ConocoPhillips’ Lance: Crude Exports Would Boost Economy

Mark Green
Posted April 27, 2015

ConocoPhillips Chairman and CEO Ryan Lance talks with Energy Tomorrow about key industry challenges ahead and details the case for ending the United States’ 1970s-era ban on the export of domestic crude oil. Lance is a petroleum engineer with 28 years of oil and natural gas industry experience in senior management and technical positions with ConocoPhillips, predecessor Phillips Petroleum and various divisions of ARCO. His past executive assignments with ConocoPhillips have included responsibility for international exploration and production, regional responsibility at various times for Asia, Africa, the Middle East and North America, and responsibility for technology, major projects, downstream strategy, integration and specialty functions. He is a member of the Society of Petroleum Engineers, and earned a Bachelor of Science degree in petroleum engineering from Montana Tech in 1984.

Q: Given the current downturn in oil prices, talk about the key decisions ahead for the industry over the next 10 years.

Lance: We foresee several key decisions ahead for companies in our industry. First they have to determine their strategic direction.  Industry has transitioned from an era of limited resource access to one that, due to the productivity of North American shale and the potential for shale development elsewhere, offers a new abundance of resources. Although many of the best conventional resource areas remain off limits in traditional exporting countries, shale and other unconventional resources offer immense potential in many areas that are accessible. So companies now have an unprecedented range of options – pursuing North American shale,  international shale, deepwater development, LNG, oil sands, international exploration, and so on. Companies must determine where they have or can build competitive advantages and leverage relationships with host nations, potential partners and suppliers, and identify the long-term opportunities best for them.  

Another consideration is addressing costs. Given that today’s environment of lower, more volatile commodity prices seems likely to continue for the foreseeable future, every company must be concerned about maintaining its financial performance by controlling costs and enhancing the efficiency of work processes.

Many companies, even some larger ones, may reexamine the extent of their vertical or horizontal integration and consider changes, depending on their individual circumstances and how the market evolves in the future.

Safety must remain fundamental to us. I know I speak for the industry when I say that our first priority must be to keep everyone safe, and all our products securely contained in their pipes and vessels. Industry statistics consistently show that safety performance can be negatively impacted during downturns. A relentless focus on both personal and process safety in conditions like those we face today is more important than ever. For example, at ConocoPhillips we recently introduced our “8 Life Saving Rules” program to drive serious incidents out of the business, and it’s working. While we can’t control commodity prices, we can control our ability to make safe decisions.

Q: On crude exports: Speak to “energy isolationists” who welcome the benefits of abundant supply (lower consumer costs), yet oppose exporting U.S. oil and natural gas.

Lance: The first thing I’d say to them is that the energy renaissance is real. There is no longer any question whether North America has enough oil and natural gas to meet its needs. Reserves and production of both are already at or approaching all-time records, and climbing fast. Further, enormous shale areas still await development. This new abundance stems from applying U.S.-made technology and innovation to unconventional reservoirs, particularly shale. It was long known that shale held substantial hydrocarbon resources, but it was not until the 1990s that a new combination of horizontal drilling and hydraulic fracturing finally made commercial production possible. Production has been growing ever since. Further innovation lies ahead. We have only scratched the surface of shale’s potential, and are already seeing encouraging improvements in drilling and completion efficiency as well as initial production rates. In effect, this is the first inning of a nine-inning game regarding shale technological innovation.

Crude oil exports can help domestic energy production. The best way to maximize the benefits of the energy renaissance to the country and consumers is to ensure that producers can access healthy markets for their production. Crude oil exports would expand markets for domestic producers and thus encourage greater investment in new resource development.   

It’s important to note that refiners would still have all the oil they need. The preferred destination for U.S. crude oil would remain the domestic market, because of lower shipping costs. Thus, U.S. refiners would not be adversely affected by crude oil exports. Domestic producers are only seeking the ability to export the oil that exceeds what U.S. refiners can economically utilize.

Q: How does the current low-price environment affect a broader policy decision on exporting U.S. crude oil?

Lance: Crude oil exports are particularly needed today. Recent studies by Rice University and IHS underscore the point that American crude oil sells at a discount from already-low world oil prices, worsening the impact of the price downturn not only on domestic producers, but the U.S. economy. The discount stems from a mismatch between the type of oil produced from shale, and U.S. refining capacity.

Remember, not all oil is the same. There are different varieties of crude oil. Unconventional reservoirs typically yield “light oil,” while many Gulf Coast and Midwest refineries were designed for “heavy oil” from Venezuela, Mexico and Canada.  Light and heavy oil differ in their gravity, mixtures of hydrocarbon compounds and product yields, so they require different refining processes and equipment.

