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National Energy Policy: Crude Oil and Refined Petroleum Products.
Subcommittee on Energy and Air Quality
Mr. John Paul Pitts
Good Morning, Chairman Barton, distinguished members of the committee. As this committee goes forward in its quest for a national energy policy, I am honored to be allowed to provide what insight I can, as an oil and gas journalist for the past 25 years, and the oil and gas editor of the Midland Reporter Telegram for the past 18. I am not here today with another bag of statistics, a legislative wish list or well-worn argument, but simply the results of a survey of a small segment of America's oil and gas producers. Hopefully, as you go forward with the urgent task of creating policy to fix America's energy problems for the sshort term and the long term, this survey information will provide you more insight into the challenge. This survey of Permian Basin oil and gas producers addresses many of those challenges. The Prolific Permian Basin Larger than Norway, Italy or Ireland, the Permian Basin is a prolific, geological province, comprised of 52 counties in West Texas and Southeast New Mexico, accounting foooooooooooooutheast New Mexico, aIt accounts for 75 percent of all the oil in Texas, and 18 percent of the nation's 5.8 million barrels of daily oil production. The capitol of the Permian Basin is Midland Texas a world class oil town, and a microcosm of the domestic oil industry. If somehow, you could take the entire domestic oil industry from Louisiana to California and Texas to Canada and distill it down into a single city of 106,000 you would have essence of oil or Midland, Texas. Because Midland lives and dies by theee and dies by thee of price of oil and gas, and the issues that impact those prices, producers, there, are perhaps more keenly attuned to oil and gas issues than any other oil town in America including Houston. Chairman Barton was in Midland recently on a faaa mission ct-finding mission for this committee, and I am sure he will agree with me that when it comes to getting a feel for America's energy destiny, Midland is a go-to-place.
The Producer Survey
Each year the Reporter-Telegram interviews a cross-section of Permian Basin oil and gas producers majors and independents from Midland to Hobbs, New Mexico, conducts a survey, in which it attempts to interview each oil and gas producer major and independent in order not only to determine spending and activity levels for the year, but producer opinions on key issues. We do not ask for a simple yes or no, but sought to engage them in discussion to validate a bigger picture. While it is neitheNot higno, but seek to engage them in discussion to find the reasons behind the answers. While it is neither highly scientific, or large in sample, over the years the Reporter-Telegram Producer Survey has proven nevertheless to be a highly accurate baromeemeter of mood and money in the oilpatch. That's because there are a large number of producers, intensely focused on oil and gas, in a region with one of the oldest and largest concentrations of oil and gas in the world. in a region with one of the oldest and largest concentrations of oil and gas in the world. Today, we offer the results of our survey questions on energy policy, in hopes that it will , perhaps, give the committee a broader understanding of America's oil and gas producers, a better feel for what needs to be done and what is politically possible, and physically doable.rica's oil and gas producers, a better feel for what needs to be done and what is politically possible. Over decades of trying to make a living in the risky and politically charged oil business, Midland oil and gas producers have developed a strong sense for the possible and impossible. Here are some of the responses. Energy Policy On the issue of energy policy we asked: Is the time right for an energy policy? And how high should it rank sPon President Bush's policy agenda. To no one's surprise 97 percent, said yes this is the time. Only three percent said no. On its ranking as a priority, 91 percent said it should be high or very high on President Bush's agenda. But 9 percent said it should rank less than that. From the responses we detected not only a great deal of enthusiasm, that a national energy policy is finally on the table, but a strong sense of finality surroundin never. Next we asked: Do you think it is we heard many times that it was now or never if America is to finally have an energy policy. Next we asked: Do you think it is politically possible to achieve a national energy policy? Only 44 percent said yes, 25 percent said no, and 30 percent said maybe. If producers were all over the board on this response, one must remember that the oil industry has had along history of disappointment in matters energy policy issues. While they want it to be true, it is very appare they are not long history of disappointment in matters of energy policy. While they want it to be true, ( that an energy policy is coming) it is very apparent that they are not confident that Congress can bridge the political differences or that the public will be able to overcome their NIMBY ways or their bias against the oil and gas industry. Also for decades, producers have been told repeatedly, that it is politically impossible to achieve an energy policy. The traditional argument is that there are more energy consumers than producers and the only thing consumers care about is cheap energy and the cheaper the better. One producer noted: We will never get the consumiiuming public's attention on energy until they begin to stack American body bags on the deck of air craft carriers in the Middle East. Energy Security Next we asked:How concerned are you or your company about Energy Security Next we asked:How concerned are you or your company about U.S. energy security? Over 80 percent said they were very concerned, while 19 percent said they were not. Why only 80 percent and not 100 percent? I sensed that some thought oil and gas had become too global for anything drastic to happen. Also there is the lull factor created by the fact that we have gone decades without an energy policy and have had to fight only one wayr which we easily won. Most, however, acknowledged that it was sheer folly and highly dangerous to be 57 percent dependent on foreign oil producers. Especially when America has so many energy resources and It was frightening, and was even more fr of t some of our foreign oil suppliers are openly hostile to America its culture and religious heritage. And then there is Iraq. We are their biggest oil customer, but they are so bad we have to bomb them from time to time taking care not to hi not to hiit any oil facilities. Energy Independence Energy independence will become one of the most critical aspects of a national energy policy. Is it a realistic goal or not? If it is not, should we just forget about an energy policy, and focus on our military? We phrased this question