 Okay, good afternoon. Hi, good afternoon to everybody. Thank you very much for making it out to CSIS on a snowy Washington Day. Some of you actually come from places where there's significantly more or less snow, but this is how we do it for two inches of snow here in Washington. My name is Sarah Ladislaw. I'm the director of the Energy and National Security Program here at CSIS, and I'm really pleased today to be able to present to you a new study that we have spent some time working on called Delivering the Goods, Making the Most of North America's Evolving Oil Infrastructure. A little bit of background for those of you who are not familiar with some of the work that we do here and where this report fits into the context of what we've been doing the last few years. We've been focusing a good deal on unconventional oil and gas development probably since about 2009, and one of the first ways that we started was looking at a study that looked at the upstream impacts and concerns about unconventional gas production. And at the time, most of the focus was on how much resource was out there and how long could it be produced and at what cost, and whether or not the environmental impacts of producing that resource would be a game stopper or show stopper in any way, shape or form. We spent a good period of time focusing on all of the sort of water and seismicity, air quality and other issues associated with developing those resources and basically came to the conclusion that yes, in fact there are issues to be managed on the environmental side, but they can be managed, but it takes work to manage them. And I think in the intervening years we've seen what that process looks like with industry sort of upping their game in terms of best practices and approach, regulators increasing how they're regulating and understanding sort of the new and evolving practices. But it's an ongoing process and one that we still sort of continue to track and deal with each and every day. Out of that process came two sort of fundamental questions. One were what were the geostrategic impacts of U.S. tide oil and unconventional gas development, and the new sort of strategic posture and energy for the United States. We spent a good part of the last year studying that issue and put out a report, a three-volume report sort of dealing with all of the market and geopolitical impacts of shale gas and tidal production. And then the second question was really what's happening with infrastructure, both in the United States but within the North American context. And part of the reason for that was a two-fold question. One, was the infrastructure going to be able to get built in time or would be a constraint on sort of the development of these resources? And two, what would the long-term effects be of all of the different changes that were going along with the infrastructure changes that we were seeing? And so we launched this project, which was really looking at midstream oil infrastructure, the pipes, the barge, the rail, the processing facilities, getting oil from the place of production to the place of processing and delivery. And so we've basically written up sort of a snapshot of what we came to through that process and then teed up some policy areas that we think that that changing oil infrastructure tees up or raises both because of the nature of the infrastructure changes that have taken place but also the sort of nature of the policy issues that will in turn shape that infrastructure going forward. And so what we thought we would do today is I'm just going to go through the outline of the report. We have copies here for everybody that is interested in getting one. But then, there you go, free advertising. But then have a bit of a discussion on the contours of some of what we've been talking about or what is in the report with three of the best experts that we can find to talk about these things. We're very, very pleased to have with us today Adam Saminsky, who's the administrator of the Energy Information Administration, a longtime friend here at CSIS, to talk about his view of sort of North American oil and gas development, but particularly what's happening with oil prices because he figures you're all going to ask him anyway. So why not get it out of the way and tell you. And then Harry Vitas, who is a Vice President at ICF International, to talk about the changing oil infrastructure from sort of a technical perspective, he's one of the best people to sort of explain what's happening to sort of the pipe and the rail and the infrastructure, both in terms of what's been happening over the last several years and what may be happening going forward, especially given some of the key questions in this new price environment. And then finally, Kevin Book, who is not only the head of Clearview Energy, partners, a well-known analytical group here in town, but also privileged to have him as a senior associate here at the CSIS Energy Program and also an author on the publication. Before I go through what the publication says and sort of start the presentation for today, I just wanted to thank the authors on the publication, some of which are here today. Frank Verastro is unfortunately away, but my colleagues, Lisa Highland and Michelle Melton, if you could just stand up, wave your hand a little bit, okay. So I know it may be lost on several people, but condensing what's happening in terms of the sort of production and changing quality and infrastructure on a North American basis and just something that's readily accessible for policymakers is no small feat, and Lisa and Michelle deserve a huge amount of credit for doing that in a way that we're proud to sort of represent here at CSIS. So last thing before I sort of go through what we say, we did not sort of conclude the policy conclusions for the policy areas that we raised for discussion. And part of the reason is is as we were going through our process of sort of socializing the issue and talking through some of these various issues that we think were raised for infrastructure, for consideration, we didn't necessarily think that they were all ripe for conclusion. Many of them are ripe for strategic review, and we think that in 2015, actually in my perspective, especially in light of the oil price downturn, will perhaps make this a great time for the U.S. and Canada and Mexico to think anew about some of these questions. So I'm just going to quickly go through what we did. Like I said, the report focus was essentially twofold, a snapshot of the changes underway in North American's oil delivery system. So what has happened over the last several years up until about the end of 2014? Explain how the changes in midstream infrastructure are prompting a debate on various energy policy issues, which I'll go through in a moment, and then provide guidance to stakeholders and policymakers who are considering some of the economic, environmental, and security consequences of these policy issues. We actually think in Washington these days it's pretty hard to get even-handed information about some of these very contentious political and energy policy issues. And we really tried very, very hard to capture what we thought we were hearing on all sides of the debate about where some of these issues lie. We expect that some people will disagree with us on how we framed it, but that's by nature, I think, an indication that we landed somewhere in the middle. So our project approach and structure, for those of you who are familiar with us, is sort of how we do our process here. We look for the best experts we can find on various issues, bring them together, and have a series of informal, not-for-attribution, consultation exercises, sometimes in workshops, sometimes in one-on-one. And then we also have smaller, in-depth, issue-based discussions to look at sort of market and policy developments. And we also have some big events looking at some of these things. So last year, for those of you who were among our audience, we had several sessions focusing on crude oil exports, several sessions focusing on the Strategic Petroleum Reserve, several other things that sort of came up in the context of what we'll be discussing today. So what did we conclude? Well, I mean, so fundamentally, the United States' midstream infrastructure is changing as a result of three proximate trends. One is volume, changes in volume of production. The second is changes in location of production, and the third is changes in quality. As you all sort of know very well, between 2008 and 2013, 2.4 million barrels a day added to the market from U.S. production alone. We shouldn't forget that Canada is sort of the original and conventional revolution before tidal oil production was happening in the United States. Oil sands production was one of the largest contributors to non-OPEC production growth in the world. And going forward, which is one of the reasons why we focus sort of on the North American perspective, Mexican production and ability to stem a decline in production or even increased production over a period of time through the reform efforts will be consequential in terms of looking at where new volumes will come from or where trade and crude and product go to. In terms of where the production is coming from, EIA has done a great job focusing on the seven new areas that came up with about 95 percent of the new production over the period of the last several years. Some of these are new producing areas that weren't producing nearly as much before, such as in North Dakota and Utah, and some of them are fairly traditional places like Texas and Oklahoma and other sources. But sort of the surges in production, even among the traditional areas, were so significant which we tried to sort of show here, that it sort of tested the capacity of those places to be able to move that product from production centers to places where they could be put to the best economic use. And then finally, in terms of quality, the vast majority of what was produced over the last several years being of API gravity of 40 degrees or higher, very sort of light crude and being sort of delivered into a system that was not only a refining system that was not only tooled to use heavier grade crudes from Canada, but also with the expectation of a heavy heaving of the crude slate sort of internationally as well. And so that's caused some adjustments on the refining side in particular. And then this slide essentially shows some of the changes that you've seen in the different pads, which are the different sort of areas where we examine both sort of import and export of crude, but also refining capacity and in transport. In terms of overarching trends, we've seen fewer imports from outside of North America. Imports into the United States hit about 7.6 million barrels a day in 2013, down from 9.8 million barrels a day in 2008. But just because we're seeing a decline in imports from outside of the United States, we're certainly seeing an increase in terms of the amount that we're trading in both directions with Mexico and Canada. And when you look at where all of the infrastructure lies, we tried to put together a new graphic that shows the rail terminals, petroleum refineries and crude oil pipelines in the United States, a massive amount of already existing infrastructure that is very much sort of centralized in a great degree sort of in the Gulf Coast of the United States, something like 50,000 miles of crude oil pipelines, 142 refineries and 120 crude by rail terminals. So a lot of this infrastructure has been altered in terms of the direction of the flows and with a great deal more sort of transiting through and around the Gulf Coast area, more coming out of the Midwest to get to either the Gulf Coast or the East Coast and largely pushing out some of the imports that we're seeing into the East Coast. But mostly a lot, a great degree of light oil replacement there are not necessarily as much in terms of medium and heavy grade crudes. And then the third change we're seeing is sort of the modality of the trade, the trade flows or the flows within the United States. This slide is just another representation of the growth in things like barge rail and truck traffic that has come into use to be able to move crude that was not necessarily able to get to the right market, both in terms of sort of optionality in terms of being able to capture the best net back for the product that you're selling or in terms of just the timing of being able to site and permit the pipelines to get where you'd like to go. I think one of the questions that Harry will talk about in a little bit is whether or not we'll see sort of the continued sort of growth in non-pipeline uses as we go forward over the next several years. And one of our fundamental questions being, you know, this has probably been one of the larger shifts in terms of volume and direction and modality in terms that you've seen in the United States