 Okay. Good morning. Hi, everybody. Welcome. My name is Sarah Ladislaw. I direct the program, the energy program here at CSIS. We're very pleased to have all of you here today for our event on low oil market prices, the energy market impact of low oil prices. We have sort of playfully titled it How Low, How Long? Not because we're going to tell you. These guys probably have a view, and if we pulled all of you, you probably have a view as well. But what we do want to do today is talk a little bit about something that we've been writing about lately. My colleagues Frank and Guy and Larry Goldstein myself are one of our affiliates, Kevin Book, have all written recently about what's happening in oil market dynamics and in gas market dynamics and how to tell what's important to watch, what's not important to watch, and what are the critical factors going forward that will eventually answer that question of how low, how long. And so we are really, really pleased today to have a great group of experts with us to help sort of talk about some of those issues. Rusty Brazil has graciously agreed to come speak again here at CSIS. He's the president and principal energy market consultant for RBN Energy, and he's going to talk a little bit about the U.S. perspective, what's going to happen with tide oil and shale gas production from a U.S. perspective. And then we've got David Knapp, who's a senior editor at Energy Intelligence Group, who is a long time friend, and we're uncovering a conspiracy that lots and lots of really good oil market analysts are originally from Connecticut, so maybe more to follow on that at some point. And he's going to talk a little bit about his perspective on what's happening in the market right now with an eye towards producers outside the U.S. context. And then Jim Burkhart, who is the vice president and head of global oil market research and energy scenarios at IHS, and a long time friend of many of us in the program is going to talk about the demand side of this equation. Where do we look for demand to be absorbing some of the excess in the market, and what should we be watching on that front? Jim Jensen of Jensen & Associates, who a lot of you know was unable to make it. Some people actually did get snow this past week, and so he's one of them, and won't be able to come and do the focus we wanted to have on natural gas markets, but he's graciously agreed to come again at a future time, so we'll look forward to rescheduling that. So without further ado, I'm going to turn it over to Rusty, and we'll do each gentleman will have a presentation, and then we'll have a bit of a discussion. So Rusty, please. Button. Got it. Last time I was here, it was a little over a year ago. My topic was condensates, and basically what seemed at the time, the Department of Commerce had rules that didn't seem to make any sense with what was going on with increased volumes of condensate in the fact that at least as we understood the rules at the time, they could not be exported, and it looked like the situation was getting worse. But then what do you know? The Commerce Bureau of Industry and Security changed the rules, or at least they clarified the rules, let a couple of companies started to export condensates, and then came out with some workable rules. So now anybody you can export condensates, if you like, all you have to do is run your product through a relatively simple process, and you can get it done. It was a great outcome, and I'd like to think that the team here at CSIS, some of their initiatives had something to do with it happening that way. Well, today we're talking about something that is a lot bigger than condensates. We are talking about a full bone, no holes barred price crash. If you're wondering what a price crash looks like, this is it. That's Brent WTI LLS prices since the first of 2014 until today. That is a crash. If you're having trouble seeing the trend on that slide, there's the trend. Crude oil prices down about 60% since June of 2014. This is the first time that this has happened in the shale era since shale came to the oil patch. So we are truly in uncharted territory right now. The big questions are what do producers do about all of this? What are the risks involved in the market right now, and where are the opportunities? So that's what I'm going to try to address. This slide is one that I showed a little over a year ago when I was here last. I thought it would be interesting for us to look at it again. This is the increase in production that's basically behind a lot of what's going on, and it's for not only crude oil, but also natural gas and natural gas liquids, which are all experiencing the same sort of production surge. Natural gas production up 55% since 2008. That is about 70% of the worldwide LNG market. So we talked about bringing an LNG in a few years ago, and now we're talking about exporting LNG. The United States has increased production to the tone of 70% of the entire LNG market in the world over the last few years. That is, by the way, 8 BCF higher than it was a year or so ago when I was here last. LPG, natural gas liquids. This is propanes and butanes, and that slide that you see there, up double. So effectively, they have doubled since I was here last. That volume is up about 300,000 barrels a day. And then the real culprit, U.S. crude oil over the last three and a half years or so, up 82% from 5 million barrels a day up to 9.2 million barrels a day, getting things back to where they were in March of 1986. March of 1986, I see a few people here in the audience that might remember in March of 1986. I remember it well. I was working for Texaco at the time. I was trading natural gas liquids. I just talked my boss after about two years into letting me trade futures. I don't know if any of you guys know about what the culture of Texaco was at the time, but trading futures was not kind of a strong suit of the company back in those days. And I took a long position on motor gasoline futures as a, quote, hedge against some of our marketing requirements. Well, it didn't work out so well, because prices had fell from about $30 a barrel on crude oil down to around $10 a barrel. As a matter of fact, almost exactly the same trajectory. If you look at it, then we've experienced over the past three or four months, and it took a while for those markets to come back. We'll talk about what that looks like in a few minutes. But remember that date, March of 1986, because it is significant. What has that done to prices? Well, I think it's instructive to go back and look at what prices have done over the past few years. Back in the 2007 to 2009 timeframe, when natural gas went up, crude oil went up. When crude oil went up, natural gas liquids went up. Then that same thing, when we hit the financial crisis, all of them came down in tandem. But then the world changed. Then we kicked in with shales. Shales kicked in on gas first. So when the crude oil markets in the world started to recover, natural gas liquids and crude oil came back. But natural gas stayed in the doldrums because natural gas was in oversupply and couldn't be exported because we had no export facilities. Then we got to the end of 2012 and the first of 2012. The second piece of this equation dropped, and that was when natural gas liquids became oversupplied. Remember, natural gas liquids kicked in for supply increases a little after natural gas did on that previous slide. Natural gas liquids separated from crude oil, and really there were three tiers of hydrocarbon pricing at that point in time. That lasted up until the middle of 2014 when we hit the price crash scenario. Price crash scenario, crude oil came down extremely hard. Natural gas liquids came down just as hard percentage-wise. Natural gas not quite so bad, and so that has had an implication to what producers have done. Crude oil rig count since November of 2014 down 261. So crude oil rig count is coming down hard. Natural gas rig count already was down, now at 316 had been up about 1600 or so back in the 2009 timeframe. But remember, production on crude oil natural gas and natural gas liquids are all still increasing and are still increasing as we sit here today. The reason why is well productivity. We are getting a lot more out of the wells that are being drilled than we were before. Here's a good example of that. This is EOG's productivity gains in Eagleford over the last few years. Back in 2011, it took them 22 days to drill a well. Now they can drill a well in less than 9 days. If we simply say in the 365 day a year we divide 365 by those numbers right there, that means a single rig can drill 16 wells in a year, could drill 16 wells in a year back in 2011, now can drill 41. The initial production rates out of those wells have increased from 533 barrels a day up to 767 barrels a day. One of the main reasons is because the laterals are longer, there's more of the well bore that's connecting to the formation. So they're getting more out of each well. If we take the numbers in that second set of columns and simply multiply them by the numbers in the third set of columns and say how much oil can a given rig generate in a year, that number is up 239% from 9 million barrels a day up to 31 million barrels a day. So it's a big change in productivity. Those sort of productivity increases have been impacting things all over the shale markets, not just of course in the Eagleford. If we take that productivity increase at the prices that we were looking at back in the fall, the Eagleford would generate an internal rate of return of about 40%. That's what those productivity increases implied, meaning that it is a discounted cash flow rate of return with fixed prices for crude oil at West Texas Intermediate, $90 with a differential back to the Eagleford, $3.75 natural gas. That's about where it was in the fall of last year. The good old days. Here's what rates of return, and these are what's known as half cycle rates of return. They don't include lease costs, the late cost of the land. They only include the cost of drilling the well and then the revenues that come from drilling that well offset by the operating cost. So if we look first at natural gas, natural gas prices at $3.75, the rates of return in plays like in Louisiana, Hainesville, 5%, 6%, Fayetteville, up in the Marcellus in Utica, there's really two different markets operating up there. One market is for producers that are fortunate enough to be able to have transportation capacity to get out of that market. Those are yielding 15%, 16% rates of return. Prices are extremely low in that part of the world right now, and therefore, if you're stuck with selling at prices in the Marcellus in Utica, you're only