The mismatch is in the fact that  U.S. light oil production currently exceeds domestic refining capacity from an economic standpoint during seasonal maintenance turnarounds, and this mismatch could reach 1.5 to 2 million barrels per day in the foreseeable future. To offset the cost of processing light oil in facilities not designed for it, U.S. refiners purchase light oil at a $5 to $10 per barrel discount from world oil prices. The discount incentivizes refiners to process more light crude oil, but negatively impacts producers and the U.S. economy, while putting domestic producers at a competitive disadvantage to peers in other countries.

At today’s low oil prices, differences of a few dollars have substantial impact on upstream investments. For example, a $3 change in a $50-per-barrel price environment has the same effect as a $10 change in a $100 price environment, according to IHS. Many unconventional resource development projects are uneconomic below $70 per barrel, and even high-quality unconventional plays are uneconomic at $40 per barrel or lower. At recent prices the domestic oil industry has been forced to reduce activity levels and investment, and eliminate jobs. Suddenly, the industry that helped lead the U.S. economic revival since 2009, generating 40 percent of U.S. GDP growth, is in decline.

Exports would open new markets, encourage greater domestic production, and yield economic stimulation that would benefit consumers and the nation. Crude oil is the only energy commodity subject to an export ban, which was imposed by the Energy Policy and Conservation Act of 1975. Given the vastly improved energy landscape, exports should be allowed to enable the United States to realize the full potential of its unconventional energy resources. Currently, exports are allowed of such refined petroleum products as gasoline, diesel fuel and home heating oil. In fact, according to the U.S. Commerce Department, during 2014 exports of refined petroleum products were a record $146 billion, or nearly 10 percent of the total value of all U.S. product exports. There is no sound economic reason to prohibit crude oil exports, while allowing exports of the products made from crude oil. 

Q: What are the potential benefits of crude oil exports to the country and to consumers?

Lance: Perhaps the biggest benefit is lower gasoline prices. Roughly a dozen economic studies by government, universities, research groups and industry concluded that domestic gasoline prices would fall if crude oil exports are permitted. This is because U.S. gasoline prices are primarily determined by world gasoline prices, which in turn follow world crude oil prices. Adding new oil supplies to the world market through exports would put corresponding downward pressure on world and in turn U.S. fuel prices. IHS estimates U.S. consumers would save from $265 billion to $418 billion over the 2016-2030 period, or 8 cents to 12 cents per gallon.

Allowing crude oil exports would protect current jobs and enhance future job creation not only in oil and natural gas, but nationwide in service, supply and support industries. Oil and natural gas now support 9.8 million U.S. jobs and contribute 8 percent of U.S. gross domestic product. IHS estimates that oil exports would create from 394,000 to 859,000 new jobs per year, on average, between 2016 and 2030. Each of these jobs in turn creates three jobs in the supply chain and another six jobs in the broader economy.   

The broader economy would be stimulated, too. Brookings Institution predicts that allowing oil exports would encourage U.S. production growth of up to 3 million barrels per day. IHS found that resulting benefits to the overall economy would far exceed benefits to the oil industry, as each dollar created in the oil sector generates $2 in the supply chain. Thus, allowing crude oil exports would increase annual U.S. gross domestic product by $86 billion to $170 billion, increase average household labor income, encourage growth in oil industry capital investments of $750 billion through 2030, improve the U.S. trade balance by $67 billion annually, yield $1.3 trillion in additional governmental tax and royalty revenue through 2030 and generate higher royalty and leasing income to landowners.

Q: What are the potential geopolitical benefits of U.S. oil exports?

Lance: Exports would have a stabilizing effect on the global oil market. We have already seen an example of this. Growing U.S. light oil production since 2009 has backed out 3 million barrels a day in crude oil imports, according to the Energy Information Administration. By offsetting production losses in the Middle East and North Africa, these new supplies helped prevent fuel price increases. By allowing oil exports, we would continue this ability to stabilize the market.  

It also would help reduce oil price volatility. Our past success at stabilizing the market has spared American consumers from considerable price volatility that would have otherwise occurred. All else being equal, without the U.S. production increase, world oil prices could have been $12 to $40 per barrel higher in recent years, according to ICF International. As a result, U.S. consumer gasoline prices would have been 30 cents to 94 cents per gallon higher in 2013. Allowing oil exports could yield similar benefits in the future.  

Finally, exports would enhance U.S. global influence. Enabling the creation of new markets through crude oil exports would strengthen the economic power that underlies U.S. global influence, while helping other countries that now rely on less-secure sources to diversify their energy supplies.