and in North America in some period of time, is it a shift that's largely reconciled itself? Is it done or are these sort of features of a new market dynamic that will continue to persist going forward over the next several years? So after we sort of talk a little bit more and Harry will talk more in depth about some of those infrastructure changes, we basically teed up five issues that we thought that result from some of these infrastructure changes. And the first and perhaps most immediate is the transportation safety issues. And here we focus on crude by rail, given especially the sort of recent crude by rail and well-publicized crude by rail incidents that we've seen. Certainly something that we flag as being an area that is requiring a greater deal, a greater extent of policy attention, but also receiving it on several levels. And so we go through the report and catalog the ways in which both at the federal level regulators are seeking to address some of the safety concern issues and then look at how states and local communities are also addressing them as well. We do think, you know, there's a renewed sort of interesting question about whether or not the increase or the recent accidents and incidents will once again sort of raise concern about whether or not regulations are coming along fast enough or are put together in the right way to be able to manage some of these issues. On the strategic petroleum reserve side, we think it's the logistical issues that basically get some of the strategic issues. There's several reports that have come out now. I think Secretary Moniz was even talking about some work that the Quadrennial Energy Review is going to be doing on this SPR. And basically talking about how there's so much volume passing through the infrastructure that is set to enable use of the strategic petroleum reserve that there are questions about whether or not it would be able to be used in the way that would be envisioned during a time of disruption. There's also some studies that were done by the DOE over the last year that basically looked at the maintenance issues associated with the strategic petroleum reserve and whether or not we're maintaining that asset in a way that would be able to perpetuate its existence and use in the future. The need to be able to look at some of these functionality issues raises the question of whether or not it's a good time for the United States to be looking at the strategic petroleum reserve, largely a crude oil-based reserve in a larger sort of strategic perspective, whether or not the reserve as it's currently configured or currently envisioned is precisely the right one for the future that we face going forward given the U.S.'s sort of new energy posture. But then also that, you know, the future that we look forward to in terms of global refining mix, global product trade flows, and the like. So we think that it's a good time to be taking on the task of having that strategic review and trying to decide what the right SPR is going forward. On the oil exports debate, we think that there's been a lot of work and we catalog a good deal of it about the economic contours of whether or not the United States should be exporting crude oil beyond what we already export today, 400,000 barrels a day, largely to Canada. We think it's largely been framed as an economic issue and it certainly is an economic issue, but it has some pretty strong political dimensions. And so we go through what we think some of those political dimensions are and talk about some of the ways in which policymakers, both on the executive and legislative branch side of the equation, can take a look at the issue of crude oil exports and advance the ball either incrementally or more wholesale approach. On Jones Act, we basically do write up of what the Jones Act actually is, what its purpose was, and some of the recent debates about whether or not it actually meets its economic and security purposes. The Jones Act largely is security-oriented regulation. The big question here is, are the security benefits that the Jones Act is supposed to be providing, both in terms of maintaining shipbuilding and crew maintenance capabilities, are those being effectively maintained in the most economically efficient way? Or are some of the distortions that are being created because of the way in which we're moving crude both within and around the country, are those sort of exacerbating this debate? And we think the fact that more people are willing to talk about this in an open forum and on the Hill may indicate that time for re-evaluation of the Jones Act on those terms may be in the offing for this year. And then finally, we talk about climate change. We talk about environmental impacts and safety concerns in the front end, but the latter half we talk a little bit about the climate change issue and the sort of the dimension of midstream oil infrastructure that has something to do with the climate challenge. Largely, there is no reconciled linear path forward on the U.S. or North American approach to reduction of emissions that is satisfactory to those in the climate community. And so we ask the question about what the impact will be and what oil infrastructure in particular in the United States plays in that sort of political and policy-based dialogue. On the one hand, you've got folks who are of the belief that every drop of oil you produce is contributing in the wrong direction to a climate challenge. On the other hand, efficient energy infrastructure being built that creates a healthy economy in a carbon constraint and one in which there are carbon constrained policies is not necessarily seen as something that's unachievable for others. Unfortunately, we're not necessarily having that debate in an organized way. And so that could cause some problems for oil-related infrastructure in the United States going forward absent some sort of dialogue like that because, quite frankly, the infrastructure is the part that exists for multi-decade-old timeframes. And so that's why we think you're seeing more targeting of oil-related infrastructure within the context of that debate. So some of the uncertainties that we raise, both we're going to talk about today but also within the context of the report, is oil prices obviously, you know, the magnitude and the pace of tidal production in the United States is part of why we're focusing on the U.S. so heavily in this report because the type of surge you've seen in the United States is fairly unprecedented in terms of what we've had to accommodate. And so with an oil price downturn, the question is how long and how low will prices be, and Adam will talk a little bit about this. What will the upstream impact be? Will we see sort of a slower pace of oil production development in the United States for a period of time? And what might that look like and what will the impacts be? How will that change some of the netbacks for the different transit modes and the appetite for investing in this infrastructure given the uncertainty that it will introduce into the market? On the regulation side, one really good example of regulations coming down the pipe, though there are others, is the upcoming rail tank rules. What will the timing and sufficiency of those be? And will there be any future changes to the export rules coming out this year? I would add to that list some of the other sort of methane regulations and other things that may have an impact on the market, both upstream and on the midstream side. And then policies, you know, how do these policies intersect with one another? One of the things that we've had some subsequent discussions about in recent months is, you know, how do the lifting of the Export Ban and the Jones Act or the interoperability between the SPR and the Jones Act, how do those things relate with one another? The only other thing I would put out there on the table and one of the reasons why we're, even though we focused a great deal on the United States in this story is that we think that, and Kevin will talk a lot about this later, is we think that having a North American vision about all of this is actually important because the infrastructure, you know, a lot of it is cross-border. A lot of it is the United States still does operate within sort of a global community and the integration of the North American energy sector has been a long time priority for the U.S. government dating back to NAFTA. So thinking about some of these issues over a longer time horizon with a continental perspective may actually help us find answers to politically tricky issues from a sort of strategic continental basis as opposed to just looking at it from the U.S. parochial interest side. So that's all I've got to say about the report. You can read it. It's got a lot more detail and insight than I was able to put on the table right now. The only thing I'll say is today you're sort of, we're kind of tricking you. You're at a rollout event, but it's actually a bit of a kickoff event. We don't like to put suggestions for policymakers to do strategic reviews on the table and not suggest a pathway forward. And so for the course of the year, those five issues will be things that we take up in public forum and we'll be here to try and answer some of those questions about what we think the policy solutions could be. So we hope you'll join us throughout 2015 to be able to do that. So without further ado, I'd like to ask Adam if he'd want to come up and start us off in our discussion. So thank you very much. You can use the arrows here, okay? I think Sarah deserves a hand for that. Sarah, thank you for the introduction and this opportunity to come back here to CIS where I was once a senior advisor. You know, the list of topics that you have here is a really good one. Railroad transportation safety, the Strategic Petroleum Reserve, crude oil exports, the Jones Act, and climate change. Thank God you didn't throw in the Keystone Pipeline, the EPA Clean Power Plan, and a meeting that I was at at the Commodities Future Trading Commission this morning on position limits in the futures markets under the Dodd-Frank legislation. This reminds me, you know, when you look at this tremendous list of authors here of this study, Frank Verastro, Michelle, Sarah, Lisa, and Kevin, Frank couldn't be here today, but Sarah, I'm reminded the last time I was here at CSIS, Frank introduced me as just being one policy comment away from returning to CSIS. As an advisor. So many topics, so many places to fall in a hole. So I thought that I would talk about low oil prices, and I'm going to try to do this in 10 minutes or 15 minutes, and certainly not more than that, so that we have plenty of time for Harry and Kevin to give their presentations, which I think will fill in a lot of the information on the infrastructure issues that you really want to hear about. First of all, with oil prices, I kind of forgot this, right? So for everybody in this, in the room today, I want you to, you know, cross your heart and say, the next time that prices stay at some level for three years, I promise not to believe that it's forever. Right? Whether it's low or high. Look at this example, and this is in real dollars, so they're comparable. There have been, I've, in my career, I've gone through three major drops in crude oil prices and just as many increases and some smaller ones 12 or 13 times, we've had fairly significant increases and decreases in crude oil prices. So 1986 big drop, 2008 a big drop, and now the one that we have today. So just keep in mind that what we're going through today is part of the cyclical behavior in the commodities markets and it's probably not going to be forever. I'm going to skip through that. This will be on the website, I think, later, so you can look at the details. So there was that three year period from, you know, three and a half year period from January of, well, here you just see from January, but trust me, back to roughly 2011, we had oil prices averaging about $110 a barrel. So then in the summer of last year, we had a number of developments that began to put downward pressure on oil prices. One of those was this huge surge that has continued, actually, of U.S. oil shale and Canadian oil sands production, which in a sense overwhelmed supply and demand balances in the crude oil markets. We also had the return, unexpectedly, of Libya production into the markets in the summertime. We had a lot of bad news about the Chinese economy and growing concerns about the overall level of the global economy, what was happening in Greece and Europe, what was happening in Japan, you know, the one bright spot economically seemed to be the United States and I'll come back to that. We might still be that one big bright spot. Then the other thing that happened and hasn't gotten a lot of attention, the Saudis and other OPEC producers watched this very carefully and that is the dollar, the value of the dollar against