api blogger conference call: energy issues post deepwater horizon - 7.22.10

8/9/2019 API Blogger Conference Call: Energy Issues Post Deepwater Horizon - 7.22.10

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API

BLOGGER CONFERENCE CALL

MODERATOR:

Jane Van Ryan, API

SPEAKERS:Dr. Tim Considine, Natural Resource Economics Inc.

Stephen Comstock, Manager of Tax Policy, APIMarty Durbin, Federal Relations API

John Felmy, Chief Economist, APIRussell Jones, Senior Economic Adviser, API

Andy Radford, Upstream/Industry Operations, APIRichard Ranger, Upstream/Industry Operations, API

Robin Rorick, Group Director, Marine & Security, API

Thursday, July 22, 2010

Transcript by

Federal News Service

Washington, D.C.


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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 isJane Van Ryan for those of you who are just joining us. And I have several people in the roomwith me here at API and Tim Considine, the author of a new study on the Marcellus shale, whoalso 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.Lets start the call today by first finding out who all we have on the phone. A number of youindicateda number of bloggers, I should sayindicated that they intended to be on the call.

Lets 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. Im glad you could join us. Who else is on?

01:12 CARTER WOOD: Here. Well, weve got the Ecuador trip revisited becauseCarter 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 elsedo we have?

01:29 JAZZ SHAW: Hey, Jane, its 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 hasnt told us that theyre on line yet?

01:54 TIM HURST: This is Tim Hurst from Ecopolitology.


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01:56 MS. VAN RYAN: Great. Thank you, Tim. Nice to hear your voice. Anyone

else? Im expecting several more bloggers so maybe theyll be joining us shortly. I think you allknow the rules for our blogger conference call: Everything is recorded; everything is on therecord. 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.

Were happy to talk about most any questions that you might have. Youve seen a partiallist of the people who are going to be participating in the call today as speakers, who can provideinformation. 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 youre comfortable with this, Marty, Imgoing to put you upfront and you can explain whats happening on the Hill. This gentleman isMarty Durbin. He is in charge of our federal relations initiatives here at API and of course hesmonitoring the Hill activities very, very carefully today. So Marty, why dont we start with you?

03:10 MARTY DURBIN: Okay. Sure. Thanks, Jane. Im just kind of being updated by

the minute hereyou know, literally, getting these e-mails, articles from Roll Call, The Hill andwhat 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 nextweek or the following week before they leave for August recess. The plan for months now hasbeen 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 beforethe August recess. At best they can have a very narrow energy bill. And, frankly, Im stillskeptical that they can even get any of the energy provisions on the floorwhich kind of leavesyou with the oil spill issues and how much they can put on the floor. And we really are talkingabout next week.

The Democratic Caucus has been meeting now for the last hour and theyre just rightnow having a press conference with Sen. Reid, Sen. Kerry and Carol Browner. And well knowmore probably in about an hour or so because then theyre going to begin another leadershipmeeting to determine what theyre going to do next week.

We do hear that they willif they do get into the oil spill -- it will probably stay focusedon two main areas, one being the reorganization of the Department of the Interior and thenbeefing up some regulations of offshoreoffshore drilling and then liability that has beendebated in the Senate in the Environment and Public Works Committee.

Again, thats very fluid right now. And the Senate calendar is very clogged. Theyretrying to finish work on a small business bill this week; they have a supplemental appropriationsbill. There are a few other things hanging out there. And then, before they leave, they have tothey intend to approve the nomination of Elena Kagan to the Supreme Court. So thats kind ofthe lay of the land right now in the Senate. Thats really what were paying more attention to. Idont want to dismiss the House because theyre also scrambling, trying to get an oil-spill related


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bill onto the floor next week before they leave. Theyre leaving next week. The Senate staysaround 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 everythinghappening on the Hill, thats one of the reasons why we wanted to have the blogger conference

call today, this week. And, of course, Ive sent you all a number of materials involving taxissues, oil spill liability, Marcellus shale, even some polling results that we got yesterday. Sowith that, I just want to open this, open the floor to your questions. You can ask anything thatyou have on your mind, anything that youre interested in and well do our best to answer yourquestions. Who would like to go first? Oh, and please identify yourselves.

06:19 MS. TVERBERG: This is Gail. I was just going to askyou mentioned the oil-spill liability. To what extent do you think the choice or the limit is going to make a differenceon which companies are willing to drill in the Gulf? I know there has been talk that having toohigh a limit is going to eliminate the smaller companies from play.

06:44 MR. DURBIN: If I canthis is Marty. Frankly it will make a big difference.Essentially, the higher you put the liability limit the fewer people that are going to beeconomically able to continue to produce in the Gulf.

Now, its a it gets a little complicated because theres essentially two different issues:You know, there is raising the cap on liability; there has been a lot of focus around a $75 millioncap on economic damages. Thats just, you know, once BP in this case has finished cleaning upeverything, statutorily, as long as they arent found to have been reckless or negligent or whathave you, there is a $75 million cap on economic damages for, you know, restaurants andeveryone else that was affected.

The bigger issue for companies that are operating offshore, what they call the financialassurance requirements, where you have to get a certificate of financial responsibility. That isgenerallycurrently, in the range of $35 million to $150 million. Even if you have a very highcap on the economic damages, yet you have a reasonable financial responsibility in that, it wontput as many people out of play.

