 Good morning. Why don't we go ahead and get started. We have quite a bit of material that we're going to be covering today. So let's get the program going. I'm David Pumphrey, Senior Advisor here at the Energy and National Security Program. And it really is a great pleasure to have this session with this group of, to me, our kind of the all-star cast in terms of oil market analysis and thinking that's going on on oil market. So I think we are very pleased to be able to have them with us. And I see many in the room whom I'm sure will have very probing questions to ask as we move forward. About a year ago, we started a project here looking at the infrastructure needs that the country would face as we dealt with the expanding oil production in many parts of the country. And then wanted to look at policy questions that this brings to for and rethink our framework of policies we've had in place for the past 30 years. So we thought we could work this through maybe until middle of the year and then start thinking about the question of crude oil exports and the policy framework for exports. And fortunately, we had made enough progress for when this issue started to break very rapidly at the end of the year in the beginning of this year. So it really was a pleasure to be able to be in a position to bring this group of experts forward to address a number of important questions in terms of why would we even want to consider exporting when we already will continue importing? What might be the effect on prices? What kind of volumes might we be looking to? What are the ways to work around the growing pressures created by increasing production? So without too much more ado, we'll go ahead and move forward. You have copies of the bios for all the speakers and I think you can see the wealth of experience that has been brought to the table here. We'll run through first a series of presentations and prepare yourself, you probably get a lot of numbers. So make sure you're taking notes and writing them down as we go forward to be able to frame your questions. We'll go in the order on the program except that Michael Cohen and Kevin Book will switch places and Kevin will bring up some of the political questions we face after looking and thinking about the technical issues. So our first speaker is Raju D. Wan, who's a senior director now with IHS Insight. He has been a frequent speaker here for a number of years when he was with Petroleum Finance Corporation. Raju, it is really a pleasure to welcome you back to the podium here. Thank you. Good morning. Thank you for letting me talk today and to start this presentation. And as you said, I would like to start by putting numbers out there to discuss this whole issue of export. Why are we having this discussion? What's happening really into the U.S. oil system and why are we saying that we're at the verge of needing to be able to export oil to global markets? So the main issue here we're going to be facing and I will describe it a little bit in my presentation is the quality of the oil that we're producing and what's happening in the U.S. So let's go ahead. And the main question really is how long it would take the system to adapt. What we're having here is a very sharp increase in supply and that velocity of increase in the supply side in a way create problems on the demand side is how quickly can we adapt our refining tools to absorb the change in the crude supply quality. And these two charts here just to start to show a little bit how quickly we've seen production rising from that 5 million bal per day number early in 2011 to close to 8 million bal per day right now. So that very sharp increase over the last three years when you look at the second chart here in particular has everything to do with obviously shales but more importantly when you look at it in terms of quality all the incremental oil has been light sweet crude. And that's an important start point for our discussion today because it's that change in the crude slate in the United States which is creating the problems that we believe we'll be facing shortly here. So when you look at it basically our production of light sweet went from 3 million to over 5.5 million over the last 2.5 years. And that's the question is how the refining system is able to absorb that incremental light. What we'll try to look at which is think about the first one the red line showing the net imports. So we were sitting here three years ago saying that we were importing 9.5 million bal per day and producing 5.5. So the gap was 4 million bal per day and the perception was that the gap would continue to open. That's the whole debate about energy security how we need to reduce our reliance on foreign suppliers etc. Three years later these two charts between production and imports have crossed and probably statistics by the end of 2013 will show and that's the red line that the imports are a million and a half lower than our production. So we moved from a position where we were where imports were 4 million above production to a position where imports are lower than production. So our dependence probably by the end of the year was 5% when we will look at the December numbers when they'll come out. Next to it as important is the light suite crude imports and we really want to insist here it's really we mostly displaced light suite barrels that we were importing from abroad mostly from West Africa and Europe which have declined quite dramatically and in particular you can see that 3 here is almost I have completely displaced the imports of light suite. The rest also is declining pretty fast and we'll go a little bit in the detail of that. This is an important chart and I'll spend a couple of minutes to explain what it is on the left side what we're looking is at the average quality of crude imported both in the United States in total and in Pad 3 so on the Gulf Coast in particular and what we see here is that over the last three years the average quality of the crude imported is getting heavier and more sour. That doesn't tell you anything about volume but tell you about the quality and we're getting heavier barrels as we displace all the light imports so we're in removing the light imports. What you see on the right side of the chart which is the characteristic of the crude inputted in the US refining system. The top chart is US and the bottom chart is Pad 3 and what you see here is basically the characteristic of the crude inputted in the refinery hasn't changed much which means that all the production increase went to displace barrels not to change the quality of the crude we are running in the US refining system. It means by increasing production close to 3 million barrels per day what the refiner are absorbing in the United States is pretty much exactly what it was four years ago before the increase in production. They haven't changed their diet if you want even with price discounted for light sweet most of the time. And that's important because it tells us how quickly the system on the demand side is responding to the increase on the supply and we're saying that it's not responding much. So let's try to project a little bit from that static picture I said this is where we are and where we'll be in the next two years. To understand this capacity absorption issue we need to think that there is really four different ways to continue to increase the absorption of light sweet. The first one is to continue to displace imports. The second one is to imagine that refining capacity is going to increase so we have more input needed into the refining system. The third one is one of these relief valves that we call export to Canada which is allowed. And the last one is really to change the diet of the refining system what the refiners are willing to take and to displace in terms of inter qualities or displace mediums or heavies with light. And in a way it's by order of difficulty. So when you look at this displacement of imports since we displace almost all imports in pad three in the Gulf Coast we need to look at the rest. And in pad one and pad five so on the east coast and the west coast when you look at how much more we can remove light sweet you see the top chart here and the red bar sorry the bottom one we're already displacing almost all the light sweet imports there's another 200,000 valve per day probably that we can get out of the system and the point is it's happening pretty fast when you look at these charts here with the Bakken crew transport it tells you that all the increase in the Bakken is really incrementally going to the east coast and is displacing all the imports as we go. We believe basically by the end of 2014 we will have displaced most of the imported light sweet on the east coast. And here when you look at the whole system so all the pads together we believe that sometime by the end of 2014 pad one will be completely out of imported light pad three will still have some imports but this is a really specialty crew for specialty product and pad five is really mostly how I here importing still light sweet from outside the United States so what we're saying is basically we are coming close to the end of that substitution valve into the system and over the last three years we basically removed all the imported light sweet barrels and by early 2015 really at the latest it looked like it would be done. The second way to look at it is how much increased capacity we have in the system which will add demand if you want and clearly we start to see announcements of new refining units or coming online but as you can see most of them are really half of 2015 especially the big ones the two Valero unit and in total is not huge it's 300,000 ball per day so over the two years maybe 400,000 ball per day and we're already running a very high utilization rate so there's not much to win in term of utilization rates what's important here is we're saying that supply is probably growing at at least twice that rate and there's a lot of momentum in supply growth while demand is really starting to get going and it takes a lot longer in a way to build these units than people think so it's at least 18 months probably longer considering the tightness of the sector in the United States and really we need to think about this issue here of velocity is how much momentum we have on the supply side versus how much it takes to build new units I was making simple calculation right now we're growing close to 2,000 to 2,500 barrel per day per day in terms of supply in the United States and it takes many months to be able to build these units the third valve we've been talking about is Canada we can export to Canada and what we've seen is these export have been ramping up very fast in both charts here and it's related to prices when the prices have allowed the export we've seen real spike in export in November and I think it will continue going forward you see in the bottom chart the bar is where we have real data versus the forecast and already in November we saw a big jump and we believe that actually the December number will be even higher so we're close to 200,000 barrel per day of export to Canada from almost nothing a few months ago and the total light suites imported by the eastern part of Canada which is not linked to the production in western Canada so that can be fulfilled if you want from the United States to displace imports into Canada is around 425,000 to 450,000 barrel per day so we're almost close to half of that being imported from the United States so there's not a lot of incremental demand potential in Canada probably another 200,000 to 250,000 so when you start to put all the picture together I said okay the increase in if you look at all the displacement of imports the increase in capacity, the export to Canada and you look at our supply forecast which is around 800,000 barrel per day for this year and another 700 for next year into this momentum what you'll see here is above the 200 bar is what we call the surplus or in a