generating one or negative 1%. Negative 2% in the Rockies. Back in those days, the good old days, Eagleford 24%, that's wet gas, that's gas containing NGLs, 23% in the Granite Wash, that's in Oklahoma, 32%, 22% up in the Marcellus in Utica. Things were good back in the fall of 2014, and these numbers are off from where they were of course when crude oil was $105 back in gin. Crude oil was even better. If I was up in the Bakken, 39%, 37% in the Naya Brera in the Rockies, 41% in the Anadarko in Oklahoma, there's that 40% that we just looked at in the Permian, Delaware, and 40% down in the Eagleford. So crude oil plays looked really good at the time. That was not to last. By the time we got to December, let's look at what has happened. Those 40% rates of return dropped to the mid-teens, 11, 12, 14, 12. Those wet gas plays that were in the 20s dropped to single digits, 4, 9, 3, negative 4. Gas dropped from $375 to $3. Gas rates of return went to the negative. That's where we were in December. That is not where crude oil prices are today. Crude oil prices today are somewhere in the $45 range. Let's see what happened then. Crude at $45, natural gas at $3. The crude oil plays are basically at break-even. Natural gas liquids plays at negative numbers and the natural gas numbers don't change because we still got natural gas at $3. So what this boils down to is that at $45 at the cost that we saw for these wells being drilled in the latter part of 2014, if it falls any more than this, most of the producers are going to be under water. Now, what does that mean? Well, the world is changing. Costs are coming down, and as costs coming down, the rates of return for these prices will go up. Exactly how much those costs come down and how much these rates of return goes up we'll just have to see over the next few years. What we've done, though, is we've taken this world that we see here, these break-even prices and translated it into a set of projections for production. But a few caveats before we get there. First of all, what are our price expectations? Well, since 2008, U.S. imports are down 3.3 million barrels a day, and product imports have reversed from being imports to being exports to the tune of another 1.5 million barrels a day. That basically means we've thrown 5 million barrels a day into the global market during a period of static demand. In my view, that's the main thing that has triggered the collapse that we've seen over the past few months. Consequently, our view is that prices are unlikely to rebound or recover any time soon. How soon as soon? Well, remember my story about 1986? Let's look back at 1986, when prices crashed by 60 percent or so, they came back then to about 50 percent under the next year and did not get back to the pre-crash levels for another three years. Then those prices only got there back over to above the pre-crash levels for about three months. Then crude prices sank back below pre-crash levels for another decade. Well, we're not necessarily saying that we think that the crude oil prices are going to be below $100 for the next 14 years, like they were in 1986. There's a lot of differences in the supply-demand picture versus how things were set up in 1986. It's not going to be 14 years. It's not going to be 14 months. Current forward curves. Here is what the market expects or here is what the futures markets are trading at in terms of current forward prices. It will give you a sense of what is being anticipated in the market right now. So when we look at the cases that we've done in terms of production against these, it will make a little bit of more sense. These are prices as of yesterday. Brent prices under $50 for current month. Getting up to no, getting up to only $74 by the time we get out to 2020. West Texas Intermediate down at $45 or so in the current month. Getting up to only about $66 by the time we get it to 2020. Henry Hub, natural gas, and that's on the right-hand scale. Getting only up to $4.12 by the time we get out to 2020. So at least in terms of what's going on in the futures market, prices are viewed to be relatively low for quite some time. One of the reasons is because I think most of the market believes that it is unlikely that crude oil production is going to fall off anytime soon. And there are several reasons for that. First of all, producers are cutting back or drilling, but they're still drilling their sweet spots. In other words, before all this crash happened, they had a list of 50 projects. 50 projects, then the good ones are at the top, the not so good ones are at the bottom. I've got half as much money to drill. I cut off the bottom part of the list, and I only drill those projects that are most likely to give my very best results. What that means is that per well production is going to be increasing in 2015 versus where it was in 2014. There were some projects that were being drilled called science projects that we're trying to figure out and delineate exactly where some of the new plays were. Those science projects have bit the dust. Wells in development and those are not completed will be brought online. So there's a lot of projects that haven't been brought online yet, either they haven't been completed or they haven't been hooked up because the infrastructure is not there. Those will be completed and they will be hooked up so effectively the money has already been spent. Third, there's a lot of producers that over the last few years have signed what's called HBP leases. Held by production clauses requiring that the producer drill the well or lose the lease. They've had a lot of money for those leases and therefore we think a lot of those wells will be drilled just to hold the lease. Some producers hedge their prices and they hedge their prices on those futures numbers that are a lot better than the ones I showed a few minutes ago. They're going to continue to drill and produce against those hedge numbers. So drilling services costs are coming down and therefore economics are improving because they're going to be paying less to get the wells drilled. When I say sweet spots and say that the producers are only going to be drilling those wells that are exactly in the right places, a lot of people don't always know what that means. And Justin Kringstad at North Dakota Pipeline Authority put together a nice little slide picture that shows exactly how that works. These are all the wells that are in the Bakken in North Dakota inside that red box. These are all the wells over the last few years that have been drilled that have 300 barrels or less initial daily production. It's a lot of wells. 400, a little less. 500, a little less. 600. It took until 600 barrels a day until the wells that are being drilled up there are economic. Wells that only generated 300 barrels a day, 400 barrels a day, 500 barrels a day are underwater economically right now. Only the wells when I finally get up to 600 barrels a day are actually making money. 7 in 800, a little bit more money. 900, really good money. And if I've got a well that's generating 1,000 barrels a day up in the Bakken, I still have rates of return up in the 60% range. So there's a lot of drilling and production that can go on even though there's a lot of producers that have their wells underwater because they're in the wrong spots. If you're going to be investing in any of these guys, you want to make sure you know where they are. So we have worked up based on the scenarios that we have tried to delineate in the market, three different views of how production is likely to shake out in the future. Growth scenario assumes that crude oil prices are going to get back to 80 bucks by 2017. That's considerably more bullish than the forward curve is right now. Cutback scenario, we're going to assume that production is going to continue to grow for all those reasons I said a few minutes ago. And WTI is going to get back to the $70 range by the time we get out to 2020. That's a little bit better than the current forward curve. And then the contraction scenario where WTI prices stay in the $50 to $60 range all the way out to 2020. So the big question is under those three scenarios what does production look like? Here's the answer. This is what happened to production between 2000 and 2007 falling off to about 5 million barrels a day. This is what's happened over the last few years with production getting up last year into the mid 8 million barrels a day. This is that growth curve. Effectively, this is what we were seeing as likely to happen before the crash. 3.7 million barrels a day increase between now and 2020. The cutback scenario, 70 bucks a barrel by the time we get out to 2020. Look at that. It doesn't fall off. As a matter of fact, it continues to grow by 2.3 million barrels a day. It just grows less than what we were thinking of because of sweet spots, those other things that are likely to happen, lower drilling cost, et cetera, that the economics of drilling wells that are left can still keep production growing in the United States. Even that contraction scenario, the one where crude oil prices are way down in the current level, 60 bucks or so, production increases this year, increases over 2014 for the next couple of years after that and doesn't fall back to 2014 level until we get back to 2020. There's a lot of resilience out there in these crude oil prices. Where is that happening? Williston, the blue area is the growth case, the yellow line is the cutback case, the red line is the contraction case. So we're cutting a lot of volume out of the Williston. It's not growing, but it's not falling off the face of the earth in terms of production. And that's the case for all of the basins. The Nyabrera, this is in the Rockies, also just basically flattening out. The Anadarko, that's in Oklahoma, falling a little bit in the contraction case, continue to grow in the cutback case. Permian, flat in the cutback case, down some in the contraction case. And Gulf of Mexico, not growing Gulf of Mexico falling off yet. Frankly, we haven't really done the work on Gulf of Mexico yet. There's a lot of the money that's already been spent, and those wells are going to come on. There's probably a taper off by the time we get out to 2018-2019. We just haven't worked through the numbers yet. And then Eagleford, flat in the cutback case, and down slightly in the contraction case. So again, those big shale plays, although they're not going to be growing anymore, if prices stay at the levels that we have in those other two cases, it's not going to be that bad, at least in terms of total production. Canadians, same story. Most of the Canadian expenditures are up front. Water treatment plants and all the other infrastructure that