And, again, unfortunately, those proposals out there right now are very unreasonable.Theyll either eliminate the cap, put the financial responsibility over a billion dollars. Thatessentially means youre going to be down to the largest privately owned companies andnationally owned companies.

08:25 MS. TVERBERG: Right, and the nationally owned companies could very well besomebody from overseas, of course.

08:31 MR. DURBIN: Correct.

08:35 MS. VAN RYAN: Another question, please? Youre all being too kind, toocourteous of one another. Dont hesitate.


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08:53 MR. WOOD: Well, this is Carter at the National Association of Manufacturers.Im wondering if you could give us an update on the moratorium in the Gulf. I havent had achance to read up on the rally yesterday, but a sense of the mobility of drilling rigs. Thats onething I dont really have a good understanding of, how easy it is to just up and leave. So kind ofjust 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. Youknow, the rigs can and some already have chosen to leave the Gulf of Mexico. We havesomething around 30, 33 rigs that have been impacted in deep water. I think two or three ofthose have already announced plans to leave. The others have been successful in working outsome sort of agreements with the companies as part of a reduced rate to keep the rig in the Gulfwhile they wait this moratorium out, until we figure out if we canhello?

Oh, sorry.

10:07 MS. VAN RYAN: Go right ahead, Andy.

10:10 MR. RADFORD: Until we figure out if we can appease theyou know, meet therequirements set forth by the Department of the Interior to get back to work before the November30th deadline. I think if it had beenyou know, if companies get signals that November 30th isgoing to stretch on even after we make an earnest effort to do whats required I think youregoing to see more drilling companies just say, were going to have to move elsewhere. Wereally cant afford to sit idle that long.

10:41 RICHARD RANGER: This is Richard Ranger, also of the upstream group. And,ultimately, its really a matter of the contractual arrangements between the companies that ownand 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 beingsuccessful in negotiating arrangements that involve some compensation to the drilling companiesto keep their rigs here. But theyre in business to employ those rigs. And, depending upon thelength of the moratorium and depending upon what develops in other operating areas in theworld, there may yet to be some strong financial incentives for one or more of thosethedrilling rig operating companies to consider relocating those rigs.

So the longer this moratorium continues, the more vulnerable our offshore industry isbecause 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 Americas domestic crude oil productionin recent years.

11:57 MR. WOOD: Has API been involved in, say, an amicus brief or some functionlike that with the legal proceedings?

12:06 MR. RADFORD: Concerning the moratorium, were not involved in any legalcases of the moratorium at this point.


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12:15 MR. WOOD: Okay. Do you have any sense of how quickly those might beresolved, Im assuming every time a moratorium is announced there will be a lawsuit that willstrike it down and then well 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 weve seen so far is that although the judgesmay rule the moratorium out of order and the administration probably turns around and issuesanother moratorium. So were in a bit of an Avalon Hill game whose outcome isnt completelyknowable 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? Isntthere may be a surplus of drilling rigs right now?

13:24 MR. RADFORD: Actually theres a number of deep-water basins in closeproximity torelatively closeWest Africa and Brazil are the two most obvious candidateswhere these rigs would go. The ones that have announced theyre leaving, one is going to Egyptand I think the other one is going to Angola.

So but Brazil has, you know, great designs on exploring and developing their deep waterand havethere are a number of rigs currently under construction that plan to go to work inBrazil in the order of 20 rigs. So were looking at a big market there. And they could get a jumpon their exploration and development program and get started a little early if these rigs move outof the Gulf.

14:12 MR. RANGER: And with Brazil, Gail, its important to recognize, too, thatPetrobras, their national oil company, is a very significant player. So they have both a policy anddomestic resource focus and operate under a bit different business rules. So they might be moreinclined to mobilize more quickly to try to induce one or more of these rigs to come down toBrazil from the Gulf of Mexico. Again, thats speculation at this point depending upon thelength of the moratorium and the degree to which other playersother national oil companies,other resource nationsconsider 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 thearticle is all about, really, how other countries like Norway, Egypt, Brazil are moving full steamahead on their deep-water projects recognizing that there is now some increased [rig] supply thatthey could probably capitalize on. So the basic point of the article was, other countries arentslowing down and this is going to create a pinch here.

15:35 MS. VAN RYAN: Thats Robin Rorick, by the way.


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15:37 MR. RORICK: Oh, Im 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 sentout. I think you have all probably seen the tax briefing paper. There are plenty of reasons tosuspect thatin fact its written in some of the proposals that taxes would be raised on the oilindustry to pay forwere not sure what exactly. But Ive got Stephen Comstock here, who cancertainly address any issues about energy taxes.

16:16 MR. HURST: This is Tim Hurst from Ecopolitology. And I suppose my questionis sort of tangentially tax-related. Its really more about climate. So since it looks like there isntreally going to be much in the way of climate action coming out of the Capitol thisat least

before August and probably not until, you know, late this year, you know, its no secret that APIhas been opposed to a cap-and-trade and I believe opposed to the upstream cap-and-dividend,although Im not entirely sure about that. Where does API sit on this sort of utility-onlyprovision thats kind of being kicked around right now? And is there what does an API kind ofdeal look like?

