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Todd Peterson: Notes on CERAWeek 2015



 

Day 1

“Managing through Turbulence and the Cycle”

Houston - Speakers included government representatives like Senator Lisa Murkowski from Alaska and Ryan Lance CEO of Conoco/Phillips. Also speaking were representatives from GE Power and Water, Saudi Aramco and Kuwait Foreign Petroleum Exploration Company. 

Senator Murkowski pointed out that the US was in need of a major energy bill given all the recent changes in the market. That the last major energy bill passed by Congress was in 07.

She said that it was time to lift the ban on exporting crude oil. That it did not make sense to lift the ban on Iran selling its crude in international markets and punish US producers. Further she stated that the ban was anti consumers keeping motor gasoline prices artificially high.

The Senator feels that Alaska should have an LNG export project even with an estimated $60 billion price. She finished her comments by saying that she would be proud to have a bumper sticker reading “energy is good”.

Ryan Lance the Chairman & CEO of Conoco/Phillips followed. One of his comments was that $40 for light sweet oil from shale was on average a breakeven. Because of the current low crude price his company is trying to cope by reducing costs where they can.

GE Power & Water CEO Steve Bolse talked about his companies approach to business development. One of their main principles is that “if you are going to spend significant amounts it should be a game changer”. That they focus on how to help the customer make more money. He said that in the current environment GE plays bold and feels it's a good time for acquisitions.

In contrast Shaikh Nawaf S. AL-Sabah CEO of KPC Foreign Exploration Company is focused on building a strong balance sheet otherwise you can't weather the down cycles and you become “wobbly”. He said that the wobbly companies will become more realistic about their value when their hedges come off and prices are still down. This will be a good opportunity for acquisitions.

Sally Jewell, US Secretary of the Interior rounded out the day by stating that the Agency is focused on establishing new fracking regulations pointing out that 32 states have fracking but only 16 have regulations. In addition the current Administration has a policy of opening up more Federal Lands for exploration and development.

 

Day 2

“Turning Point for the Oil Industry”

Houston - This is “Oil Day”.  After the breakfast the audience heard from Rex Tillerson, Chairman & CEO of ExxonMobil. The leader of the largest publicly traded oil and gas company told the audience that US regulations and policies from the 70's and 80's were weighing down the industry. That the industry and the world needed more free trade. He said there were 4 important changes the US government could implement. 

1- That the government be quicker to recognize that new technology is safe.

2- That crude should be treated equally as other free trade products like agriculture and refined products.

3- More transparency and certainty under the law.

4- Help our allies.

Tillerson pointed out that he last spoke at CERA WEEK in 2012 and since then because of government policy, that regulations and cost of doing business have only gone up. That the industry now has to prove that “the impossible isn't going to happen”.  Rex Tillerson also said that he believed that breakeven for shale oil is $40/bbl. and “that he could live with that”. He was asked what he thought about the future for hybrid automobiles and he responded that the market will continue to grow but still has a battery problem.

Patrick Pouyanne the CEO of Total talked about how his company is handling low oil and gas prices. He said that their philosophy is not to react but not over react. You have to reduce cost. CAPEX is first followed by E&P budget and then OPEX. In other words “big projects are on the long back burner”. He commented about the tragedy in Yemen, about the new government in Nigeria and how sanctions are hurting their Yamal project in Russia.  While Total has a long relationship with Iran he said it's nice to be friendly but Total is not a charity when it comes to business. On a separate topic he went on to say that the Yuan “is the currency of the future”.

Robert Dudley, Group Chief Executive of BP was the luncheon speaker. Because it was the Anniversary of the Macando disaster in the US Gulf a lot of what he talked about referred to that. But he did go on to speak about other topics like Alaska and that BP is working in a consortium and with the government to move forward the big LNG project. In general BP sees growth in consumption but that it won't come from North America or Europe but developing countries like China and India.

Gary Heminger the President and CEO of Marathon said that his company like many other US refiners is switching from heavy crude oil to light sweet. He pointed out that because investment in refineries is so

big and for a long period of time that Marathon was against exporting US crude oil. Marathon is in favor of replacing the refined fuels program and repeal the Jones Act.