very carefully. We asked is energy independence a realistic goal to pursue, in the context of a comprehensive energy policy that includes if it is only a little space, we must begin to put space between America and the treachery of the Middle East. Oil Price Stability Oil price volatility has proven to beven to beven to beconservation, access to reserves, coupled with the use of broad-based energy resources including: coal, nuclear, oil, natural gas and alternatives? The majority, 68 percent, said that even with the best energy policy, energy independence is impossible, that we have gone too far down the road of dependence to become totally free of foreign oil producers. Only 31 percent thought it was possible. Many of those negative responses, however, were qualified by noting that energy independence should be pursued, even it may not be achieved. You can't hit the bulls eye unless you aim for it, said one operator. There was also the sense, that even though total energy independence is unattainable, we must begin to back away from the Middle East even s: Price controls don't work. Every floor has a ceiling. Both floor and ceiling would be artificial and mismanaged byy here was the fear that both would be artificial, and that it would be highly corrosive to the welfare and security of America. During the downturn of 1997-1999, $11 oil nearly destroyed the oil and gas infrastructure. Then, in 2000-2001 high oil prices, above $35, produced a near train wreck in the economy. We asked Basin producers if they would support a floor price on crude oil as a means of controlling oil price volatility. Over 60 percent, said they would not support a floor price. The reasonnnne was the fear that both would be artificial, and that it wouldm for crude oil. Another 11 percent said they did not think it was the right pricing mechanism, but accepted it because, it was the only thing we have. Another 11 percent had no opinion, and only 23 percent thought NYMEX was a legitimate and useful pri government. But 37 percent said they would support a floor price. Next we asked: Do you approve of NYMEX as a pricing mechanism for crude oil? Of those responding, 54 percent said they did not approve of NYMEX as a pricing mechanisricing mechaniscing mechanism for world crude oil. Most of the comments reflect the opinion that: NYMEX does not truly reflect free market principles; that it is a price-maker and not a price- taker; that there are too many more paper barrels trading; that it was vv said yes it was a good pricing mechanism. It is working and it is good for OPEC, U.S. consumers and domestic producers. Most of the 14 percent who responded negatively to the idea of the trading band qualified their answers by noting that they fearedddolatility by design for the benefit of commodity traders. There is a strong feeling, even among those who favor NYMEX, that it must be changed to prevent extreme price volatility. Then we ag mechanism for world crude? Is it working? About 86 percesked about the OPEC trading band of $22-$27. Is it a good pricing mechanism for world crude? Is it working? About 86 percentdid not. Again access to reserves, was given as the key to achieving the 30 Tcf goal. Also, that it is developed within the context of a North American Natural Gas Market that includes Alaska, the Lower 48, Canada, and Mexico. Few feel the U.S. can can OPEC did not have the discipline to make it work. Oil and Gas Production As the number one energy consumer in the world, America is faced with two major challenges: 1. flattening an oil production decline curve of 2-3 percent per year, 2. trying to discover, develop and sustain 30 Tcf per year of gas production within the next 10 years. We asked: With the right oil price scenario, intense l price scenario, intense drilling, and access to domestic reserves, do you think the domestic oil industry can flatten the oil decline curve? Approximately three-quarters said they were confident the steep oil decline curve could be flattened 26 percent did not. While most said the maturity of U.S. reservoirs, would be the biggest hurdle to flattening the decline curve, they also thought new technology could helpeservoirs, would be the biggest hurdle to flattening the decline curve, they also thought new could helpould help compensate for maturity, and thought that opening access to domestic reserves would be a bigger factor in flattening the decline than increased drilling. We also askede scenario, intense drilling and an energy policy that encourages exploration and pr about natural gas: With the right gas price scenario, intense drilling and an energy policy that encourages exploration and production, do you think a North American gas market can reach and sustain the target of 30 Tcf natural gas production per year? There is more optimism here. A solid 89 percent thought a North American gas market could sustain that level, only 11 percent nk them and chose all three as top concerns. Environmental extremism is the bee in the bonnet for Basin producers. For example, during the California crisis, when natural gas was in short supply and gas prices soared above $10, rigs in New Mexico, drdo it alone. Environmental Concerns Asked to rank their top concern as producers lack of rigs and crews, oil price volatility or unreasonable environmental regulation, we found few who would railling for natural gas were shut down, and men with families to feed were put out of work so as not to disturb the prairie chickkng for natural gas were shut down, and men with families to feed were put out of work, so as not to disturb the prairie chickoverdependence on Middle East oil. As you seek to build consensus around energy policy issues, I hope this information can be of some small use. Thank you very much. The Bottom Line I think the bottom line of our survey is this: There are many things to be addressed and fixed to have a viable national energy policy.even though they have doubts that conditions in America have changed enough for an energy policy to happen. As unfortunate as it is, we can only hope that the California situation will suffice as America's wake up call on energy that it is only bla Permian Basin producers strongly support a national policy, and when called upon to step forward help solve America's energy dilemma will do so, ly support a national, and when called upon to step forward help solve America's energy dilemma will do so, ck outs that are needed to get America's attention and not body bags. I applaud the Committee for the very serious work it is doing in moving forward to formulate a long term energy policy, that will provide the nation with secure, abundant, sustainable and affordable energy sources for decades to come an energy policy that will hopefully decrease the danger we face from over dependence on Middle East oil. As you seek to build consensus around energy policy issues, I hope this information can be of some use. Thank you very much.
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