17:11 RUSSELL JONES: This is Russell. I have to say that we dont have a flatopposition to cap-and-trade. We did very much very clearly oppose the Waxman-Markey billbecause of the way it was written. Looking forward at other bills, you know weve beeninterested inyou know, if the Senate could actually create a utility-only bill. But, not havingseen one, we cant react to one since we havent even seen one. But weve looked at a variety ofapproaches. We have members that support cap-and-trade. We have members that support acarbon-tax approach. So it really, for us, we need to look at whateverwe need to look atspecific language to understand how it operates.

One of the issues that weve had with the structures ofthe bills like Waxman-Markey isthe treatment of the petroleum consumers compared to other sectors of the economy like theelectricity consumers. The Hillthe bills that have been written have very aggressively tried toprotect electricity consumers from the impacts of higher prices caused by the allowances bygiving them away for free, which is one of the great ironies of this in that all of the studiesindicate 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 forpetroleum-product consumers. So we would think a level playing field is important. And thatincludes a level playing field for all consumers.

19:05 MS. VAN RYAN: Does that help, Tim?


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19:07 MR. HURST: Yeah, that does. I actually had a little technical difficulty at thevery beginning of that. Whathow about cap-and-dividend? Did you comment on that? Iactually fell off the call for a second.

19:19 MR. JONES: We havent we dont have a specific position on cap-and-dividend.

I mean, we do have the Cantwell-Collins bill thats out there. Weve looked at it. Our membershave 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 wed prefer to wait to see what theactual 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 theprior, lets say, Im not sure exactly, regulation of companies that are drilling in the Gulf, Iunderstand API has set standards, that they also do some things with monitoring. And how doyou see this changing going forward? I know theyre still looking at new legislation, but what

kind of things do you see as changing?

20:28 MR. RADFORD: I meanthis is Andy, Andy Radford, again. When you saymonitored, as far as the government or API does that?

20:36 MS. TVERBERG: I didnt think they did but there was one news report I saw thatsaid something about so-and-so inspectors. And I thought they were talking about API. Andthat struck me as strange. I thought it would be government inspectors. Your involvement wasin standards.

20:53 MR. RADFORD: Yes, we have our standards and recommended practices; someof them are incorporated into the regulations. The inspection function is carried out by theMinerals Management Service and now the BOEMER. (Laughter.)

21:12 MS. TVERBERG: They could have found something simpler, couldnt they have?

12:15 MR. RADFORD: Yeah, but some of the changes weve seen so far have come inthe form of Notice To Lessees that MMS has issued. There is the NTLO. There was an O4, anO5 and an O6. The one on NTLO5 contains somebasically in the areas of inspection andthird-party verification of blowout preventer and well-control equipment, some newrecommendations for secondary control systems and also new equipment, recommendations fornew configurations of equipment, that will come and form.

A little down the road theyre going to be issuing interim rulemaking; we expect that inthe next month or two. And that will set forth some new recommendations, new regulations fordrilling equipment and practices.

And then, following that, there will be some more lengthy formal rulemaking once weonce they get the benefit of the investigations that are ongoing.


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22:27 MS. TVERBERG: So this is what the agency that is succeeding MMS is going tobe doing, right?

22:32 MR. RADFORD: Yes.

22:34 MS. TVERBERG: Thank you.

22:36 MS. VAN RYAN: Gail, one other thing: And I dont know that you all have seenthis. I ran out of time this morning myself and I could not send this out to you. But if you go tothe blog, the Energy Tomorrow blog, youll see a blog posting put up maybe a couple of hoursago about this. One of the Notices To Lessees and operators deals with how you protect againstblowout. And, interestingly enough, four of the major oil companies have gotten together andtheyre planning to build and deploy a new containment system. Theyre committing $1 billionto developing this system.

Its 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 accidentever occurs again. Thats highly unlikely that something like that would happen, but at least theequipment then would be in position and deployable.

So thats one way that the industry is trying to address some of the issues that have beenbrought to bear since the accident. So if you guys want to check that out, take a look atI thinkit was a blog post that went up this morning and theyve put one on top of it since then alreadybut you can at least get some information and a diagram there.

23:52 MR. RANGER: Weve also set up four taskforces that address various issues thathave arisen as a result of the Deepwater Horizon. Theres a taskforce study on offshoreequipment and one studying offshore operating procedures. Interim reportsI say interimnewreports from those taskforces, which went to the Secretary of Interior that were almost entirelyincorporated into his recommendations to the president made in late Marchlate May, excuseme.

In addition, there are two other taskforces, one focused on source controlcontrol ofwells and well incidentsand then another one on oil spill response. And so theres atremendous amount of industry effort that involves people with expertise and experience from amultitude of different companies working together to try to ascertain what practices areavailable, what emerging technologies may exist and what basic technologies and procedures arereliable 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 anythingelse you have on your mind?

