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tv   Key Capitol Hill Hearings  CSPAN  February 17, 2016 10:00am-12:01pm EST

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not have enough votes left after trump to elect any republican. that goes right back to hillary clinton. two of the first people that donald trump spoke to before candidacy was the clintons. host: michael in littleton, colorado. hillary clinton is scary. she couldn't get out of our way
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in the nixon presidency. she couldn't get out of the way of her husband. thankfully, her husband was impeached. everything upd and lied and taken so much money from her foundation people better wake up and support because if hillary clinton or ted cruz gets in, we will be hurting like nothing else. donald trump wants to make our country better. he loves our country. i am a veteran. he is down to earth. people don't know what he does on the side when he gives money to people. he helps people. he helped a marine who was imprisoned in mexico. i will leave it there so i can get in more calls. caller: hello.
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i have a different take on this. them and the first one who scares me is jeb bush because he sounds like -- when he talks. two, hillary clinton. i listened to her and i couldn't --p wondering if bombs word if they would be said the same way they were going to say it if she became president. and the third one i am scared of is bernie sanders. because if you take a picture of , they sanders and yoda look very similar. host: robert in texas, and independent. is it baytown? caller: yes. democratd of any
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was wither husband china when he was in office and she wants to give away everything we have got. we have already given away too much. we need to get rid of the giveaway stuff. nobody wants to do nothing for seniors. had kids in school since they were 10 years ago or 20 years ago but still, they have pay to school taxes. i think we have to many giveaway programs. i just don't think that is right. host: ok. can in florida, a republican. caller: hello. i want to make a comment. thead an article in atlantic last night and it changed my mind on a lot of things that i am thinking about about candidates. were has said that they
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bombed first by the russian so they went over and bonk them. if they get all the americans out of the middle east, they said they wouldn't attack anybody. i don't know whether to believe that or not or whoever said that. in leaven inget brooklyn. a democrat. caller: hello. bernie sanders scares me. host: tell me why. caller: i live in brooklyn, a few blocks from him. he he neverand finished college. he divorced his first wife. mother and hasy his third wife. support fromans of 20 years old to 40 years old. the only way he has had an income is by running for office. but he doesn't tell you all of
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the stuff you need to know. he is like donald trump. i have to apologize as a new yorker for donald trump. we all have been listening to him for decades and we just saw him as a harmless trash bag. that is why he never ran for mayor or governor because nobody would have voted for him. host: ok. that doesn't for our conversation on today's washington journal. we will be back tomorrow at 7:00 eastern. we bring you now to the center for studies to bring you up with what is going on with oil prices. saudi's and russia have agreed to a freeze in output in order to halt the slide of oil prices. that will be the topic that they will be discussing at the center for strategic and international studies. live coverage here on c-span.
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[indiscernible crowd noise] [indiscernible crowd noise]
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>> we're live at the center for the strategic and international
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audies where they are hosting meeting on the state of the oil market. reuters writes, the fate of the oil committee could be decided today when opec members travel to iran to put his fate that country with freezing output levels. dominant opec saudi arabia and non-opec russia and exporters agreed yesterday to freeze production levels but said the deal was contingent on others joining in. a major sticking point with iran absent from the talks. venezuela and kuwait said they were also ready to freeze out with sources in iraq. that is the world's fastest outgoing source in the year. they are dealing with a growing oversupply and helping prices cover from their lowest in over a decade. we will hear the rest of the story at reuters.com. this is about to begin.
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>> good morning and welcome. i am frank verrastro. holding theonor of chair in energy and geopolitics. a couple of administration topics. in the case of an emergency exit, it is down the steps and out the front and we assemble the street from the hotel. you can also take a left going up the doors and that brings you down by national geographic on m street. just so we are good.
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this morning session, i am excited about. , 2014,st or september coupleues here wrote a of items when people were still talking about coming out of this turnaround really quickly. we thought it would be lower for a lot longer. when you look at the opportunity pool and you looked at what we demand, we bleak were starting to build up overhang and didn't see how you could work it off that quickly. over that time, production has continued to increase. stocks have continued to be built. and the demand-side has gotten weaker and caused concern. about a year ago, we assembled a panel similar to this end it was such a huge success -- almost everyone on the panel nailed this much to the chagrin of the investors and the pain going on
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in the market. it is not fun, believe me. we do certainly understand that. but how long will it take to move out of this? the session at the timing of this? we totally timed this with -- only kidding. but we saw that the market moved up today and don't see how you can get that kind of agreement. a freeze where you are already producing where -- producing more than the world demands. we haven't seen the iranians number yet and the saudi's are 10.2 -- a10.1 or brilliant tactical move. we have changed the narrative from getting rid of oversupply to freezing and oversupplied situation. and yet the markets moved up a couple of dollars over the weekend. the session that we have today, i would describe this as the dream team. we are excited to have them.
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collectively, and i'm being kind, they have over 100 years of experience in oil markets, refining and economics. they are also personal friends. one of the real benefits is when you are able to do it substance and you will get a content rich presentation. you also get to do it with people you enjoy and you are able to engage in that kind of conversation. howard gruenspecht will still start things up. he is the longest-serving deputy built upr and he has an extensive resume doing economic modeling, energy and environmental work. pleased tocially know that howard was let out and we can have him here today. presidentiel is the of the leading energy market analysis advisory firm. , he was anreated rbn
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executive at chevrontexaco, and he just published a new book -- i should have had a topic of it -- had a copy of it and it is a bestseller, called "the domino effect." i urge you all to read it. is another longtime friend. he is the senior editor of energy intelligence. iea before doing market analysis. .nd then john auers this guy knows it perfectly. he is the executive vice and aent of turner mason refining downstream expert and started his career with exxon. so we have a bunch of slides that we can present to you since
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c-span is covering all of this with the permission of our presenters, we will put them in pdf format and make them available. i just thought i would do a bit of framing. to get us going. bears, 2000d the 14-2015 we had a bull market and a bear market. we have talked about this ad nauseam. there is a lot to be said for what is going on but we are looking to continue this. itn you look at gdp growth, is hard to see how demand overtakes supply anytime soon. when you look at the actual market, you will hear a lot from rusty and david and howard on the supply side. so notwithstanding, opec theuction is still high and u.s. is resilient. we will talk about the economics of the rollover. we spent some time last year talking about stupid money,
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where every company thought that investment in their competitors that didn't have as robust a balance sheet, was going to be a problem done the world and it is coming to fruition. sometime in april we will do financial markets and editing which we think will be aged -- be a good discussion. on the demand-side, you need to look out for both the non--- countries where the growth was going to occur and what that means for banks and lenders. that is key, going forward. whether a lot of risk, it is syria, iran, iraq, venezuela -- have become complacent to that. we think we are living in a different world. this is the chart of doom. it is supposed to elicit a lot of laughter. the problem is, when you look at japan, therussia and
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united states and china seem to be the only ones who are doing well. look at the estimates and trendlines for where china economic growth and u.s. growth -- when we started we were indie threes but now we are down to 2.2. china started in the mid-seven's and there are some people who think china isn't at 6.2, they are at 5.9 -- what does that mean for the economic downturn? when you start looking at the rollover, why the rollover on the supply side has been so resilient, it isn't just the properties and geology but the investment and the fact that we reduced the cost structure. at $30, people are not making money. so this is not sustainable. and the long-term of that means that prices will rise and what does that mean to the economy and for a price spike for the industry?