way what the refiners have to incrementally take and change in terms of quality from what they're taking already so displacement really of something else a medium or heavy barrel and what you start looking at numbers here which are quite important displacing 6,700,000 barrel per day of medium sounds easier said than done those are different quality crudes refiners have been optimizing their tools around these crudes changing them would require different economics and in particular we looked at what it would do if we're displacing these barrels in terms of the quality of the crud slate and what you see here the green line of the first chart in particular is what's the average API the axis on the right how quickly it will change if we want to absorb all of that and what you see here we'll be moving from this 30, 30.5 degree API on average to 33 pretty quickly that's a big adjustment for the refining industry it's not clear that we can do it that fast I'm not saying we cannot do it but it's really again this issue of velocity how quickly we can adapt the demand to the supply and in terms of volumes what you'll see here is that in a way once you pass the seasonality of demand you'll have a pretty sharp increase in the push of that crude into the refining system which will have price impact this displacement of medium which is what people assume will happen that will remove the next tranche of import which is the mediums I said it's probably more complicated than just doing that one of the reason is that the refiners like those crudes and if these crudes are priced competitively there's little reason to change for a less optimal input in your refinery and as you can see here actually the medium imports from the largest sources of medium in the United States Saudi Arabia haven't really changed and have a certain level of stability in it because there's also refineries which are owned or co-owned by Saudi Arabia which are geared to absorb these barrels so in a way the ability to shrink that pie which is around a million and a half right now is probably a little bit more complicated and requires price differential a lot wider than we have them right now just to finish with prices what's interesting here the blue line is WTI prices versus brand basically and the other three are the golf crudes versus brand and what we saw is a big discount for brand early in for WTI early in 2013 when demand was low when we had maintenance and it's really tightened during the summer when we were running very hard and the balances in the United States got tighter but what we saw this fall was very interesting we had a surplus of crude and as we put a new infrastructure to bring crude from the mid-continent to the Gulf what we saw is that all the prices in the United States start to be discounted versus global prices and that was a major disconnect between the US and the world not just between WTI so mid-continent crude and the rest of the world and in many ways that's probably tell us something about the future that when you have these surpluses being seasonal or structural the whole complex start to move and we see these big differential and it's important here we're looking at $15 to $25 discount from brand and if I might look quickly at that so let's say brand is at $100 and you have $20-$25 discount it means that the crudes in the United States are fetching around $80 and when you look at the production in the different plays and we look at break-even prices 80 start to look at really where the marginal plays are which are producing oil what's interesting in the United States is that the system is very skewed the first half of that chart if you want the first 6 or 7 plays produce close to 70 or 80% of the incremental oil so it means that prices will have to come lower to start impacting production to slow down it means that these differential we have and if we move into a surplus situation prices between the US and the rest of the world will start to diverge quite a lot by $20-$30 potentially if there is no outlet for this crude outside of the United States and I'll stop here Thank you Rajay for setting the stage for the rest of our discussions. Our second speaker is Ed Morris who's had a very wide and extensive experience in both energy policy and with the private sector and now with city commodities and so Ed it's a great pleasure to have you back again he's been a friend of the program for many years and while we're getting you set up I can tell jokes we do need some levity it's a pleasure to be here and it was great to follow Rajay who set the stage really remarkably well when many of us first got into this business and many of us the arrows are not working I guess I'll use that many of us are kind of and I see the first two bullets are not there by many of us I mean a lot of people who are in this room one of whom I'm looking at actually several of whom I'm looking at when we first got into thinking about energy we were either in the US government or close to it in terms of observing what the US government was doing and one of the issues that we were grappling with came out of the strange circumstances of 1973-74 when the US was at the time and it's useful to go back to those days we worry about gasoline prices in the US with respect to crude oil exports setting the stage was the mandatory quota system where friends of congress and friends of the president were the oil industry people and the quota system was designed to protect high cost American oil from low cost imports that had been discovered in these parts of the world the Middle East, the Far East and Latin America and as a result of that quota system US prevailing crude oil prices were roughly double world prices and then as the inflation that was triggered by the Vietnam War caught up the country chose to devalue the dollar going off the dollar gold exchange standard in August 1971 and these were frozen in the United States basically both at the wellhead and the burnative and then the Arab oil embargo took place and all of a sudden US prices having been double world prices at the beginning of the year were a fraction of world prices by the end of the year and gasoline lines were formed largely because of this imperative to export to higher price markets and we were involved in creating things like the crude oil equalization tax that was designed to provide ways to equalize the refinery acquisition cost of crude oil we had different kinds of pricing over time for old oil, new oil stripper well oil leading to incredible debates that only were triggered because of that anomaly created by the Arab oil embargo combined with going off the gold exchange standard about how to decontrol prices and get back into the rest of the integrated global oil market and when the US got into the integrated global oil market there's no accident that decontrol was accompanied by a radical drop in prices in 1981, 82, 83 economics do work and it's strange how we are now having this debate on the cost potentially to the American consumer of gasoline which is going to be modest no matter how you look at it if we export crude oil and we never have this debate about agricultural products where there is a significantly more greater impact on food costs and on fuel costs as a result of exports I like Roger's picture, I disagree with him in one little respect and that is the export of US crude oil to Canada triggers an export of light crude from Canada to the rest of the world so I would add a couple hundred thousand barrels a day to his basically four hundred thousand barrel a day number and say the six hundred thousand barrels a day is up for grabs and I agree with him by the end of this year it looks as though US exports to Canada will reach four hundred thousand barrels a day from the two hundred thousand barrels a day it currently is and I just want to round off that picture because of many of the things that Roger has been talking about in his explication one of them has to do with pad five so pad five is going to see an onslaught of rail crude just as the east coast sees an onslaught of rail crude and it's not the only crude which could just in terms of receiving terminals reach two hundred thousand barrels a day by the end of 2014 but there's also Mexican crude that's now going again into the Asia-Pacific basin through the Selena Cruz refinery system and a pipeline that has two hundred and fifty thousand barrels a day of excess capacity and that too is going to go into pad five as well as into the Pacific basin so we're going to see as a result of those we can argue about the numbers and I see Marianne Cause here and she might have better notions about what those numbers are than I do but I would suspect there's going to be a hundred thousand barrels a day of less than crude there's going to be exported into the Pacific basin so add that to the four hundred by the end of the year it'll be five hundred a day of exports from the United States all under permissible law today then add to that expected re-export of Canadian crude and that will come certainly by rail because there's no problem with commingling and there clearly is under current law an ability to re-export so whether the rail goes to Albany or to Perth Amboy there are systems available to take that crude as has already happened to the Caribbean and re-export it to other places and there will of course be significant pipeline takeaway capacity in the US Gulf Coast by the end of this year where there will be a complication on commingling potentially but let's say the potential is there for another two hundred thousand barrels a day of re-exports of Canadian crude from the United States which would bring that number from five hundred to seven hundred a day a radical change so it's kind of appropriate that we're having the debate over what all this means today this is just one addition to what Roger had said there are very good reasons why the refiners in the United States are not going to build large scale new plants it's expensive there's uncertainty there's a history of over-build and under-build the refining industry has just spent a lot of capital and upgrading capacity to process heavier grades of crude and they've done this in the same way that Northwest European refineries did this forty years ago just at the time when there was an unexpected surge of light sweet crude so they're not exactly likely to spend shareholder capital given their history and yes sooner or later as Roger said we have to do this I've talked about my additions to what Roger said on the eastern Canadian market and the east coast market I talked about the west coast rail receiving capacity which is going to make a very big difference Roger talked about all crudes in the US coming into a disconnect with crudes in the rest of the world and he mentioned Saudi crudes there are other crude streams as well including the Mexican crude streams which is why we're seeing a shift by the sour crude producers other than potentially Saudi Arabia which does after all have this hideous marketing problem of having to export eight million barrels a day and wanting to preserve market share including market share market to higher prices mean higher gasoline prices I think yes and no and it's really terrific that the senate has started a public debate on the subject one that was long in the coming and long overdue sure they're going to be lower prices because of dislocations but all in all we're in a system where the overall expectation is that gasoline consumption is on the decline gasoline consumption may be up a little bit at the end of last year because per capita income was not up but the number of people employed was up so people were driving to work in a way that they hadn't been before but every indicator demographic indicator, cafe, fuel indicator looks as though the amount of gasoline being consumed is on a very rapid downward path between now and the time the vehicle fleet changes 11 or 12 years from now so the current almost nine