 This is State Tech Hawaii. Community Matters here. Welcome. Jay Fidel is out, so I'm going to be co-hosting our Energy in America series today. And we've got our guest, Lou Puliarisi, and he's going to talk about energy in America. So welcome, Lou. What do you have for us today? Okay. Thank you. I'm glad to be here. One of the things I thought I'd talk about in light of rising oil prices, a lot of turmoil in the world, oil market, sanctions on Iran, the remarkable resilience and continued growth of what we call the North American oil and gas production platform. And I think this is a story which we've sort of touched on in the past, but I think it's time to revisit it a little bit to see why, understand why it's so resilient and why it's continuing and how it's continuing and how it fits into a larger kind of strategic vision for the United States and even its importance, even it demonstrates its importance of a strong relationship with Canada and Mexico. Awesome. With that, I thought we would take the audience through this short discussion on this today. Okay. Do we have some graphics? So let's put up the first, so we have a couple of pictures we're going to start with. Let's put up the first picture, which is not too geeky, but it does have a kind of cartoon representation of a very prolific basin. Part of something we call the Permian basin in Texas. Can your audience see that now? Yes. And I think a lot of us, if you take a look at that, this is a play in the Permian. We won't spend a lot of time on this, which is called the Wolf Camp. And what I want to, most people who talk about the oil and gas, they talk a lot about horizontal drilling. So you've got to drill down into the pay, and then you move your drill bit, and then about to your production pipe horizontally. Maybe as much as 5,000 to 10,000 feet. But what this shows is something a lot of people have not fully understand, is that there are pay zones at very different levels. And this is a very famous region of the Permian called the Wolf Camp. And you see these different layers here, Wolf Camp 1, 2, 3, 4. And you see a vertical drilling rod, a drill bit has come down into the geologic earth. And what is happening at each of these levels, the green, the red, the blue, they're now able to produce from different zones, and each one, they can shoot the drill pipe out horizontally. So this enormous productivity you're going to see now in a few minutes of this production profile in the United States continues to be not the traditional way that which we found the oil and gas, which was in reservoir traps, but producing it from what we call source rock, right? This is the geologic formations that occurred 10 million years ago, in which all these deposits were embedded in these rocks. And have historically, some of them would migrate to traps that were difficult to find. And today, that's not the case in the U.S. We have source rock, it's very ubiquitous, it's in other places of the world. And so nobody in the U.S. is drilling a dry hole. Everyone can find oil. They just have to find it at a cost that is less than its price. And because this has now become a manufacturing process, the United States is no longer reserve limited. The future of U.S. oil and gas production is going to be entirely determined by not how much oil we can find, but the manufacturing process for producing it. And I want to show you, let's go to the next picture. And this is a kind of, is that picture up now? Yeah. And if you look at this next picture, you can see literally two dozen pumping trucks. And, you know, it looks like a very chaotic scene. When you produce unconventional oil and gas in the early stages, you, after you drill the, you bring the bit into the, into the pay zone, and then maybe you, you then drill horizontally for a long distance, and you put sort of your, your pipe into that area, you perforate it. And at that point, you need to pump lots of water and sand down there. That water, water and sand, which these trucks are all doing, is opening up the pores of this shale line. And if you were to see it, it looks this, it looks like a piece of granite. You would be shocked if they could ever produce oil for them. But under these great pressures, 7, 8, 10, 12,000 feet below the surface, you know, you know, below the surface, we are able to open up those pores and the oil then flows out. This scene you see in this picture does not last long, just for two to three months. At that point, all the trucks leave, all the water facilities leave, everybody leaves, and all you're left with is a series of vows, which they call a Christmas tree, and it then produces naturally over a period of time. At some point, they might bring in an artificial lift, a pump jack or something. Now the next slide, let's go to the next slide. And I think, you know, a lot of us don't understand how unusual this development is. This is a slide from the Energy Information Agency. And I don't want to blame the, actually, they were right in the path with everyone else. And you see the black, the black sort of figure in that thing. The black zone there is what the Energy Information Agency and actually most analysts in the world, particularly most analysts in the U.S. said would be the likely protection in the United States between 2010 and 2020. The red is what we actually produced. And this shows