other currencies and the dollar had a huge rally that started in the summer and historically, strong dollar has been associated with weak oil prices and vice versa. So it wasn't just the OPEC meeting in November and a lot of people focused on the OPEC meeting, it wasn't just that. This is by way of trying to explain that when you're forecasting, the opportunity to be really wrong is high, right? In fact, you know, I looked back at these big, I told you there were 12 or 13 times that oil prices did something really big since the early 1970s and if you take the number of years, you know, a little over 40 years and that many times, it's about 25%, about 25% of the time, something really bad is going to happen, you don't know which way and that suggests to me that there might actually be a legitimate reason for trying to hedge in the futures markets given that level of uncertainty. This is something that we do at EIA where we actually use something called the Black-Scholes equation which was designed to try to predict bond prices and we've actually turned it upside down and what we do is we say, look, Black-Scholes can help you understand if you know what prices are in the options markets for different options on crude oil. So right now, what do you have to pay to buy a $55 option on WTI or $60, $65, $70 and so on all the way up to $100 and something that you can work backwards and say, what the market? So not EIA, not Wall Street analysts, not anybody else, what the market is implying about the volatility range associated with the underlying commodity. So those blue lines that you see there say that back in early 2014, the market itself was saying prices could go as high as $125 a barrel or as low out to early 2016 as low as $50 a barrel. Now we actually went a little below $50 but that range that the 95% confidence range that the market was implying actually did a much better job of predicting the possibilities of where oil might go than most of the analysts including EIA by the way. So the green dashed lines are the current market volatility estimates that are based on the options market. So just to kind of round this off, $30 to about $100 a barrel over the next two years. Right, so the, you know, I said this, I said this up on the Hill to the House Energy Committee. Surely we're surely now, surely is here, surely I will remember this. And one of the Congressmen said, Administrator Saminsky, that's a pretty wide range. You know, and I said, well, Congressman, this isn't EIA's models that are predicting this. This is people that are actually investing in the futures market. And yes indeed, and there are a lot of things that could make oil prices go up and a lot of things that could make them go down and I'm going to get to that in just a little bit. One of the things is in our forecast for where we will see crude oil prices go, so we have projections in the short-term energy outlook. And we are basically saying we'll average a little under $60 a barrel for Brent this year and about $75 a barrel for Brent next year. That recovery is very similar actually to the recovery path that oil took in the 2008, 2009, 2010 timeframe. So that's not to say that we're just going to follow that same pattern, but it is to say that it's not out of the realm of possibilities that some kind of recovery like that might take place. Let me talk a little bit about supply and demand. Demand for oil globally tends to be driven by GDP, economic activity. And the typical forecast for global GDP growth on an annual basis, and you see some of those going out to 2020 here, is about 4% growth per year. In our models, that turns into a little over 1% per year growth in petroleum demand. So 4% global GDP growth turns into about 1% per year growth in oil demand. So somebody, you know, this is fairly easy math to do. What's the overall level of global demand these days? And the answer is about 92 million barrels so let's just make it easy to do this. Round it up to 100, what's 1% of 100? A million. One million barrels a day of growth is probably a fairly decent estimate of what world demand will grow by for petroleum. So that's kind of what we have. Most of it looks like it's going to occur in places like China and elsewhere outside of the developed countries. You know, maybe we'll see a little bit of growth in the U.S. actually this year with low gasoline prices and a recovery and some gasoline consumption, but mostly it's going to be outside the U.S. So keep in mind a million barrels a day of growth in oil demand. Now let's look at supply. What that yellow bar there on the left-hand side the year 2014 is a combination of North Americans called Mexico flat to down. So the growth that you see there split between the United States and Canada. A lot of that is the United States, shale. Read the numbers, over a million and a half barrels a day. Alright folks, now do the math. Oil demand is going up by one and U.S. and Canada combined are going up by almost 2 million barrels a day. What happens to the global oil markets when demand is only half of global supply growth? You just saw it. Okay, so now if you're going to rebalance this because nobody's talking about a huge surge in demand globally. The demand numbers are going to be what they are. Maybe they'll go up a little bit, but not a whole lot. This has to happen on the supply side. Something has to happen on the supply side to fix this. So what we're saying is it looks like in 2015 you're only going to get about half of the growth in North America that you got in 2014 and in 2016 it's even a little bit less than that. So we're going to see less shale oil production. I'm not really ready to say at this point that in this short timeframe that we'll see less oil sands production because those are kind of like deep water projects, a lot of upfront capital investment that doesn't get turned off immediately. In fact, in EIA's forecast, deep water Gulf of Mexico production climbs over the next several years even though oil prices are very low. So this is going to be kind of shale and whatever else is happening in the world. Those production numbers have to come down to rebalance supply with demand and get rid of some of the inventory that's been building up. Okay, so there is a tendency and I kind of came out of this world to say, oh gosh, low oil prices, that's, you know, in the stock markets they call that a correction and corrections are usually looked at as something that's going down, that's bad, right? But the drop in oil prices has a very positive aspect to it, certainly in the United States. EIA calculates that given our estimates of what gasoline is going to sell for in 2015, the average household in America is going to have an extra $750 to spend on something else rather than gasoline. And if you happen to live in the northeast and the weather warms up a little bit, you might have that amount again in a lower heating oil bill. There are a lot of households that have more than one car. There are a lot of households that don't have any cars and so households with cars will do even better than this. So a really interesting question from an economic standpoint is what are consumers going to do with an extra $750 or 1,000 or even $1,500 a year of disposable income that they're not spending on gasoline and heating oil? That to me is a really interesting question. We also know on a macro level that about every $10 drop in oil prices in the short run, so in the course of a year, is worth about 2 tenths of a percentage point of GDP. So we've had about a $50 drop in oil prices. That means GDP might be 1% greater in 2015 than it otherwise would have been. Again, that's a pretty impressive number. Here's how those numbers stack up. And as you see, a lot of it on a national basis comes from gasoline, but keep in mind in certain regions like the northeast, you'll add in heating oil on top of that. In the Midwest, propane is going to be cheaper this year and that will help incomes in the Midwest. Okay, this is what I talked about earlier. Many of you, I'm sure, have been to Oil Company presentations. In the first slide they put up as a disclaimer that says these are forward-looking statements and they might be wrong. So I said that, look, the market itself is saying that oil could be as low as $30 a barrel as high as $100 a barrel over the course of the next year with a 95% confidence range on that. How could you possibly get to $100 a barrel? It seems like really hard to believe that you could get to $100 a barrel. What could happen that could drive oil to that level? Well, one thing, for example, is Venezuela could just fall apart. I mean, the Venezuelan economy isn't very bad shape. There are a lot of social issues down there. Inflation is out of control. There have been demonstrations in the streets. We know back 10 years ago that Peta Vesa went on strike. If that should happen again, Venezuela is producing well over... Somebody helped me out with the number here, Venezuela in production, but they're exporting 800,000 or 900,000 barrels a day and it's production, I think, is about 2.234, something like that. That would take a lot of oil off the market. What happens if ISIL or ISIS could figure out a way to disrupt Iraqi oil exports? What happens if the negotiations with Iran fail and sanctions against the Iran titan? Iranian production has been creeping up over the past year and that could get cut. Social unrest in other oil-dependent countries, just to pick one, Nigeria. A lot of oil production in Nigeria, a lot of exports, a lot of problems there. Is it possible that something could happen? What if OPEC actually got together and cut production? I mean, it's happened before. That could send oil prices back up again. What could send prices down? World economic activity. We know things have been bad in China. Now, the last few days there have been some signs that the Chinese economy might be picking up, but it's been an interesting situation there and we'll see where that goes. What if the Saudis keep production up? What if the Saudis actually increase production? I've seen some reports in the trade press that say the Saudis might just want to match what other OPEC countries are doing in terms of oil production. Why should the Saudis give up market share in Asia to other OPEC producers? And if that should happen, I think we could see lower prices. What if unplanned outages go off, come back again? We saw that once with Libya. Everybody seemed to be really surprised last summer when Libyan production rose. Could it happen again? Could we see disruptions? It's hard to see how things are going to get better quickly in Libya or Sudan or Syria or Yemen. I don't know that that one is going to happen, but certainly over the course of three or four years it could happen that it would have an impact. Another one on the downside is what if the Iranian negotiations are successful? I think everybody would hope that the efforts of Secretary Kerry and Secretary Moniz, who were over in Geneva just this past weekend working with the Iranians on trying to come up with a solution to the nuclear issues, that that would be successful. We would get a nuclear deal with Iran, in which case the sanctions come off and Iranian production probably comes up. So watch out. Now, just a couple of points on North America, really the topic of the meeting here. Today is doing some really interesting stuff on North American energy cooperation. I just want to highlight it very quickly for you. We are very much involved in a trilateral effort with Canada, Mexico, and of course the United States to reconcile important export data on energy flows, so not just oil, crude oil and products, but electricity and natural gas. The numbers don't always exactly match up, and we would like them to do that. Data available quickly. If you look at Sarah's infrastructure map for the United States, it stopped at the Canadian border and the Mexican border, and we would like to actually be able to show energy infrastructure for both Canada and Mexico, and we're working with Canadians and Mexicans on doing exactly that. It would be available on the EIA website, it would also be available on Canadian and Mexican websites. We're also looking at the possibility of trying to compare outlooks. Do the Mexicans have the same forecast for importing natural gas from the United States that EIA has for natural gas exports to Mexico? Really interesting question, and we would like to look at that, and there's actually a fourth area here. Terminology, we are trying to get a common lexicon so that when we talk about issues, let me pick one that was not on Sarah's list. What is condensate? So that when we talk about condensates and we have numbers for Mexico and Canada and the United States, that we have a common lexicon on that. Here's a map that shows a number of the key border crossings for energy between Canada and the United States, and there are a lot of places where