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	REMARKS TO U. S. GLOBAL STRATEGY COUNCIL WASHINGTON DC MAY 10, 1989

(20 MINUTES)

Thank you Jack. [Handwritten addition: copeland wash DC]

[Handwritten addition: “It could be worse”]

We hear a great deal these days about America’s energy security, about our need for a national energy policy[Text stricken: , or strategy]. What we don’t hear much about is how such a policy relates to the realities of the marketplace.

Perhaps the starkest of these realities is a single fact: 80% of all [Text stricken: oil] wells drilled in the world have been drilled in the lower 48 states.

[Handwritten addition: I’ll have different view—]

[Handwritten addition: Let economics get the rig count up.]

[Handwritten addition: No floor — just means a c. p.]

This means two very important things for energy security and energy entrepreneurs.
— One, America’s oil reserves [Handwritten addition: and exploration prospects] are vastly depleted, with the possible exceptions of Alaska’s north slope [Text stricken: and offshore].
— Two, we’re a high cost producer.
— And, third, most of the remaining [Handwritten addition: U.S.] oil is unrecoverable at today’s prices.

This adds up to a bleak future for energy security — but only IF we accept one assumption.

That assumption is that the United States could not get enough oil on the world market to meet its energy needs if oil supplies are disrupted.

How realistic is this assumption? And are the likely effects of a possible disruption so great that they warrant interfering in the economy with policies that artificially stimulate the domestic energy industry?

There are several reasons why I believe the answer to this question is, no — why I believe a harmful disruption is so unlikely that it does not merit interfering with [Handwritten addition: the] [Text stricken: energy] markets.

First of all, we have the Strategic Petroleum Reserve. It’s our national insurance policy. And it’s a good one.
—It will go a long way toward protecting us if a disruption occurs.
—And just it’s presence will help deter a particular nation or cartel from trying to impose an oil embargo.

[Handwritten addition: and as the price for oil moves up then other forms of energy will come into play because of economics]

The fact is that an embargo won’t work very well if we can offset lost imports with our own stockpiled reserves. It wouldn’t be long before the embargoing nation would probably be hurt worse by lost oil profits than we would by a [Handwritten addition: temporary] lost [Text stricken: oil market] [Handwritten addition: supply].

Most nations — even Middle Eastern nations — aren’t tempted to do the kind of things that won’t bring them benefits.

[Handwritten addition: They are driven by economics just as we are]

In fact, they could be overthrown from within if thier economy sags.

If our national leaders suspect the risk of a disruption is increasing, I suggest they increase the fill rate of the Strategic Petroleum Reserve.

As a businessman, if my risk increases, I increase my insurance policy. And I don’t expect the government to bail me out if I run a risk and lose.

I think this is what’s behind much of the talk about “energy security” and a “national energy policy.”

Many oil companies took a big risk in the arty ’80s in expecting prices to go higher.
— They did not restructure.
— They stepped up drilling and it was a mistake. Prices didn’t go higher, they went lower. In fact, they went much lower.

Now they want the government to bail them out. And what better justification for the bail out than to use the time-honored technique of invoking national security.

Don’t misunderstand me. Rising imports do present national security concerns. I just don’t believe these concerns justify coming to the aid of a mature industry that has been slow to come to terms with the reality of the [Text stricken: energy] marketplace [Text stricken: today].

An oil import fee is a perfect example of how the government could do more harm than good in the name of energy security.

Two-year-old governmentstudy found that a $10 oil tariff could create 120,000 jobs in the oil industry, but it would probably cause 400,000 jobs to be lost in other sectors.
[Handwritten addition: — An import fee would artificially raise the price of oil in the United States, hurt the U.S. competitiveness, and increase inflation.]
— There would also be no guarantee that oil companies would reinvest the additional money generated by the tariff into oil projects.
— I suspect that any additional money would go to the banks to repay debt.

There aren’t many prospects left worthy of drilling.
— [Handwritten addition: 1973-1983 Explain]
— An import fee would be almost impossible to implement. Too many exceptions would have to be made. To start with, we’d have to exempt Canada, one of our largest [Text stricken: oil] suppliers, because we [Text stricken: both] just signed a free trade agreement.
— We would then exempt Mexico for other reasons, and the list grows.
— If a tariff to raise the price of oil makes for bad economics, it makes for worse politics. It could never get through Congress. There are simply too many consuming states, and not enough producing states.

The fact is that the modest price of oil today provides a great boost for the U.S. economy [Text stricken: as a whole].
— Every hike in the price of oil amounts to a tax
— Every time a gallon of gasoline goes up a penny, and stays up for a year, a billion dollars is siphoned away from American consumers.

