December 2015 /// Vol 236 No. 12

Industry leaders outlook 2016

Competitive markets mean a brighter future

In my December 2013 editorial, I issued a call to action, imploring my industry colleagues to proactively educate the public on our actions regarding responsible development.

Keith W. Lynch, ConocoPhillips Company

In my December 2013 editorial, I issued a call to action, imploring my industry colleagues to proactively educate the public on our actions regarding responsible development. A specific goal was to offer a balanced view on hydraulic fracturing. I’m confident that many took up the cause and had informative conversations with their family, friends, and even strangers. For those who did, I thank you. The good news is that the informed public has started to see through much of the misinformation offered by many anti-development organizations. News stories disproving allegations about the impacts of fracing have emerged from many sources.

Even the U.S. EPA assumed a more neutral, fact-driven position on the issue in its long-awaited Assessment of the Potential Impacts of Hydraulic Fracturing for Oil and Gas on Drinking Water Resources, released for peer review and comment in June 2015, stating: “. . . we did not find evidence that these mechanisms have led to widespread, systemic impacts on drinking water resources.” The focus is rightfully shifting to well integrity and the critical role that it plays in ensuring environmental protection.

More education needed. This year, I feel compelled to again ask our industry to join me on an educational campaign. This time we need to target our messages to the United States government. Throughout 2015, members of Congress debated the relative merit of repealing the 40-year-old ban on exporting oil produced in the U.S.

Over several decades, refineries have become more efficient at running specific crude types by focusing on varieties available in their markets. This typically meant a focus on heavier crudes for import-dependent countries like the U.S. Indeed, imports peaked at 60% of U.S. supply in 2005. The preferred choices in crude types imported frequently were (and still are) heavier sour varieties, which fetched lower prices. Many domestic refineries were, therefore, configured to run on “price-advantaged” heavier crude. Allowing refineries to pull their crudes from a global market well-supplied in a spectrum of crude classes results in better process efficiency, which should benefit suppliers and consumers.

This concept of efficiency also should prevail in today’s profoundly different oil market, characterized by greater domestic production of light, sweet oil from shale, as well as weakening demand growth. Many domestic refineries configured for heavier crude cannot efficiently process light oil and condensate. As a result, production of these varieties overwhelms refining capacity during the twice-annual “turnaround” or maintenance seasons. This surplus could worsen, if production growth resumes.

To deal with this mismatch between production and refining capacity, U.S. refineries must operate at reduced efficiency. That means to offset the cost of this inefficiency, they require a discounted price for U.S. crude oil that has ranged from $4/bbl to $11/bbl off the world (Brent) price.

Reasons to end the ban. Not allowing the export of U.S. light crude exacerbates a market imbalance between available crude and the most efficient consumption points in other countries. Bi-partisan support for repealing the export ban has been building, with congressional hearings held, and a House of Representatives bill eliminating the ban passed. However, there is still a long way to go before the ban is lifted.

With the U.S. and most of North America in a new era of energy abundance, there is no longer a reason for protectionist controls on oil. The U.S. recently surpassed its prior 1970 oil production peak, with potential capacity ready for additional development and growth, depending on commodity prices. Additionally, any measure that benefits America’s economy—as repealing the ban would do—often translates into a growing global economy. Exports also would diversify world oil supplies and stabilize the market, which would support economic growth. Importantly, studies indicate that the U.S domestic market should see lower gasoline prices.

Once again, the U.S. plays a leadership role in bringing new oil and gas resources into production. Sustaining this role requires continued development activity. Domestic crude price discounts caused by the export ban exacerbate the impact of already-low oil prices, and reduce the industry’s ability to invest in new supply and improving technology. Continuous improvement in technology lowers the marginal cost of development, thus leading to more resources being converted to reserves.

The best way to encourage unconventional resource development, worldwide, is progressing development of technology in proven North American plays. Subsequent development of shale resources elsewhere expands access to affordable energy, driving continued improvement in living standards in developing countries. That is a win for all. One step in promoting this self-sustaining improvement process is supporting fair competition in the global oil market. Please do what you can to support the repeal of the U.S. crude oil export ban by working to lobby Congress for action. wo-box_blue.gif

The Authors ///

Keith W. Lynch is the Global Completion Chief for ConocoPhillips Company, based in Houston. Mr. Lynch has held a variety of technical and leadership engineering positions, mainly focused on drilling and completions. He graduated with honors in 1983 from the University of Wyoming, with a BS degree in petroleum engineering. He is a member of SPE, serving on several standing and event-focused committees.

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