you the remarkable kind of achievement of technology, ideas that man has, and its ability to expand production. We see here, in a remarkably short period of time, the U.S. went from, you know, five and a half million barrels a day to over nine million barrels a day. In fact, probably in the next year, we will be the largest oil producer in the world. The world produces about 100 million barrels a day. The U.S. is now 10% of that production. Wow, that's, yeah, yeah. Okay. Now, the other interesting thing is that this growth rate, if we go to the next slide, this shows oil productivity by major play. And these areas here, the Permian, Hainesville, Eagle Ford, they're all in Texas. The Bakken is in North Dakota, Appalachia is in Pennsylvania, West Virginia. And the Darko and Nibara are all in New Mexico. Okay. And some Nibara is up in Colorado. And what this shows you here that all these unconventional problems, these places in the prior to 2010, which were not producing anything, continue to expand production. And what's unusual about the U.S. oil production today is that it is probably one of only two places in the world in which we have something called short cycle production. Historically, oil production would go through something like this. Producers would believe that the long run price of oil was high enough to justify massive investments. Those investments would take up to 10 to 12 years. They would produce a lot of oil. The price would fall. They would not often be recovering their capital cost, but the incremental cost of production was quite cheap. And investment would fall off. So we had big cycles of boom and bust. But with the U.S., if you see the downturn there, that's when oil prices fell in 2014. And the U.S. production retracted right away. And soon after they recovered, the U.S. came back very quickly. This is very unusual in the production cycle of the United States. The world oil market, anywhere in the world oil market. And because of this, it has tended to moderate these boom and bust cycles now. Whether the U.S. is a big enough producer to do that for the world oil market is something that remains to be seen. But so far, it's had a very important balancing effect. Largely due to this very unusual short cycle capacity. Yeah, interesting. It sounds like a systemic change in not only the technology, but also the financing of these products. Exactly, exactly. It's very, very interesting. And by the way, I've always said the U.S. does not have the best share of resources in the world. But we have the best above-the-ground rules. Because we have a free market or, let's say, private ownership above the ground in most of these provinces. A great deal of oil and gas is found on the federal land, of course. But the Shale Revolution takes place largely on private land. So you can go to the Vachomerka in Argentina or the Bosnets in Russia and see very promising Shale deposits. But they have above-ground conditions that are not amenable to quick production. In the U.S., people can move very quickly. Okay, so you're, and I'm always learning a lot from your explanations and your slides. I really appreciate the graphics and the diagrams. Yeah, sure. Thank you. Okay, so any questions or shall we move forward? No, I want to hear more and see more of your graphics. Okay, so the next one is, I think this is very important because this next one shows something I call net income. But if you think about the United States, we consume 19 million barrels a day. 19 million barrels a day. And yet people say, well, we still import a lot of oil. We still import 9 million barrels a day. But that's really not the way to think about this. If imports and exports are how you're going to measure energy security, not how we would do it, but it is what somebody looks at. You have to also remember that the U.S. exports a lot of petroleum products. We can import crude oil from Venezuela or Mexico or Saudi Arabia, but then we process it in the U.S. because we're a very sophisticated refining industry and we re-export it. So the real way to think about this issue of the U.S. trade position is to look at net exports. The U.S. is a large continental land mass. It doesn't make sense for Hawaii to buy its crude oil or its heavy fuel oil for its power sector from Louisiana. It's cheaper to get it from Indonesia. So transportation efficiencies means you sort of move things around in the most efficient way. So if you look at this graph there, you can see, yes, the U.S. imports a lot, but we export a lot. So what is our actually net imports? Net imports in 2017 and they're falling now in 2018 was three and a half million barrels a day. So out of 19 of the lines of foreign supply in effect is only three and a half million barrels a day. And most of that is coming from Canada and Mexico. Ah, okay. And that means that the U.S., the U.S., but Canada and New Mexico are going to become very soon a net exporter to the world oil market and a net natural gas exporter, which doesn't mean we will disconnect from the world oil market, but we will be a new source of stability in the world oil market and we still have interest in the Middle East and everyone else. Although our politicians may not understand that when they look at these charts. The next thing is to look at, the next chart looks at the crude and consumption and production of crude