million barrels a day of gasoline consumption looks like it's on a path down to five million barrels a day and that's the most telling issue of whether there's going to be any really significant impact on gasoline prices in the US to the degree there is if we export crude it looks likely that it's really swamped by declining gasoline in a country where the refining system is geared up to manufacture gasoline so the debate is welcome but I think the conclusions are going to be clear the other issue has to do with the Harold Ham testimony in the Senate a couple of weeks ago and his point that higher prices would stimulate more production and I think that's exactly right I mean Roget looked at a cost curve we know from the EIA that productivity increases of 26% per year are continuing apace not just with respect to natural gas production but with respect to oil production the cost curves are coming down so even if we accept what Roget presented as I do as fairly representative of the cost curve the pressure is downward and there's no doubt given the nature of this industry it's an industry where 55% of the production is done by 10,000 companies and 45% of the production is done by 40 some odd companies this is an environment in which pennies count in terms of capex and cash flow and the more nickels that a producer in the US gets the more will be plowed into capital expenditure looking at the degree to which this is likely to happen is difficult but there's no doubt that higher prices coming to producers would stimulate more production and that has significant other ramifications across the country so I think I've made all of the main points I wanted to and I look forward to the discussion thanks very much. Thank you Ed. I think it's the first time since I've been here that anyone's invoked the mandatory oil import program so I don't know if it's good that I actually remember that so that's what I'm going to talk about. Thank you. I'm going to speak with Michael Cohen as the vice-president and lead North American oil analyst with Barclays. Michael's been very familiar with Washington having been at the Energy Information Administration and then he spent a couple of years in Paris and I guess decided New York was the place he had to try next so Michael thank you for joining. I want to be part of this very intellectual and very forward looking panel and so thank you. I hope that I can just add a couple points from my presentation that haven't yet been covered but I think that we can all look at this debate in a couple different ways. I want to just discuss with you a couple of the key determinants that I see for what price impacts might be over the next couple years and also just throughout a couple of the big issues which my co-panelists have addressed and that is at what price will refiners will be able to process and be willing to process a dumbbell crude. What is the impact of what the rail standards and delays and infrastructure build out what might that have on this whole debate on crude exports also what's the retail price impact which some of my panelists have addressed and then finally as we enter this opportunity in terms of whether there will be any changes on the regulatory front what are the implications for investment both downstream and upstream and so as my panelists have already addressed this is just a display here of that we're now importing less crude than we are producing and that as a result of this development the production growth mainly in the light ends have turned the US into a net product and that's what we've been doing here in the last couple of years so here this is another way of looking at a slide that Roger looked at and what you've basically seen here is that refiners have been able to purchase domestic crude at a cheaper price than they've been able to purchase foreign crude that development you could also show with the widening of the discount of WTI to Brent and the result of this disconnect from both the domestic and imported side has been that refiners have displaced their level of imports down to less than a million barrels a day by the end of 2013 and this is for light crude so looking forward there's a lot of debate right now in the market about what the impacts on price will be there's a lot of debate both on the inland and coastal connection and what prices WTI would be versus LLS I'm not going to get into that as much today is to address what the impact is of the various production scenarios what is the pace at which imports can be reduced and all the different levers and options that Roger and Ed talked about and then finally how quickly can rail actually allow that all to happen so this is a one way of looking at several different production scenarios you can see here that EIA is reference case early 2014 AEO release in black and the Wood Mac and Bentech forecast in blue and gray you can also see overlaid on theirs their price assumptions just to caveat that the Bentech forecast there goes through 2018 and the reason I've chosen these is you could add PFCs you could add IHS you could add any other organization and they would probably be at around the same level as the Bentech forecast and so in 2016 and continue to have 200,000 to 300,000 barrels a day of production growth afterwards but the EIA case is interesting and EIA has been doing a lot of work on the upstream and trying to understand the various scenarios and they will be coming out with an additional cases in addition to the reference case in the coming couple months but it is interesting that you can see for the lower 48 that production growth does fall off to almost nothing so it raises a question are we really in a period where we will see a glut of crude and it's a bit of a chicken and egg issue too because it depends on what the price impact will be on these incremental barrels in the medium term and I think the other thing to keep in mind as we talk about this is what is the overall market context in the rest of the world I mean if you could say that globally in the mid term oil projections mostly show a reduction in the call on OPEC crude but the broader market context is that from a fundamental standpoint that may be the case but OPEC behavior and continued unrest in the Middle East and North Africa we expect at least to keep prices more elevated so I think the bottom line here is that while these price levels may be lower and leading to a lower profile for this production you could have a markedly different scenario where prices are higher and leading to higher production growth and that may at the same time not necessarily lead to WTI or LLS prices being higher because of the disconnect between those two markets so here you can see that at least in the medium term what we would expect is that Canadian refineries could conceivably take about 500,000 barrels a day of additional light crude 200,000 to 300,000 barrels a day of those light crude came from West Africa and we would expect that to drop out and like Ed and Roger have said there could be some additional light re-exports of that crude so the one caveat with that is that you do have the line 9B and bridge line that is going to be taking additional barrels to the east coast of Canada so that opportunity exists for a certain amount of time in 2014 but after that that opportunity may not be as much as before so here this is another way also just of looking at the light displacement and I think what Roger has talked about already is that there will be some amount of sticky barrels that have destination clauses or that are destined for companies that have equity shares like Motiva and so I think that this is where it becomes important to understand what will the willingness be of the different companies to take that additional crude and to switch to a medium or to switch to a medium light blend we may also see additional pathways for medium imports to shift in 2014 such as going from the Gulf Coast to the west coast and I think that it's just important to keep that in mind when we're trying to do this accounting of what the total shifts that could happen in the medium term might be and the bottom line is it could be more than what you may think here you can see the additional rail capacity build out the biggest amount of this is coming from the west coast and you could also while it could have the biggest impact it may also have the biggest impact because it may be delayed you have about 300,000 barrels a day of rail offloading capacity into the west coast in the remainder of this year but after that it is a 1 million barrel a day increment into pad 5 and that's important both for the Canadian crudes to make it to the west coast and also for the Bakken crudes and I would agree with Ed's statement that we're likely to see additional Alaskan exports or not re-exports but just exports to Asia in the coming year and I have a slide on that at the end that I'll show you here what have been the implications of all of this and I think this has been less covered by my panelists so I'll try to just put this in context as a result of this mismatch between light and heavy and the refiner make up and production growth we've seen lighter products constitute a larger share of U.S. product exports so you can see here the share of light products goes from about 25% to 35% over the last two years and this reflects essentially a surplus of light products and why is this important it has meant that in addition to many other reasons because of what is going on in Europe the refinery capacity there has lost its competitive edge and you can see here in 2004 the close the difference between the Brent Cracking Margin Brent Crack and LLS and WTI was very small but it has widened to something that is very large by the end of beginning of 2014 here you can see it a different way OECD refinery throughput has been well below the five year average over the last two years and in contrast the U.S. refining throughput has been well above so we would expect this to continue as long as the crude export ban remains in place another implication of the export ban has been that the NGL part of the barrel has lost value versus WTI and this has been reflected in the fact that you've seen many companies announce that they have started to consider additional petrochemical products additional petrochemical projects and additional products of what is coming from these NGL barrels I think an important thing to think about is what is the impact on condensate prices you've seen a $20 barrel discount to LLS historically but that discount has come in pretty significantly over the last year part of this is reflected on the LLS side of the ledger but it's important because it has an impact on the economics of condensate splitter projects if that differential is low then the economics of an condensate splitting project to produce additional from that barrel becomes less and so here I think there's been a lot of reflection on this mismatch of light incremental production and whether there is actual capacity to process it and I think a lot of it though depends on what your view is on what happens in the Eagle Ford this is a breakdown of the different qualities of production based on Bentech forecast from 2012 to 2019 and it basically shows that you have an additional 1.9 million barrels a day of light and light oil and condensate production that needs to find a home and about 400,000 barrels a day of new condensate splitter projects are projected but I think that it's important to understand that there are likely an additional 400,000 barrels a day of projects that are unannounced and the reason they're unannounced and we hear this anecdotally is that there is an unwillingness by companies to necessarily say that they are announcing a project because that would alter the market perception that there is a glut accrued so if the market perception right now is there is a glut and they announce an additional 400,000 barrels a day that may remove the arbitrage incentive for a