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U.S. Policymakers Still Regulating Oil, Gas Like 1970s, Says ExxonMobil Chief

As much as the energy industry's investments in technology are shaping the 21st Century, operators continue to struggle under the weight of policies that are products of 1970s thinking, ExxonMobil Corp. CEO Rex Tillerson said Tuesday.

Tillerson was opening keynote speaker to a packed audience at IHS CERAWeek in Houston. He offered advice and criticism to U.S. policymakers, who he said needed to reshape their thinking from the days of oil embargoes and scarce domestic energy supplies.

"This must change. The society that fully benefits from the historic opportunity before us will need sound energy policies, policies worthy of the science and engineering and entrepreneurs” that have redefined the new landscape. We need policies that recognize the turning point moment, the optimistic policies that reflect our shared efforts for energy and environmental protection, that appreciate the power of free markets that create revolutionary relations, then proceed with conviction that a new world is best constructed on free trade and global cooperation."

Policymakers need to undertake four actions, he said.

First, said Tillerson, the U.S. government has to recognize that oil and gas advanced technologies and techniques have been "thoroughly proven in the most harsh conditions on earth." Second, the government "needs to promote free trade in natural gas and crude oil as we do for virtually any other industry in the United States."

The third objective should be to "approve critical infrastructure projects" such as  the Keystone XL pipeline. "The United States and Canada both need this and other vital infrastructure projects...Keystone will do more than deliver crude oil. It also will improve our competitiveness, increase energy security and improve our relationship with our most important trade partner."

Finally, more transparency and "certainty" is needed in the regulatory process because the "delays and machinations" are a detriment to investment. Keystone, he said, has become the "poster child" for the government's dysfunction. The regulatory process is "stifling to the industry. Lawmakers "have much to learn from others, such as the Canadian system of more cooperation and certainty. Unfortunately, the United States has not improved over the last four years" on that front. Regulations "frequently burden companies with expensive delays, unnecessary duplication...It's a fundamental tenet that leaders provide a clear and certain pathway to regulatory compliance."

The keynote was Tillerson’s third since CERAWeek began 34 years ago. It also, coincidentally, is the "third significant cycle" since he began working for predecessor Exxon Company USA in 1975.

Conference Chairman Daniel Yergin asked him how the industry has changed, for better and for worse.

"Each cycle has its own characteristics. What is different about this one is the North American revolution of supply from unconventional tight oil, in particular. It came at a time when demand began to weaken a bit in Europe, and the United States was becoming more energy efficient, which is a good thing, but it combined with a weak, uneven economy, and China slowed down…

"Then late last year the freight train of tight oil kept delivering, and no one in the market really foresaw that. Those two events, innovation and imbalance" are the main differences.

Also different is OPEC’s decision to protect its market share, Tillerson said. "By and large, many people have opined about what OPEC's actions are about. I don't take the view that it threatened supplies." He said it was a "price discovery exercise, which is important for investors to know...It's very useful for the industry to have a clear understanding of resources and how they are able to withstand a different price environment.

"My expectation is this is going to be be with us for a while. We'll have some false signals, some false responses, it will bump this way and that..But we'll have to settle in for at least a couple of years, and then we’ll see how things respond." He made similar comments regarding prices in March during the fourth quarter conference call (see Daily GPI, March 4).

The stupendous growth in North American unconventional natural gas may be a guide into how the unconventional oil market will respond, or not.

"If you look back at 2009, 2010, we were pumping over 1,200 gas rigs, we had production around 55 Bcf/d, and the price was $8.00, $8.50...Now we are running well below 300 rigs, gas capacity is...74 Bcf/d and we have a $2.50 price...Clearly, the significant reduction in the rigs did not reduce the activity in production. If that is analogous, we will learn. It’s the same principles, the same optimization to dollars to put into the resources that are being applied to tight oil…I see the same phenomenon in tight oil.”

The price reductions have led to “gains in efficiencies, and the resources recovered per well. We saw the same type of improvement in shale gas."

In all cases, "what we have to do as an industry is we have to perform," Tillerson said. "We have to manage the risk proposition, demonstrate our commitment, our ability to operate safely and responsibly...Most of the time, regulatory response is because of some failure on our part or some risk the public sees as not being properly managed.

"It's difficult for us to respond to a perceived risk when it's posed in a question as a negative to prove this isn't going to happen...We oftentimes are unwilling to look at the facts, to look at the science..." More than one million wells have been fractured and the U.S. Environmental Protection Agency has found "no documented cases of groundwater contamination."

However, there's "ongoing public concern...We as an industry haven't demonstrated that we can control that risk...We are seen as being unable to protect groundwater zones but we've demonstrated that we can." The concern "requires regulators to look at the facts. There's a lot of noise out there publicly, sincere people with sincere concerns. But we must look at the facts and we must look at sound science and not just respond to the noise."

Yergin asked Tillerson if ExxonMobil is reacting any differently to the current market downturn than it has in the past.

"I think the way to prepare yourself for the inevitable in the commodity business, which we are in is what you do in the years' proceeding. You put yourself in a way to deal with it positively or not."

Since Exxon merged with Mobil Corp. in 1999, the size of the workforce is 50% smaller, "but we are running a larger business. We have taken advantage of skills and people and are much more efficient and much more able to withstand a downturn."

The drop in prices has caused a rethink in the investments timeline. "How we test across pricing affects the timing more than anything else. We always are taking the view that we don't know what prices are going to be. You can take anybody's price forecast you want and we can say, 'you'll be right.' The price goes up, the price goes down. How we...run our business is that we don't know what the price will be. We pay close attention to price efficiency, cost efficiency. We operate well and reliably. We keep things we have invested in running smoothly."

Capital expenditures are 12% lower than they were in 2014. However, there's no sight on what the outlook is for 2016 and beyond. ExxonMobil in December published its most recent annual Outlook for Energy to 2040 (see Daily GPI, Dec. 9, 2014). That's the long view, said Tillerson. It's not a specific company forecast for the oil and gas environment in a year. When asked by Yergin to provide his view, he laughed.

"It will look different,” he said. "But we will still be here."

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