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slides one of the eia and howard will talk about it and everyone will touch on it. when the supply will come back in the about months. when do we start dipping into the inventory and withdrawing the overhang to bring the market back in balance? we are in a situation when we get to the third quarter, we are adding to the inventory or starting to withdraw. but withdrawing will be fast enough to get you out of this anytime soon. and then refining. one of the reasons we brought john on the panel, is that with the exception of extended crude in saudi arabia, most crude goes to refiners to be processed. that is the marketplace. but the characteristics that we are finding, like sweet is not the same as heavy sour. we have refineries that are configured to make certain products slates and the economics to optimize those refineries is based on the
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your fuel costs are, and your outputs, what your high marginal products are. so we will look to john to give us more detail on that. i would like to start this panel. i welcome howard to the stage and we will get off. thank you for coming. [applause] down.: just down. sounds like oil markets. i would like to thank frank verrastro and the entire team at csis for organizing the session and inviting me to put his pay. the truth is, adam would be here if he was not in saudi arabia and you would learn more. but i am very much interested in hearing the insights of my fellow panelists and also the constructive interaction with everyone in the room. in this town, it is often said
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-- i see senator johnson here, that where you stand is where you sit. the energy administration institute is within the department of industry to impartial data and analysis. we don't take positions on policy issues and by law, our information is issued without prior review. my comments do not necessarily reflect their views. now i can say anything i want. in 1850, almost eight decade before colonel drake produced oil from the first well in pennsylvania, charles begins already had a keen insight in oil markets. , a character in david copperfield explained --
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annual income, 20 pounds, annual .xpenditures, 19 pounds results, happiness. annual income, 20 pounds, annual expenditures, 20 pounds. result, misery. dickens recognize that the balance can be dependent on a thin margin. income and expenditures are both totally elastic. outcome depends critically on whether his expenditures to the right or the left. oil supply is not completely inelastic. but it is certainly -- certainly reduced in response to the sharp slide in prices that began in
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mid-2014. a demand that i will talk about a little bit is also elastic, in the short run. micawber who looks at the bliss market from his own perspective, and oil producers misery -- and there is much misery in u.s. producing regions as well as among major exporters around the globe -- can be in oil consumers bliss but it is not clear that it is that blissful. it is fun when you go to the gas station but the economy is not doing that great with it. but i do see some happy faces when i stopped near the foot of the key bridge to fill up my car where, the dollar digit in the price is a one dollar rather than a two dollar or three dollar. even the national average price of diesel fuel has fallen below two dollars and gallon in the
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latest weekly survey. and diesel has been more expensive than gasoline. a little bit more about prices later. here it is. have already seen this because frank stole it from a but that is fine. the balance between production and demand for oil plays out repeatedly. 2014, the accounting suggest that global production has consistently exceeded demand. differenced by the between the blue and the brown lines. as shown by the green bars measured against the right access, global stocks of crude oil and product have been steadily building. eia forecasts continue global stock builds through the first half of 2017.
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of 2015,rst half demand was 2 million barrels a day, but that dropped to 1.6 million barrels a day in the second half but that is still a big contribution to global inventory builds. many on both sides of the oil market, crisis is are viewed as the most important summary statistic. is a foolsorecasting errand. , it is one of our assigned duties. so for better or worse, this is the baseline forecast. we have $38 a barrel in 2016. and thoseur forecast of others should be taken with more than a few grains of salt.
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as perhaps best demonstrated by the value of options in futures contracts for delivery from oil over the next 1-2 years, which imply at a very wide range, ranging from the dotted lines on -- $20 per barrel to over $100 per barrel by the end of 2017, required to capture a 95% confidence stand for the market. this is not a statistical calculation, it is based on the options of futures. spanhe markets confidence does unwind. in the gamelayers so uncertain about the future? a 3-21 month time span.
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some see that prices may be higher than or lower than conventional wisdom, whatever that is. oil demand growth on the higher price growth. it surprises to the upside. that could be economically driven by economic growth. prospects look thin there but you know. it could rise to the upside. actually doducers something with respect to output , there are some significant disruptions in production that are not built into the kind of outlook that we have with supply. social unrest in oil dependent countries speaks to disruptions. non-opec production slows more than expected. so there are a lot of reasons why prices could be higher and lower. some are demand driven and some are supply driven.
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the world economic growth is more than projected. projections are anemic but it could be worse. theknow, despite discussions of freezing productions at very high rates, productions could rise. there could be a reduction in unplanned outages. regularly tracks unplanned outages and there is a ready big set of them that are there and built into our outlook. maybe iran could do better than we expect they do with sanctions being lifted? -- the market is providing those dotted lines. now i would like to move away littleices and look a bit at the underlying supply and demand situation, beginning with supply.
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the outlook for u.s. supply has attracted lots of interest home and globally. maybe too much, if it is possible, maybe too much attention is being paid but they are important. and we do a lot of work in the area. the latest forecast for u.s. supply relevant to the fourth quarter of 2014. it presents and it just an picture. average 2015 production shown by the components together show the blue line, one at to 50,000 barrels a day above the level in .he last quarter of 2014 if you look at the blue line, you can see that eia forecasting production to be roughly 800,000 barrels a day lower than the fourth quarter of 2014 by the third quarter of this year. and remain close to that through 2017.
