midst of a slump…but we will be well-served if we get this right.
So oil prices go up and oil prices go down…
Our job is to ensure that we can survive and thrive — no matter what the economic weather might bring.
A wild card, of course, is not necessarily the economic weather, but the public policy weather.
That is one area that has changed dramatically since 2004.
I won’t rehearse the litany of corporate bailouts, soaring unemployment and bank failures for you…
You know all that already.
In fact, our industry — while under stress — is among those that have not shown up in Washington with its hand out.
Unfortunately, one of the side effects of being comparatively healthy is that it has once again made us an attractive place for government to look for revenue.
While we remain hopeful that the Obama administration and Congress will choose to partner with our industry, the early signals have been mixed.
On the positive side, the president, the Congress and the American public all want to reduce the nation’s dependence on imported oil.
Conservation, biofuels, wind and solar alone can’t get that job done.
President Obama has acknowledged the need to increase domestic oil production — and has said he is willing to consider opening new offshore areas to oil and gas exploration and development.
Massive spending on the stimulus and numerous bailouts will undoubtedly put enormous pressure on the public finances of the United States.
To help pay for all this spending, the president’s 10-year budget proposal includes new taxes and fees on the oil and gas industry…
With a significant portion of new revenues coming from a carbon cap and trade system.
BP has long supported cap and trade as the most efficient way to slow the growth of carbon emissions in the near term…
And stabilize atmospheric CO2 concentrations over the long term.
Details and pace matter enormously here, however.
Every American, and every company and industry in America, will be affected by implementation of cap and trade.
If done with care, I believe we can manage the transition to a lower carbon world in an acceptable way.
If done poorly, we risk damaging our economy, curtailing energy supplies, increasing foreign imports and affecting the living standards of tens of millions of people.
That’s why I believe policymakers will approach the issues of climate change and energy with great care and caution.
Unfortunately, the proposed budget contains other tax and fiscal changes that could, if enacted…
With a significant portion of new revenues coming from a carbon cap and trade system.
BP has long supported cap and trade as the most efficient way to slow the growth of carbon emissions in the near term…
And stabilize atmospheric CO2 concentrations over the long term.
Details and pace matter enormously here, however.
Every American, and every company and industry in America, will be affected by implementation of cap and trade.
If done with care, I believe we can manage the transition to a lower carbon world in an acceptable way.
If done poorly, we risk damaging our economy, curtailing energy supplies, increasing foreign imports and affecting the living standards of tens of millions of people.
That’s why I believe policymakers will approach the issues of climate change and energy with great care and caution.
Unfortunately, the proposed budget contains other tax and fiscal changes that could, if enacted…
- Reduce US oil and gas capital spending…
- Endanger many enhanced oil recovery projects…
- As well as production from marginal wells…
The US energy industry has a strong record of investing in new supplies.
The higher prices of recent years set off an oil and gas drilling boom in this country.
In 1999, for example, 18,939 oil and gas wells were drilled in the US.
In 2008, spurred by rising prices, that figure nearly tripled, to 55,669.
But now, as I said earlier, the rig count has fallen dramatically.
Also, more than 300,000 — 85 percent of all US oil wells — produce less than 15 barrels of oil equivalent a day…
But together, these marginal wells account for 20 percent of US production.
Obviously, we drill a lot of wells in the US, and we produce a lot of wells…and we respond to the fiscal environment in which we operate.
So further increasing the burden on an industry that is already under pressure can only negatively impact domestic US oil production.
Many of the ideas contained in the budget have been kicking around DC for a long time.
They have been rejected in the past, and rejected for good reasons.
The higher prices of recent years set off an oil and gas drilling boom in this country.
In 1999, for example, 18,939 oil and gas wells were drilled in the US.
In 2008, spurred by rising prices, that figure nearly tripled, to 55,669.
But now, as I said earlier, the rig count has fallen dramatically.