electricity, natural gas, crude oil and products go back and forth across the border, and we would like to be able to show the maps on either all sides of those crossing points. We're already doing a little bit of this on the shale plays, but you'll notice like the date on this, 2011, we think that with some of our own work and the help of the Canadians and Mexicans that we'll be able to build up on this and get more maps like this that show things moving across the border so that we don't have these artificial barriers with the border. One of the things that we'll be able to do, and I heard from the Mexicans that they were actually taking advantage of this, most of the hurricanes this past hurricane season were on the west coast of Mexico, and they were using the already existing hurricane mapping capabilities that EIA put on our website to help with where the hurricanes were directed towards the infrastructure in Mexico, and we're going to make that a more formal process as we go forward. This is the last slide in my advertising page. Please go to our website and take a look at all the good stuff that we have. Many things that we do at EIA and are working on now are ideas, actually, that we get from people like you who say, how come you don't have this or could you do this a little bit better and we would love to hear from you on your ideas about that. So thanks very much, and Sarah, over to you. Thanks, Adam. That was great. I was telling Adam before this when we were talking about the North American initiative, having once tried to do an integrated North American gas vision because we were going to be as a continent importing so much gas when I worked at DOE. It is exceptionally hard to do anything that's North American and integrated without that common data platform, so I think it'll be of use to a lot of people. Harry, I'd like to welcome up to the podium. Thanks. Okay. Well, thank you. The disclaimer. Yes. Basically what this says is that if you use what I say to try to make money and lose, it's your fault. But I think if you use what I say and make money, I think I deserve 10% at least. That's what the lawyer says that means. What I'm going to do is talk about infrastructure with a little bit more specificity and what I want to do is sort of take you around the last four years or five years of development and talk about what's been happening, why it's been happening and then try to look forward into the future in terms of what we expect to happen over the next several years. I'll be having several different themes that I'll be trying to set forth, but one of the most important themes that I'm going to be talking about is that the infrastructure industry has been exceptionally capable in terms of building new infrastructure to supply the need of transportation capacity between the sources of oil and the demands of oil and that there are a lot of projects on the drawing boards now and that I don't expect to see in the next several years any particular bottlenecks related to market inefficiencies and so on, but where we do see problems in almost every case, it has to do with government regulation or things related to lack of decisions. There are three points that Sarah made this morning that I want to reemphasize with this first chart. There are three charts here on this one slide. The first one shows production in Canada and the U.S. and the point I'm going to make is the same one Sarah made which is over the last four or five years using enormous growth rates both in production of oil in Canada as well as United States. So that's the first thing that we need to talk about is how did that extra oil production get accommodated into the market. The second slide or the second chart on the upper right-hand side is showing us imports of oil into the United States not counting Canada and what you see there is a drop in imports from about 7.2 million barrels per day down to about 4.5 million barrels per day and then the third chart I'm showing you with the lower right-hand side is what our trade has been in petroleum products not the crude oil but the products made from crude oil and there are two lines on that chart the first one, the blue one is the product exports which you can see has been going up and then the orange line is the product imports which are going down and what you see as the net trade is the gray area at the bottom and the important thing in the last five years that is quite surprising is that we shifted from becoming a net importer of crude products petroleum products to a large export of petroleum products so if we look at kind of the big picture and look at the numbers off to the side here what we see is crude oil in North America at least US and Canada grew by 4 million barrels per day our imports went down by about 2.7 million barrels per day and our petroleum products went up by 1.7 million barrels per day so essentially what has happened in the last five years is that we had just a shift in where the crude oil came from imports being substituted by domestic production but also actually in that increase in crude flow and that difference then has been taken up by petroleum products exported in other words we are refining more petroleum products so we are moving more crude oil around as well as moving it from different locations this is a cartoon that is not drawn accurately it is intended for those of you who like primary colors and simple concepts which is to say most of us the point we are trying to make here is where is production growing that is those blue areas showing the upward slending production and the main thing that has happened is most of the production increases been kind of in the central part starting from Alberta down to Texas both South Texas and West Texas the first blue area is the oil sands up in Alberta and the major source of the growth in Canadian production the next blue area is the Abakan area in Montana and North Dakota we have another blue area in the Rockies which is the Niagara play that is just now beginning we didn't show the central part of Oklahoma and Kansas but that is another area where tide oil has been growing and then the two areas in Texas Permian and Eagle Fort have been the other areas so one theme then is is the oil production has been growing it has mostly been in the central part of the continental areas the next thing we are showing here in the green areas is the direction of flows or the change in flows and the good thing to think about this in terms of it makes it easier to understand is that the changes that have been taking place for the last five years are also the ones that we would anticipate out into the future which is to say more of the Canadian oil is coming to the US primarily by pipeline to the central part of the US and then down to the central part of the the midcontinent area down to the Gulf there is also certain amounts of oil that are going more increasingly to the different coasts the British Columbia if allowed and then to the eastern Canadian area those are the other two green areas we expect more into the future and then the other thing that we are seeing is more flows from the Rockies to the midcontinent down to the Gulf and more flows from Permian and South Texas into the Houston and eventually Louisiana areas so the major flow changes are exports and then primarily down to the middle of the country to the Gulf of Mexico and what I'll show you here then in more detail is individual areas and talk about what infrastructure was developed and what might be happening in the future I'll talk first about the Bakken and what's happened there both in terms of the Bakken area as well as what's going on in eastern US rail I'll then talk about Cushing which is the area in Oklahoma that many of you are familiar with and what's going on there I'll then talk about the Gulf Coast area both the west and the east part of that and then I'll talk a little bit more about rail and rail regulations and then finally I'll talk about what we expect to happen in the next five years and how what might happen might be influenced by the kind of price uncertainty that Adam was talking about a minute ago this is a chart showing North Dakota and what it's showing you is in the yellow line in the middle is the actual production increase and you can see we've gone up very dramatically in the last several years the blue lines represent transportation capacity out of North Dakota the dark blue is the rail transportation capacity which you can see was originally very very small and it grew very dramatically in the last five years and then the light blue is the transportation capacity from pipelines and the point I'm making here is that there actually has been overbuilding of capacity in the last several years and that's primarily to allow optionality from the producers perspective of where they can ship their oil there's options to ship it to the west coast options to ship it to the east coast by rail and by pipeline and there is that flexibility and one of the key issues is in terms of how that infrastructure will be used in the future is what the price differentials are that will lead to those incentives as to which direction the coil goes the other point I want to make with this chart is if we look out into the future in terms of what pipeline capacity is being planned within the range of uncertainty that we have is to where the oil production will go in the back from let's say a $60 oil price up to $100 or $100 plus it's still within the range of that planned capacity so it looks as if between what we have now in place and what we're planning we should have enough capacity for the Bakken I believe now where is the oil from the Bakken going one of the most interesting things that has happened in the last five years is this enormous increase in rail transportation and one of the most interesting aspects of that has been the movement of Bakken oil to the east coast and what this slide shows you is all the facilities that were built in the last several years to accommodate the Bakken oil coming to the east coast and this includes movements to Albany for transport to other locations it includes several different projects at individual refineries it also includes other locations in Virginia which are terminal locations so what's happening that is we've built over this period of time a total of 940,000 barrels per day of offloading capacity into the eastern part of the U.S. which represents about 80% of the refining capacity in this area so this is an enormous change in the pattern of where oil has come into the east coast almost totally it was brought in by imports from other countries so this is one of the areas where you saw that big dip in imports of oil this is where a large part of that happened is the substitution of the domestic oil primarily the Bakken oil from North Dakota and Montana to these east coast refineries and the reduction in imports of things like Brantor and Nigerian lights no talk about infrastructure is complete without something about Cushing Oklahoma Cushing is important for three different reasons when you hear about a NYMEX WTI price it's quoted at Cushing Oklahoma so it's the location of the futures price so it's important as a pricing point number two it's the nexus of several different transportation corridors both rail and pipeline so therefore it's a trading hub and a transportation hub and then the third reason Cushing is very important it's the location of a large part of storage the flexible storage that's used by traders I'm not going to go through every single thing here in terms of which pipelines have been built recently and how they're being used I would say that the two main things to take away about Cushing is that when we were talking about Cushing ten years ago it primarily was a location where oil was moved north into Cushing and then oil was then moved from Cushing into the Midwest for refining that has changed that's reversed we saw that three years ago when the seaway pipeline was reversed from going north from south to north to Cushing now to the Gulf Coast so that's the main thing and then the second thing I would want to point out to you is that there's more oil coming to Cushing in terms of the industrial infrastructure that's planned the Keystone XL pipeline would go through Cushing plus there are other things that are being planned like the Flanagan south line to bring oil from Patoka down into Cushing so more of what we've had in the past which is to say more oil coming into Cushing from the north is also going to be happening in the future and this is going to continue to be a very important trading hub a very important storage hub my next discussion is about the Gulf Coast and again there's a lot of complicated things going on here but what I want to do is talk about the eastern probably the western part of the Gulf Coast which is to say the Texas area first and then I'll talk about the