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looking at the components of production, we see different trends for different parts of u.s. production. that is the yellow line, that includes the tight oil that everyone talks about, it has been the source of production growth from 2011-the beginning 2015, that is where the adjustment is occurring. we see quite a big -- in early 2015 we were above the four quarter of 2014 and we see that over 48 production dropping by where then one million barrels a fourthative to the quarter of 2014 levels. a big problem there. continues on a shallow declining trend.
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almost imperceptible with some re.sonal affects thei and the green line calls for mexico production to continue to rise. investments were made long before they came online. more of them come online in 2016 and 2017. so the blue line is a some of the three other lines. again, we see u.s. production pretty weak over the next two years, relative to where it was at the end of 2014. so, i am not going to give a quiz on this one. again, beginning in october 2 thousand 13, the eia has
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provided monthly drilling productivity reports that focus on key shale production regions for oil and natural gas. putting up slides about four of them. currentfrom this drilling productivity report. thing it is a gestalt that we offer a few summary observations. starting with the first row, it is knows prize that recounts, the black line -- and this goes back to the start of the shale through now. 2014, rate that from counts have to -- have declined dramatically. however, new productivity per rake, shown by the brown line,
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has continued to rise. row,ng to the second legacy well oil production declines have generally been increasing over time, as shown by the brown lines, the top line on the brown is zero. and at the beginning, there is not much of a decline because there are not very many legacy wells that over time, we have accumulated more and he production declined. if you have sharp eyes, you will notice that in three of the four regions, the decline in production from legacy wells is actually starting to decrease in recent months. as shown by the upturn at the end of the lines. this reflects the decline and of legacye rates .ells as they age
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that is particularly true as a legacy group includes fewer and fewer new wells with steep declines at the start of their production profiles. member, fewer new wells are being drilled. so if you view it with the notion that you are writing a bicycle into the headwinds of legacy declines, what is interesting is that the headwinds are slackening a little bit. over time. the bottom row shows the summary , taking into account both knew well and legacy production. reduction in all areas and the permian is declining and we are turning. it is about at zero change in march 2016, excuse me. this is another more legible
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picture of the same thing. hopefully, the bolder lines in the middle are the same lines as shown in the charts for the relevant areas on the bottom chart. what we did an experiment which lines, the actual production trajectory with a little bit of a direction for february and march of this year, and we compared them to an alternative which holds recount octoberregion at the 2014 level and those are the dotted lines. not surprisingly, they are higher than the bold lines. and another alternative where no new wells were drilled after october 2014. where the vertical rig that are less productive than the horizontal ones, but has warned the brunt of ricks. the dotted line is not too much higher than the bold line.
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so really, the vertical breaks were not getting us that much and the horizontal rick production has held up that is starting to fall off. it is a very different picture. we see the largest staff between the top and bottom line. difference between production with october 2014 recounts sustained by the time you get out to march 2016 is 800,000 barrels a day higher than what we believe to be the actual production. it can fall somewhere in between with the line in the of the continued drilling at the rate of october 2014 and no drilling at all past the fourth quarter of 2014. so, enough. whense as i said earlier,
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we think about the state of the oil markets, it is natural for us here to pay great attention to what is happening and what might happen with oil. a strong case can be main -- can be made that the oil markets would do best to turn their attention elsewhere. pies and ithese violated rules by using pie graphics but i didn't know how else to do it. it puts the components of u.s. -- adam is out of the country so i can violate the rules -- it puts the components in the context of overall crude oil supply in short-term energy outlook for this year and next. the pies are pretty similar to each other. oil or shale,bout we are talking about the blue four pointh we have 7 million barrels a day in 2016 for4.46 barrels of -- and
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.46 -- and 4.4 6 million barrels a day in the second. i wouldn't trust the second digit. it will depend on crude developments in the rest of the oil. that is the red area. it is just crude oil which is why it doesn't add up to 93 million barrels a day because that would include all the natural gas liquids and refinery gain. i am just looking at crude oil. looking at the red areas, the rest of the world, three distinct issues merit attention. -- we don't model them. we don't model the stability of venezuela or other things that might happen. we don't project anything about that. there is opportunity
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for political events in all kinds of places. extreme pressure on countries that rely on oil exports to fund their governments. support programs may be important dude -- important to stability. importantld have an effect on the state of the oil markets. the second is exporter decisions. frank has shown his view of some of the recent things that we have been seeing, whether it is real or not real or whether it means anything. many analysts a court a large role in the current oil market to exporter decisions including the decision by saudi arabia in the late 2014 to maintain production at high levels, rather than reducing production to help restore the balance between supply and demand. future decision by major exporters to change their strategy cannot be ruled out.
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thatld agree with frank what has happened so far does not constitute such a decision that such a change, if it were to occur, could affect the markets. and the third big thing affecting the red area is investment. unlike geopolitical events and exporter decisions, which are quite idiosyncratic and difficult to foresee or model, i think investment has really changed in this sector. there have been tremendous cuts in the amount of investment that is being made. if the red area looks like shale , you could see the effects of those cuts pretty quickly because shale has a short time from investment to production. for the more conventional or traditional oil investments and major projects, it is a much and in this
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forecast, we are not seeing significant falloff in the red area production through 2017. but at some point, this drop off does have an effect. there was a lot of work done by the the iaea about natural declining rates in conventional oil. they are significant. investment has not stopped completely. but it has been cut substantially. and at some point, one would itect that to show up in -- is showing up in the blue because again, the nature of the , but at somecle point it will show up in the red. and that is a load of oil. -- that helps to bring whether you view it as a good thing or a bad thing is another question -- but that effect
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could have a significant effect on the balance in world markets. capital a washington span -- capitals fan so i don't advocate rocking the red but from other analysts you should be watching the red very carefully. note, ir thing i should want to turn to demand and then i will stop, i don't want to monopolize the time, but way at the beginning we said there was two things you had to look at. supply and demand. but frank rightly said we should consider demand. here is our view of demand. -- in 2016 and 2017 we see continuing demand growth about 1.5 2 million --
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1.4 5 million barrels a day in 2017. combined with our outlook and stagnant global supply, that underlies our projection for more talents markets by the second half of 2017. that is way back on the first slide. but demand really matters. and our view is not the only perspective on demand growth. our view happens to be similar to that of the international energy agency. think, in its most recent outlook has lowered what was a much higher outlook for demand growth to something much closer to what we have. it just so happens that we are not trying to do this, it happens that opec has a similar view in their latest documents. banksgain, some private have significantly different views. and again, looking back, there
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was a wide range of views when we started 2015. the iaea was at a million werels a day growth and didn't have prices were we were, it ended up being significantly higher. --re was significant remain there was significant range. in 2016 and 2017 in this picture, you get 2.5 million does help youat with your balance of the situation. thing i want to tok at now, economist like draw supply and demand curves with quantities on one axis and crisis on the other. this is not that. but it is important to keep in is not just and function of price. it is also a function of economic growth.