Also, more than 300,000 — 85 percent of all US oil wells — produce less than 15 barrels of oil equivalent a day…
But together, these marginal wells account for 20 percent of US production.
Obviously, we drill a lot of wells in the US, and we produce a lot of wells…and we respond to the fiscal environment in which we operate.
So further increasing the burden on an industry that is already under pressure can only negatively impact domestic US oil production.
Many of the ideas contained in the budget have been kicking around DC for a long time.
They have been rejected in the past, and rejected for good reasons.
Given that track record, we hope that Congress and the administration will carefully consider the likely consequences before adopting policies that would:
And the critical role played by physics and economics…
And that it takes time to find, prove and deploy new technologies for any new energy source.
It’s clear our industry must be part of this energy debate.
Consumers, regulators and NGOs are already heavily involved.
And if it is revenue and jobs that we all want, we have an excellent argument to make…
Opening the Outer Continental Shelf to exploration and production — spurring new investment activity and jobs — holds more promise than increasing taxes and causing reduced investment.
These are points we are making — and must continue to make — to our elected officials.
And make them without apology.
- Inhibit US production…
- Increase the trade deficit…
- Idle thousands more American workers…
- And further increase the nation’s dependence on imports
And the critical role played by physics and economics…
And that it takes time to find, prove and deploy new technologies for any new energy source.
It’s clear our industry must be part of this energy debate.
Consumers, regulators and NGOs are already heavily involved.
And if it is revenue and jobs that we all want, we have an excellent argument to make…
Opening the Outer Continental Shelf to exploration and production — spurring new investment activity and jobs — holds more promise than increasing taxes and causing reduced investment.
These are points we are making — and must continue to make — to our elected officials.
And make them without apology.
A healthy America needs a healthy energy industry.
As BP chief executive Tony Hayward is fond of saying, the future hasn’t been cancelled. It’s only been delayed.
Once economic growth recovers — and it will — we can expect oil demand and natural gas prices to recover as well.
Countries outside the developed world contributed more than half of total global GDP growth in 2008 and will continue to do so in the future.
As their economies recover, they will need more energy — including oil and natural gas — to continue their rapid industrialization.
When that happens, our industry has to be there.
Our cost structure has to be fitted more closely to the volatile energy price environment we accepted as normal before 2004.
We must strike the right balance between today’s needs and investing for the future — in good times and in bad.
It’s a tall order. It won’t be easy or simple.
It strikes me that’s why holding this meeting in New Orleans is so appropriate. Four years ago, many wrote this city off.
As BP chief executive Tony Hayward is fond of saying, the future hasn’t been cancelled. It’s only been delayed.
Once economic growth recovers — and it will — we can expect oil demand and natural gas prices to recover as well.
Countries outside the developed world contributed more than half of total global GDP growth in 2008 and will continue to do so in the future.
As their economies recover, they will need more energy — including oil and natural gas — to continue their rapid industrialization.
When that happens, our industry has to be there.
Our cost structure has to be fitted more closely to the volatile energy price environment we accepted as normal before 2004.
We must strike the right balance between today’s needs and investing for the future — in good times and in bad.
It’s a tall order. It won’t be easy or simple.
It strikes me that’s why holding this meeting in New Orleans is so appropriate. Four years ago, many wrote this city off.
Saying that the task of recovery was too formidable.
But the people of New Orleans refused to accept that.
The task is far from complete….much work remains to be done.
But the very fact that we are sitting here today is a tribute to what determination and a sense of the possible can achieve.
Our industry can afford to do no less.
Thank you all for listening. I will now take two or three questions from the floor, but I will be available in the breakout room afterwards for those I don’t get to here in the ballroom.
But the people of New Orleans refused to accept that.
The task is far from complete….much work remains to be done.
But the very fact that we are sitting here today is a tribute to what determination and a sense of the possible can achieve.
Our industry can afford to do no less.
Thank you all for listening. I will now take two or three questions from the floor, but I will be available in the breakout room afterwards for those I don’t get to here in the ballroom.
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