sponsor of such a project to actually go through with it so I think what we'll see is again it's a bit of a chicken and egg situation we'll have to see what will happen here this is a graph of surplus NGL exports and basically this is the difference between the demand and supply for these NGLs and it reaches about a million barrels a day on our calculations by 2018 and then here this is important you can see that globally the IEA forecasts between 2012 and 2020 LPG demand growing by only about a million barrels a day so with the exception of the US LPG demand grows by about 600,000 barrels a day in that same period but the US has an additional 400,000 barrels a day of LPG to export so what does this mean? It means that we, the United States will be likely pressuring other prices of LPG outside of the US in the medium term so there are others that are much more qualified than I to speak about refinery yields and they've spoken here at CSIS before but this is just a display of the difference between processing a Bakken and an Eagle Ford barrel which is what an imported barrel is and you can see here the it's a little hard to see with the light but you can see that the yield of middle distillates falls by about 10% between for processing a local domestic barrel versus an imported and then also here once we have the additional Canadian barrels into the US Gulf Coast and into the United States you also lose middle distillate yield by processing those Mexican or Venezuelan barrels so I think it's important to keep that in mind what you've seen is refiners have been investing more to try to mitigate that drop in middle distillate yields but it is important in that the refiner is going to make that marginal that marginal dollar on being able to get additional money from middle distillate yields so that is where the investment is going to it is going to be an important factor in any additional investment that refiners will make so in my view the ultimate question is whether production will be curtailed and what I've tried to display here is again a different way of looking at the supply stack and focusing specifically on the different condensate windows in the Eagle Ford you can see here $52 a barrel $64 a barrel $67 and almost up to 80 Eagle Ford mostly the oil window lies in around 70 to 80 range and then also Utica condensate in about the 60 to 70 dollar a barrel range so given all of these potential pressure points there is a likely impact on some of these supplies to not be invested in in the next two years but afterwards it does become an issue for producer hedging if you look at the shapes of the curve right now we are in a situation where we are extremely backwardated and the back end of the curve is at an area of around $75 so although right now prompt prices may not reach these levels and we may not ever see the futures curve be a good predictor of forward prices it does have an impact on investment strategies and it does have an impact on as my colleagues have said on those nickels and dimes that the producer is able to make so just focus specifically also on the back end if you look here this is basically what is going to be producing in 2015 and those assets what are those assets break even prices and this is the curve of those break even prices of what is producing in 2015 and you can see here also that about 92% of the curve here breaks even at around $60 a barrel or below at about $50 a barrel 73% of this curve breaks even or below that amount so if we take the Alaskan North slope as an example in other words what happened when we to occur crude prices increased to $1.30 and while there are differences in situations we can take that price impact and apply it here you would expect that Bakken production might increase by about 50,000 barrels a day just looking at that $1.30 change and that's a back of the envelope calculation but it's still important and so what is the impact on the American consumer that this is really where the debate will be centering and of course we heard this debate come to the fore in the senate hearing that we had last week and I think the important thing to emphasize here is that in the past EIA has concluded many studies on this and whether there is actually relationship between spot and retail prices retail gasoline prices and they've basically shown that spot movements determine most of the movement in retail prices and I think it's the other thing that's important to take into account when you're looking at whether prices have actually changed is that what have been the relative discounts during a period of uncertainty or other kinds of problems so here in September 2008 pad 3 refining utilization fell to around 60% which was the lowest level at least since 1985 and so of course when you look at it without excluding that one month you may have differences in retail prices in the different geographies but if you take that month out of the mix then you basically get a situation where this is an indexed relationship between the U.S. and ARA gasoline you basically get a situation where there has not really been any change in those relative differences between different parts of the country and so here you have it for gasoline index 200 here you have it for jet fuel and also for ULSD and you basically get not much of a change so the bottom line there is that world product prices are the determinant for U.S. spot gasoline and so I think I'll stop there I think and just conclude this is just a display of what kind of economics might have to be in order for ANS to be exported we did have the window come up last year but it would have to occur on a larger and more sustained basis for a refiner to choose to take an alternative crude than ANS crude so assume that export restrictions remain in place for the next two years production growth does remain economic for both Eagle Fort and Bakken but the important thing to take into account is this mismatch between the light crude and condensate that comes from those light crude and condensate in the world in the rest of the world I think the other thing that's important here as an additional lever is that last year refining utilization averaged around 88 percent if we saw an increase of up to 89 or 90 percent which is possible but may not be likely in terms of refiners needing to make sure that to keep safety as a first priority but if we did see at least just an increase in refining utilization that would add an additional 100 to 150,000 barrels a day of another lever and then finally I think when we take into account what might happen in terms of any changes to the export restrictions we should also not remove from the discussion what is going on with rail build out and regulations there if we adjust these if we adjust the crude export regulations in LLS to WTI or LLS to Brent narrows then you have an impact on the economics of rail in terms of getting rail to the east coast and to the west coast so that needs to be taken into account and then finally there is the Jones Act and the impact of what any restrictions might have on whether the shipping industry would remain viable and be able to serve the same routes that it has before. So there is a bunch of chicken and egg issues here and I think that needs to be part of the debate also so I will stop there. Thank you Michael I think you are ending on having a discussion about the impact on consumer prices sets up nicely for the final presentation Kevin Book with Clearview Energy is going to walk through some of those considerations and how things might sort out and what the impact could be. Kevin is a senior affiliate with the program as well so he is often here and we are very pleased to have him here always great insights on developments on energy policy around town so Kevin Thank you David for having me and it is hard not to observe that this is a standing room only crowd. This is an issue that there is enough interest in that this very big, very beautiful new room in this very big, very beautiful new edifice is full of very important people and so it is humbling to come after three very smart speakers who are also very expert in the same thing I am going to be talking about in some form so I had to rack my brain to come up with things that had not been said before I did not entirely succeed and I will try to breeze through the slides that seem redundant. I think you have just gotten a very thorough and very good education in the issue from many perspectives and I am going to try to add just one more to them and once I learn how to use this device I can just use the keyboard that by the way was the slide that said nothing I say is true don't listen to it don't do anything with it and please ignore it but the challenges of saturation which is sort of what everyone has been talking about the oil glut, what it means politically these are the things I want to focus on perhaps more than the mechanics that have been so well discussed first this is the short term energy outlook look ahead at what we can see in US crude production that Mary dotted reddish brownish line at the top is production growth through the end of 15 the way the EIA saw it in their most recent release and it's a very happy story interestingly the price is diving down a little bit which isn't as happy a story but well above those asymptotic cutoff points the previous speakers mentioned in the $70 to $80 and this is the thing that we should probably be thinking about we want to see production ramp up for all of the best energy security reasons in the world and we should probably be worried that something might get in the way and stop it from happening and that something is this idea of saturation what is saturation well you could define it a lot of different ways but let's think first of all we're at the point where we've taken Michael's last 2% and we've used them in blending and we've somehow displaced the contractually advantageous crudes in pad 3 with and taken out I guess it was Roger's medium and we've done everything we can do in refineries running as hard as they can safely run that would be one condition another would be that you've displaced all imports well I think we've covered that in great size the economically viable modifications and capacity expansions which you've seen these listed the 400,000 barrels per day plus or minus 400,000 unannounced although all that have been announced may not happen when it comes to these sorts of expansions so you have to take them all with a grain of salt until there's actually steel in the ground but that's all been done and then you reach a point where the production programs that have been undertaken are undertaken you've already committed capital to the plan you planned and the world is different the price is lower and it's no longer worth investing and suddenly that upwards curve turns down this is the this is the saturation point this is the point where domestic production growth slows stalls maybe or even production declines that's the point we're talking about it's the one that's hard to figure out because in case you didn't just notice there were a lot of big variables that are hard to figure out okay so you could look at three differentials but you did that already now you're bored you could look at import substitution and production growth but it's been done so we'll move on guess what inventories built yes they did move on oh and by the way refiners were running like crazy until about September when there were turnarounds and when you're going to see these discounts and the US crews get most acute those are going to be during those turnarounds that happen in the shoulder seasons okay good glad we did that okay economic and energy security risk the one I just talked about the saturation point where production growth flattens or starts to taper off that's a lagging indicator right what had to happen first well everything else had to happen first and you had to exhaust the dollars not yet spent in the already committed capital plans and