Emilio Lozoya Austin the CEO of Pemex described the new policies issued by President Pena Nieto to divest pipelines, ports, midstream services and fertilizers. That the new Pemex should concentrate on E&P and refining. That Pemex should find world class partners and do more JV's with them. There is to be less red tape and fuel subsidies are to be eliminated.  He was asked when heavy Mexican crude could be swapped for light US crude he said he is waiting but feels a positive decision will come soon. 

In a separate session, Gustavo Hernandez-Garcia the Director General for Pemex E&P said that Mexico will be the biggest opportunity in the world. Besides E&P, Pemex is also interested in developing the LNG business.

YPF was also in this session and Miguel Matias Galuccio the CEO said that “things were going great”. New oil from shale was fetching $77/bbl. domestically. He credited Chevron, Dow and Petronas for their commitment to help develop Argentina's huge shale reserves. To illustrate the magnitude of the Vaca Muerta field he said it was bigger than Baken or Permian and that they have only explored about 3%.

Statoil's John Knight, Executive VP told the audience that low prices have not slowed down production yet but continued low prices might in the future.

The CEO of Ecopetrol of Colombia said that low prices are forcing his company to change cultures and adjust their budgets accordingly. This is a big problem for Colombia's government and economy.

Dinner was highlighted by a one on one conversation between Daniel Yergin of IHS and Henry Paulson, former US Secretary of the Treasury and former head of the NSA.  There were two major subjects. First was cyber security and the other was China. In fact Mr. Paulson has just written a book called “Dealing with China”. He complimented Chinas policy of improving their economy. He said “Your economy is key. It's what makes a country great”. When you have a problem you shine a light on it like China is doing now exposing corruption problems. 

As for cyber security he policy he commented that “this would be interesting if it wasn't happening to me". Here he was referring to Edward Snowden and his leaking information to the world. In fact Mr. Paulson considers him a traitor and that he has done tremendous harm to the US and its allies. That Snowden revealing how the US intelligence agency works with its allies will make it harder for foreign governments to trust working with the USA.

 

DAY 3

“New Landscape for Natural Gas”

Houston - After breakfast the featured speaker was Claudio Descalzi the CEO of ENI. While he said that the present situation of prices is not so positive we still need to be real. He is positive that the future looks better especially for gas. Of course he is talking his position as ENI has huge gas finds and projects in Mozambique and Egypt.  In Mozambique he said development was easy in that it only took them 3 to 4 weeks from drilling to completion. That even with the current low prices he anticipates FID by year end.

In a Gas plenary session that followed Andy Calitz of Shell Canada predicted that LNG production would reach 450 mtpa by 2025 and natural gas consumption will grow by 50% by 2040.

In the same session Andrew Walker of BG said that going forward the 3 main LNG producing areas would be Australia, North America and East Africa.

Charif Souki the CEO of Cheniere and developer of Sabine Pass LNG project was proud to announce that the first cargo LNG would be exported shortly. That soon Cheniere would become the largest buyer of natural gas in North America. He pointed out that oil prices were having an impact on natural gas prices and that rigs should stay down until prices find a balance. Charif said that investments in LNG are for 40 year periods while drilling investments are much smaller and for shorter periods of time. He doesn't see large new projects but does see a niche for 1 to 2 mtpa projects were you don't need long term buyers. He concluded his presentation by stating that oil indexation does not work anymore.

Michael Smith, CEO of Freeport LNG had a slightly different opinion than Mr. Souki in that he thinks the next wave of LNG projects in the US will come from expansion of existing projects.

He was also happy to announce the closing of the financing of train 3 of his project.

Hirobumi Kawano, President of JOGMEC explained how his was a government institution with a goal of trying to stabilize energy price for Japan mostly by investing in projects and guarantying loans.

Volodymyr Demchyshyn, Minister of Energy and Coal Industry of the Ukraine told the audience about their dependence on Russian natural gas. The Ukraine also sees 1/3 of all Russian natural gas going to the EU passing through his country. They are planning on buying at least 50% of their gas from the EU in a hope to be able to negotiate better with Russia.

The luncheon speaker was Rich Kinder, CEO of Kinder Morgan. KM has 84,000 miles of pipelines in North America and a large midstream business. He sees the market growing in the next few years to 110 bcf/d of which 10 to 12 will be for LNG exports. Mr. Kinder mentioned their LNG project with Shell at Elba Island but did not mention the Gulf LNG project in Pascagoula which is much larger. He did point out that KM “is not an LNG company”. Their main focus is getting the gas to the export terminals. He is all in favor of crude exports and that we should push forward integrating Canada, Mexico and the USA.