25:39 MR. MALEY: This is Steve Maley with Redstate. I was hoping to get out of thiscall a little more conversation about the tax law changes. Specifically theres been somediscussion about how treatment of foreign taxation affects domestic producers versus offshore,


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foreign-based companies. And also with changes to provisions like intangible drilling costs andpercentage depletion. Have you done any quantification of what the impact is going to be on thesupply 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 takeyour second point first. We have been trying to pull together some information on the impacts ofrepealing IDC on production and investment in the domestic U.S. oil and gas arena. Percentagedepletion not as much, but certainly with respect to IDC and 199 and so were currently workingand trying to see if we can develop something that will give a little bit of substance to thestatements that these things are considered to be a significant impact on the investment andcapital that can be committed to oil and gas by many of the domestic oil and gas producers.

With respect to the secondor respect to your first point with the foreign issue. There isin the Presidents budget and weve been hearing the issue being brought up both by Ways &Means and Senate Finance Committee and what it wouldwhat the provision would do is itwould modify the current rules that are in place that allow companies, specifically the U.S.-basedoil and gas companies, the ability to use foreign taxes they pay abroad to offset the residual, sortof, 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, youre allowed a foreign tax credit. Soif you operate in France and you pay taxes in France on that income, the U.S. will also tax thatincome, but to avoid a double taxation, the U.S. tax is offsetor youre allowed to offset theU.S. tax by the tax you pay in France. The proposal would be to essentially restrict that for oiland gas companies.

So if you want kind of a plain example, imagine that every two weeks you get moneywithheld from your paycheck. You go on April 15th, file your return and you calculate your fullamount of tax and then you offset that by the amount you withheld to get to the amount that youneed to cut a check to the government for. Well, in our case, you wouldnt get the full amountthat you withheld. You would get a portion of that.

And the only reason why theywe havent got any good reason why they believe thatthis is necessary other than the fact that they claim that were getting credits for royalties insteadof taxes that we pay. But frankly, the rules as they exist now prevent us from doing that. If it isa royalty, we are unable under the current rules and current statutes to be able to claim that as acredit.

The way the rules are set up is that in fact with U.S.-based oil and gas companies, wehave multiple sets of rules that other industries do not have with the way in which we have toor the way in which we can calculate and use our credits. So the rules as they exist now areactually skewed in the favor of the U.S. government. And you know, I think what theyre


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looking at is issues or things that theyve created to just maybe address the overall image of thisand hopefully sell it. But frankly, were trying to fight this very strongly.

30:11 MS. VAN RYAN: Steve, I wonder if you could address this whole perception thatseems to be pervasive out there among certain groups of Americans that insist that the industry

receives subsidies.

30:25 MR. COMSTOCK: Theres been a lot of statements out there that the oil and gasindustry is the most heavily subsidized industry around. You know, all that you have to do islook at our effective tax rate and realize that thats not true. On the whole, our industryseffective tax rate, at least for 2009, was around 48 percent, whereas the rest of the S&P wasaround 28 percent. A lot of that is due to taxes that we pay on our overseas operations, but wealso 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 oiland gas subsidywell, any U.S. manufacturer gets section 199 or is eligible for the domestic

manufacturing deduction. So its not anything specific to oil and gas; its available to anymanufacturing entity out there.

LIFO is another thing that people have brought up. You know, anybody who hasinventory and has to account for it, both on their books and tax rolls can(inaudible)LIFOaccounting.

IDC even, if you sit and you think about a number of companies that perform researchthat they can expense on their tax returns and its used to generate an asset thats going to have avalue going out into the future? Well, IDC is the exact same thing for us. We have these laborcosts that are associated with drilling. Sameessentially you need to be able to drill the well inorder to make sure that theres something there to be produced. Theres no real differencebetween that and R&D deduction.

So when people talk about subsidies, they portray it in a light that somehow the oil andgas industry is the only one and its overly subsidized. But in reality, theyre no different thandeductions that everybody else is eligible for and you can certainly go through the [tax] code andpull 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 kindof a table that would say, you know, okay, the oil and gas industry had revenues of, you know, inthe year 2008 had revenues of X and they paid taxes of Y? And then the financial banks andthings had revenues of X and they paid taxes of something else. And the electricity utilityindustry had revenue of X and they paid taxes of Y. And then add them all up and so you get thetotal 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 weve done is the oil and gasindustry versus sort of the all manufacturing or S&P companies. We havent specificallyidentified other industries as a comparable.


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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 updatedfrequently at energytomorrow.org. Its called Energizing Life. And I think if you take a lookat 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 dollarkind of the middle of thepack in terms of earnings. And a lot of other industries made significantly higher earnings thanthat. That chart might be helpful. But I dont think we have one that shows both earnings andthen taxes paid.

34:36 MR. COMSTOCK: Not by industry. No, we dont.

34:37 MERV BENSON: This is Merv Benson. Does that 48 percent include the tax atthe pump?

34:44 MR. COMSTOCK: No. Thats 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 thats on top of the income tax.

34:58 MR. COMSTOCK: Correct. The way theyou know, in addition to all the othertaxes that we pay on our income or even severance, theres the $30-some-odd billion that wecollect and remit to the state thats on the from the motor fuels excise tax.

35:16 MR. BENSON: So I guess the government is actually making more on a gallon ofgas 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 howmuch is allocated to raw material, how much is essentially margin for refining and then howmuch of, sort of, the dollar from a sale of a gallon of gasoline goes to excise taxes both at thestate and federal level. So they certainly make a substantial amount.

36:01 MR. BENSON: And they dont have any risk of production or finding oil and gas?

