Black gold and natural gas from an industry point of view

On Friday last I was fortunate enough to be invited to participate in a conference call with the nice folks at the American Petroleum Institute (thanks to Jane Van Ryan for setting me up) along with thirteen other bloggers from across the country. And while I took reasonably copious notes, fortunately I don’t have to replicate the chickenscratchings that my notes tend to turn into when I’m writing quickly; instead the API folks were kind enough to reproduce the call via transcript and in audio form as well. (If you have a spare hour-plus it’s pretty informative, even with that somewhat nasal-voiced guy from monoblogue chipping in.)

We covered a wide range of subjects and I’ll be the first to admit I learned a little more about the business of petroleum. When most people think about the subject they consider just two areas, maybe three: the rig or well where the oil or gas is pumped out of the ground, the refinery where oil is processed, and the gas pump where you bring your car or SUV up to, gazing slack-jawed at the price numbers spinning ever upward. However, there’s a LOT more to the oil business than just those three factors.

I was a couple minutes late to the party, but I did manage to catch the initial topic of discussion – the late and unlamented Congressional moratorium on offshore drilling. Trouble is, like Lazurus, restoring the ban is one of the many aims of Congressional Democrats should they increase their majorities in both bodies and most certainly they would have a backer in Barack Obama if he’s elected. So while the lifting of the moratorium was cause for a little celebration, the industry is still holding its collective breath awaiting further action. (What’s really disgusting about this and many other free-market situations is that we have to rely on Congress to give a green light to items that the federal government has little or no business getting involved with. The business of America used to be business, now I think it’s waiting on political favors.)

On a related note, the topic of supply came up and the recent shortages of gasoline in the southeastern area of the country were mentioned. Right up there in the realm of “stuff I never knew about”, the situation of product movement has created this bottleneck as recovery from both Hurricanes Gustav and Ike is slow. It’s forcing supplies to take a circuituous route to that region and since oil only can travel at a few miles per hour because of pipeline limits, the situation is taking awhile to unravel.

Of course, that led into a discussion about refinery capacity and spreading the wealth, as it were. Most refineries are placed in areas with a healthy supply of crude oil, and even the ones which aren’t still exist near a pipeline which can bring the supply needed to run efficiently. One item I’ve referred to in the past and found intriguing was President Bush’s 2005 proposal to place new refineries on former military bases, but API President and CEO Red Cavaney countered by citing the economics of investing in expansion of existing refineries rather than building new, claiming the extra capacity comes at 60% of the cost of a new facility in half the time.

Perhaps that cost savings comes in part because of the smaller likelihood of legal snags. In terms of getting supply, one giant hurdle is the constant litigation that environmental groups and other gadflies subject energy producers to each time a new field is opened. Cavaney gave the recent example of a lease auction for Alaska’s Chukchi field – the government received $2.7 billion in bids yet not one hole has been drilled in the nearly eight months since the sale because of legal action against each and every lease acquired by the companies. This is one case which screams for tort reform!

Frequent readers of monoblogue know, however, that while I’m foursquare behind drilling here and now to help assure our energy independence my main focus on securing more energy supply is the number of good paying jobs that oil companies could create for Americans if only the hurdles placed in their way were cleared out. My question actually began a pretty robust conversation about the employment aspect, which I thought was a good selling topic for keeping the issue alive as prices declined:

This is Michael Swartz. I write for Monoblogue. Now, earlier, you talked about an education effort to inform the public about your goals. But originally, it was based on a supply. Obviously, when we are paying $4 a gallon for gas, the supply end of it is paramount on people’s minds. But now that gas prices are declining a little bit – it is down to 3.50, 3.40, 3.30 – and on the other hand, the unemployment rate is edging up to 6 and 6.5 percent. Do you – (inaudible) – see a change in strategy that is really required in terms of education and taking it more away from the supply – making a less emphasis on supply and more of an emphasis on the jobs that are created?

MR. CAVANEY: We are going to be doing both because they both are relevant. We have not seen – and obviously, people are on the watch for it – a drop-off in the support for drilling that materialized now that the prices have been falling. But one of the things that is very important to us going back to the discussion we had about the OCS and the moratoria is there are some tremendous job opportunities with well-paying jobs available if people will end up moving forward. These go beyond just the people who are going to man the various rigs and platforms and the like to the fact that particularly if you look at closer in – let’s say 50 miles from shore. Fifty miles from shore where better than half of the crude and natural gas is undiscovered, but technically recoverable has been identified. Those are lands where the technology is such that we can build the platforms. We can build the rigs. We can do all the offshore work in U.S. yards and in U.S. manufacturing operations. So there is a great deal of indirect labor that would flow and be connected to those things – much more so than would be in a case that you are out 100, 150 miles and you are going to rely on most of your platform work and drill ships and the like to be coming from abroad. So it goes to the point I made at the very beginning – if you expand the opportunities for becoming a sort of strategic energy center outside the traditional Gulf area or Southern California or a little bit less – let’s say, outside Philadelphia, there is a pretty good opportunity here for good paying jobs – not just the construction jobs that moderate when you are done, but of a permanent nature because this stuff will – has the potential to continue and grow for years to come.

Yeah, that’s why I write because my words don’t always come out as I’d hoped when I speak. Regardless, Red brought up a good point about all those spinoff jobs. Imagine the impact on the economy of the Eastern Shore if Virginia was brought into play as a producing state – apparently there is some commercially viable product not far offshore. We could use that economic shot in the arm and it would complement all that’s slowly developing around the Wallops Island space facility.

Needless to say, it was a learning experience for me because I’d only participated in something like this one time before and that was on a smaller, statewide scale. It’s most likely I was the little guy involved as far as readership goes but I appreciate the chance to speak with these industry leaders nonetheless – in order to get larger, one needs to hang out with a better crowd and that was one goal I achieved. So I’d like to thank both the API staff involved and the other bloggers who made the call both informative and interesting. A couple of them (Bob McCarty of Bob McCarty Writes and Greg Balch of The Barnyard) already have their take on the call, I’m just adding my thoughts to the list.

Author: Michael

It's me from my laptop computer.

4 thoughts on “Black gold and natural gas from an industry point of view”

  1. It was a great converstion and I thoroughly enjoyed it. I am going to suggest to Jane that she open a roundtable Email discussion group among those of us that were there. What say you?

  2. It’s actually not a bad idea as long as we can more or less stay on topic. I’m sure also that Jane can answer most of our questions regarding the industry’s perspective.

    Naturally I’m waiting for my friends on the left who didn’t stay up all night to read this to start calling me a toadie for Big Oil. But I don’t think I’d find as agreeable or interesting of a group on a Sierra Club conference call.

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