it takes to produce Canadian heavy crude oil. Canadian heavies, you can see from the blue area there, that's the growth case, is responsible for the vast majority of the increases. Cutback case, it tapers off, but it continues to grow for the next couple of years. Contraction case grows slightly in the next couple of years, and then falls off to below where it was today. So there's changes, but not dramatic changes, not collapsing crude oil production like we saw in 1986. What's happening in crude oil has a significant impact on natural gas as well. The crude oil has been responsible for a lot of the increases in gas because of associated gas, gas that comes along with crude oil production, and the production of natural gas liquids, which also comes along, of course, with natural gas, producing wet natural gas, it's called. This was our growth case, expecting to grow 3.8 BCF over the next few years. That's the cutback case, expected to grow 1.4 BCF over the next few years. That's the contraction case, basically no growth over the next few years. Again, even on natural gas, the collapse is not there. Things are staying basically flat. With all of the production that's coming on in the Northeast, one of the things I talked about when I was here last is the fact that the Northeast is going to become a net production region. Last year it was in the future. Now it's going to happen this year. There's going to be more gas that is being produced in the Northeast than the Northeast can possibly use. That means there's going to be huge interregional flows. The majority of the pipelines are going to reverse and flow gas either south or west rather than north and east. There's going to be lots of new infrastructure projects. They're going to have to be built in order to make that happen. And we're going to import significantly less natural gas from Canada. We're going to be building 28 BCF of new natural gas pipeline capacity projects, 41 total projects that are going to take gas out of the Northeast and to the Midwest, down to the Gulf, into the East, down to the South Atlantic, and up to Canada. So there is going to be lots of new infrastructure going on there. Conclusions. Crude oil prices are unlikely to recover anytime soon. Even with lower crude prices, it is likely that U.S. crude production will continue to increase or at least remain flat. Typical rates of return will decline, but producers are going to be moving to sweet spots to maximize production volumes and the combination of hedging, HVP leases, and lower drilling and services costs are going to continue to support more drilling activity. For producers, survival in this environment are going to be all about being the low-cost producer, managing your business so you're in the right locations and being able to handle lots of uncertainty because there's going to be lots of uncertainty out there. Had one other slide I was going to share with you, my brother-in-law works in the oil patch. The oil patch guys have gotten social media. So they are trading pictures about what the oil patch or what the crude oil collapse means to them. So he was over at the house this past weekend and showed me a couple of the pictures that the oil guys out in the patch are passing around and so I wanted to share those pictures with you. That's what stacked up rigs look like. That is a rig yard in Midland last week showing rigs not doing anything. When you talk about laying down rigs, he explained to me you actually don't lay down rigs, you stack them up and that's what they look like. This is a trailer that normally would be hauling a rig to a new location hauling hay. He thought that was somewhat symptomatic of the current environment that the market is seeing and I think my last slide or my last picture speaks for itself. Thank you very much. In the interest of time I've got a lot of questions for Rusty but let's move on to David because I can't follow that slide. Thank you Rusty. This is my first trip to the new facilities and it's quite impressive. I want to thank Guy Crusoe and the Connecticut Mafia guy and Frank Verastro, Connecticut Mafia guy. I also see Will Cole here and my colleague Herman Franson is around there in the audience. Good crowd. Rusty and I don't always agree on stuff but boy almost everything he said is right in line with my thinking and my job is to broaden this oh I got a point at it, there we go, is to broaden this to the world stage and I'll have a couple of points that I want to pick up which weren't quite said as strongly as I think they need to be in terms of what really caused this and I'll talk a little bit about the sort of adjustment process and more on a global basis with the supply and demand components but I'll leave most of the demand stuff to Jim Burkhard who's going to speak after me. How and why did this happen is sort of where I want to start and look at the role of the key players in the oil market and there's been a fundamental change here there's an awful lot written about it but it still needs to be thought through about we used to have a market in which Saudi Arabia was a swing producer and it was very clear they weren't happy about it but they kind of did it but they did it in specific situations and now my colleague John Van Schijk and I have been calling them the twin swingers that it's the U.S. and Saudi Arabia that are the swing producers where the U.S. is sort of the involuntary swinger in all this and the Saudis have sort of abrogated that role so there are some really interesting questions which I'm sure you guys will address in great detail in future meetings about Saudi Arabia it really needs to be the focal point where are we in the process and I have some views on it you know the directions of the change in the market are pretty clear it's simple economics so I'll just highlight that but there's a whole lot more going on that I mentioned here and then let's just take a look at the end of this year and see where we are I'm not going to go out to 2020 I don't have any major disagreements about the U.S. with what Rusty had said and then I'll have a quick note on some of the vagaries of this break-even price and some things that will highlight some points that Rusty made about the flaws in some of these upstream activity measures like you can't just count rigs or permits or various other things because production has a bunch of other things going on with it well why did this price collapse happen and the easy thing is to say Saudi Arabia did it you know November 27th we all thought well they'll cut a little bit and they'll make prices better and the Saudis said we don't do that anymore we don't think it makes any sense for us to cut we're just making more room for this non-OPEC stuff well that's not what caused this and I think you got a taste of it from what Rusty had good what the previous speaker has said Rusty Rusty you could be Rudy next time the price collapse is a consequence of the birth of the shale era plain and simple that changed the rules for oil markets that had been in effect in 1986 and whatever and it's something that isn't going away which is why we're seeing the kind of continuation and production growth in the shale area you know we could also discuss whether there are other shale areas in the world that really matter or whether it's just about the US and various other things and why the US let it but the answer is that that's what caused it that's where this extra 5.5 million barrels a day came from it was the rise in US shale well what happened is a bit more fundamental than you might think it is it really has a lot to do with how geologists think about what their job is it used to be geologists were guys that were really good at interpreting all the signals about where the oil stopped and where the oil started was a paragraph or a sentence or two at the end of some geology article the source rock for it well source rock contains maybe 70-80% of the original material and now we know how to get into it we know how to frack it we know how to go horizontally through the deposits we know how to get deep enough to get down to those shales now and so that's what's really happened in my mind and that's what doesn't go away that's why you get the continued forward momentum in what's going on in the US and there may be a couple other places that you'll see some things in Argentina or China or probably not in Europe but we're in a different world now so what happened was with this whole new huge reducible resource now sitting behind the supply side of the market Saudi Arabia can't change the resource space so they've chosen to change the economics and that's what this is about they have said we're in for the long haul here and as I said there's a good conference on that is when economic pain within the kingdom gets strong enough to overturn these longer term market share objectives then when it's an economic pain gun pointed at your head then maybe they cut maybe they try to put together a deal with OPEC maybe they try to put together a deal with OPEC and non-OPEC involved in it and the role of the key players Saudi Arabia has convinced OPEC they convinced OPEC to hold production allow these prices to drop and they don't have a goal they're going to drop until this what some people in OPEC have called the experiment either works or doesn't work and I think the doesn't work has a lot to do with the financial pain that's caused by the low oil prices in sort of major producing areas the rest of OPEC went along because they had to without the leverage of the Saudi spare capacity on the upside and their ability to swing over wide ranges that other countries don't have or the reserves that they have behind it financially OPEC wouldn't be much of a cartel to the extent it ever was a cartel which we could have another debate about that and Cole has done that a few times that I can remember the price decline keeps going there are a lot of questions about are we there yet the answer to that is no similarly the cliched response to when will we get there and the answer is when we get there and I don't mean to be flippant this isn't really a car ride with small children we're on this is a roller coaster ride for an entire industry which affects huge amounts of money for governments, for companies and for investors and those that come up with the creative answers and see the signs better are going to be the ones that win well where are we in the process the process of this experiment that I called it to drive down prices started well before the November 27th meeting under the weight of the growth in the U.S. and the decline in U.S. imports which filled up the Atlantic basin with lots of sweet crude which became a big