then you started to get to this point so the point when it arrives is not going to happen first second I don't know if you've noticed this but it's not production growth that our elected leaders are watching we're proud of it when it happens here in Washington it's talked about a lot but it's gasoline prices that gets you re-elected or voted out of office and the leading indicator of saturation a glut probably doesn't increase the gasoline price at the pump there's some reasons to suggest that actually their price dynamics that if you did export it also wouldn't increase the price at the pump and I'm sure we'll get into that discussion during the discussion that follows but let's put it out there now which is that if you were going to export and it incrementally added to the stock of crude in the world so that there was more production than otherwise would have been expected in theory that would add to spare capacity at least in the short term or until the next grievous disruption that nobody expected and you would have a world that was more resilient with less price volatility and potentially lower gasoline prices since this has been happening in some form for the last three years it's very difficult to actually prove it of course because how do you compare the world as it is now to the counterfactual that you'd like to argue but suffice to say that you can't introduce this much light sweet into the world without some stabilization effect and if you look at the outages we've had it's pretty clear that we've been riding pretty close to the same price irrespective of what blows up falls apart or collapses into civil unrest around the world which is pretty impressive so I'm going to give you a map you had all these charts I figured I'd try something different here's a map if you really want to get people to quit working for you what you have them do is you go back and look through all the votes in congress over a period of time and the resource base in the home states of the members who voted and you establish statistically but not in a way that I would fly to the moon on that all politics is local and you've now just proved that zero equals zero and you need to hire a new associate however if you look back over our most recent sample period members in congress vote for what's in the ground about 73% of the time you may think well this is weird why am I talking about congress there are three ways the policy for exports could change and congress is the third one of them the first is the administration using executive powers vested in the president's authority under various and sundry laws that this think tank and others have discussed including the export administration act and the energy policy and conservation act the second is the bureau of industry and security of the department of commerce can go ahead and make a ruling on its own it's been asked by one notable senator from Alaska and last week we had an exciting time I think all four of us when clients got a news article that said that they'd actually made a decision which turned out not to be true but it was an exciting day for many involved but in the end there's some possibility it actually takes congress to work this out and so it's worth at least discussing how they make their decisions and if they vote for what's in the ground at home let's take a look at the distribution of oil states shall we so the top ten oil states are about 93% of onshore production and you can see where the big ones are Louisiana is an oil producing state it has other valuable industries as well including refining North Dakota is a very notable oil producing state very recently but these are not the same as the states where refining capacity is located not entirely about two thirds of them match up which is pretty good but there have been some people and I'm not going to suggest that there's anything like a debate actually happening between refiners and upstream producers but there have been some would suggest that there are competing interests that must be resolved in terms of whether or not the acquisition cost of crude is something that should flow to the refiner or whether that perhaps should be given to the producer to encourage greater upstream production suffice to say this means that the debate that you're going to have if it were just about what's in the ground at home is a debate that can't happen quickly or soon it's also worth noting that this isn't a majority of states this is a relatively small minority of states one thing that happens in every state though is that people drive and a statistic that seems to be probably the most interesting one I can come up with that hasn't been used already is the share of disposable income that goes to gasoline on a state basis it doesn't really matter how much you drive of gasoline is cheap and you're rich it doesn't really matter how cheap gasoline is if you're poor and you drive a lot and so the darker the state is the share of gasoline by our model which is about to be updated so this will probably change a little bit this is what the fight is about this is where the political discussion takes place and the question is do you feel it at the pump does the consumer benefit is there tangible consumer benefit and there's going to be a need to study that deeper than I have for this slide okay so gasoline prices which everyone cares about tend to correlate much more closely to global crude prices the Brent price here so what you have is when the blue lines point down that was a month when gasoline correlated more closely with Brent than with WTI and I think you get that picture you've seen something like it before okay so let's talk about one of the distributional impacts in this policy discussion if refiners are getting crude cheap and making lots of refined products and shipping them overseas there is something that's happening the blue line trending up is the growth of products exports on a net basis which you've seen in great detail and the blue bars are the net trade and petroleum and products on a quarterly basis which you can see is still a negative number but about 27 billion on a quarterly basis less negative than it was at the beginning of 2012 so that's a pretty meaningful impact from a balance of trade perspective and of course the argument is not a new one there was another thing that was in sort of a recent debate here in Washington you probably missed it but there was some talk about LNG exports at one point and there may have been a question about whether it was better to export the raw material or the finished product for all of a variety of reasons and this is similar in form but we actually have a balance of trade benefit from refined products exports so if you didn't have the whole map of people scared about gasoline prices it has one factor to overcome in this debate you also have a tangible balance of trade benefit that matters to some people here in this town okay now let's just imagine that Congress does debate this what about the Senate Energy and Natural Resources Committee I see some alums of that committee here in the crowd so I want to be very tactful about what I say but it is probably one of the last bastions of bipartisanship in an increasingly fractious town and let's assume that they get along anyway irrespective of what's in the ground great, what's in the ground as it turns out the Democrats have about 11% of the nation's crude oil production through October of last year and about 27% of refining capacity and look at that Republicans have about 27% of the crude oil production and 8% of the refining capacity I'm not going to say this is going to be difficult for partisan reasons these are economic reasons that happened to perfectly hue to partisan division in spite of the fact that I've spent the last decade plus showing why energy policy isn't partisan but in this most nonpartisan of committees I'm sure they'll come to an easy and speedy resolution to this complex and discordant balance of interests okay so the thing that comes up when the Washington Post which I've always thought of is a newspaper that's leaned a little bit left of center starts saying maybe it's time to look at crude oil exports I get heartened and I think wow look at this pro trade discussion happening in my local newspaper and then they conclude by saying because there is a distributional consequence of crude being trapped which is that all the rents are going to the refiners well that's an easy thing to show actually what you have in the gray bars is the Brent WTI spread which, guess what, correlates very closely to the generic crack spread the 321 crack what a refiner makes in theory from a barrel of crude in the products relative to the cost and the blue line is the gasoline price on an average basis and the money made has gone up a lot the gasoline price hasn't gone down at all this is of course the distributional question now having already explained to you that the gasoline price doesn't really care much about what the US crude oil price is it doesn't change very much the question of whether a specific industry sector is entitled to capture the rents for having an acquisition cost that's artificially or deemed artificially low is showing up in the Washington Post how sophisticated we have become okay exogenous factors are the final problem here let's imagine that you're a member of the House of Representatives apparently you have to ask for your job again every two years I'm glad I don't have to do that apparently you can argue till you're blue in the face about all the economic upside particularly if it happens to be in your state or district but you probably want to pay attention to what happens to the world and that means that for example if you induced a half million barrels per day of crude that goes into the giant global crude pool which is of course neither hymogenist nor a pool you would probably get based on our model which is roughly speaking about six dollars or so of rent price depreciation until something else happened unless of course you had an event that took 500,000 barrels per day off the market in which case the way the model works more or less it's about the same price increase let's imagine you're the elected official who voted for crude exports just before something happened in the world and well before the economic benefits that would go to the world from those exports had a chance to be realized that I guess puts the politics in perspective thanks, I guess we'll go to discussion now Kevin thanks for ending on that note to tell us yet again that economics doesn't trump politics so we'll go forward well first join me in thanking all the speakers for these presentations where we start on this is a really great set of presentations a lot of material there I'm hopeful that all of this will be able to the speakers will agree to put up on the website so you can go back and look through it in more detail so we'd like to move to the question and answer period I'm sure there will be more than a few questions so we have a couple of ground rules we like to follow in terms of the questioning if you can identify yourself and your affiliation would be great if you can also put it in form of a question it's always helpful as well but if you have a statement to make of disagreement that I think would probably provoke a response from our panelists and then finally if you can wait for the microphones to reach you before we do that but as we're getting started I'd like to get the thoughts of the panelists and there are some implications here of where you would come out but I think it's useful to just go ahead and touch on it directly do we think that if we move to a world of allowing exports into the marketplace we would see lower world oil prices I mean it's obvious you're increasing supply in the global pool how you calculated I'm not sure but you'll see an equalization if you're on between the global price and the North American price so it's down I guess it's on clearly as the US