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it has an effect on prices, specifically in emerging countries. -- the is a little tale eia is very transparent and what this shows you is starting in january 2012, we started with , in thet blue line short-term outlook looking at 2013 oil markets. 2012, we hading of the countries of at about 6%. but over the course of that time, we kept looking at 2013 almost sixiced that .ell to under four by the end of 2013, we had most of it in the can so we knew what the number actually was. we started out looking with a higher outlook than came to
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pass. and the same thing in 2014 on the ground line. you look at 2016 on the black line and the little stub of 2017 at the far end, all of them have a downward slope. so we are starting up with the views of what demand might be in recent years with economic growth. so with that, it is another thing to keep an eye on. especially in lieu of what frank and others have had to say. i have another slide but i don't think i will do it. i should do it? i am worried about time. i am paranoid about my colleagues. one that people -- i have been doing it. a this -- i have been doing variant of this.
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, caner thing i would watch exporters cohere and this looks at the lessons of history, i am an old person. and there are 212 year actual times and then there is from the energy outlook 2015. the important thing to note is that in the first 12 years, with1985, which ended saudi arabia, which had been cutting oil production and then nogot to be very low and mas. of 1986,he beginning they changed their policy. but what happened to the world
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on the demand side, it increased by 3 million barrels a day. oecd went down and then it went up. non-opec supply went down and part of this was the saudi arabians cutting production but also, iran and iraq were doing all of the things that they have done so well for so many years. changing a little bit now. and it ended with a big price decline. and the next historical time was 2000-2012. consumption went down but non-oecd went up over that time. a much different thing on the production side. we needed 12 million barrels more and 6 million barrels came from opec and 6 million barrels came from non-opec. in we had pretty high prices
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2000 12. historically high sustained prices. maybe not the peak level that was reached in july, 2000 eight, but it was a very high price. witho historical times different outcomes. one ending in low oil prices and one ending in high oil prices. so i thought it would be interesting to take a look at what might happen from 2013-2025. we have the outlook for demand and again, it may be too strong. demanda plus one on oecd and over the last two, it was negative. demanddo have an overall , plus 13. the next picture, the only difference is that we have the non-opec supply from 10-15 and
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that wasd there was -- million barrels a day, all we did there was to get that spread , two different views. and then we looked at the implication for the call on opec. and we did the math and ended up with a negative three-plus two. which interestingly enough, that is in between the other two times. opec itself is quite different. you have a situation where iraq is getting back in the game, which it hasn't been in for some time. getting back in the game. so you can't just read off the numbers and say, well, it is , because within
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the exporting group of countries, we have more people who want to produce and that is an interesting question of what will happen there. , a this is something personal hobby horse of mine that i have been watching, and i don't know how it will come out. but i think it is a useful way of thinking about this longer-term issue. if iran and iraq want to significantly increase their , the implied invocation for the rest of opec, if they were going to fit in in this system, is very challenging. so with that, i really am done and i think you very much. -- i thank you very much. [applause]
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>> sorry about that. after the message that david and i had, i was surprised that frank had his back. the story i'm telling this year is worse than last year. that was funny. metaphor as the metaphor because it captures what we are seeing today.
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in the markets for gas and crude oil and ngl. version oft for a the slide that we used last year and it shows the price cycle that we have seen. even going back before that. in the pre-shale air a 2007-2 thousand nine, back in those days, our crude oil and natural gas moved in lockstep. when one went up, they all ran up. and then when they went down, they all went down. and that's was the way that a lot of folks thought it was going to work but by that point, shale had come into its own. shale production had increased. when crude oil and natural gas increased after the meltdown, gas prices didn't go along with it. they held down. so producers shifted their budget over to drill for natural
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gas. he crude oil did not come on that quickly. so what happens next? gas stayed down. we started to produce too many natural gas liquids. propane, ethane, and those prices came down to exactly like the prices in natural gas is a few years before. then, what did producers do? a shifted more of the budgets to drill for crude oil and that got us to that final phase there of crude oil prices coming down along with everything else. so what does that mean? that is when i divide the world up into 1.0 and 2.0. between 2009,e after shale started to have an impact on the marketplace. and basically, thanksgiving 2014 when prices crash. shale 1.0 is that
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that every time a commodity crash, every time something went down, the producers did the next logical thing. he moved to the x commodity. guess what. we are out of commodities. producers are dealing with shale 2.0. shale 2.0 says that i cannot serve my problem as a producer by moving to the next commodity, i only choice is to deal with the situation however i have to deal with it. lower cost, smarter drilling or cutting the capital budget. there is one other aspect of shale 1.0 that is going to be with us for quite some time. i will call that the aftermath. we will look at this slide and it will be the same crude oil slide that we looked at on the previous slide. we have all of the clutter taken out of it. we can see more detail of what has happened in's 2009 up until
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now. now i give you a visual metaphor that you might be able to envision what it might look like as we look back on it a few years from now. i wonder if we will look back on that and think of this time that we have just been through as a bubble. in billionst drew of dollars for producers and midstream companies but now has to be worked off, exactly the way we had to work of the inventory of houses in the housing crisis and how we had to work off the inventory of.com companies when the.com bubble burst. i'm not saying that's going to happen but it is an adjusting thing to think about. let's come to terms with what has happened over the last few years. this is crude oil production are all ofd these your numbers howard, hopefully you recognize the majority of them. they must be right. 9.2 billiong to
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barrels a day now. not much of a decline. a 70% cut in prices. --s is dry grass production dry gas production. have extended these out to see what is happening based on flow data and what that says is that we were down a little bit in production in the first part of this year but right now, in the past two weeks we have hit all-time record levels of natural gas production in the united states so it is just going right now even with prices well below two dollars. and natural gas liquids, propane and butane, the fastest-growing commodities on the planet, nothing is slowing down there at all. mean in termsthat of the relationships between production volumes and what is going on in the market?