problem and prices were going down but certainly the November 27th meeting by OPEC just intensified that downward movement and we've seen as you saw with rusty slides that the December and January moves were pretty strong we've actually done quite a bit of the work in terms of getting prices down now we're basically waiting for the response but the phase two that's going on right now is the surplus is building inventories and there's just too much oil in this market and the responses certainly from the prime offender if you want to call it that but the main reason for it the U.S. is not going to give any quick gratification and I'll show you some numbers of mine on where I think all that is going the other thing when we talk about the forward curve you'll notice the shape of the curves that we were looking at a minute ago it's called contango and what does contango do it makes it economic to hold oil either as speculative inventories or you've just happened to be stuck with it transactionally it doesn't bother you much because you can trade it up the curve you can hedge those curves however do tend to shift point up and shift down so I'm not a big one to look at the forward price curve as a predictor of future prices it's a predictor of what people today think they're willing to pay in the future which is important and useful information I think Russia used all that appropriately well phase one works slowly for a number of reasons because there are various things that slow down both supply responses and demand responses the supply responses we heard a little bit about in terms of the forward momentum drilling to hold leases programs that are underway welds that haven't been that are almost completed or are completed haven't been hooked up especially true for natural gas so what I also would like to add is that there's like a phase 2A that may or may not happen and that's kind of a race between how fast you can build tanks how much the monthly surplus is that you have to accommodate and what the shape of the curve are is you put all that together and there's a lot of oil going into storage on land right at the moment and a lot of it is not counted it's in smaller storage it's in non-OACD countries that don't count very fast and it's now starting to show up in some boats as floating storage you can always find another boat there may not be a good boat but you can find another boat you can always build a tank it's just the top and four walls but there is some constraint on the rate with which you can build that there's also the constraint on how steep the forward price curve is if it starts to flatten then you get what's basically phase 3 which is when a lot of this oil now isn't economic anymore and it starts coming out of storage and that has a big role to play in any price recovery because it will blunt it as I said when prices go up supply goes up and supply goes down that's very simple economics demand is the opposite so what are the reasons why besides the forward momentum and some of the supply decisions the one thing that didn't really get mentioned completely but it was hinted at is that the short one and long run components of what we call assysities for supply and demand are different and on the supply side the difference is just really tied up in the all-in finding and development costs and what we think is going to be what I think is going to be the first area that gets hit is not going to affect current supply it's going to be projects are delayed projects are cancelled because of price expectations which is the other thing it's not just today's prices what that does to future price expectations I think Russi said that you know the sunk cost these major projects that are almost done you have a completed project off of Angola that just needs the last little bit done sunk cost or sunk forget how much you spent just look at what you have to spend from here to get it done and if that's a small number against what you see the future revenue streams being then you go ahead and you finish it and as I said I'll leave the discussion the demand side for the next speaker well there's this sort of alphabet soup of oil recovery is the V the snapback and I think that might be the most popular one right now you know people that are saying $75 by the end of the year or something like that I'm certainly not in that camp you have the U in fact the very extended you where you have a trough that goes on for a while and I think that's probably where Russi is you can also have a W and that would be if geopolitics gets involved in this and you get things shut in places like Venezuela and Nigeria if Iraq starts to go the other way Libya already seems to be in quite a bit of difficulty as well so that would either give you with my phase three of the adjustment process you get a U but the right leg is a little bit messed up I forget which leg it is of yours guy is it the right one that you're going to get the new neon but so it's sort of like that and you can't hit the ball straight if you look at what this means in terms of the global balances that we're looking for demand at about 800,000 barrels a day this year all in non-OECD OECD goes down even with some U.S. growth because Europe is bad and Japan is bad and Jim will talk about that on the supply side non-OPEC growing at 1.1 there's an error in the bullet on the slide that should just be 1.1 which is pretty good positive growth and a little bit from OPEC, NGLs and other OPEC itself is sort of the result of a flat Gulf production in Saudi Arabia, Kuwait UAE gutter maybe down a little bit but then you have to program what these erratic recoveries look like in Libya, what goes on in Nigeria with elections coming up and with Boko Haram sort of carrying up the northeast corner of the country and various other things with IS trying to do stuff in Iraq which so far is doing very well but you add all that stuff up together and maybe there's 100,000 out of OPEC unless they decide that they really have to do something because the economic pain gets too great that for now to me is an alternative scenario but it's one that still has a probability that needs to be paid attention to well here are the reactions that we're looking for in the rest of the world and you'll notice that the numbers for the US I think are probably aren't going to upset Mr. Brazil too much that what is almost 1.6 million barrel a day growth that we saw for last year we're kind of on the high end of that of some of the estimates that there are 400,000 barrels a day this year but it's a slow down in growth it's not a shut in of shale production which is sort of the alleged goal of Saudi Arabia is to actually shut in this US shale I'm not sure that's a Saudi goal I think the Saudis have a longer term perspective and they're trying to preserve the market for their oil in a world which now includes as I said at the very beginning a huge shale resource and that it's producible and that people have figured out how to produce it and it's one in which the costs are coming down in a very impressive way which also keeps more of this going well if things stay where they are kind of on the technology side and we're working on a limited number of sweet spots in a limited number of shale plays that I could see that number of the growth going down considerably in 2016 so who are the guys that are actually the brunt of the decline in global non-OPEC it's Russia and it's not all about prices it's about the sanctions, it's about collapsed currency it's about an economy that's struggling desperately, it's about Putin and it's called the personality not different than Shavez had in Venezuela then you also have China and China to me is one that's sort of in the background of all this but for years I was thinking how are they doing this in Dacheng that's an old oil field it's not a field, it's a whole group of fields but that area has been water flooded to death it's been gas injected to death and it's starting to feel like an old cement lard that was around in western Siberia so I think it's going to decline and I think it's going to decline reasonably rapidly, a couple hundred thousand barrels a day Mexico reforms notwithstanding what happens in the province it also is what my friend Dean Foss, Michelle Foss his husband has said well it's hot and what he means is that it's a seismically active lots of magna around that creates higher temperatures below and that a lot of the source rock there has been cooked and the stuff has come out I think the moderate shale in California may be an example of that I think that the Envelox cruciate study from last year on U.S. shale resource I think is the fact that that stuff has already come out and fed a lot of the big oil fields that are on the western side of the central valley in the current county area Rusty may disagree but you know and then obviously North Sea is very old U.K. is very old they're going to decline there is some idea of a story in PIW that will come out tomorrow and we need to look at fiscal changes as a result of the lower oil prices in some of these countries and they're happening probably more important on the supply or on the demand side getting rid of the burden of subsidies in some of these countries Thailand, Pakistan, Indonesia and places like that but those inhibit the speed of adjustment so we're not really out of this and then you look at the list of other smaller countries the Azerbaijan's and Egypt's and stuff like that which are going to see declines and some of them in spite because Egypt has already done something on the gas side but won't affect oil a little bit up from Australia which is just liquids from some of these LNG projects which are things that are hugely expensive but so much money has been spent that you see those getting done but isn't in 16, it'll be in 17 so that's sort of my list of where in the world this stuff is coming from okay, sort of processing this information and I won't go through all of this and I'll leave the demand stuff out but you've got to look at supply, you've got to look at demand you've got to look at inventory and fiscal policies and various other things but the bottom point is probably the most important on the other side of this is the whole set of potential geopolitical problems Iraq and Syria Libya Yemen, Sudan Nigeria, Venezuela all of these are ripe to give some oil back in terms of reduced supply to help the Saudi experiment succeed where we'll be at the end of the year and it's interesting that we did a Buff Brown and I did a presentation to the New York Energy Forum last week which we've done for a number of years on sort of the outlook for this year and we thought well let's do a price survey and