oil and products for what we call NAFTA. These are the countries of the North American pre-trade agreement, which even though they're undergoing enormous renegotiation now, these agreements are still in place. And the U.S., if you take the U.S., Canada and Mexico together as a single production platform, which by the way, we are shipping over four billion cubic feet a day by pipeline to Mexico. Some gas goes to Mexico through liquefying natural gas through the Panama Canal and then is unloaded along the west coast of Mexico. Cude and product supplies, gasoline diesel, move back and forth across both borders freely. And when you look at the, you sort of sort that out, you can see that NAFTA, the NAFTA countries, if you take a look at here, you'll see the blue is total consumption, the red is total production. See that net imports for NAFTA are even smaller than the U.S., 1.3 million barrels a day. So now we have a production platform. U.S., Canada and Mexico that produce about 24 million barrels a day. But their net reliance on the world market is only about 1.3. But once again, we are not disconnecting from the world market. That's very important to understand. But we are not a major source of new demand for foreign oil. Okay, so we're not driving the price up. We're not. We're doing our part. We're doing our part. I mean, the higher prices now are largely related to disruptions in the oil market. The loss of production on the Venezuelan, the ongoing turmoil in Libya and the recently imposed sanctions on Iran. All of these are reducing world supply. Well, let's take a quick break, and then we can get into that when we come back. Okay, great. Okay, thanks. This is Think Tech Hawaii, raising public awareness. Do you want to be cool? If so, watch my show on Tuesdays at one called Out of the Comfort Zone. I sang this song to you because I think you either are cool or have the potential to be seriously cool. And I want you to come watch my show, where I bring in experts who talk all about easy strategies to be healthier, happier, build better relationships, and make your life a success. So come sit with the cool kids at Out of the Comfort Zone on Tuesdays at one. See you then. Welcome back to Energy in America. I'm Maria Tome, hosting for J-Fiedel temporarily. And my guest here is Lou Pugliarisi. And we were talking about the resilience of North American production platform for oil. And you were going to continue and tell us a little bit about how other parts of the world are connected with this whole oil production. Yeah, so I think we were talking. We have a couple of more pictures to look at here, and then I think we can go into it. I want to show, I mean, a big issue, an important development is the growth in US LNG exports, which are now, in the last 18 months, US has exported liquefied natural gas, which is gas that has compressed so much that it becomes a liquid. It's put on specialized tankers. And in the last 18 months, we've shipped our cargoes to over 360 destinations. 360 cargoes have been shipped to literally everywhere in the world. And one of the reasons for that, the next picture is the growth in production of US natural gas. In fact, the United States is swimming in natural gas. And the reason we're swimming in natural gas is because the shale gas reserves are so prolific. They can be used so cheaply that the... And if you look at this slide, if you look at this picture here, this shows you through 2018. Actually, it shows it approaching like 80, 80 billion cubic feet a year. I saw some work recently that they think were going to be well about 95 billion cubic feet at the end of 1992-19. This is actually becoming a sear for two reasons. One, lots of producers look for oil. But when they produce the oil, because unconventional resources require some mechanism, mechanism to move it to the surface, it's often gas, not just water, but it's gas. And this gas is a by-product. You know, as economists, we try to think about that like beef and leather. You might want more beef, but you can't get more beef without getting more leather, okay, more hide. In this case, you can't produce more oil in much of the unconventional resources without getting more gas. But this gas needs to find a home. So the U.S. is looking for export markets. And LNG is a potential important development because it helps us reach out to allies with a very strategic effort. We're working very closely with Japan to, in fact, expand LNG exports throughout the Pacific Rim. Hawaii has decided to take a path in LNG. And let's go to one more, I think one more slide we'll give us is, why will natural gas, if you look at this last slide, why will natural gas in the U.S. remain cheap? And what's important to understand, you see this last one, this is from Advanced Resources International, good friend of mine, Bella Kuzka. And I don't want to spend a lot of time on this, but one of the things is you can see certain aspects of, well, he did some interesting modeling between 2017 and 2025. And we don't need to go through the whole chart, but even though many aspects of drilling for gas have gone up in price, right, the productivity of the new wells are such that in his estimates, which are quite well respected, and this is from the Hainesville, which is a very interesting development in Texas. He showed that between now and 2017, with just