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it is part of the market behaving the way it would be and that is the relationship of oil price and great count. oil prices go up and recount grows up. oil prices go down and rig count goes down. the same thing on the gas side. a close correlation between those two prices. we just got through looking at production of those two different commodities, increasing at the same time. we are seeing huge crashes in the rig count. so what is going on? the answer is productivity. this is a version of the productivity slide i showed last year. it is worth looking at the update. a performance from 2011-2015. it took them 22 days to drill a well in 2011 and now it takes less than eight days.
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all we do is take those numbers and divide them into 365. more -- the ip rate is higher. we're going to do the math of times 43 to see how righ production a given can produce. the answer is 407% productivity improvement. thousand barrels a day and up to 47,000 barrels a day. that is where all of that production is coming from. the german productivity
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report because it shows the same thing and we don't have to do mass. they have done the math for us. eagle ford ande oil p improvement on the lays. the that a single rig can do five times the word that a rig could do five years ago. the fact that we do not have that many drilling is not that big a deal when you look at how productive they are now. if you are in the business of drilling with those rigs, it could be a very big deal. looking at that five edge
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percent improvement on natural -- five hundred percent improvement on natural gas, always a look at their growth because it is in a you that you need situation. -- unique situation. i split it from everything else in the united states. everythingction, until 2016.m 2011 what must be happening, that is the northeast. a skyrocket on the right-hand scale. to 22 bcf a day. the gas coming from the northeast is absolutely astronomical and that is why we have prices so low today. even though the weather has something to do with it.
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what happens next? to answer that question, you need to know something about last thingorgot, one on the slide. that is demand on the northeast. what happened in the middle of 2015 is the total production in the northeast grew more than the average demand in making the northeast a net reducing region. -- producing region. , weo back to our was before like to do price forecast. unfortunately, we do not lead the price forecast and we do not believe in anyone's price forecast either. we use scenarios. scenariospick three and call them growth, cut back,
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and contraction. the growth forecast assuming we will get back up to $45 in 2016 on average and get all the way up to $60 by 2021. the fact that that should be the high case right now is mind-boggling. upthe low case, $30 getting to $40. something like what people expect in the red line and the headline is the curve. that is natural gas, the same thing with natural gas prices getting up to above three dollars to four dollars. nobody may believe that, but let's just see what happens to production if that were to happen. then, the contraction case below two dollars and getting up to $2.50 by 2021. we will work through producer
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economics based on those curves. we also want to look back on what happened in the past. what happened back in the good $21 --en crude oil was i'm sorry when it was $100. in order to do that, we would take those same price scenarios, but have to put them on a different scale because they were not fit on those graphs we were just looking at. that is what crude oil prices looked like in july 2014, it was $100 per barrel. curve werehe forward falling down to about $85. then, we're going to fast-forward to may 2015 with the curve is $50. we are going to look at production economics on all those cases and do the same thing on gas. that is the forward curve back
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in july 2014 and that is the forward curve in 2015. on the same day we have those corporeal curves. that is history. case and then our three scenarios that we have. as you can imagine, there was a to impact for what happens producer economics depending on which one of those price scenarios we are on. there are two other variables changing. in order for a studio to look at producer returns, not only do look at price, we have to look with twoas changed other variables that are externally important. no one is volume and number two is what is the cost of that well. is equal forvity tight curves.
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these are the numbers out of a report to you guys did last thursday showing what the curves look like for each of the major basins. it was a great piece that these guys did. those are the numbers straight out of that report which basically says that the initial production rates were somewhere around $100 a day in 2010. now, they are approaching $450 a day. most of the major basins are saying that exact same kind of improvement over time and the volume that comes out of the wel l. if you drill and get two or three times more than you did years ago, the economics are a lot better.
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drilling and completion cost are down to about 25%. an average of about another 10% ofm 15 to this first part 2016. costs are way down. volume is up, cost is down in price is down. what does that mean to economics? let's fast-forward and you guys will have copies of the slides. i will not have a detailed discussion. back in 2014, crude oil prices were $100 and natural gas at $385. crude oil rates of return for in the 40's and natural gas liquids rates of return rainy 30's and the lowplays were in teesns and single digits.
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notice that we have two different rates of returns. the prices in that region are extremely low if you are stuck with taking prices in that region. a lot of producers have taken that capacity out of the region and if they are lucky enough to have the pipeline capacity out, they were getting a rate of return of the top. if they did not, they're getting the rate of return at the bottom. fast-forward to 2015. crude oil prices are cut in half, $50. $285.l gas is down to we have always increasing and when that happens, these guys are still making money. these are have cycle rates of return and i'm not including all of the cost and buying every thing that is plugged into these things. are there produces better off drilling the not drilling if they have the money to do so? these numbers say yes.
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it means that they're better off drilling the not drilling. dry gas plays in the 17 five range. last year, you can still make money at $50. $45 and 2016 is the growth scenario. this year's cost and curves and prices, if you assume this growth scenario if we're back up to $45, everybody still in good shape. what happens if we are on the lower scenarios? case and in the $30 case -- $38 case. we are still in the positive and double digits.
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only if we get back to the $30 $2.10 gas scenario do we get down to single digits for crude oil, but not zero or below zero if you're drilling costs are down and not if you have been able to get the volumes up and you have a way to get the stuff to market. gas andigits for wet low single digits for dry gas. you have to be in the right place. this is not traditional stuff. it is all shell drilling and you have to hammer your service providers in order to be with you prices down that much. if you did, that is the rates of return that you are seeing. that does not mean you will like your financial statement. it does mean that the economics of these wells don't look so
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bad. oil looks good and we get up to 10 million barrels a of, that is an increase logic 16 barrels a day for each year. if we are on the contraction case, because of traditional production falling off because so much of the volume is falling off, we still have a decline of 225 boroughs the day. -- barrels a day. it does not follow the face of the earth, it is not decline down to the level of where we were a couple of years ago. natural gas production is the same thing. ofwere decreasing at a rate 2.8 bcf per year. since then, cut back scenario is flat and contraction scenario is a decline.