well what's the range going to be 55 kind of in the middle maybe we go 20 up and 20 down so we go 35 and 75 and maybe that doesn't include everybody but there's a lot of people in that range I think and they said well let's do a little straw poll what do you think and Louise Burke was running moderating the meeting and she put a number down and Buff put a number down and I put down 49 then I did my slides and I said wait a minute there's just too much oil why would it be 49 if you're not going to solve the problem about shutting in there'll still be this growth in the US shale there'll still be growth in Canada the declines and the other guys just don't add up to enough the Saudis are going to stick to their guns through the end of the year and this is King Abdullah's death I don't think changes any of the Saudi policy if they said if all these things are true why wouldn't it be lower than it is today and so I said I'll take the 35 you know we're going to argue the high and low cases John Filmy is smiling because he's been there before so I'm the low case but that's what I think is a likely outcome for the end of this year I just don't see a way that the brakes are going to be slammed on now 2016 is a different story I think you see much larger downside supply adjustments outside of the US the US supply adjustment in terms of the lowering of growth is going to be double what it is this year and what we've looked at and I do a lot of this bottom up things that we're being talked about by Rusty Brazil and so we get the bottom of a sort of slow wide bottom U recovery with a leaning right hand side as you accommodate the rest of those inventories beyond that I agree that we probably are in for a period of lower oil prices than we had seen certainly the $100 world and this was a Saudi thinking they said this is not a $100 world with all that shale oil out there we have to adjust to a lower volume or we're not going to be able to compete and we're not going to have markets for our oil so here's the price forecast and $35 TI and $39 Brent by the end of the year a little bit more wobble in the Brent than in the TI because that's where you see the threats of geopolitical if not the actual geopolitical events happening and what happens is that you see prices basically will cut in by a little more than half for TI and a little less than half by Brent but it's basically a halving of the oil price world and going forward I think we will see again a fairly moderate growth and very much driven by demand and if there's any lawyers in the audience you'll probably like the very last part of the title subject to major changes without notice that's the smallest font I could find but now my very brief rant and I won't do a whole lot because I think Rusty covered the second part of it the idea of break even prices which we see all the time in fact here's a couple of them that there's one on the top from a bank and there's one on the bottom from me that I had to do for a story I was writing my prices are a lot lower in terms of a lot of the existing production certainly I'm more optimistic about oil sands in terms of the existing facilities and this is actually something of an average of the four or so facilities that are doing mining and upgrading and the in situ plants I think are not 80 or 75 I think they're more like 40 and then there's a lot of prices that are down towards the bottom in that but if we go back the upstream decisions have so many outside conditions that have to do with the financial condition of the company the attitudes of the bankers the feelings of the stock market and so where these guys are going to get hit isn't so much on geology and some of the other metrics but they're going to get hit on availability of funds especially highly leveraged smaller EMP type companies and we've already seen a couple that are looking like they're about to go under and there'll be more of those this is going to be a period of major restructuring that goes on but break even prices just don't do it for me the average sits in the middle it doesn't belong in the middle there's obviously a distribution of things beyond that the average price really doesn't apply to anybody it's drowning in the four foot average depth river type situation it also that's the realized price that matters and we heard a little bit about that earlier that costs and costs are coming down when you stack rigs they get cheaper offer you 20% now talking to Herman was talking to a guy that runs a small small oil company out in California guy says I'm going to sit for a while and just try to get a 20% reduction in my rig costs and I can do it he's not the only one that's doing that this try to hit it from the the cost side so and then the the current prices and the current costs are once again part of a set of expectations that are what you need to figure out what your internal rate of return or your your ROR is on a project and those aren't always one to one you know people people who think there's a V here and that prices are going to snap back are going to be more active longer than people that see the kind of longer term world that I think Rusty Brazil and I both see and this was just some points that I think were well made by the previous speaker so with that I will hand over to Jim Burkhart and he can tell you about some of the demand aspects and other stuff thank you very much good morning everyone the global oil demand today is about half the level it was in 2000 yes yes I said that right global oil demand today is about half the level it was in the year 2000 now you may think this guy's not very good at math that would be true or I've been asleep for 15 years that's not quite true either the reason oil demand is half of what it was in 2000 when you look at the oil intensity of the global economy in other words how much oil does the world consume to generate a thousand dollars of real profit however you want to categorize it a million dollars, a dollar, a thousand dollars how much oil does the world consume to generate that output and when you compare it to 2000 it's less than half that level what this means is the oil intensity of the global economy is declining it has been for a long time this isn't any breaking news it has been declining since the 1970s it's continuing to decline it's simply a function of global economic growth tends to be much higher than the pace of global oil demand growth and the reason of reminding us of this is to show that we are in, we are on a long term trend of decelerating global oil demand growth but with low oil prices this year there's a big question is how will oil demand respond to low prices are we going to see people using more oil because it's cheaper is anybody here in the room taking an extra drive around the block anybody no one I am if I hear a good song on the radio I'm about to go home I'll drive around the block but that's not necessarily due to low gasoline prices and I'll talk a little bit more I'll get more to our view of what we think is going to happen on demand but let's take a step back look at recent trends and see what that means for the future and two really important areas of global oil demand one is the OECD Europe, North America Japan, Korea, a few other places it's roughly half of global oil demand is this OECD area and we'll look at China which as you all know has been the dominant engine of global oil demand growth for more than a decade in 2005 demand in the OECD, liquid fuel demand, oil demand in the OECD peaked in 2008 we came out with a call that yes indeed 2005 was the peak in OECD oil demand and demand in the OECD would never exceed that level again and what brings particular warmth to my heart in that many oil market analysts can say what we called in 2008 is still what we call today so I do take solace in the fact that the demand peak we called in 2008 is still in place demand will go up and down but when you compare it to where we were in 2005 we don't think it will get to that level again in the OECD and that's important because remember the OECD is still roughly half of global oil demand today so why is that, why are we not going to see the OECD demand go above the 2005 level one fuel economy trends these are they don't necessarily have a big impact in one given year but the fact that light duty vehicles and some heavy duty trucks are using less gasoline or diesel that has a big impact over time we're seeing that this year but it's not just the U.S. it's China which has significant fuel economy standards Japan and Europe so all the major markets have increasing fuel economy standards, demographics populations population growth is slowing populations are getting older in many key markets around the world, Italy, Germany very old populations on average compared to history, populations are declining in some areas U.S. population growth is declining as people get older as population growth slows that means less energy consumption particularly for oil, biofuels you might think again biofuels that's so 2007 and it is and biofuels we don't expect to see a big takeoff in biofuels but they have captured a significant share of the market even if they don't grow much from here on out if you look at the U.S. in particular the biofuels have soaked up a lot of what could be traditional considered a traditional hydrocarbon liquid fuel demand another aspect to demand trends in the OECD but this goes beyond them as well is a cultural change and this is a soft variable but folks growing up in the 40's 50's 60's perhaps even 70's particularly in the western markets in the U.S. getting a car was a big deal car culture look how many songs there are about cars you know it was getting a car mobility, freedom getting around that was a big deal and it still is for a lot of folks but attitudes particularly among younger populations are changing cars are a hassle if you're living in a city you got to park them and if you have the high level environmental consciousness the greenhouse gas component of that may also be relevant to your decision but the attitude towards changing a car is changing around the world due to greater urbanization now cars are wonderful I love cars but attitudes towards cars are changing in that classic relationship between GDP growth population and car sales that's been a formula that's been valid for decades that is changing in China the great engine oil demand growth for many years fuel economy standards there are also having an impact and China's working age population is declining China's working age population is declining somewhat of a cliche to say China will grow old before it gets rich at least rich in terms of average per capita income when you compare it to the