36:02 MR. COMSTOCK: They dont need a return on their investment. Theres no ROI(laughter)issue with them.

36:18 MS. VAN RYAN: Other questions regarding taxes or any other issue for thatmatter? Dont be bashful.


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36:23 PEJMAN YOUSEFZADEH: A non-tax question. This is Pejman Yousefzadehfrom The New Ledger. In addition to the federal governments reaction to the DeepwaterHorizon event, there have also been reactions on the part of the state governments, includingFlorida, which is, of course, colored in large part by the Senate race thats going on there and thefact 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 thatswhat theyre trying to do.

37:02 MR. RANGER: This is Richard Ranger, Pejman. We have not specifically. Wehave been tracking carefully the activities in the different states and have been working andfollowing developments in Florida closely for really a few years prior to the Deepwater Horizonincident.

And prior to the Deepwater Horizon incident, public opinion in Florida was movingtoward acceptance of or support for drilling in areas in waters closer to Florida. It depended howyou 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 ofenergy to the economy of a state that depends so heavily on tourism and so heavily on fuels toget the tourists to the state and on energy to supply the air conditioning and the utilities to keepthem comfortable once theyre there when theyre not out by the pool or on the beach.

Thats obviously changed in significant ways in Florida since the Deepwater Horizonincident. And I think youre right: The existence ofa very competitive Senate race down thereand I think just normally vigorous politics in the Sunshine State has provoked a lot of concernamong Floridians for the potential risk to their beaches and to the value of their tourist economybecause of the Deepwater Horizon incident and the risk of pollution.

Over the long term, you know, assuming that were close to a final plug and stoppage offlow from the Deepwater Horizon well, with Florida as with the rest of the United States, ourenergy picture doesnt change. We continue to demand energy to support the economy we haveand the way of life we have. To take Florida as a specific example, Floridas economy, Floridasdependence on energy doesnt change. And the importance of assurance of energy supplies,affordable energy supplies to Floridians, to Florida businesses, to Florida homeowners doesntchange.

We have obviously got a long hill to climb to reestablish our industrys credibility withmany residents in the Gulf and, significantly, Floridians. But its worth noting that in the Gulf ofMexico, there has been strong objection from the other Gulf states to the moratoriumthis iswithin the States and indeed among people who are closest to the Gulf living in the counties orparishes that are along the coast.

And so we simply see that we have a strong information-providing task ahead of us, butthe primary arguments dont change. We have an economy that depends on energy. We have (inaudible, background noise)Gulf Coast, a Gulf of Mexico resource that strongly supports


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jobs, strongly supports spending, generates taxes and revenues for the states in the Gulf. Wethink the work can be done safely. We will plan to make our voice heard both nationally and inthe 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 thehydrocarbon 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: Ive 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 dont know. But anyhow, I put it up last night on TheOil Drum.

41:31 MR. WESTENHAUS: The point I wanted to make was that in lieu of, you knowin view of taxes and the river of money that flows to the federal and the states from the oilindustry, 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 littlemore educational, such as the hydrocarbon man that might help people understand the gravity ofthe damage thats done by government policy?

41:56 MS. VAN RYAN: To be fair, Brian, Im not sure anybody here in the room hasseen that yet. Gail mentioned it to me in an e-mail, I think it was just this morning or perhapsvery late last night. And I havent had a chance to look at it yet. But well take a look at it andsee.

42:09 MR. WESTENHAUS: It will knock your socks off. Its 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 thethings that come from oil.

42:20 MR. WESTENHAUS: Its really quite clever.

42:23 MS. VAN RYAN: Well, speaking of that and of the kinds of things that you all areseeing, let me ask you a question: So what do you need from us based on everything thats goingon right now, what kind of information do you need from API that helps you with your blogposts or helps you just understand the industrybetter? Id love to get some feedback from you.


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42:25 MR. WESTENHAUS: Thirty- and 60-minute videos like the hydrocarbon manthat have educational value that the average dope can get in a little bigger than a spin or a soundbite kind of size. You know, a thousand-word blog post does one thing, but you never reach thatmany people.

43:00 MR. YOUSEFZADEH: In addition to that, just sort of a long view concerning thehistory of offshore drilling. I mean, all of us have internalized things like one airplane accidentdoesnt mean that you stop flying on airplanes or even one car accident means you stop drivingin cars. But this issue has not been internalized. And the Deepwater Horizon event is being seenas the norm, as opposed to a deviation from the norm. So that perception needs to be changedradically 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 wed always struggle with and Idont know if we were alone in industry is the challenge of presenting information about whatis 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 beexplained to second graders at a show-and-tell. And so thats weve wrestled with that,recognizing that we have a need, as I think youve described, to tell our story to the public.

One of the things Id be interested in feedback from you all is whether, you know, anumber of weeks of the Deepwater Horizon of stories of various kinds in print and broadcastmedia about offshore operations has kind of brought public awareness and even a level of publicknowledge up to where we could probably talk a bit more techie than we have in the pastbecause people have a better understanding of theres such a thing as drilling mud, theres such athing as a blowout preventer.

If we would have used those terms back, say, in December, we might have had a few setsof eyes glaze over. But I think were probably at the point where we could afford to speak in abit more concrete terms about what we do to help present information that we need to present tothe public. What do you all think?