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this is lower 48 down to about 60 per day. it is a decline, but it does not follow the face of the globe. last thing to mention, where did this go? my logic is if we do not drill, are, ifwhere the wells prices go back up, those are going to be produced. therefore, we are in a trading range. prices go up, the economics will improve and volumes will come back and push prices back down again. we have seen this before. der back when i worked for texaco and i had a long position in the market and i was not a happy camper. prices dropped from the 30's ton to $10 and can back up
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$15. for the most part, it stayed in 5 to $20. between $1 could it happen this time around? i don't know. but if you multiply that price build you a case and that is exactly what we would see. producers have to do with the situation and productivity continues to improve. even with today's low prices, some producers are economically better off drilling than not drilling. that is assuming the worst if they do not have the cash to do so. prices could rebound to $60 and production
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prices will come back, but there is no guarantee that those lower prices are going to result in higher prices because when prices get back up, production will go back up again. by the way, frank told me that i can plug my book. if you want to know more about $14.95 ons only amazon. thank you very much. [applause] now, after bring this more onto the world stage. i think a lot of the things that rusty: hearing from reflect my view. that we haveying to look at it all. i go back to the beginning of my
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talk last year. it really is all about shell. things thatew other we need to pay attention to, but in terms of the market dynamics and the state of the oil market today, it is about shell. do i have to hit a button? no? next presentation? i can actually do that, but no. thank you, mariah. as i said, we need to remember what caused this and whether or not these are still relevant. how are the rules of the key
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players changing? when ity, we saw opec started and a different opec as of november 26 of 2014. do we see it back to the old of 2016 or not? i think not and i think most of us would agree on that. term lower for longer, we were pretty early in using it with energy intelligence. how much lower and how much longer are obviously key questions. ty's side.am on rus long, buts a little it most certainly is not 14 days. for 2016, ialances
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think i'm on the pessimistic side compared to some of the other guys. i would talk a little bit about shell, but i do not have to do too much, frank because i think that has been well covered. question is lurking in the background. it in a veryin conventional way. thing andus on one that is didn't change the way that saudi arabia thought about its resource in the long run. i happen to think it does, they have not stepped up and said that. that has a huge impact on the way that they behave immediately term. you have a bio already. let's go back and remember why
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this price declines happen. it was not because go back -- opec decided to leave its market for its market management role as a production cut her. -- cutter. it happened because of the birth era.he shell burea 2014, the size of the shell resource with becoming a major issue. myths outa number of there that this was not the result of the hundred dollar crisis. this was not the result of anybody finding anything. this was not the result of new technologies. they all played a role in the speed of things, but it really was a change in how geologists
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thought about their job. the good geologist was the guy that about figure out where the oil stopped. he did not care where it started. that changed with the shell era coming-of-age. the source is absolutely essential to understanding the future of the global market in the u.s. large resource, but is also a very new resource in terms of its commercial value. andi arabia looked at that they cannot change the knowledge of the resource base, so they chose to try to change the economics. that is where we are in things right now. how are people doing? i compare this to an
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opera or a ballet where there a dance and saudi arabia that is any role of a ballerina. saudi arabia likes being in the and mohammed is in the lead of this and taking all the spotlight. is there going to be an agreement? think so, but is there a lot of pain in this market that would cause an agreement, yes. it is a horse race at this point. the other thing that is going on is that with the end of each of the act of these various dancers -- dances, there is a round of applause from the bearers who are pulling on frank's slide and there's a jump in the price of oil. just getting a little bit of relief from the low oil prices, but not giving up on the overall market share strategy.
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that 20 fivee sure years from now saudi arabia is not ending up with the biggest stranded assets in the history of the planet in terms of unproduced oil reserves. let's look at the size of the cut that is required, which we have not done yet in these presentations. by my numbers, it is 3 million barrels a day just to take care of the surplus. i will show you the quarterly numbers and a couple of slides. on top of that, we now have somewhere between 500 million and one billion barrels of oil that has gone into inventory. some of that is that oil and some of the. what i think we're still talking about on the cut on the order of 5 billion barrels a day to fix the problem.
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is that a number that opec helped him do, it was a challenging thing. this frees is not even close to giving up. a continues to build a surplus. i know we are little behind time. process are we in the and then i will get to some numbers. obviously, we have seen the price decline. this strategy that developed out of it that is not only affecting patch, itics and the is clearly affecting the level of financial pain in the market both for producers and for countries.
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means that there are two options that you might see for the saudi market share strategy. one is driving production of and start leaving out stocks. the other end is to get people cut.ree on a production whether that cut works is the second order of things. not even the is existence of the cut, it is the discussion or the possibility of a cut that moves markets. years on wall5 street, it does not matter if it is true or not. it matters whether the other guy thinks it's true and how fast you get your money into the market versus the other guy. that is how you make money. i have a friend told me early in my career that it is very dangerous being smarter than the market because you can lose a pile of money that way. the other quote which i think i
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mentioned last year, i like even better. i was on the crude world advisory committee in the 1980's. remember the number of times you heard the king of saudi arabia is dead and prices go up? you lose money. look at what these balances look like. , thereall about prices is other stuff that is going on. you will see that i have a mid-level demand forecast. this is my colleague that put
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those numbers together. we will look at how they compare to other people in a minute. thatly, i am an optimist is on the supply side for all of the reasons you just heard about. we looked at a surplus last year that was over one million barrels a day in the first quarter and crude was between two and 2.5. this year, we start off with a andlus that is well over 2 it continues throughout the year. there are people that are still making money and i think we tend to focus way too much on .verages the dumb money. i have been using the term economic darwinism and we talked
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about the shell bomb about to explode, which is the bubble scenario that rusty had brought up. the important thing is how many of those -- how much of those productions from the shell patch comes from the lower tier of the financially challenged companies. more importantly, how many of the big banks are in major exposure. that is still up in the year because remember that all prices are a huge factor in figuring out what the reserve base is for reserve base loans. the banks don't necessarily don't want to see how bad it is either. the term, kick the can down the road was ok but that's
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applicable -- applicable. if we do lose a few of the dumber players in the shell business that is good. there is a process by which is called economics were people who do badly tend to lose their assets to people who do better. onare waiting and waiting how this process will work out in the market. it is certainly not going to happen very fast if the people involved in trying to improve their level in the capital stack in the bankruptcy terminations are waiting for that price increase to bail them out. i talked to a bankruptcy legal shop a month ago and my question
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is what is the market looking like to you. are you seeing the private equity guys in the hedge fund money taking a look. he says i'm not seeing anybody. i know there has been a little stuff going on, but there is a major transfer of shell assets from the economically or mentally challenged people in smartiness to investors. you end up with a whole different picture. the same technology that is are stille in play going to be available on the same locations that will still be friendly. the eual -- i would put
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agle ford there. refineries are next door and people love you and the state does its job in a disabling way. a big mix ofs conventional and nonconventional stuff. there is a quick victory of what i think -- quick picture of what i think is the overall supply-demand situation is. a look atre with you not just the u.s. and terms of the adjustment that is taking place, it is a fairly broad set of countries that are being affected. lower oily the prices, but also by whole different set of circumstances. whether be the sanctions or geological age mexico or the sanctions for russia for the
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geological age for china. the reserves in that area have been abused. it is going to hit and a bunch of places, but when you get to the individual, i still have half a million barrels a day of growth. that puts me in a fairly different group. you look at who is thinking what about oil and you heard about this before, i have on the september chart we did.