OECD but China's working age population is declining that means a lower pace of economic growth policies that discourage driving you go to some cities that sometimes you can't drive on Tuesdays or Wednesdays or Thursdays depending on your license plate congestion is horrible in many places and these are policies designed to discourage driving so if you look at China the higher vehicle fuel economy standards working age population is on the decline policies that discourage driving and prices in China are roughly comparable to global oil market levels they're not subsidized they are not cheap so when you look at the OECD you look at China you look at the long-term trend it's very easy to see further deceleration in the pace of global oil demand growth and then the price collapse that began late last year demand also played a role the reply is at center stage when we look at why prices fell the return of Libyan production from 0 to 800,000 over a short period of time amidst this huge wave of growth from the U.S. but weaker demand did play a role if demand had been what many had expected in 2014 would we have had the price collapse it's a question so we can't forget about demand and the role it played a couple other factors about demand both short-term and long-term the Middle East along with China has been a big source of global demand growth lower economic growth therefore impact oil consumption also environmental consciousness the concern about the environment concern about climate change that environmental consciousness is much more embedded in societies all around the world than it was 20 years ago 10 years ago or even 5 years ago that's one difference when we look back at the 1980s that price collapse what's the same what's different one difference is the environmental consciousness the policies that help contribute to the adoption of high vehicle fuel economy standards and other measures that impact fossil fuel consumption this environmental consciousness is not something that's simply going to go away because oil prices are lower that is a big difference compared with years past now will demand shocks be a thing of the past demand shocks where there's more demand than we expect absolutely they will happen there will be surprises Fukushima the Fukushima disaster a couple years ago that led to a surge in oil demand in Japan a decade ago when China had problems with its power distribution availability we saw a huge uptick in Chinese demand in 2004 where we saw about 3 years of demand growth combined in one year in 2004 so will we see those things yeah absolutely there will be demand surprises to the upside but again that's against the backdrop of the long term deceleration in economic growth excuse me in oil demand growth relative to oil demand growth now will we see an uptick in demand this year because of lower prices perhaps there'll be some but the most important determinant of oil demand growth just about anywhere subsidies can kind of obfuscate the outcomes in a few places but generally speaking the most important variable is the pace of global economic growth and in the U.S. the U.S. appears to be in pretty good shape it certainly was in the fourth quarter so could oil demand growth rise this year above what it was last year yes it probably will not by a huge amount but it could be one of the stronger rates of growth we've seen when you look back at the last five years and low oil prices certainly don't discourage consumption but just we need to keep in mind the most important single variable is the pace of economic growth and in the U.S. in particular assuming the economy remains on a strong path we will see perhaps a stronger oil demand growth at least in this country than we otherwise would looking longer term you know we use at IHS a scenario based framework to try and understand the future predict the future no one can predict the future with consistency and precision and we have three scenarios that go out to 2040 these are total energy geopolitical and economic scenarios one of these three is called autonomy and autonomy is a fascinating story about the decentralization of global oil supply but another key part of it is peak oil comes much sooner than we anticipate now peak oil you know we hear the word peak oil we're probably thinking you know the debates we had you know 2005, 2006 and 7 and Sarah I'm sure we had a number of them at CSIS talking about peak oil we're going to run out of it but peak oil in this instance at least the way that I'm talking about it is peak oil demand could we see peak oil demand not in 2050, 2060 but could we see peak oil demand perhaps in the next decade in the next 10 years and that's not particularly outlandish when you look at some of the trends in place it it could happen but getting back to the here now looking at 2015 there's going to be surprises this year as my good friend and colleague Bouchin Bari always reminds me we're surprised due to our failure it's a failure of imagination we're surprised by things because it's a failure of imagination it's something I try and constantly remind myself by the way Bouchin was the only person that I'm aware of that I'm aware of that accurately called the OPEC meeting weeks before it actually happened because I had the pleasure of reading his report in early November perhaps there were others but Bouchin is the only one I'm aware of so this there will be surprises you know whatever the consensus is on certain variables is going to change the outcomes will be different from the consensus you know which variables will be different from the consensus that's the real issue so when we look ahead to the rest of this year and end of 2016 next year next couple of years I just encourage all of us to heed Bouchin's advice and let's try and maintain active imaginations because there will be surprises thank you okay well that's enough to think about for a little while we have about a half hour left for discussion and I thought what I might want to do is pick up on a thread that I've got sort of specific questions for each of you I think which we'll go into but maybe just start off with each of you in your own way put forward a theory about resilience right so Rusty you talked a lot about resilience within sort of title production on the US side can you just and the other thing I like about all of you is that I know you sit around trying to think about how you're wrong sometimes so I'm going to ask you to do that publicly how could you be wrong both on the upside and the downside about the resilience that you've ascribed to title of production so for example taking some of the factors of and presumptions about you know efficiency rates and learning that we've had and applying them from sort of a 2014 position going forward which I'm not saying you did necessarily but is there in the drive greater efficiency and the focus that producers now have on trying to be resilient going forward are there ways that things could be better than you than you forecast and ways that it could be worse than you forecast and I'm going to come down the line and do the same thing with all of you so Rusty better no I really don't see it better and remember I had three forecasts and the growth forecast was essentially the way things were before the collapse so could things be better than that no I don't think I've got a scenario better than 100 bucks and that scenario was 80 bucks but to be clear 80 bucks get you effectively the same amount of production as 100 bucks get you just to be clear like not better in terms of price but better in terms of what you would get for that price right so for example it's the basic factors of what drives production at lower prices as opposed to just having you know a higher price maybe I'm maybe I'm backwards so if could my low case it could production be worse than my low case so if you look at the low case yeah things could be worse for example if David's scenario on break-even prices turns out to be true well you know I guess I guess you'd be saying no I'm backwards again you were saying that break-even prices are actually lower than my break-even prices so I guess I'm wrong there you wanted me to be wrong so if prices continue to fall and if producers turn out to be considerably less able to adapt to this new situation drilling falls off harder than it tends to fall than we have it projected to fall off right now there are steep decline curves on shale wells so if people are not drilling new shale wells production will fall and a production falls will have the I guess what what we've been talking about maybe the what the Saudis are looking for in the first place but things have to I think things have to fall really hard really soon which means that of what it looks like a fairly stable market right now of $45 maybe it falls down to $35 by the time we get to the end of the year we start talking about numbers like $35 yeah maybe things slow down a little bit I'm rambling but that's probably the only scenario I can come up with where things are worse things better in terms of production I can't come up with it David similarly in the presentation that you gave you talked about sort of a price path going forward that could be sort of a V or a U or a W and in the description of the W you talked about sort of geopolitical circumstances that may lead to that kind of a volatility response one of the questions could it be from something else right could you get sort of a more volatile market because of the structure of the way that tide oils come back or the way that something else driving that kind of volatility you also talked a little bit about stress in sort of OPEC producers or even non-OPEC producers that require sort of a higher price threshold both for their fiscal break even price but you know for sort of a supposed domestic political stability one of the things you know I'm sort of channeling Faraday and Feshiraki who's also an affiliated fellow here at CSIS and the energy program and one thing he always sort of reminds us about is little oil prices don't necessarily mean more stress they could mean more efficiency in how some of that money is distributed in some of these places is where would you similarly sort of you know along the sort of risk chain that you had sort of put in some of the other markets where could you know people markets prove to be more resilient than you would otherwise assume or less than we assume like a couple good examples might be like Venezuela or Russia as you had pointed out well one thing that I might say is that the rest of the world doesn't matter as much to me as the US and so when I look for a perturbation that is going to really mean something for the market it probably