western part of the Gulf Coast which is to say Louisiana the second one point to make about the western Gulf is that this was another area where imports were very important and this is another area where we've seen a dramatic change in the source of the oil coming into this area there's been a huge substitution of imported oil supplemented or supplanted by North American produced oil it's been a combination of oil sands oil coming down to the Gulf Coast where these complex refiners are using it to make products and then the second sources the other two sources that have been very important have been the growth in the oil production in the in the Eagle Ford the formation which is in south Texas as well as the various different plays in the Permian basin so less oil coming in from overseas much more oil coming in from Canada and also from Permian and Eagle Ford in terms of interesting issues here that Sarah raised let me connect a couple of them to you one is one of the things that's happened is that Corpus Christi has emerged as an important hub for the Eagle Ford oil coming in from several projects built to build pipelines into the Corpus Christi area and that area has also become a trans shipping point for sea transportation of that oil part of that oil is going by barge into the Houston and then the Louisiana markets and part of it is also going up into eastern Canada so we've had a big increase in exports of oil from the US into Canada and where that's been it's been coming from Corpus Christi up around the Gulf and eastern coast up into the Irving and other refineries up in eastern Canada and that's now about 400,000 barrels a day so it's a very substantial amount of oil and the funny thing about that is none of that oil is being dropped off to domestic refineries as it's going up to the east coast of Canada and that's because of the Jones Act it's very expensive to transport oil on US ship so this is an example of where the trading pattern is very much influenced by regulation the second point I would make relates to the crude export issue that also Sarah was talking about earlier there would be a natural place where you would export oil to other countries off of Corpus Christi and maybe Houston as well which is not taking place in any of the other exports this would definitely be one of the export locations Louisiana Gulf Coast area several different things here that we want to talk about number one this is the area that's being served by the Ho Ho Pipeline reversal there's been so much light oil being produced in the Eagle Ford and the Permian which has mostly gone into the Houston area refinery complexes in Corpus Christi and they've essentially become saturated and part of the idea was to try to move some of that light oil into the Louisiana market and that's why Shell reversed last year the whole pipeline was to move the light oils from the Houston area into Louisiana number two is that there are some movements now by the barging that I was talking about again from Corpus Christi into Louisiana and then the third thing is there is a limited amount of oil coming in from Canada as well particularly by rail transportation some of the St. James area refineries this is an area where you can see from the notes here that we anticipate a lot of competition among the different sources of oil Adam was talking earlier about the growth expected by EIA and for that matter everybody Deepwater Gulf of Mexico there's several very large projects this year next year and the year after that are expected at several hundred thousand barrels per day of productive capacity a lot of that is coming in to the South Louisiana area and one of the questions is what's that going to displace or how much oil will that displace what's happening right now is a large part of the oil coming into this area is imported from you can see here from the the pie chart here Saudi Arabia, Kuwait and Venezuela and that oil is kind of locked up by from joint venture partnerships and long-term contracts so one of the things that we've been watching is to see to what degree are that the import volume is going to be going down as competition takes place and so far they haven't been coming down very much so this becomes an interesting question as to what happens now as extra volumes come in and what we want to make about this area is that it has to do with SPR a large part of the the salt domes that are used for storage are in South Louisiana and some of them are also in South Texas one of the interesting questions that comes out is why we the reason we built the salt the storage there for the SPR was in part geology the fact that you can excavate these large salt domes and put oil into them and when we did that originally this was in that environment that I talked about earlier where the flow of crude oil was north, was south to north so you would take oil out of the reserve and pump it up or the plan was you would take the oil out of the reserve and move it the same direction that oil was traveling anywhere which was to say south to north but everything that I've told you will become more severe in the future so one of the questions is what do you then do with the SPR when you reserve it when you remove it if all the oil is flowing the wrong direction I mentioned to you that one of the important themes about the use of infrastructure is optionality and the idea here is that people want to build infrastructure in order to take advantage of price differences because that's where they make money is by buying product cheaply or by buying crude cheaply and selling that as product at a profit this is a chart showing you what the differential is for an east coast refiner either buying Nigerian crude oil and bring it into the United States or buying Bakken oil and moving it by rail into the east coast market so when you see a positive differential this is how much more profitable Bakken oil is relative to the competing imported oil and therefore if you have a positive differential you have a very strong incentive to move the oil from the Bakken into the east coast and what you see here is the differential has been positive for quite some time the chart starts in 2010 and goes through last month that differential in the last couple of weeks has stayed low but last week it came up again so the setup has become stronger the point I am trying to make with this chart number one is that this is a big explanation of why we built all that rail capacity on the east coast number two the people who had that capacity made a huge amount of money during that period of time when the differential was very large and number three is the same differential as what is going to dictate what happens into the future in terms of how that capacity gets used and the incentive for additional infrastructure both here and of course other areas as well I want to spend a minute talking about rail the point where and Kevin are you talking about rail as well in your okay well I just wanted to make a couple of points about this I think many of you know we did some work with API earlier this year to look at rail transportation how it would be affected by the new PHMSA rules and as many of you know in May the new rules will come out when we were looking at this earlier this year we were looking at an environment of relatively high oil prices and we were projecting a fairly large amount of increase in production that would be transported by rail and we were anticipating that there would continue to be a certain amount of transportation from the Bakken by rail because we still anticipated the differentials to the east coast to justify that and we thought that that would be going up over time we also anticipated based on construction that's going on up in Canada that more and more of the oil sands oil would be coming to the U.S. in the form of the rail and we said that if keystone pipeline didn't get built which of course is coming more and more likely at least for the time being not to happen that you have even more oil coming into the United States by rail and the point we made in that study is depending on what the regulations say exactly you could have problems getting enough rail cars to transport that oil because the capacity to build new cars and the capacity to retrofit the cars was too small given the period of time at which PHMSA was talking about allowing the regulations to come into force so the point we're making here is that there is some threat to rail transportation if the regulation is done in a way that makes the compliance period very small on the other hand what's happened of course now the oil prices have come down is that the amount of production increase we're expecting from these areas is lower now and of course it depends on how long the oil prices stay low so from that perspective we don't necessarily see the same volume pressure that we would have set up six months ago with the rail regulations and how quickly the compliance is that there could be a problem what's happened in the interim is that the leasing rates for the cars have come down quite a bit because we've had enough new cars being built to sort of swap up the create a small surplus of rail cars but we're still transporting a lot of oil by rail let me just try to finish three more slides in terms of looking forward into the future Adam was explaining to us that one of the ways that the market would come back into balance is that the U.S. would reduce its growth rate in oil production and potentially even reverse its growth and maybe even some small decline in production what we're showing you here are the rig rates the rig counts for different parts of the U.S. and what we're showing you here is the Permian which is the area with the most number of oil rigs it has the most complex and multifaceted tidal oil plays in the Permian basin and that has come down by 36% from its peak so you have 30% fewer rigs running there than we had earlier late last year what is the second most popular area for oil rigs and that has come down by about 26% and the Williston which is where the Bakken is has come down by 35% so we already are seeing the effects of the low oil prices on activity levels this doesn't mean that oil production will go down these percents there's more complexity to that one of the complex issues is this issue of costs this is a chart showing you what an average day rate is for a rig when you drill a well you hire the rig from a third party and you pay what's called a day rate and that's the daily charge for using that rig and this is historical over the last several years from 1999 to last quarter and the point you see here with these costs and also other costs is that the cost of drilling and completing wells itself is the cost of the oil prices so one of the things that happens in the market that tends to re-collaborate the market is that the service providers that are providing the rig servicers or the fracking service or what have you are themselves seeing reductions in profitability and they reduce their rate so you don't necessarily have you have some moderation in the value and chain so that you have some re-collaboration happening without necessarily having it all happen with lower activity levels now about two months ago one of our clients asked us to look at infrastructure and what would be built under different kind of oil price scenarios and I don't want to go through all the details here but I want to just point out that everything that I've been talking about in terms of the need for new infrastructure is all being driven by activity levels and production levels how many wells are being drilled how many wells have to be connected how much oil has to be transported from point A to point B on the volume of wells being drilled and the volume of activity and if you look at different oil price scenarios you do see quite a bit of difference for the next 20 years in terms of how much infrastructure will be needed we were looking at a forecast over a 21 period of about $180 billion of infrastructure being needed if we had oil prices of $100 that goes down to about $142 billion with an $80 oil price scenario and down to about $99 billion under a $60 price scenario so there is a huge impact on infrastructure needs that's related to oil so to conclude theme number one is we've been very good at building infrastructure there's been multiple projects competing for the same flows in almost every area of the country there are a lot of projects that are being planned some of them are now being delayed there's never really no problem from the point of view of the industry coming forward and being able to offer up projects whether it be rail or pipeline to add infrastructure the second theme is optionality is very important both from the point of view of the producer and the refineries they like multiple ways of getting crude either to buy it or to sell it and they're willing to pay a certain amount for