has backed out Weissweig crude there are a whole bunch of other moving parts including the Libyan disruption which is not insignificant but by and large West African crudes have lost their premium to Brent by and large Caspian crudes have lost their premium to Brent so yes Brent is traded in a market that's crude short and that should put a relative premium on it since it needs to attract crude into that arena but I think it's sort of indisputable that when you have Weissweig crude backed out let alone imports coming out of the US into other markets that it will have a significant bearing on the most important benchmark in terms of what it tells you about waterborne crude levels it also has a significant impact on differentials between light and heavier sweet and sour crudes as we have seen on the US Gulf Coast to the degree that light crude is depressed heavier crudes have to be depressed in order to fight for a role in the refinery diet so all other things being equal the answer is yes this is contextually also not just the United States story and Kevin at least went out and said the EIA may be wrong and all of us who look at decline curves may be wrong and maybe US production is going to continue to grow and maybe certainly the data don't indicate unless you like to look at where you know capital expenditures are going now they don't indicate where the future may be and the future looks like it'll be rosier in terms of US production but it also looks like it'll be rosier faster on a global basis than people have tended to think because the revolution that's occurred technologically can be applied to a very widespread resource base and there are places in the world that do replicate in many ways the situation in the United States and it's not just parts of Canada but it's parts of Australia and parts of the United Kingdom and I suspect that just as there now is a in Saudi Arabia run on shale gas that we will see a significant spread across the planet where the resource base is relatively abundant this should lead to lower prices as well although it's I think indisputable that exports of light crude out of the US would have this depressing impact both heavy and light sour and sweet crude I would agree with that I think the only thing to add is that as you do have if you did have additional exports and you did have additional production there is the potential that that would reduce the call on OPEC and that would reduce possibly Saudi production or other Middle Eastern producers production such that your margin of spare capacity is thus more able to cushion the situation of where you would have a problem or a disruption I agree with Ed's point that not only do you have this title revolution being felt here in North America but also in Russia and in the Middle East and I think we're only seeing the tip of the iceberg on that and so yes I would expect prices would go down slightly you put me down for a yes as well it might add that it might not be the biggest thing in the near term we have to quantify the size of this contribution to global supply there's other things that could make big contributions to global supply in Iran deal that's the stores lost production so in terms of global impacts I think Ed's very right to sort of look around the world at other places where that supply may come from because our crude is probably not going to be the only thing saving the world for low prices I think we can't forget Ed's point in his slide about the trends in terms of consumption as adding to that pool in the global Hi Sarah Ladislaw with the CSA's Energy Program thanks very much it was really wonderful and substantive and great we had a session here several months back where Rest in Brazil talked a little bit about or sort of foreshadowed what's happening within propane markets now and so in the interest of sort of completing the circle on education of what people are talking about in oil and gas markets in the United States and product markets in particular there's a lot of people running around town trying to figure out where all the propane went and one of the points that sort of the counterpoint to what we were talking about here which is what happens if you export crude versus product is and what the impact on gasoline prices is which I think you've all sort of identified as a very sort of viable political factor that's very hard to put your finger down on in a concrete way that helps people's understanding is why on earth in a place where you've got so much excess would you have shortages and is there sort of another question I'm sorry I'm not wording this tremendously well but is there another question about where this argument could go that says gee should we be better preparing the refining sector for things like responding to cold snaps like this right and so there's a lot of people talking about how propane shortages are really sort of the artifact of a perfect storm at present but it's hard to understand why that's happening when we just saw a mess of slides about surplus and so could you want to talk about put sort of that current sort of political and market based concern in context of what you were talking about here is that clear at all? I'll start on propane but it's really not a supply issue I think it's an infrastructure and distribution issue the question is how quickly our infrastructure is adapting to the changes in supply and demand and how we put the infrastructure together so we see it in propane now we have plenty of propane the question is do we have it in the right place at the right time and the right quantities and again here I think it's a transportation issue but we're seeing that also on the crude side where the infrastructure cannot move as fast as the changes we're seeing in production we have areas in west Texas right now where the light crude is so light that we can't put it in the pipeline because the pipeline doesn't allow commingling of crude death light so you need to truck it the infrastructure cannot grow as fast as the supply because supply also has been surprisingly strong both in the recent years so I think it's more how the we connect the dots than not having an or having an issue with export removing supply from the United States and I think the same thing is true on the natural gas side the gas is needed in places where the infrastructure is not there to deliver it the deliverability problems have been significantly reduced but not eliminated and part of the deliverability issues political the governor of my state and others around him would allow the building of a pipeline under the Hudson that might have changed the New England gas balance a little bit an interesting thing on the gas price bike is that the ARB would still work on an LNG export basis so that you know it's kind of comforting to know that as gas continues to ramp up and supply to meet pipeline and LNG export projects that the price impact is probably going to be significantly more muted than the antagonists of those projects would have thought. I don't have too much else to add but I agree I mean this was very much a confluence of issues in terms of crop drying demand in terms of the geographical issues and if you look at the seasonality of propane and the way that the inventory behaved for propane I mean what may happen is the market may react differently next season and hold more inventory and that is something that Amy Myers-Jaffee referred to last week in her testimony that what there could be is a difference in how refiners and how different participants hold inventories for these kinds of situations and that could also serve to mitigate the kind of price impacts that we've seen this last year. A cool component and I think it's pretty straightforward but the words I'm cold resonate with everybody. The words short run dislocation wrought by infrastructure insufficiency take too long to say. I decided to stand up since I couldn't see about a third of the room so I'll follow by one over here and one in the front. Go ahead and ask your question I just wanted to get the microphones moved into the... Bennett Johnston Johnston Associates Is it clear how much refining crude oil has to have in order to constitute product eligible for export? I've understood that some producers are just stripping off gases and trying to call it a refined product eligible for export. I guess I'm the one who has to go into part 754 of the export controls for short supply. There is a statutory, a regulatory definition as far as I know what's interesting is I haven't seen anyone test it yet and really egregiously run just a quick quick wash through a warm bath and call it a splitter and then try to export the residual crude which is 99% of the feedstock crude. I suspect that somebody may do that but it's an expensive test if you're going to build infrastructure in the hundreds of millions of dollars to do it. Good morning, I'm John Kenees with Heart Energy Consulting and the question is we're talking about crude exports but there's a huge increase in condensates being produced and is Commerce Department actually looking to change to reclassify that and secondly what are we going to do with all the NAFTA out there? Nobody at this table is confident to answer that question so I won't add to the lack of knowledge on what the Commerce Department might actually be doing and reclassify it. However I think when you look at NAFTA and even ethane and look at Kevin's picture of where exports have been I think the more intriguing number is adding up all hypercarbon exports and projecting forward those exports LPG market is interesting and Kevin's picture implied by 2015 the U.S. will be in all likelihood a larger LPG than Saudi Arabia which has sort of significant impacts of note in the global market but you add up current hypercarbon exports and it's the largest chunk of the U.S. exports it's bigger than agriculture it's bigger than transportation equipment otherwise known as Boeing airplanes and it's bigger than capital goods and if you continue to project forward the numbers get bogglingly large in terms of how much hypercarbon exports are an important part important component not just of the trade balance but of U.S. national interests when it comes to looking at the export sector and it gets tricky to really do a decent extrapolation on because you have to think about whether the remaining restrictions on crude oil exports are going to be modified but it looks as though by 2018 or 19 the U.S. hydrocarbon total position including pet chems is in surplus not in deficit and it continues to grow after that and just to muddy the waters on issues that we haven't discussed yet on crude exports that may or may not be allowable or difficult to deal with politically clearly the same legal structure that has facilitated relatively free exports of crude oil to Canada can also apply to Mexico and certainly it's rational for the Mexican refining system to import some light crude from the U.S. maybe build pipelines to inland refineries it would be cheaper than upgrading refineries and getting a better mix of transportation fuels it's hard to know politically other than an election year what would stop that from happening then you know you slide over to FTA countries and just to give you one example Israel where you know let's say the Prime Minister of Israel asked for a negotiation under the FTA with Israel and could demonstrate that it is less expensive to import crude from Louisiana say than from Azerbaijan given current price differentials how difficult politically would that be to negotiate I just raised that as a question so I think the NAFTA issue and the Kahnaseid issue are telling and clearly one of the reasons why more splitters aren't being announced is uncertainty about where that regulation will go and whether it would render less profitable the decisions on those splitters Hi I'm Karmine Nafilio Department of Energy the U.S. has been very successful in exporting petroleum products and of course from the