is about something in the US and the thing that scares me is sort of a gas land mentality you know anti-fracking that everybody becomes New York State and so it has nothing to do with the geology or the technology or even the behavior of the oil companies it has all to do with the public outcry and we know how fast that can spread and what happened to like the US nuclear program at one point where it was all about the public outcry against it and so I think that's one of the real downside risks here is that you get a real event which is demonstrably negative you know we have our pipeline breaks we have our real disasters and stuff like that they have a short-term impact they sort of will impact some of the regulations as they should and the regulations tend to mean that the costs are going to go up for some of this stuff and that will cost you some production but if I look overseas and you hit it right that where is my biggest concern well it's Russia right now I don't quite know where that's going but Venezuela just looks horrible to me and you know we've got a couple people that follow it pretty closely and it's just getting worse and worse and worse I don't think Luis Giusti is here but it wasn't his fault he didn't cause that and I look at just geopolitics in general and I wrote a piece for one of our publications for energy compass a couple weeks ago they just said don't forget geopolitics it's out there what does the geopolitics do it probably removes oil that maybe helps prices and removes some of the pressure on Saudi Arabia but again on the supply side now it's the two pieces and as I said before that if the economics gun is pointed at the royal family's head in Saudi Arabia if they see their own many Arab spring brewing because they have violated this tacit deal between the royal family and the population that is going to mean more jobs more social services and various other things there are a hundred and whatever six billion dollar commitment from the late king looks like it's being violated and they start protesting and the ones that don't get shot immediately start having some sway on what goes on in the kingdom that maybe you see a policy change now I think it's a dumb policy change they're absolutely right why should we take oil off the market to make more room for other non-OPEC supply especially if we take it off and we raise prices by some that helps them more and it helps us we don't need higher prices to produce most of our oil we can produce it at 10, 15, 20 dollars forget about the budgetary requirement price just the physical production cost even the exploration and development cost I mean Saudi Arabia could produce 15 million barrels a day without much of a problem they have capacity for 12 and a half that's not their issue so that if something goes wrong in the US in terms of the domestic politics or if something goes wrong in Saudi Arabia on domestic politics that I think is a major perturbation for the market and Jim you had sort of talked a bit about sort of the sort of changing bones of how we're thinking about oil intensity of the economy going forward and one of the things that always strikes me in that conversation is that we've got a lot of places that have historically made up a good deal of oil demand that we have really good numbers on and then we've got a lot of places that are sort of the growth of demand going forward that we don't really have a great read on and so demand shocks in the past have come from our inability to sort of accurately call what's happening there you guys are a data and insight company I mean how much do you think going forward the Chinese energy demand picture is getting clearer but it's the India the Brazils the sort of rising rest picture that we just don't foresee in a right or proper way that's a great point Sarah and I'm sure Rusty David and others in this room who've poured over oil demand supply numbers over the years compiled statistics analyze them is the range of error or the scope for revisions to be made in the future even in the United States which has an excellent gathering system compared to just about any in the other place you know I wish every country had an EIA by the way it'd be wonderful but even there you know just anywhere there are big changes at times are big changes made to history so what we think happened turns out to not be the case when you look at the demand growth in particular Sarah the demand growth is occurring in places in the world where statistical gathering is still has improvement to make let's say it's a big question and one possibility is when we look back at 2014 or even this year you know could say demand growth or economic growth in China will we look back and say wow you know it's actually turned out to be a lot weaker than we thought or a lot weaker than the official statistics portray I'm not predicting that but I think all those who are steeped in oil numbers statistics you know that is a possibility if that's the case it points a different picture of the world certainly for 2015 and next year well it's you know and just to add my own two cents on the geopolitics out of the equation I do think that we have the same sort of we have the same sort of revisionist history that we can do on geopolitical speculation about things that can happen in places that were certain if there's pressure on this situation you know the bottom will fall out I came into this field studying Venezuela still waiting still waiting so anyway one more question and then we'll turn it to the audience for questions we would be remiss we have a publication coming out at the end of next month on North American midstream oil infrastructure I know you're so excited and one of the things that you know we have thought real hard about and I'd love to sort of ask Rusty and even David and this is we've seen a lot happening in the United States in terms of the infrastructure that's changing in the direction of flows and it's been an overheated market and both in terms of the sort of modes that we're using and the directions are going and the rate and pace of that kind of infrastructure development not short of the politics of the whole situation right trying to get things permitted quickly trying to get exports moved how do you think that this new environment changes both some of the on the ground investments and the way companies are considering some of these infrastructure shifts but then also do some of these things like export policy that you were here last time to talk about Rusty do they still matter do they matter in this new context and do they matter differently that's actually two questions so question number one infrastructure development was going to be slowing down anyway we built a lot of stuff we spent a lot of money and so things were going to be slowing down are they going to be slowing down more now well one of the things that we have not seen at least in our business is a lack of interest of investors as a matter of fact what we're seeing right now is the what I would call vulture capitalist coming out of the woodwork of saying anybody who we think is a little bit weak we can buy them for a song and then spend a little more money to get over here and get over here and get over here and leverage those assets that they probably wouldn't have had the money to do otherwise so we might be surprised that this low environment might actually be a good thing for infrastructure investment might might surprise us and I'm just getting that from our level of the level of business that we do in our consulting business I mean we've ever been before and it's mostly people trying to pick up a bargain in terms of condensate gosh it doesn't matter anymore the differential has gone to zero or close to it the cargos that were exported hardly make money or as a matter of fact most of those cargos that did get exported were exported at a loss even when they were exported so whether or not what's going on right now makes any difference all it makes is those economics for export even worse than they were before so you know I was one of the people that was talking to you guys about it would be great and it is great and it's wonderful that we no longer have that constraint on exports out of the United States of that product the catch is we probably don't need those export abilities anymore because of what's going on in the lack of growth of production in the United States because of the lower on condensate well condensate is just a percentage of the total so crude oil production drops it's almost it's a little bit more the decline on condensates is greater than the decline on crude oil because condensates are priced at a slight discount therefore their break evens are not so or their rates return are not so good or the break evens are lower that way yeah and there's a lot of condensate in Needleford one of the little tricks that mother nature played on us with this source rock and the shale revolution is that she put it in kind of remote places sometimes like North Dakota and so the infrastructure development had to happen in order to get that to markets also one of us has to make the point that the Bakken isn't shale it's carbonate deposits that are trapped between shale layers which are maybe or maybe not the source rock for it but I like the term shale areas that sort of gets called everything shale just simple shale and your county has a spot of shale in it it's a shale county and we're going to add it all up and I got a problem with that but you know infrastructure has become an important local point for us watching because of this remoteness if you have a $15 rail charge on Bakken Crude going to Philadelphia you're starting to hit an infrastructure determined shutdown that you're not going to get it to the east coast you're not going to get it to the west coast rail is a stop gap I mean we should add Keystone years ago we didn't there were other pipes that had a situation with North Dakota that had similar problems about getting permitted but as Rusty says a lot of the work is being done and some of these pipes in terms of Permian and the west Texas or whatever are still they're not completely full yet in terms of being committed and so we got some space to go with that but exports if you want to get rid of the Brent TI differential you allow export of crude oil and all of a sudden that downward pressure from the impacted or like a tooth crude supply in the mid continent will go away and you'll see more level prices between those two big benchmarks geopolitics notwithstanding there is no real good reason not to allow crude to be exported the condensate lightly processed stuff is something that could be used if the economics would