45:45 MR. MALEY: This is Steve from Redstate. I work for a Gulf of Mexico operatorand one of the issues that Ive tried to educate people about is the difference between our shallowwater operations, which are essentially not incident-free, but if you look back over the 40 yearsup until March of 2010, an acceptable risk, I think most people would say from an environmentaland 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 towater depth, due to drilling depth, due to pressures, due to oil versus gas. Theres a multitude ofthings that make it much less risky. But the people that dont know and dont want to knowanything about our business lump them all together and equate them as the same thing.

(Cross talk.)


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46:55 MR. WESTENHAUS: Brian Westenhaus again. You asked what advice onecould give headed your way? Well, everybody on this call is very intelligent. But out there in thereal world, half of those people have IQs under 100 and they vote too. (Laughter.) Well, I knowits funny. It seems funny, but they vote too. I mean, watch Obama and who goes to watch himtalk? Look at the faces in the crowd. Its scary, you know. You got to get it simple.

47:29 JOY MCCANN: This is Joy McCann and I actually agree with Brian very, verymuch. I think that theres I think that you really do needI hate to say this, but you needbright colors, you need oversimplification. You need to use the least techie-sounding terms and Ithink it would be a terrible mistake to go too techie in stuff thats actually gauged to the averageperson because the average person just isnt that smart.

48:02 MR. YOUSEFZADEH: And the average person is geared at this point not tobelieve you. I mean, youve part of the problem is you could have the most sellable messageout there, but if no ones listening, then whats it worth? And part of what you have to do is to, Iguess, sort of wave your hands and say, hey, over here, we have a story to tell. And thats going

to be a process entirely independent from actually refining that story and having the chance totell it.

48:41 MS. MCCANN: Which is why I think a lot of the people in Louisiana have a lotto say. I mean, I think its really, really important that the shrimpers in Louisiana are very muchin favor of getting, you know, their relatives who work on the rigs back to work. I think itsreally important.

49:00 MR. YOUSEFZADEH: Yeah, quite frankly, I mean, thats one of the best thingsyou can do is you couldwhen people talk about stopping offshore drilling, a great many ofthem, the image they have in mind is that already-rich oil executives dont get a chance to linetheir pockets any further.

I think its exceedingly important and it has the virtue of being trueto point out thatthere are people who are never going to be millionaires whose livelihoods depend upon gettingoperations back into order. And these people are just getting killed. And thats the mostimportant thing you can do in terms of turning around public opinion.

And once public opinions turned around, in order to have thein order to be geared tolisten to your story, then you can start talking a little bit more about the technical side, aboutthings that youre 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 alittle bit more is that a lot of the overseas operations are done at a much, much higherenvironmental cost. I think we really, really need to be talking more about what happens whenthe drilling occurs overseasyou know, whats going in Nigeria, whats going on elsewhere.What happens when the risks are higher and the impact to the environment is much, much worse,when this stuff leaves Americas shores?


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50:38 MS. VAN RYAN: And youd 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 theyresimply explaining what they do in the industry and putting a human face on the industry, is thatthe kind of thing you could use?

50:56 MR. YOUSEFZADEH: Yes, absolutely. I mean, this is an election year andeconomic issues are prime, especially unemployment. And this all just feeds in and it feeds invery, very strongly. And you absolutely needthis has to be an economic and employmentissue. 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 Perotabout the giant sucking sound of Washington, D.C. They suck up jobs; they suck up cash; theysuck up taxes. They suck up everything. You know, the little ad that Occidental runs is funny,but its highly instructive. It works for people that are highly intelligent every bit as well as itworks for the people with an IQ under 100.

These things are hard to do, I grant you, but its important to get them done because theads true. You take oil out of our economy and were sunk. You cant support 300 millionpeople without oil; it wont work.

51:59 MS. TVERBERG: Yeah, thats right. The problem with the ad is its in kind ofan obscure format. And if it were in, you know, just a standard thing that people could passaround on the Internet a little more easily, I think it would be even betteryou know, that theycould share on Facebook.

52:18 MR. WESTENHAUS: It sounds almost evil for an association to do, but youalmost need a library of stuff for people to call on, you know, specifics. You know, trying tohave the stuff on YouTube; thats Greek for me. I dont have the time.

52:32 MR. RANGER: Theres something I could call your attention to because we are,you know, constantly updating our website. We have information, we have our ads accessible onour website, we just postedwhat was it, yesterdaya new primer on hydraulic fracturing,which, of course, has continued to be a significant issue, particularly with respect to developmentof onshore natural gas resources.

We also have on the websiteand I dont know if Jane has sent you the link, but she cando so -- e have a couple of video productions on drilling, one of which involves real peopleemployedyou know, wearing hard hats, working in the oil industry, explaining the basics ofwhat goes on at a drilling operation from field locations in Texas and in Colorado. So weve gota couple of things like that. What youre saying is very helpful and I really, really appreciate thefeedback youre providing.

53:41 MS. VAN RYAN: And speaking of hydraulic fracturing, I think all of youreceived links to a study on the Marcellus shale and the economic impact there. Because youretalking about jobs and economic benefits and so on. You should have all received that study and


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Tim Considine, whos the author of that study, should still be on the phone wi th us. Are you stillthere, Tim?