Gulf Coast refineries there have been a lot of reasons why they've been able to do this good markets in Latin America where there's insufficient refining capacity complex refineries with good middle distillate products lights and good supplies of heavy oil etc and in particular very low gas prices natural gas prices especially compared to other refineries in the rest of the world and in particular they haven't really benefited that much compared to say mid-continent refineries as far as low oil prices so and I noticed that Amy Jaffe's testimony on the Hill sort of presented this as a choice between exporting oil or exporting products now my question is if we did exports how much of those exports would be offset by corresponding imports of heavy oil or heavier oil or how much would be offset by exporting less products it's hard to know in part because however dysfunctional Washington may be when it comes to energy policymaking Ottawa is more dysfunctional and Canadian crude which should be exported by pipe into the Pacific Basin to bring the highest net back to Canadian producers is stymied by politics in our northern neighbor so yes I think that we would in a world of exporting we'd also be importing and probably significantly larger volumes from Canada and Carmen you know as at least as well as anyone else in this room that the US is not one economy that comes to trade flows we are arguably at least three maybe at least two but three different countries when it comes to when it comes to the petroleum sector and to some degree the natural gas sector so you know whether there are exports in a perfect equilibrium world from the US Gulf Coast there should be in that perfect equilibrium world imports of crude in various places certainly the East Coast should be an importer of light crude if the pipeline system infrastructure were built and way to equalize better Canadian crude with waterborne crude and Bakken crude with waterborne crude just to add one one element again if you are in a perfect world in the EU also another area if you could reduce the size of the refining sector because it's not very profitable you could lose another million value per day of refining which again here talks about the competitiveness of the US refiners right now cheaper input but as you said cheaper gas they will remain very competitive even in an open world so there is market share on the product side that can be used to be gained here if you have perfect policies on the other side too I was going to give Paul Connors from the Embassy a chance to respond but I think you may have stepped out of the room on your dysfunctional Ottawa comment so at any rate I think there was a question here and then there are a couple of hands I saw okay so we'll take one two and then three after this question. Thanks very much I'm Joanne Thornton with Policy Connections International which is an international trade policy consulting and I wanted to follow up a little bit on some of the discussion we've had already about trade and Ed's comment in particular about FTAs and I'm just wondering to what extent you all see the US trade policy agenda affecting this debate over oil exports or where it fits the US trade policy agenda we have negotiations going on with our Pacific Rim trading partners and with the European Union in particular and I'm wondering do any of you see our trading partners weighing into this debate either because they're potential customers or because they're feeling pressure on the downstream product competitiveness side and it's reminiscent of the argument that we in the EU made together in Mexico versus China in restricting raw materials exports and rare earths so anyway any comment you might have on the trade policy agenda as I mentioned in the speech what has happened in Europe is largely in part a result of the US having access to this additional cheap feedstock and so in the US and the EU are going down this path in negotiating this trade agreement I guess the short answer is I wouldn't rule it out although I'm not a trade policy expert but it is clearly a part of why the European refiners are in such bad shape right now I think the other issue is whether the WTO whether under the auspices of the WTO I think the issues there become much less clear cut as the regulations and the articles that are part of the WTO are not clear in that they don't allow a country necessarily to raise this as an issue and also the US holds particular weight in that organization there will be other considerations there and whether another country would actually raise it so it suggests that it cuts two ways particularly looking at the TTIP negotiation if Europe is going to shut down all their unprofitable refineries and we're going to be the fuel supplier of choice their fuel quality directive creates some challenges for high complexity refineries running their co-curs and capturing big margins so that kind of discussion is clearly going two ways and the question is whether it hastens something that is already being discussed in Washington or compels a resolution to the current situation faster than anything else and I would guess that probably waiting for multilateral treaties to be ratified other things will push this debate along sooner. I agreed with the point you made Michael earlier about gasoline prices following grant prices makes perfect sense to me and the implication of course would be that consumers haven't been helped by trapped crude in the U.S. nor will they be hurt by exports however less than a month ago Barclays issued a report saying that there were tremendous gasoline savings from the crude being trapped here so is there an arbitrage opportunity in Barclays or what's going on? Yeah, I think it's a point worth clarifying and we I'm not going to take issue with the merits of the analysis I think that what needs to happen is that there needs to be a full review and an understanding of what happens what has happened over the course of time and as I mentioned in what I said you need to take into account the September 2008 month and for Ike and Gustav which is largely the which largely led to that disconnect being shown and largely led to that $10 billion figure so if you take that out then versus they would promise Michael we wouldn't address that to him directly that question yes somebody had to there's a question here right behind her Fernando right one more thank you very much my name is Adrian I'm from the Department of State one region in the world that constantly gets underrepresented in this discussion of crude oil and things like that is the Caribbean and I've always wondered at least from the point of perspective from academics and things like that what are some ways that the Caribbean can introduce methods of reducing the tendency on crude oil to put into context when you mentioned oil refinery production as profitability on the Virgin Islands there is or used to be what was called Hovenza what was the third largest oil refinery unit in the western hemisphere and it closed citing unprofitability because they were using the same product that they were producing for consumption and I was just wondering if I could get your thoughts on that it is a large refinery in the Caribbean actually which I think can import US crude if I'm correct yes everybody said yes but I think it's a heavy refinery mostly so it needs heavy oil rather than light oil the other issue is Hovenza used to be a big gasoline machine to import back into the United States so it was based on processing crude at the time when the US had a large deficit in gasoline so it was really geared toward that the US had a very large export of gasoline so the question is where the market for that refinery is not very clear and I'm not sure it's very competitive because it doesn't have the cheap gas that most refiners do have in the United States and the other point is that sadly the breaking down of the Venezuelan refining system has had a tremendously adverse impact on the region exogenous factor and that is an additional lever when we talk about levers and ways in which in the future there could be a way that that refiner might come back into service and that is an additional outlet for additional crude supplies whether they're from Canada or the United States I've seen a couple of hands on the right hand side here so Lou and then there's a question I think in the back over here Lou Polarisi Energy Policy Research Foundation if you run a network model we have sort of a modified if you think about this it's a big deadweight loss right I mean it's a deadweight loss because we can't move the crude either externally or efficiently internally and it seems to me from a political point of view we think you can get well head values up anywhere from three to five dollars a barrel but that's revenue to not just return on capital and labor but state, local and federal governments and I'm wondering whether that's a theme that Congress might be interested in they tend to be interested in money and I'd be curious whether at particularly if you looked at the efficiencies I mean the infrastructure system is adapting as fast as it can so we're seeing crude movement growing big pipelines coming online this year the rail is improving and we're seeing a lot more in the East Coast so it's really the we go back to this issue of the velocity of the change is can we build infrastructure as fast as we're growing production it's taking time in term of Pitchett here of local revenues to local government I don't know I mean this is a political question I think it's very local and in different places will have a very different impact I mean consumer might have a bigger voice to some places than others the Dallas Fed has done several studies on the subject so they've looked at the employment impact in the 23 counties of the Eglford which have been great and they've been greatest in the poorest of the counties but across the board employment is up above the Texas average and importantly in terms of county revenue skyrocketing revenue significantly larger gains than in any other place in Texas let alone most places in the country Roger is right it's at the micro level and the impact in an area where there is both production and refining is significant you're talking about sort of taking refining and upstream production together a little over two and a quarter percent of GDP which is up from what it was this morning I was talking to somebody who used to work for Vice President Biden and we were talking about this very topic and I said but you probably don't think of that as a very big number and his response was no it seems like a very big number and I guess in the context of the current economic situation there is national concern outside of those localized impacts there are broader economic indicators that are actually moved by upstream production in a way that perhaps in a more robust job creation environment there might not be Kevin I would go back to your earlier chart and say does that override the gas price question from a political perspective I think in the end people see their gasoline price about 40 times a year and they think about it every time as a cost not very many people in the confines of Washington DC even see a unit train of crude let alone an oil field so in terms of where the decision centers are and where the population centers define house districts you really basically have a gasoline discussion not an upstream discussion John Powell EIA if the U.S. exports condensate in light crude where is that going to go what refining center will accept that crude and what will the U.S. refining system do to replace that lost crude will they cut refinery runs cut exports or import other world or just Canadian crude the export issue I mean the light oil market is a very large oil market so it can go many places can go to Asia can go to Europe can go to Latin America so I don't think there will be an issue of finding a place for these barrels the other side of your