In the afternoon Daniel Yergin interviewed Ernest Moniz the US Secretary of Energy along with  Greg Rickford, Minister of Energy Canada and Pedro Joaquin Coldwell the Secretary of Energy from Mexico. 

Sec. Moniz pointed out what a power house North America would be if all 3 countries were more integrated. That regulations should be similar making it easier for companies from one country moving into another. He went on to say that in the US there is an aging infrastructure that needs huge investments to repair and upgrade. The Secretary listed 3 important items for the Department. 1 was to help the Caribbean region diversify its energy supply. 2- To build energy security for the US and its allies and friends. 3 – To hold a Tri-lateral meeting of Ministers from Mexico, Canada and the US. 

The Secretary was asked if DOE had to approve exports of US gas from Mexico or Canada? His response was that it was the same. FTA is OK. Non-FTA has to be after NEPA review.

He was asked about the negotiations between the US and Iran but he did not want to comment. He only said that because of his training at MIT as a nuclear scientist he had been recruited for the job. He did say that it did help that his counterpart from Iran also studied at MIT.

In his final comments about the DOE strategy going forward he said the goal is safe guarding the environment with “a greener economy meeting climate targets”. 

The Secretary from Mexico told the audience about the number of inter connects already existing between the US and Mexico for gas and electricity. He wants to build more.

Minister Rickford talked about the delayed Keystone pipeline but is confident the issue will be resolved. He went on to point out the huge reserves Canada has and that they will look to export not only to the US but to the world. Part of Canada's resource base is hydro especially in British Colombia he hopes to export some of this to the US.

All agreed that integration particularly in power is essential especially in times of emergency.

 

Day 4

“Electric Power's Crucible”

Houston - The day started with different Strategic dialogue sessions with no featured speaker until lunch.

One of the sessions covered Mexico's power generation. 

Guillermo Turrent, the Director of Modernization for CFE commented on his companies plans. He stated that there current consumption of gas is 2.5 to 2.7 bcf/d. This CFE plans to increase to 7.5 bcf by converting existing plants and building new power plants. They will support building more pipelines including ones coming from the US. Additionally they plan on diversifying supply by having multiple suppliers.

Francisco Xavier Zalazar Diez de Sollano the Chairman of the CRE or the Energy Regulatory Commission of Mexico was very forth coming about the opening of the market. He told how CFE would help establish a spot market in Mexico because CFE is always long or short and will be allowed to buy, sell and swap based on their positions.  

In a separate North American Plenary Thad Hill the CEO of Calpine talked about growth in the USA. He described an industry that is very regulated restricting growth. He said that the majority of growth would be along the coasts. As an example and because of the low price of natural gas a power plant mounted on a barge in South America was moved to Louisiana. Mr. Hill also talked about the future of solar but pointed out the limitations. “There still isn't a grid built to handle the demand when the A/C kicks in”.  

Continuing the Mexico theme the CEO of CFE Mr. Enrique Ochoa Reza spoke about building lots of additional pipelines between Mexico and the US and inside Mexico. They are also planning to convert older plants that run on coal or are less efficient to CCGT.  These investments will be done with private companies. CFE has a push internally to reduce losses in their system caused by old under maintained pipes and stealing.

When asked how other companies can gain access he said that they will follow a US process of having open season and when CFE has spare capacity they will be mandated to offer it as interruptible to others. 

Growth in Mexico has been in the 6 to 7% range but that CFE expects growth to jump to 12 to 14% in the coming years.

Solar for homes will also be promoted in the future.

His biggest challenge is “how to change a culture to understand what competition is?”

The featured speaker of the day was Gina McCarthy, Administrator, US Environmental Protection Agency. She too has a lot of work establishing regulations for power plants especially in the area of released carbon into the atmosphere. The new regulations will be known as the Carbon Pollution Plan.  Her comment about this plan was that “we are moving to a low carbon future”. That President Obamas thinking is “what makes environmental sense makes economic sense”. 

Ms. McCarthy reminded everyone about the work load by pointing out that the EPA in the last 3 years has received 3.9 million letters or comments which all have to be read and then responded to. In addition they all have to be filed in the appropriate docket and that's a lot of work. – Todd Peterson

Todd Peterson is a international oil & gas consultant and contributor to Petroleumworld. Petroleumworld does not necessarily share these views.

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