54:01 MR. CONSIDINE: I am.

54:02 MS. VAN RYAN: Good. I dont know if any of you have any questions abouthis study. The study deals with the potential economic, very positive economic impact of theMarcellus shale in Pennsylvania, New York and West Virginia. And Tim, correct me if Imwrong, but isnt 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-developmentscenario for the year 2020. Currently, the industry in West Virginia and Pennsylvania is creatingover 57,000 jobs and thats based on direct employment in the industry and all the supply-chainspending that it stimulates and the induced spending by households and landowners of lease andbonus payments and royalty income.

55:00 MR. WESTENHAUS: Have you got a map with a bright dollar bill, green spotover 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 thatmoneys going to be spent.Well, its got to be visual. I mean, you know, I like lots of traffic. Ialso like high-end traffic because they click on the ads pretty good. With these numbers, youvegot to get down, you got toyou know, youve got to come down off your high horse and talk attheir level. The second-grade thing works and Im sorry it works. (Chuckles.) They hangaround 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 differenttopic?

55:41 MS. VAN RYAN: Of course.

55:43 MR. STYLES: First, let me just offer an observation that might be helpful to thisconversation, which is that, you know, it seems to me that what the industry is currently facing isan epidemic of fear, uncertainty and doubt, similar to what the nuclear industry faced after ThreeMile Island. And that may be the only relevant analogy, to TMI. But it might be helpful to lookat what other industries have done to counter those sorts of things.

Im not sure the nuclear industry is necessarily the one to look at. But you know, otherindustries have gone through things like this and found ways to try and guide folks out of it. Thequestion that Ive got actually relates to ethanol, a totally different thing. I know that theindustry has generally stayed relatively neutral on ethanol policy, but theres a couple of big


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things coming up that could have a very significant on the industry, both in terms of investmentcost and in terms of potential liability.

Im referring to, first of all, you know, as we approach the blend wall, youve got thispending 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 bestuck with the liability when cars stop working are not going to be the ethanol producers who, Ibelieve, have actually been indemnified under some of the recent legislation. But its going to beeither the auto industry or the oil and gas industry or both.

And then the other issue relates to the very interesting proposal thats just come out ofGrowth Energy which, I think for the first time, fragments the way that the ethanol industry istrying to go on its policy stuff. Youve got the 45-cent-a-gallon, volumetric ethanol excise taxcredit ending at the end of this year and theres proposals to extend it, but Growth is saying, wait

a minute, dont extend that tax credit. Shift that money into tax incentives for putting in E85infrastructure, gas stations and blenderthey call it blender pumps.

I guess the idea is you have a tank of ethanol in the ground and you blend some arbitraryamount of ethanol into every gallon of gas at the consumers request, or whatever. Do you haveany thoughts on all of this? Because I think, you know, this is about to start having a seriousimpact, not just as Hamburger Helper, but as something thats going to really cause potentialoperational issues and costs.

58:05 MR. WESTENHAUS: Buy that man a steak.

MR. JONES: Hi there, this is Russell Jones. Im more of a climate person than anethanol person, but Ivelistened to some things around the building, so Ill share what I do know.API is, in fact, very concerned about EPA prematurely approving higher-grades, beyond the 10percent and higher percentages.

Were in a fairly extensive research program to test these higher grades. I dont have thedetails in front of me, so I couldnt tell you who its with. But I think there is some legitimateconcern as to whether the vehicles that are on the road can take the higher grades of ethanol,especially with the older vehicles.

And weve been urging EPA not to prematurely do this, to prematurely approve thehigher grades, for precisely the reasons that you raise. There could be a whole lot of liabilityissues and we dont want to be on the wrong end of that. And we dont think EPA ought toapprove products that are going to do harm to peoples vehicles. I think the research program, Ithink, is supposed to be done this fall, but I dont have the details. But I think the liability issueis a very serious one and we are concerned about that.

Interesting thing on, you know, youre talking about the magic blend pumps, wheresomebody walks in and says, I want 47.25 percent ethanol today. It seems theres an interesting


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meshand maybe its not a mesh; its a mishmash between CAFE regulations and the fuel thatpeople buy. You know, the EPA has the CAFE regulations. Vehicles have to meet so manymiles per gallon.

Thats based on some specialized fuel that you cant buy at the pump, called indolene or

something like that. Its not based on what you do buy at the pump, which is largely, these days,fuel with 10 percent ethanol in it. The problem is that every time you add ethanol, you lower thefuel value, the BTU content of a gallon of fuel.

You know, so when somebody goes in and gets the high-ethanol-content fuel, theyrebuying low-BTU-content fuel, which translates into low miles per gallon for the vehicle, whichmeans the vehicle isnt going to get the miles per gallon anywhere near what CAFE says itssupposed to be making, and which the auto manufacturers have complied with.

So as people move towards the higher-content ethanol, I think people have got to reallystart thinking about, well, how do we relate these CAFE requirements? How do people know

what, in fact, mileage they even have a chance of getting when they buy a vehicle? I thinktheres a number ofissues down here that have to be addressed before we start pushing increasedvolumes of ethanol into the market.