question is would that reduce what the refineries are taking I think the U.S. refineries will take as much light sweet they will need because they're the closest to the field and they have a cost advantage and they will import what's the other crude they would need to optimize their refineries I mean one way we need to think about it we need heavy crews for the U.S. refining system and the global market needs more light sweet so the way we should present it is we should be able to import beer and export champagne because that's the way market will look at it we can put these light sweet onto ships and we'll find many markets for them Jerry Cunningham Bungie Global Markets in the context of both the shale revolution and the debate about whether or not to export crude oil could you discuss the prospects for the offshore Gulf of Mexico production industry is that long dormant since most of that production will be in the area that is currently looks like it will be saturated how does all this play out for and given the long lead times for those investments how does all this play out for prospects of production growth we're going to see increase in production in the Gulf Coast I mean we have a number of projects starting 15, 16, 17 so we're going to see growth the question you're asking is right is if there is no resolution on this export issues how do you approve new projects in the Gulf Coast and how do you approve the process of the project into that 5, 7 year period when you don't know if the refiner's on the coast can absorb them and or how the price differential are going to be and if prices of these offshore crews are going to start to be linked to WTI which they look like in even if some of these barrels are not light sweet and that medium sour, but that in a way will just Continue the same trend which is displacing Imports if the price differential or if prices are too low We will probably see delays in this project, and I think we're already detecting some delays in approvals Hi, my name is Ben Salisbury with FBR capital markets Formerly one of the people who made those maps for Kevin and it occurs to me that the the biggest issue in us energy trade policy right now Is the environment which hasn't been discussed? So I was wondering in terms of volumes net Global consumption with export if we repealed us crude export ban next year five years from now What would be the net greenhouse gas benefit? I mean we're talking about exporting a few hundred thousand barrels a day We're talking multiple million barrels a day And what's the projected greenhouse gas differential net globally? Thanks. I think it's too late to say you're fired So there is a trend. It's a good. It's a really good question, Ben And it comes in sort of in the context of where environmental challenges have been going They've been going to infrastructure that connects resources to markets And the logic is that without this infrastructure there will not be an incentive to produce Therefore stop the infrastructure keep it in the ground and the greenhouse gas emissions will be avoided that logic is not actually part of the The decision process of the the permitting agencies under NEPA right now But it is the logic that underlies the Keystone XL final environmental impact statement And so clearly it's going to be an important question if you look at EIA's Examination of LNG exports and greenhouse gas impacts. I think you'll get a similar result. They noticed that exports Would increase production which would increase greenhouse gases and the question is whether it's by a lot Or a little relative to what you think is an important baseline If we're gonna hit a 17% national target by 2020 this probably doesn't distort it Not significantly compared to other things, but it's not zero You can't drill a hole and produce a hydrocarbon without having some sort of implicit impact We're starting to get close to the answer get an indication of how many more questions we may have Okay, so we've got three why don't we take all three questions together and then the panelists can choose Which one they really want to answer Ken my record world docs our total oil production consists of much more than just shale oil How does the cost to produce oil by conventional means by biofuels deep water drilling? Canadian tar sands compare to tight oil My name is Frank Bremant private investor my question is a bit esoteric, but I like to ask it that is I've noticed that We've had some pretty dramatic Variance now between what the commodity market futures products are really focused on which is WTI in the US Versus where the dynamic plays on the voters are as you mentioned earlier here protein. It's gold out there What's the what's the your vision or what's your interpretation of the futures markets? Particularly the energy futures market as a whole has been able to keep up with this battle rhythm that we're seeing here and all this Information that's been flowing through here Bill Murray with energy intelligence group. It looks like we were talking a lot about the differences in the economics of the Of the oil price versus the politics of the gasoline price But from some of the especially Kevin's presentation it looks like There's gonna be not an agreement to export anytime soon in Congress and so really we should perhaps later this year We'll be talking about what is it? What will what will the link price of all the the the oil blends be in the United States and by the end of 2016 How depressed will it be? I mean is that the trend because I don't see You know the low-information voters is the gasoline purchaser and that seems to be what we're what we're really dealing with right now Okay, so I don't know if you maybe we should just start with Rajay and you can address the The ones that you would like to address I'll start by the last one the question is really again how the political system System adapt to the velocity of change on the supply side and And how much time we have for the political system to adapt you know We have another year. I think where we'll find Decent market for the crude supply coming on and 15 become the question mark I think pretty much for all of us that It could go either way and we might have a very large seasonal surplus or Starting to have a structural surplus Into our balances and we'll see bigger discount correct So the the price is gonna have to be what adjust if we cannot export so it goes back to the price curve question Right now if you look at Brent versus WTI the future curves, they're showing a growing discount between WTI and Brent, but we don't know exactly how big the discount is gonna be and the way I put it is it's difficult to to forecast breakpoints Not slow slide here, but at one point where You know during a maintenance season or even Not a shoulder season, but a full refining Demand season where actually the pipelines are sending so much crude into the Gulf Coast that we start to see discounts at these times I think the market and all of us will have difficulty to pinpoint when and how much but we might have Periods in the next 18 24 months where we might have very wide discount Which in a way raised that question of export even higher than we're doing today Gonna focus on the middle question, which was on WTI and other other prices It's really interesting that to compare WTI Brent on a deferred basis But that really is looking at the deferred price of WTI which was converging with Brent Six months ago and is now steeply discounted against Brent Compare that with natural gas where we just saw this run-up in the prompt and virtually no change at all in the deferred when you look at futures curves It's not useful. I think to think of them as predictive, but rather to think of them mostly as the supply and demand for Deferred prices at different strike prices today rather than some indication of the future and it may be that If you look at some other factors you get a clue to it WTI seems to have yet again significant length in terms of the position of non-commercial Participants in the market yet if you look at open interest, it's really collapsed significantly so the number of market participants has been reduced and it's probably the case that due to the retreat of both banks and more particularly commodity hedge funds from speculative trading that that drop in open interest has come out of Positions that were on the deferred part of the curve and it may it may be at least some newspaper reports indicate that There was significant liquidation by some market participants in a very thinly traded Part of the market and if that is the case then we should see that convergence Equilibrium returning Again, it's not going to be a predictor of things, but it will just likely be a return to some kind of norm When total open interest gets readjusted by the market participants propane happens to be a Traded commodity that does not have a well-established highly liquid contract in it so You get liquidity In an informal market, that's not very deep and not very long in duration and I think That's what makes it so difficult to Think through these things if you look at Marcellus natural gas production, it's steeply discounted to Henry hub There's virtually no relationship to the price dynamics at Henry hub So I think the real answer is you have to be very careful at the way you look at these and Don't try to get the wrong answer from something that can't give you the answer that you're seeking I think just to to pick up on the question about how depressed oil prices might be in 2016 scenario Or 2015 2016 scenario assuming that we don't have any change in the export regime You know what we we'd estimated that it would that LLS that you basically would end up having a floor under LLS as implications for for producers clearly But I think there's other implications For on the light product side as I noted that you have 400,000 barrels a day of incremental LPG Export capacity and export capability into a market where there's only 600,000 barrels a day of LPG demand growth So the implications is that there will clearly be product price pressure on the light ends and that may serve to to reduce refinery The refinery output of those of those products if they're not able to make I guess the the one topic that didn't get covered was Conventional oil production, and I think when of course senator Johnston was in in the Senate Deepwater production was unconventional and extremely complicated and risky and of course it still is but One of the areas where this export policy really makes a difference or could make a difference is that explicitly Production from the outer continental shelf is prohibited So what you have is a debate which is starting much like the LNG debate to fracture into certain markets Alaska LNG exports do not compete with the lower 48 for example Is there a world where we could envision this debate taking it taking a turn where OCS exports from the Gulf of Mexico? Are excluded from the current prohibitions because they're effectively not needed or they're not as desired Could you open up a market that was stimulative of production? And it's not the most conventional production but you know it is It is clear that high oil prices will stimulate as much of the conventional production as can still be done But I think it was I think it was Roget slide at the very beginning all the growth. We've seen has been light sweet and all of it from tight formations So I mean at least for the most part. That's really where that's really where the the issue is coming from It's not it's not coming from enhanced oil recovery in conventional fields Well, this has been a great Session today. I think a lot of material a lot of information before we close I would like to mention that next Tuesday. We're doing a session which will be review on natural gas resource Assessments, which I think will have some very interesting Information for those who are following that so please now join me in thanking the panelists for a great job