extra infrastructure to be able to have that flexibility and as we saw in looking at that that's when you make your money is when you have those options the third point I would make is that there's a lot of sensitivity to oil prices in terms of what infrastructure is going to be needed so we need to watch what's happening there to try to figure out what the infrastructure market is going to be the other point I would make is that the regional price differentials and the quality differentials are very key to understanding how oil infrastructure gets used what the value is of building new infrastructure and then the third thing is there are policy issues that are very important I mentioned the rail cars I mentioned the Jones Act and I mentioned the crude export which affect how oil flows around and potentially how infrastructure has to be built to accommodate that market reality thank you okay thanks very much Harry that was fantastic I think maybe just to keep things moving along and do some questions after you'll show me the magic part of how to do this well thank you very much really it's a privilege to be on a panel with two such great speakers and for those who've never worked on a CSIS study let me tell you that I have newfound respect for the thoroughness with which the team approaches these things Sarah, Frank, Lisa and Michelle looked at every word and I'm not kidding in that report, hopefully you will too I have the job I guess of following up a discussion about numbers and molecules and the metal that carries them with the discussion of the hot air that can stop them so with that I wanted to introduce a couple of key points whether it starts from the mind mouth or the smokestack whether it's the boiler tip the burner tip or the well head governments have a pretty big role in all of how this turns out my job is really to talk about some of the policy uncertainties and it's so easy to just talk about the US, Canada and Mexico as if they are indeed an integrated energy policy platform energy market and so forth but energy infrastructure is well it is partially interconnected that's right that's an I word it's like integrated but it's not the word integrated and infrastructure implications can be interrelated yes if you build something that obviates the need for something else somewhere else there is an interrelationship also an I word but not integrated energy fundamentals are intrinsic every country's got their own situation and as I think I'm going to take a couple of slides to show those situations can be different and policy processes tend to be largely independent which is to say that some of this integration that fifth high that we were hoping for could be a lot harder energy politics needs an L which is local and so that speaks to some of how the policy works really at clear view one of the things that we've tried to point out to our clients over the years is that the fundamentals drive a lot of the policy issues and the politics tend to constrain them so the university the universe of possible outcomes is really bounded on those two sides so when we talk about the Mexico U.S. Canada natural resources juggernaut we do have to think about some of these very independent policy and political considerations let's start with just a few slides with charts and after those two sequences of charts I'd sort of feel naked without them and I don't think anybody wants to see that so the per capita energy consumption of the three countries in question a couple of things that are very straightforward and obvious about it red is Canada blue is the U.S. green is Mexico Mexico is per capita energy consumption is going up and the other two countries are going down and also the other two countries are much greater per capita energy consumers and that speaks to something in the way of development also the energy intensity of living up where it's cold in Canada has a lot to do with it too energy intensity of GDP which for those of you who don't speak economist on a fluent basis is how many molecules how much energy you need per dollar of economic output you'll see some trends here that essentially all of our three economies and we're talking about becoming more efficient in terms of how they use energy but Canada in the U.S. becoming more efficient faster and really if you look at Mexico the energy intensity of GDP went up before it started to come down a little bit as you progress through the development phases of an economy you tend to use more before you become efficient enough to use less with wealth the other thing to point out again is that the energy intensity of Canada's GDP is quite high and then not to leave out an issue that seems to keep coming up in this town carbon dioxide intensity of GDP and here I think you'll see Mexico again Mexico is the outlier it's falling very slightly whereas it's falling rather dramatically and the U.S. is still the most efficient producer on a GDP basis whether you look at carbon or energy inputs then there's the other side of the story so looking at crude oil and natural gas liquids the stuff that's flowing through the pipes the stuff that's filling up the tank cars the stuff that's moving that's being delivered the 10 year growth rate compound annual growth rate based on an EIA pro-former for 15 says that we're looking at still a 6% compound growth even with a slowdown in our growth same theme you heard from Harry and from Adam before him and if you look at the difference in this chart the outlier is obvious compound growth of production up in Canada not as much and down in Mexico so again I'm trying to set the stage for the policy discussion I want you to think in terms of the fundamentals and to some extent the politics those fundamentals require last thing to think about is refined products balances you have different refinery outputs here grouped sort of loosely but if you look at where we are we're the blue still and most of our bars are up quite a lot which I think is a point that Harry made very well and if you look at our neighbors to the north and south there's still some import dependency in the refined products the finished fuels that people actually drive and burn and so when you think about how these policies are going to be shaped that too is a factor let's count the miles shall we actually you can count a lot more miles than this in the US but the chart starts to look a little bit weird and so what I did is I just looked at explicitly the upstream and transmission pipeline component but you can see the US has got we've got the pipe in North America that most of us are talking about most of it is here Mexico's red is crude in products blue is gas and like I said there's a lot more gas pipe than I have in that chart now look at the railroads let's see wait a second isn't that the same slide no but it sure looks the same alright what we're talking about is the infrastructure being relatively proportional in a lot of ways and wow that's not a big shock when you think about what's moving through the infrastructure itself well why wouldn't it be proportional if it moves in one mode or another and by the way they connect then why shouldn't they be relatively the same okay so the final part of this just sort of comparative analysis before we dig in country by country and policy by policy how are the countries the same or different in sector organization Canada's got a very strong provincial regulator for its production with a federal overseer it is a market based non-state owned actor economy now there were experiments in Canada's history where they had some state owned enterprises and those were interesting times for those who were in the oil industry in Canada the United States is last apparently I'm in alphabetical order okay Mexico state energy regulation state energy monopoly which is only just recently begun a reform process after 75 years of monopoly and central control one of these things is different from the other in the US much like Canada private investors no state owned company and a federalized system where the states have strong regulatory purview so you're going to have trouble getting to integration based on these differences these are fundamental and political and policy differences that will make it difficult but not impossible to eventually realize better cooperation and they will also set up some dynamics when we talk about what the future looks like to what extent will cascading or different or competing policies produce outcomes either inefficient undesirable or really excellent and super great let's talk first about the US at the federal level hard not to talk about climate policy as an infrastructure driver there are certainly components that are obvious especially when it comes to natural gas transportation infrastructure for that matter generation infrastructure to support the clean power plan which Adam did mention and I found a way to fit in do I get points for that and maybe less obvious is that flaring reduction initiatives whether they be federal or to the extent that they're also going to be state level initiatives they also create a demand for infrastructure stripping anything out of the the ground and separating it into different component parts as you grow production you're going to have to rationalize your offtake into different new build-outs of infrastructure and that's kind of the point interestingly we are at a point in our history where we are asking the permitting agencies at a federal level who look at infrastructure to ask what are the life cycle greenhouse gas implications of this infrastructure on December 18th the council on environmental quality reissued a guidance document telling federal permitting agencies to do just that to look upstream and downstream and look at what the overall greenhouse gas implications are now this is new terrain what does it really mean we're still waiting to find out for some infrastructure build out this may not be a very big dynamic whatsoever it may be eminently possible to show that you're displacing a higher carbon intensity fuel in a destination market and therefore there's no significant impact which is the language of the term as FONSI finding of no significant impact in NEPA speak and who doesn't like to say FONSI anyway the other implication though is that in some places you may find that there's a higher burden of proof more permitting latency it certainly means that for some of the infrastructure that we need and want to build there's new things to think about as you get federal permits and no I'm not talking about cross-border permits but by the way the prototype of this was the Keystone XL pipeline the State Department used this process even though it wasn't strictly speaking a NEPA process they nonetheless went through and looked at the life cycle impacts and at a higher oil price which the EPA has pointed out it vindicated the pipeline in that analysis some question of whether at a lower oil price it still does I'm not answering that question crude oil exports so the export issue has many elements to it but they mostly come down to the question of whether or not exports become a more significant demand outlet for growing supply the other demand outlets have been the avoided imports and the use in refining and our exports to date have been an outlet to Canada and at some point Canada stops needing all of the diluent and light crude that we're giving them because we have more than they'll actually want in the end the issue has big implications for infrastructure I don't think I really need to dwell on that here but if you think about how we have defined an export policy and by we I mean the Bureau of Industry and Security at the Department of Commerce in December they've said there's a limited amount of exporting of condensate maybe some crude you can do if you process it first and that implies an infrastructure build out of its own since there's a new kind of processing infrastructure at a lower capital expenditure a stabilizer with a distillation tower that can be used this is an interesting thing again when you think about how that policy changes what if the policy were more broadly defined in a way that less processing was required would that infrastructure be white elephant infrastructure that wasn't needed cheaper than refinery or a splitter to be sure but something to think about it definitely affects the investment implications crude by rail well okay so the the optionality has been discussed the reality of essentially what's happened in the last couple of weeks is hard to miss in the context of a rulemaking generally at this point in the process the department that is sending its rule to the White House is usually defending why it wants to do what it wants to do while the White House is busy saying you got to figure out how to spend less money this looks bad this is a harder thing to do in the context of two very fiery explosions one Valentine's Day weekend that is