compel that they don't at the moment as Rusty points out there are still very good reasons to export US light sweet oil but there isn't much of a market for it in the Atlantic basin at the moment that's got to change and a partial answer to the question that you asked Jim Africa we kind of think is a place we have to pay attention to as fairly large future growth down the road because we're not counting it very well and this is a growth area in terms of population it's an area which is converting from traditional fuels to regular from traditional to commercial fuels and we haven't really picked that up in a lot of the projections that we've got so I would look for that to help specifically the Atlantic basin market and the sweet oils the sweet light oil is easier to process and so if you're doing fairly rudimentary refining construction in the African side of the Atlantic that that would kind of match up okay got a few minutes left for questions we have a couple ground rules please identify yourself in your affiliation and please make your question in the form of a question we've got one over on this side anybody else and then we've got Will Cole why don't we group a couple of them because I'm afraid we're going to run out of time thanks for the panel in the comments I just want to turn the session on his head how long the obvious of that is why was it so high for so long yeah that's actually where the name came from we had a presentation that was the flip of that and we said oh look at that can we just get a microphone to Will over here real quick Will Cole and Johns Hopkins question I guess for David David nice to see you here on the Saudi strategy and prices and all that your projections for a pretty low price for oil going forward to the end of the this year and more important than the low cost of production Saudi rave it seems to me is the is the price that the Saudis base their budget on for remunerations from oil exports I don't know what that price has been must have been at least around $80 or so last year which means that they're going to be able to live through this because of their presumably quite large reserves monetary reserves but how long do you think that can go on before they really might feel another pressure to change policy and we're going to take one more question over here in this round and we'll do another okay okay thank you I'm Qi Hongzheng from Xinhua news agency my question is to Ross Tia and David that is according to your projection that your lower end is about the oil prices about $50 per barrier so it seems that the whole year the price will stay at this level but I also hear some news that said that some even experts even projected the oil prices will fall to $20 per barrier so what are your reasons to support that you think now the oil prices have almost touched the bottom of its prices thank you alright so we got three different questions there when I start yeah in terms of why it didn't come to my theory markets I spent 15 years as a trader markets tend to hit tipping points and like on one day everybody concludes oh my goodness everything is oversupplied on that day it's totally psychologically driven which gets back to the question that you were asking a few minutes ago so as long as if I'm a seller I can pick up the phone and find a relatively I can find a buyer relatively easy then I don't reduce my price but on the day that I pick up the phone and I make five phone calls and there's nobody that's gonna buy that's the day that I say oh my goodness something's gone wrong and then I call my buddy at the other producer and he says I've seen the same thing and then I call my buddy at the other producer and he's seen the same thing and then all of a sudden boom that's when you have your collapse so my theory is it was happening all along and probably should have happened all along but there was enough demand increase in Asia Pacific region to basically make up the difference for a while and at some point we got to the middle of 2014 and that stopped so back to your question then could prices go to 20 bucks what would keep them from going back to 20 bucks David I think one of the things that David said was very important the perception of the market is that five years from now prices are gonna get back to 60, 70, 80 bucks and so there's a contango in the market right now so the surplus that's in the market today is being put in storage it's being put in storage and that storage can be hedged so that my profit on taking that gas on taking that crude out of storage is gonna be locked in it may kill the market when it actually comes out of storage and David I think that was one of your points is that it could very well slow down any kind of recovery when that crude oil comes out of storage but I think it is crude oil going into storage both in terms of ships and in Cushing, Oklahoma that is propping the price up today David can I well actually I know we're running out of time but I know this all leads in a certain direction one of the things I wanted to ask you it's built off of what Rusty was just saying and sort of builds off what the other gentleman was saying where it's there's generally two discussions going on right now right one where you're looking for historical analogies for the time that we're in and another one that says we're in a new time how do people know I just don't want us to leave this stage without the opportunity to sort of ask you how do you know if this is a new paradigm or if it's like 1986 or like some other period of time that we're in and what's relevant about that kind of analysis I think that's what helps sort of differentiate you know there's those people who ask or one of those two communities and then there's the day traders that want to know the fluctuation but it's sort of the difference between the $20 versus $200 versus volatile versus new price threshold what do you think about that yeah well I think you will anticipate my answer I think it's a new world and my colleague Barbara Schuch and I who are I think around in 1851 and when they found the first well we've been doing this a long time and we were saying why this isn't 1986 and you know my answer I gave right at the beginning that this is the shale era I wrote my cover story for the overview for oil market intelligence that came out last week was shale era changes the rules so that it's just different the answer to why so high so long there are two other aspects of that one of which I touched on is that the financial side of the market was relatively powerful there was a lot of money to put into the market the financial side maybe was pulling along the physical side and keeping it from dropping below that and the other thing was signaling you know and OPEC is not a cartel but there is a signaling function which is the Saudi function and it was King Abdullah back before the Cancun that talked about price range and a comfort level developed around that price range that price range then went up and the big decision once Saudi Arabia saw all of the shale oil coming out of the US is that this isn't a hundred dollar world anymore that was wrong we need to readjust to a lower price and we don't know what it is the answer to Will's question is that I think it's 65 or so that what is in their kind of budget mind but it's interesting you bring this up that we have a group Energy Intelligence Research and Advisory which David Kersh who you some of you know runs and we were having a bit of a debate about whether the long term part of the Saudi strategy if there was one and he just spent three weeks in the kingdom and didn't get any real answers from the people involved in it but two years to me is negligible on the basis of what they'd have to do in terms of drawing down reserves their budget has a deficit in it I mean their understanding that there's a deficit there's a consequence for that Kersh's point is that as soon as they start drawing that down they lose some of their borrowing power some of their attractiveness for investment how low will it go there's some internal panic maybe about it what do they do about some of the money that gets given out to a thousand princes or how many there are and stuff like that so this idea that if the economic gun gets pointed to their head that all the sudden market share just goes away as a goal of theirs and I can't disagree with that so five years no they couldn't do five years with this can they do too I think they can and how do you get to twenty dollars is distressed cargos in the Atlantic basin and a flat curve maybe that is putting all of the stored oil on top of all of the over supply that's going into the market every day and that that will take it down to twenty and then twenty just brings on a lot of it changes expectations as you point out but it also I think advances the time at which not just Saudi Arabia but your favorite Venezuela which is kind of falling apart already gets even worse that Nigeria gets even worse that any kind of deal to be made among the factions within Libya you can't cut up a pie that's shrunken so small there's nothing left in it to eat so I'll take this opportunity to comment on US crude oil export policy and I think the question is does the US want a policy that's embedded in the price controls the chaotic price controls of the 1970s where does the US want a policy that can enhance energy security so even though Rusty is absolutely right about the pressure on the system excuse me today as much less than perceived to be than it was not too long ago but if we think policymaking should be based more than on you know the here and now the policy makers are not going to be able to predict the future the oil price how much oil it could be produced from the US why not adopt a policy that could accommodate would be beneficial whether prices are low or high for many years to come so even though it appears less pressing it's still a relevant issue well Jim I think it's a good note to sort of end on I do want to come back to one of the reasons why we did the event this way the way that we did which is a lot of people with a lot of answers about a very uncertain future and a lot of people in a position to make decisions about how to make themselves more resilient to whatever future they're afraid of or they want to see come about and so on both the sort of US tidal side and on the other major producers in the world side and on the sort of demand side there's a lot of decisions both on the policy and market and investment side that made in the near term may change that outlook that we've got for the medium and longer term so we'll make sure to keep everyone posted on it please join me in thanking our speakers for their time