off-the-shelf productivity improvements, the cost of producing natural gas in the United States, in the Hainesville anyway, and almost all the reasons are like this in the unconventional area, is not likely to increase more than 10 cents. So we have this remarkable, you know, from 250 to 260,000 people feed a million BTU. So we have this remarkable development in the U.S. where we are using a lot more gas, we're exporting a lot more gas, but the price of gas is not going up. Okay, yeah, I remember many years ago when there was a natural gas price spike, and I think, you know, and so there was a lot of concern from the folks who have shifted over to that. So I have a couple of questions for you. One, in the short term, you mentioned NAFTA is being renegotiated. Do you have any insight to how that might go? Do you think they're not going to touch the fuels part of this? So I think there are two or three issues here on the fuels part. First, because, if we talk about Mexico for starters, because Pemex, which was the state, still is the nationally-owned state oil and gas company of Mexico, was a completely state-run entity in Mexico when they originally signed NAFTA. Most of the energy provisions were not even included, right? So energy, oil and gas, electricity moved across the Canadian and the Mexican border as if there were free trade agreements, in other words. Each country could do something that they chose NAFTA. So I think the big issue for Mexico is when, you know, MNLO or, you know, Mr. Obrador took over, he has suggested that he wants to look at these very important energy reforms which actually were part of the constitution, constitutional change in Mexico. And they have brought in large investment, not just in offshore-owned gas development, but in renewables, solar and wind. So I don't think that those are really at risk. I think the Mexicans will continue to move forward with those energy reforms. However, Obrador has raised concerns about all the petroleum products and natural gas and Mexico imports from the U.S. Now, our research suggests that he cannot produce those imports cheaper in Mexico, but it is a very nationalistic thing, you know. So it's possible, much like, I believe, much of the trade work the U.S. is doing, people do something counterproductive. And so we are involved in some discussions as a think tank with the Mexicans, sister think tank down there, on how to engage the Mexicans on some of these issues. So I do think that's of concern. It's really not wrapped up enough to so much as it is with the election of Obrador who threw out the PRI and came in with a much more left-of-center view of energy development. How about Canada? Canada is... Canada, we are having still traditional problems with autos and dairy products. However, I believe that I'm hopeful that this NAFTA issue will get resolved within the next six to 12 months. And there will be some issues having to do with autos and manufacturing. It was never... NAFTA was never aimed at the energy sector, but it's important to understand that a disruption of energy trade between the U.S. and Canada and the U.S. and Mexico would not be good for the U.S. It would harm the... it would harm the efficiency of this wonderful production platform and could actually put some constraints on our ability to expand production. I'll give you one simple example. If you can't find... If you're in the Permian Basin, which is Texas, a large play in Texas, you're producing a lot of oil, you're shipping it, maybe you're exporting it to a binder, but you're also producing gas. If you can't find a home to that gas, you have to flare it. The Texas Railroad Commission, they don't like you to flare that gas. And after two to three months, they're going to come in and visit you. And the Texas Railroad Commission, oddly enough, is the main oil and gas regulator in Texas. And we're going to say, look, you're going to have to... you're going to have to restrict production because we don't want you flaring that natural gas into the atmosphere. It's not good to the environment, and it's wasteful. So I think that this is an example where at the trade relation deteriorate to one side of the border, it's not like we can sell it to somebody else. Everybody who wants gas in the U.S. can get it now. I mean, we do have some infrastructure issues of moving more gas out of Pennsylvania, West Virginia, Ohio, other parts of the country, and those things are slowly getting worked up, worked out, and there's lots of opposition to some pipeline. Closing off Canada or Mexico is really a bad idea. Well, I regret that we have actually run out of time. Okay. So I wanted to ask, is there one more thing that you wanted to mention that you hadn't mentioned yet, or... Well, I think that we want to watch this space. People talk a lot about renewables. They talk a lot about... and renewables are very important, but it turns out that you're going to need a lot of that gas to deploy the renewables because renewables are still intermittent, and, you know, and they're interruptible and, you know, so we need strong backup to make renewables work, and for the meantime, that's largely going to be matched up. Okay. So you heard it from Lou, and thank you so much for your very informative, interesting, and timely presentation on the resilience of the North American oil and gas. Thank you.