also an issue that when you think about its implications I think Harry put it out very clearly since this is how a lot of this incremental production is going to move how this rulemaking turns out has significant throughput relevance that ultimately impacts not just how things move but the incentive or the ability to produce at the upstream given your offtake opportunities and so it's a very very big issue and for that reason you know as much as everyone wants a hurry up rule all the different elements of this whether they are tank car design whether the composition of the crew and how it's addressed, monitored or modified or for that matter the operational requirements on the railroads are by no means easy this is one of the tougher ones regulatory speaking and obviously optics wise it's one of the more important ones one thing about crew by rail which has changed also politically you see on the slide post accident intervention risk we think of congress as this immobile object that in its partisan lassitude ignores all the immediate needs of the population we like to criticize them but just wait until something happens that makes constituents scared congress can move very fast and sometimes it doesn't even have to finish the job it can get an agency to move very quickly too I don't think any of us should dismiss the realistic possibility of congressional intervention in the event of a serious accident and this too could change the shape of our infrastructure thinking as we look out in the future upstream environmental among the things you might think about or how the federal government is looking at waste streams but also the critters that hop and mate in the presence of the energy production and transportation that takes place upstream the sage grouse is the one that gets the most attention but there are many more our federal policies have been expanded to make endangered species listings for infrastructure build out that's a set of reforms that some are still under way but they mean that any species listing in a producing area does have implications tax reforms hard not to overlook that the president's budget request included a change to its past suite of plans to rescind existing tax treatment for oil and gas infrastructure included a plan to eliminate fossil fuel partnership tax treatment to eliminate the oil and gas and presumably coal MLPs not likely to become law but if you want to see how things get built out quickly or not how investor dollars are attracted or deflected based on tax policy can be a very big factor the SPR there's been no shortage of discussion about right sizing and rationalizing it obviously I think you understand where the infrastructure implications here are moving to a place where storage has to be shifted around different types of petroleum are going to be stored or cycled then we're going to need different infrastructure to support, maintain and deploy even if we keep the one we have the question of whether or not we want to keep as much of it still a very live question apparently crude oil is worth money all I can say is if anyone is thinking of selling it can you wait another 25 or 30 dollars don't sell low okay so policy issues on the state level and local level fracking bands are interesting from an infrastructure perspective because to the extent they exist and to the extent they take the form of setback requirements or other explicit environmental prohibitions they can fragment the scale economies in a formation making it very hard to efficiently deploy infrastructure in and around a producing area they are losing mostly in court right now in most of the places that are happening except for where they are winning one very notable data point to be the state of New York premising its statewide fracking ban on health concerns which was immediately adopted by the Maryland state legislature also emulated in Colorado by activists there for activists whatever you want to call them and in Oakland California to the extent that health concerns can promote more fracking bands something to keep on the radar induced seismicity I don't want to put to find a point on it we're early in understanding what it means but few things scare people more than this earthquakes in places where they don't happen attracts attention disposal infrastructure is an important part of production infrastructure and everything that goes with it if you're going to have an integrated infrastructure plan and you can't put your water in the ground you might have to think whoops you might have to think about what you're going to do economically severance taxes local governments could grabby just like the federal government the difference is that the local governments don't have congressional deadlock in their way a lot of the producing areas are looking at their own budget gaps and saying look at all these oil and gas companies well if you think about it now is probably not a time to try to change the tax regime on the other hand if it's a question of whether or not you're going to fund schools watch the politics folks state level preemptive self-regulation is what states especially western federal land states have been doing a lot of trying to say to the federal government hey guys we're running things stay out we got this still happening especially again in states like Colorado but here too you know the implications for infrastructure especially when you look at trying to avoid explicit regulation of methane emissions from existing gas and oil sources this is a place where states can end up creating constraints on your build out okay wasn't that enough oh wait no there's two other countries okay it'll only be another 25 or 30 minutes so Canada Canada a higher carbon intensity lower coal penetration in their generating mix phasing it out hurts them less and by the way did you know the good people of Alberta have had a carbon tax in place for years what took you so long America oh and they're using the money to pay for pipeline infrastructure and for carbon capture and storage to facilitate more oil production as well so it's actually a very well thought out scheme but the climate policy implications of a binding deal are not an issue right now global federalism failed at Copenhagen now we're going bottom up we're trying to figure out what to do and Canada has decided that they didn't like Kyoto very much not looking for extraordinarily strong showings but let's not kid ourselves they are integrated in a lot of ways markets among them and as we look at how they interoperate with us to the south we can exert a lot of pressure on the way their climate policy shapes their infrastructure decisions and in some cases we are federal crew by rail regulation in Canada is different from here and that perhaps is the biggest thing the trains don't stop unload into different cars and then cross separately and then reload back into other cars to come back here as the border crossings take place along the railways so they have an earlier phase out for their existing tank cars they have new plans in terms of how they're planning to ensure and bond there are different differences in those regulations that too changes infrastructure across the continent but also across our border if we're the ones exerting or if we're doing some climate joke here prepare yourselves some forcing on their climate policy then they're doing some influence on our train policy too okay oil sands pipelines among the things that Canada can do other than send oil through Keystone XL is send it through First Nations lands or send it through the hostile environmental natives of the province of Quebec neither of these is particularly easy but obviously when you think about what infrastructure when you look at Harry's chart of where crude oil is going to move there are other alternative routes over maybe it's a 10 or 15 year horizon that shape some of the rail implications for the heavy western Canada sedimentary basin frack lash yes it's there too Canadians have the ability to try to discourage interesting the Alberta Energy Regulator has taken on induced seismicity in Ohio if you find an earthquake within five kilometers that's one magnitude or above it's time to stop drop and call the state in California you can go up to 2.7 under their draft rules Alberta and their cowboys for magnitude and above that's when you phone 311 but they're getting there so again when you think about what it means incentive programs there there are actually national infrastructure programs in other countries where the word infrastructure also includes energy not necessarily in this one so much but hey look out Canada is actually looking at devoting as part of it's it's new building Canada fund national infrastructure component some some of the very things we've been talking about today pipes trains infrastructure to support them and did anyone notice they came out with some tax breaks for their LNG export facilities apparently they're adding infrastructure incentives for some of this export infrastructure while we're still talking about exports on the other hand some of those West Coast projects have a challenge in terms of competing with some of our projects here in the US so well it is what it is okay Mexico did anything happen in Mexico recently oh yeah right so like the biggest thing to happen in the oil industry in any country in a really really long time denationalization in a big way and painfully so at a low oil price how difficult it is to auction your resources and make it look good I think you know I think Adam and maybe Harry also or Sarah somebody somebody spoke before me who was smarter than I am and remembers who they were says that you know this has to succeed for for political reasons and it's absolutely true so one thing you can do to succeed when you have an auction is to is to try to not have too much stuff to auction so the downsizing of round one on low prices when you think about where there is gas the shale the gaseous part of it goes across the border we're sending lots of pipeline gas to Mexico 4.7 BCF a day and 15 going up to 7 and 16 and yet at some point the domestic production of that shale would obviate the need for that infrastructure and less of course you're not going to lease any of that stuff and by the way it's really far from existing infrastructure now and it wouldn't have been too attractive to lease out at the current price environment refine products so the other side of the export story someone has to buy Pemex has asked for 100,000 barrels per day of light they want to send Maya they already are sending Maya one of the complexities of the question is whether or not the Maya they're already sending us counts towards the light sweet they want it's a political decision but again as we look at how the infrastructure to facilitate these exports is driven this is consideration incentives here too national infrastructure program the P&I which includes 180 million notionally on E&P spending includes you know Andy don't feel bad there's still sorry that's 180 that should be I think that's 180 billion sorry about that cut it off by it's a factor of thousand that's like when you're wrong you'd be wrong for real so forgive the typo it's 180 billion and that's 25 billion for processing so you have to factor by a thousand there perhaps it was only 1.5 billion but they had you so no existing midstream incentive in Mexico right now similar to MLPs in the US or unit trusts as they were in Canada when you look at again sort of the advantageous tax treatment that brings investor dollars in particularly across borders this is a policy change that in Mexico could change some of the way their infrastructure looks you might find particularly in the current low yield environment a lot of investor interest if Mexico were to provide it they don't currently so climate policy last point I'll make remember what I said they're coming up the curve higher energy and carbon intensity as they do but they've still made us a pledge everyone at Copenhagen saw it it was against business as usual which is the right way to make a pledge if you're Mexico and they've got a law they passed one of the world's first climate laws in the wake of Copenhagen but have they put teeth in it yet no they haven't yet but watch this space what if they do my call is it's probably not the first thing that happens given all the other reforms they have to do so that's that's my comments thanks okay well that was a lot to take in and all very good thank you guys very much we've got 15 minutes left for questions we'll be passing around a mic we are being webcast so please wait for the mic and identify yourself in your affiliation and put your question in the form of a question I will ask one while you guys think about what your questions are and I do invite or not shy panelists to ask each other questions if you have one about each other's presentations the fundamental premise behind the topic