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then, we have a recent one. we had some that growth and i have a bit more growth because as howard and rusty are optimistic about the gulf of mexico in terms of the completion of mostly completed facilities. i am quite nervous about the future of the gulf. we were talking in the green room beforehand that the wall service people are telling me that there is literally no explorations going on in the gulf of mexico. what we have in the queue to be , why i am in this
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because of waiting for information that the clients there.y are -- i saw completely different set of pictures in terms of productivity gains and their impact. i need to wait to be proved wrong about how deep those declines are. we do a conference every year in london and a number of you have been regular participants in that. meeting, mark who was running eog told us that we were going to have a 700,000 barrel a day u.s. year on year decline by
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january. i had to do with that. i have huge respect for him and he is out there in the business and he saw that what we are using is going on. that is a good picture of the good size of the picture. that did not happen. that does not mean that it will not happen in the future and things won't come down, but as long as you see the nuts and bolts of the productivity of the ls, you will still see oil production growth. and year, i made a forecast and asit was my forecast it looked like it was going to be right, it all of a sudden became the eig forecast. almost all of you said, what
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about 2016? i said, i cannot to you about that yet. my company does not know if it will be right or not. it is kind of sideways. e went from almost $100 to $50. now i see it going more or less sideways. this is on the left-hand side. i think that is volatility. one of the things that we do not talk seriously about was the shape of the forward price curve. critical thatly clearing the market every month to have a place for the oil that does not fit in the supply demand balance is to go, if you
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have a sufficiently upward slope price curve to justify, and , that oil will go away. as soon as you find that curve, the oil comes back down. the front end of the curve goes down in the economics come back in the note oil goes back in. that is why feel like a fish going through the water this year. up and down. at the end of the day, you are still in the low 30's. a lot of people say that is too low. the economics require 40 or 50 or 60. i had a guy at the research institute saying prices have to go up, and i asked why? is because of the pain. around, venezuela is paying and iran is paying.
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since when did saudi arabia treat pain in any of those three places as a negative? part of their gain might in fact be about the level of pain within opec. let's put pressure in their, there is someone -- let's put russia in their and their someone who is not our friend. if you look at the price , every month i was making an update on the forecast. all they did was allow the producers to hedge at much more fun levels than they are now. then, he came down. these are all the temporary things. there are no geopolitics.
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, but we saymatter the middle east has never had a higher degree of geopolitical risk that it has today. i absolutely believe that. it makes for a nice discussion, but the production for the middle east has never been higher than it is today. the rest of the world has plenty of oil, too. geopolitics,ut the but i don't care about any commercial way. as soon as the market gets tighter, we are going to be talking a lot about sudan and yemen and syrian, but not with this kind of surplus. , this isk longer-term a combination of a couple of themes that you heard earlier. there is another fact that we
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kind of talked about but i think it needs to be reinforced. finding development costs are much better. the adjustments you get short-term and oil markets from shutting fields because the cause have gotten so below their below operating costs, it is very much smaller than the cancellation of longer-term projects. that have started and you have not completed or those that you have not done yet. oil on thet get the n-opec side, you'll probably end up with a deficit. i have a very soft expansion path for saudi arabia. the everything i said about the long-term part with the saudi market share policy, he being sure that oil has a market share, we will keep it cheap enough. role in energy
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markets. that is what feels that gap. the saudis can do it. they have the ability. there are also a lot of rigs in saudi arabia. i think they are preparing to bring on more capacity and use that capacity and that would feels in this gap. i think there is an upside for oil prices as you get towards the end of the decade. through some of the shell and the slides will be available. the eagle f that ord is not as bad as we think it is.
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i agree with rusty. idea of not fully andegating the shell stuff it means that what we might be seen in terms of measuring shell counties is in terms of oillerating conventional decline. inertia in theof termination of oil production.
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i think that the eagle ford has not gone down that much. my forecast was much higher than what we have seen for most of this year. i'm continually making adjustments. i need to be proved wrong about non-opecnued growth in supply. this is just to remind us how has been for the revolution of the u.s. we look at the states that were in long-term decline, a budget the states have stepped up. if we look at the u.s. production, the only thing i
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would add is that besides the main shell states, it is gulf of mexico and ngl. marketk the ngl continued to look good. the only thing that here is that betweenhe difference talking -- bachan. if you look at the permian part of new mexico, there is been more start. you will see that things turn over. let me just finish with the idea that there is a whole lot of things going on in this oil market.
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paper markets have changed a lot of things. what you see in daily moves in the market have to do with market psychology. we see asset allocations going on. commodities, it is where you put your money. physical market interactions are becoming much more intense. everything, the flash boys is a great book. it is all about speed. things change very quickly. they also don't change permanently. you get a lot of temporary episodes. we try to track the relationships between currencies and oil and between economic sp
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isn't that interesting. low oil prices have declined economic growth prospects. do we rewrite the economics books? no. it is by the convocation between oil and the markets in general and the strange correlations. speed ino about the which oil prices decline. the volatility around those declines that are adding to uncertainty which makes business decisions more difficult and then cause economic problems. physical markets are more complex. the shift to the east has changed, the players, there is a whole day's work of stuff on that. dominaters at times would goes on any physical market.