I think the other issue thats going on is there is this RFS-2, reformulated fuel standardnumber two, that has, you know, so many billion gallons of fuel that are supposed to be producedand delivered to the consumer. EPA is in the process of reassessing what the market is able todeliver. And for this year, theyve already decided earlier this year, they decided that themarket is incapable of producing anywhere near the volume required by the law, so theyverevised it, as theyre allowed to do.

But next year, I think, the volume requirement is something like 200200 andsomething, million gallonsI dont have my numbers right here. And theyre lucky to theU.S. really hasproduction ability of about 10 percent of that, maybe less. So theres getting tobe a big disconnect with the ability to deliver the biofuels to the consumer and what the lawrequires.

So theres going to be a whole lot of interesting issues on the requirements of the law, theability to deliver fuel to the consumer, what theyre getting and what theyre actually howmany miles per gallon theyre getting in their car.

01:02:34 MR. STYLES: Yeah, I mean, just to follow up on that, it seems like clearlywere approaching the point where all of these policies are converging in a way that is likely toend up in a train wreck. Theres clearly a limit to how much ethanol you can squeeze intogasoline when the gasoline pool isnt particularly growing and were getting very close to thatlimit.

I guess the other specific question that I would haveI mean, one of the comments theEPA has raised, they seem to be proposing as a compromise the idea that E15 would beintroduced as a separate blend for vehicles manufactured after some date X. But, you know, as


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an old supply and distribution guyI spent 10 years of my life doing supply and distributionwork for TexacoI cannot imagine how thats going to fit into the marketplace, particularly atthe same time youre trying to introduce E85. I mean, it just seems like a total no-can-do. Andyet, ifyou dont have something like that, you know, theres no way to get to 35 billion gallons ayear or anything close to that.

01:03:38 MR. JONES: Well, you canIm being facetious here but each servicestation probably has about three different tanks, some sort of regular, mid-gradeand premium.And then you have three more for an E15, grade of each. And then, you could have three moreto get your E85. I mean, youre right, it doesnt work.

01:03:54 MR. STYLES: Yeah, Im 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 thisdiscussion, because Ive been going over it. You know, the Growth Energy proposal just is amystery to me. The notion of it is that, oh, the blenders and the oil companies are the ones whoare really getting the subsidy and the ethanol producers are not at all. Well, the best research onthis issue was done by Wally Tyner of Purdue who is a very respected agricultural economist andprobably 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 carefullydone on it, says that the ethanol industry is the one that ultimately receives the benefits, youknow, following kind of the analysis of incidence of taxation and subsidies. So I really ampuzzled why theyve come forward that ultimately they could end up causing themselvesproblems.

And finally, you know, the limitation on selling more ethanol is not the oil industry. Itsnot blenders pumps. Its 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 theethanol folksthat there are 8 million cars or so and only a million of the owners know thattheyre flexible fuel. And so, a strong outreach to those customers is the best way to be able tomove up that chain. And youre absolutely right. I mean, with low gasoline demand growth orno gasoline demand growth, youre going to hit the blend wall pretty quickly.

01:05:35 MS. MCCANN: But theres one other P.S. on ethanol that I think justwell,actually two, one which has been touched on, which is that ethanol is very, very, very highlysubsidized. And of course, when there are fluctuations in the ethanol market, it actually affectsthe food market. And a lot of people think that thats that those two should be divorced simplybecause of the impact it has on food prices, depending on whats going on with ethanol.


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But the other thing to keep in mind is that in the averagein the mind of the averageperson, the environmental costs are very, very high with oil and gas but not with ethanol. And ofcourse, you know, we know that there is a huge dead zone in the Gulf itself because of all of theyou know, agricultural runoff from all of the extra soybean and corn thats just being grown forethanol production.

01:06:29 MR. STYLES: Absolutely. In fact, the CBO just put out a study on theeffective cost per gallon of gasoline equivalent of the ethanol subsidies. And they come up witha number for what it costs per gallon to actually replace a gallon of gasoline with ethanol, andits a stunning number, like $7.00 a gallon or something or $3.00 a gallon. Its like off the chart.(Chuckles.)

01:06:56 MS. YOUSEFZADEH: This is Pejman Yousefzadeh. The greatone of thegreat 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 thanwould 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 formersenators who go onto bigger and better things like to keep that kind of domestic supply, which isessentially protectionism run amok in the energy sector going.

01:07:40 MS. TVERBERG: Id be interested in a link to that Congressional BudgetOffice study on ethanol. Was it Geoff that had that?

01:07:50 MR. STYLES: Yeah, Gail, its actuallyI did a posting on the Growth Energything, 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, weve been going for over an hour now. I dontknow if anyone has any other additional questions. I must tell you, Ive enjoyed the discussionimmensely. And I appreciate your candor in giving us your suggestions on what we should doand how to try to explain this complicated and highly technologically advanced industry to JohnQ. Public. Its a challenge, as you know. Its a challenge that were all engaged in every day.So any other thoughts that you have, please send them to me. And in the meantime, were goingto get the audio file and the transcript prepared. And well send those out to you, send a link tothose two documents to you at some point tomorrow, I hope.

So if I dont have a chance to visit with you before the weekend, have a wonderfulweekend. Im sure well be in touch. Thanks, everybody.

(END)

api blogger conference call: energy issues post deepwater horizon - 7.22.10

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