and the report that we did was that there was a lot of changes happening within the North American energy system specifically driven by volume coming on in the United States in terms of tide oil production and that the infrastructure coming from that we're sort of putting pressure on these policy issues well if we're at a period of time where we're not growing as fast from a U.S. perspective in terms of overall volume does it then take pressure off some of these policy issues and in what way could they that sort of manifest itself so anybody Kevin I guess there's two things yeah I mean so that Adam doesn't have to say anything about it the exports issue is diminished in terms of its immediacy by pushing back the saturation point where the demand outlets are used up if you produce less whatever you thought that point was it must be further off now when our growth is slower so to some degree it weakens the policy case and you know that probably doesn't matter very much because if you've looked at how close most of the lawmakers are willing to get to the issue they weren't really willing to get very close to it in the first place but now they have an excuse to say maybe they don't have to also you know I looked while Harry was talking actually when you brought up that chart about the spread and the WTI Brent spread is now about $11.50 but in a low spread environment some of these questions about Bakkenkru on Chuchu's start to go away because we're buying from the coast and in a low price environment some of that supply of the Bakkenkru on the Chuchu's doesn't get produced so it definitely does it does bound and shape some of the policy issues I'd argue that if you're going to think about policy hopefully you're going to do it for longer than five minutes at a time and you should think about long-term price dynamics long-term expectations these are after all long-lived infrastructure decisions just Kevin it's one thing is there are a number of producers who would probably argue that given the low oil price environment that even a $10 spread between Brent and WTI has huge implications for their revenue stream and that the need at least from a producer standpoint for some kind of relief on exports might even be higher so I think it's a complicated issue I think in general the idea of the bottlenecking at refineries being somewhat less of a problem is correct I was going to say the same say the same thing which is that in terms of the volume increases they'll be lower so therefore the amount of volume you have to accommodate in terms of pipelines, rail exports is lower on the other hand as you drop the oil price the profitability from the producer's perspective is more squeezed so every penny that he gets per barrel is important so if you're an oil sands producer looking at oil prices that differential between moving oil sands by pipeline versus rail becomes very important in a low price environment and the same thing for if you're an Eagle Ford producer looking at selling your light oil at a steep discount and you could get it exported and make another $4 or $5 that $4 or $5 becomes very important when the oil price is $60 Hi Emily Meredith from Energy Intelligence and I have a question that's ever so slightly off topic but Kevin you alluded to it a bit and that's about LNG exports and the question is you know recently we've been hearing some things from Canadian and Mexican based LNG projects saying that they're looking at relying on US gas for feedstock and so the question is basically how does that fit within the context of US LNG export policies is that a threat for the US or is that a way around our policies So my colleague Christie Tezak did some work on this and it sure looks like you can't just use the pipeline gas that you send across the border and export it without getting so to do that also in general sort of this idea that you're going to game the DOE and expect that it's just going to work out it's probably a bad way to do business some of the questions though might be whether or not you do get the non-FTA authorization and do it anyway there's actually a case to be made based on whether it be environmental concerns that's not happening right now you know where we are right now is that we're getting approvals a legitimate way of structuring the non-FTA delivery to the global market probably isn't going to come up as much Sarah I might want to just comment combining the last two questions in a sense keep in mind that with lower global oil prices the spread between US natural gas prices or Canadian gas prices and the world gas prices which tend to be contractually linked to oil has narrowed and that means that almost any LNG project doesn't look as good in February of 2015 as it did in February of 2014 now LNG projects are going to be based on 25 or 30 year average estimates of what gas prices and oil prices will be so it might not make a huge difference but I would be I would not want to be going into a capital allocation meeting saying trust me it's you know that we won't make any money if we had it to sell today we wouldn't do that well but it'll be just terrific over the next 25 years it's a lot easier to go into a meeting saying this is making money today and it'll make money in the future and then the capital gets allocated so everybody's looking for something to cut out of their capital allocation this year and we ran some preliminary numbers with in a low oil price environment and you don't get a whole lot more LNG build out in the US and Canada and we have a lot of infrastructure projects right now I'm Jan Meyers with Resources for the Future there have always been NIMBY problems on any infrastructure building of particular pipelines in our country but in the last 5 or 6 maybe 10 years there's been another even bigger resistance, climate change advocates McKibben being the prime example what do you think our energy security and energy economy should do to address that? I can try to talk about it speaking as an economist there's an argument called the second best argument which says if you're trying to do something economically efficiently and you aren't able to do it you may have to settle on a way of doing it that's less economically efficient because it's the only option you really have an economist would say that the issue of climate change and climate mitigation is best solved through some kind of pricing mechanism that puts a value on carbon and lets the market determine which energy source is more cost effective as a mitigation or which technology is more cost effective and it's really kind of a separate issue from the issue of production of hydrocarbons or the transportation and refining of them. In other words they'd be most economically efficient to place a value on carbon high enough to meet your climate change goals and let whatever project goes forward that's most economic including whatever that value is on the hydrocarbons that hasn't happened so what has happened is the environmental NGOs have said we're going to essentially try to stop fossil use in any way possible so almost every project that I'm aware of has some degree of opposition if it's a gas pipeline if it's a gas development if it's oil pipelines they all get the same kind of opposition if there's some regulatory process that they can go into and influence and I think the way you would have to stop it is to essentially say let's let's try to do it the right way which is let's go ahead and implement a policy and let's move away from this idea of having wars every time somebody wants to build a piece of pipe or what have you which is economically inefficient but of course in order to do that you'd have to get agreement on a climate policy which of course is nowhere I don't see how that could possibly happen so essentially we're in that second best world where people are fighting wars piece of pipe by piece of pipe this gets to the question of the new CEQ guidance as well we've had an infrastructure permitting process at the federal level by the FERC and the Army Corps in particular where they've basically said the upstream is being regulated by the state where the production is taking place and it's very difficult to make or if not impossible to make the case that the overseas or downstream impacts are clearly linked to one specific piece of infrastructure moreover there's some question about whether or not that infrastructure ever really induced the upstream production from which the greenhouse gases are purported to be linked the policy has changed now so we are in an environment where that case has to be made differently that you want to make this is in our national interest but it's a makeable case there's a peer reviewed study I saw the article I think this week that they've looked at LNG exports and they've looked at the whole life cycle so they've done this and it displaces heavier carbon intense fuels in destination markets and therefore it's a net benefit so I mean the rules of the game are changing enough that I think like any other economist I think the price on carbon is a solution to everything but if you want to get by right now the answer is probably to look at the life cycle case you have to make okay we may have time for one last question we have a hard stop at three so it'll have to be quick hi I'm Andy black with the Association of Oil Pipelines first thank you that may be the best quartet of presentations on liquid fuels movements that I've ever heard so thank you I saw a theme in several of the presentations whether it's arrows showing crude or products or NGL movements throughout the country or tables of all the different projects that are being developed a theme that if you stop one specific pipeline project or one specific rail offloading facility you're not going to stop this broader movement and we as a public we want those movements of crude and NGLs to get to where the consumers and the workers can use that value but as you have your list of things for policy makers to consider I haven't read to see if it's in report is that an important thing for policy makers to recognize that these barrels are going to move to where the value is whether one project is stopped it's certainly something that came up significantly consistently throughout the course of the discussion I mean I think one of the first things that we explored was when you've got volumes coming on as quickly as they have been where was the capacity able to move the product to where it needed to get to and then where was it deficient and how long did it take to be able to put the infrastructure in place and I think as Harry was saying one of the really amazing things about the system that we've had and the production experience we've had is that we've been fairly successful in being able to move product to market even when there weren't pipeline alternatives there as well I think one of the major questions now is one you know do going forward in a period where the production is not necessarily as an intense as high over a period of time what is the preferred method of being able to deliver these goods to different markets I mean is what we've seen over the last period of five years been a move towards optionality given the pace and the uncertainty on both sides of the sort of production and demand side of the ledger as the system sort of adjusts and is it going to find equilibrium or given the nature of how production goes going forward is it going to have to adjust further in the future I think some of what we were talking about in terms of US offshore Gulf production and what the refineries are doing to adjust will be part of sort of answering that question but there really hasn't been a lot of evidence to suggest that when there's production out there that needs to find a market it doesn't do that right I think that figuring out where the intersection between market decisions are and policy decisions are has really been at the crux of what's been going on the last several years where policymakers are sort of waiting to figure out what the market solves on its own and where intervention is necessary or needed to be able to sort of resolve some of that and to be fair to all parties that's been a hard thing to do over the last several years things have been changing quite quickly so that's a partial answer to your question anyone want to add anything else that was a great answer I second what Adam said well with Adam's endorsement I can't do any better for the day so listen I want to say thank you to all of you for being here and I was remiss and not saying I'm sorry we missed our old colleague Dave Pumphrey who used to be the director of the program with me and started off this project and is stuck in Kiowa so today if we're sorry you're not here we're pretty sure you got off good on that deal but thank you guys very much for Adam and Harry and Kevin and our team here at CSIS for putting it together we'll see you next time thanks