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when you see changes in the , are youthe wti looking at real world or psychology? mostly, it is about psychology. i've left a couple of slides which gives details on supply and demand. sitting in the middle of all the poor refiner that has to do with not only the congregations in the crude oil market that you've heard earlier, but the product markets. there is a global surplus of crude that has become a global surplus of product. there is a new exporter of products in the world, there is actually several of them, but the u.s. and saudi arabia have changed a lot of the dynamics. let's hear about what refiners
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are up to. i have moderated before. [applause] content,romised you but john we when i take away from your time. we will upon for questions at the end. john: our try to be very efficient with my time. frank, thanks for inviting me and for all of your attention. about theto talk petroleum business that makes money. can you hear me? we have seen and heard a lot from this guy in the last few months. who will hear a lot from him going forward. we know he loves winning. he thinks the u.s. is not doing
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enough winning. u.s. refining has been doing quite a bit of winning, especially against our competitors japan in europe and south america. who wins in the game of refining? the supply and demand apartment is important. means refinery cannot do a whole lot about, green means it is something they can do a lot about. you cannot do a lot about refined product demand growth. they are stuck with whatever the market gives them. they cannot do a lot about the competitive market, but you can do something about it. we have seen in the last two or he you have seen timely responses from the refiners.
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i do think it is seasonal and we will work through it. what they can do is they can make investments to shape their products leads and make them more valuable. they've been doing that for the past three years and trying to make more diesel because it is in more demand. they can also make investments to try to access markets better supply and demand balances. location is also important. refiners are located close to .hese oil basis we are growing we have a situation where you cannot even get the crude out of the area. they experienced double-digit discounts and their crude supply costs compared to guys on the coasts and international refiners.
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there are other stocks that are not as important to crude, but access to cheaper intermediates ," refiners have the ability to trade intermediates. access to cheaper ethanol and the ability to blend natural gasoline into the gasoline pool, those are pluses. what refiners can do is make investments to process the changing qualities of crude. they have done that in the last several years. before that, they made significant investors with the growing latin and canadian crudes. they can also make investments that improve access to crude. east coast refiners don't have direct access to some of the light oil, they make investments in rail facilities. offering costs are important. natural gas is the most
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important variable cost in a refinery that is used to for refiningogen processes. today in the shell gas boom in the u.s. has been a boom for u.s. refiners. must cheaper access to gas and ins in asia have to bring russian gas. size is important when it comes to cost. a lot of the merger acquisition activity we have seen has been largely justified by being able to reduce redundant costs. invest in projects to increase energy efficiency and operating efficiency. refiners do a better job at managing costs than the guys that don't.
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finally, regulatory environment. the guys in washington care about that. it varies not just from country to country, but state to state and even from melissa pahlavi -- they cannot do a lot about where they're located. these regulations could impact the man in a negative way. they can impact the way to execute projects. that try lot of people to mold those legislations to limit the potential to refiners. sometimes they are successful and sometimes they are not. also, making wise investment decisions to make compliance
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more cost-effective. demand and wet have seen a little bit of that from howard. obviously, the developing countries is where all the demand has been in the last 10 years. increased by the last 9.9% in that impacted the global recession in 20 -- 2009. almost 14 million barrels a day increased in the emerging economies. the developed economies lost 4.5 million barrels a day. 1.4 million barrels of that is the u.s.'s share. we have seen a bit of a change in the current low-price environment. the response to low prices. of the product demand growth
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in the last year came from the u.s. and europe. we have seen slower growth from producing countries. low oil prices have negatively impacted their economy. most of that 1.4 million barrels a day came on the east coast. more of it came in the midcontinent and the west coast. whereas, the gulf coast and the rocky mountains also showed growth partially aided by strong energy in those areas. similar to what happened worldwide, the consuming parts of the country showed the greatest demand growth in 2015 responding to the low prices. the east coast and west coast
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and more subdued growth in the midcontinent and gulf coast declined. partially related to the impacts of the slowdown in the energy business. you build refineries where the demand growth is. you generally build capacity to try to match that demand growth. we know in the last 10 years, we have been fairly well matched at 9.2 million barrels a day of demand growth building about 11 million barrels a day of refining capacity. when you consider normal utilization rates, that is a 11% increase. most of that came in areas where demand is growing. asia had 80% of the capacity growth. middle east showed strong refining capacity growth with both grassroot refineries and
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existing refineries. one exception is latin america, even though there were strong demand growth for the last 10 years. down byal capacity went 200,000 barrels a day. their effective capacity went down even further. for countries were demand was falling in europe and develop parts of asia, they have to rationalize -- rationalize capacity. one exception is the u.s. despite demand falling in the u.s. as it did in europe and develop asia. we had over 100,000 barrels a day over can find capacity. did we go against the trend? we increased our level of competitiveness. we were when he's -- we were winners as the donald would say.
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it has been a free market in the oil business. ,aybe we do nothing so a time but we were still economically and politically stable. case. not always the we had some pretty misguided energy policies in the 1970's where we controlled the price of crude oil and by the early 1980's, we had a very bloated refining system in the u.s. with 300 refineries operating. the average capacity was less than 600,000 barrels a day. a lot of it was living on subsidized crude satisfied. reagan deregulated the energy 1981.s in
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i think was finalized in 1982. the refining industry went through a long, darwinian process. it did go through a survival of the fittest process through the next 30 years. that was good for the refining industry. you hundred 80 refiners shut down and it was not good for the people who work there. we had a capacity that was greater than we were in 1982. it has evolved into the most advanced, complex set of refineries in the world. we have five times as much capacity. the ability to take gas and turned it into diesel. we can run heavier and more higher crudes and more
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reliability rates than anywhere else in the world. we also have the deepest and pooltalented set of labor all the way from management to scaledal down to the people. that allows refiners to run these with higher reliabilities and allows him to have lower operating costs despite high wage rates. it also allows them to execute projects at lower costs than anywhere else in the world. you can build or add to or expand capital improvements cheaper at the gulf coast. to put the final frosting on the cake has been what has happened in the business. low gas prices have been a boom
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to u.s. refineries. just to take a look at the magnitude of that, the average gas price in the u.s. refineries versus what the refineries in europe and singapore see that throughout that show guest boom gas prices0 9-2013, skyrocketed in those areas, especially in singapore and asia, where they bring high cost of lng. dollarsd below four iodough that whole per compared to our refiners in those areas. pricesdecrease in energy , there has been a compression of that advantage. still an advantage, but a compression. if you look at the

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