Today, many producing nations have a big financial stake in America — much bigger than 15 or 20 years ago.
— They’re very unlikely to embargo an economy they have a large stake in.

[Text stricken: Many rely on the United States as a principal arms supplier.]

And we can be almost certain Iran and Iraq won’t initiate an embargo [Text stricken: in the foreseeable future]. They’re going to need a lot of cash to rebuild their [Text stricken: economies] [Handwritten addition: countries].

So, from a national perspective, why should the country not profit from today’s relatively low price of oil?

Why not use up [Handwritten addition: a big part of] [Text stricken: the rest of] the world’s oil while it’s available at a cheap price?

Why not keep our remaining reserves on hand until the time comes when the world’s reserves are largely depleted?

Why not shut-in our production 10 percent or even 20 percent? If we looked at the free world oil [Handwritten addition: reserves] [Text stricken: supply] as [Handwritten addition: you would] a unitized oil field we’d only be producing [Handwritten addition: about 17% — 19%] percent [Handwritten addition: of the daily production in the free world]

[Handwritten addition: US oil reserve to Production Ratio of approx. 10 yrs]

[Handwritten addition: Saudi Arabia oil R/P ratio = 146 yrs]

[Handwritten addition: produce at todays rate without finding new reserves for 10 yrs]

[Handwritten addition: US % of remaining world proved crude oil reserves = 3.3%]

[Handwritten addition: % of Proved and undiscovered = 5.1% reserves]

And why not keep [Handwritten addition: our reserves] [Text stricken: them on] hand until the price of oil makes them [Handwritten addition: more] profitable to extract?

I don’t claim to have the right answer for each of these questions. But I think they’re legitimate questions that aren’t often asked, especially at energy forums like this one.

The way I see it, this applies to the Arctic National Wildlife Refuge and the Outer Continental Shelf. If there are large reserves there, why the rush to produce them at today’s low prices?

If national security is involved, what are we going to do when we deplete these reserves?

Do we seriously believe that the fate of the American petroleum industry is at stake in the decision of whether to open up ANWR?

Now, I know many say we can’t afford to allow [Text stricken: the backbone of] a vital industry like the oil industry to be devastated. It might never recover. It might not be there when we need it.

You know my position on that point. I believe when entrepreneurs see an opportunity to make a [Text stricken: good] profit, they have a wonderful way of reviving things — and in short order.

[Handwritten addition: When the economics are there then the projects will be developed. Don’t buy that all the geologist will be sacking groceries somewhere.]

As far as the majors are concerned they can take care of themselves. They are experiencing record profits. [Handwritten addition: Their profits are better now than when we had $40 oil.]

The time has long since come [Text stricken: and gone] for the industry — both the majors and the independents — to face the reality [Handwritten addition: of] [Text stricken: in] the marketplace.

[Handwritten addition: The oil industry in the US is a different game today.]

[Handwritten addition: 1956 — Texas]

[Handwritten addition: 1971 — USA non replacement]

[Handwritten addition: overlooked because price for oil went up.]

While government initiatives on intangible drilling and depletion allowances are fine, they will not be enough[Handwritten addition: .] [Text stricken: to put the industry back where it was 10 years ago.]

The majors survived without them, and they are not enough to offset the devastation the independents suffered from the Tax Reform Act of 1986.

The future of the domestic energy industry is natural gas, not oil.

Unlike oil, gas is plentiful at [Handwritten addition: the right] [Text stricken: a price] and clean — ideal replacement for imported oil.

Once gas deliverability bubble disappears, industry will start growing again, and that’s good news for energy security.
— Gas bubble is about to end.
— Balance of supply and demand should greatly enhance gas prices, which are currently trailing oil prices by a significant margin.
[Handwritten addition: — Jump to parity (explain)]

Price for spot gas today is only $1.40 Mcf but will be $3.00 Mcf two years from now.

Mesa — the company I founded and am now general partner of — is the largest independent producer of domestic [Handwritten addition: gas] [Text stricken: oil and gas].

We restructured and covered our flanks, striving to become the lowest cost gas producer in U.S. by focusing on shallow, high duality gas reserves.
— Part of Mesa’s restructuring was to transform into a limited partnership in 1985.

Since 1985, Mesa doubled reserve base to estimated 2.85 trillion cubic feet of gas.

[Text stricken: Mesa has added reserves through acquisition.
— Purchase of Tenneco properties last December added about 300 billion cubic feet to Mesa holdings.]

Mesa has survived the downturn in the industry not only because of our restructuring efforts, but we also saw changes coming. We were prepared for it, and we acted when change was essential. We might have even helped the restructuring process for others.

The formula is quite simple, and my message to Congressional leaders is this. [Text stricken: Tamper with the energy marketplace only if it is neccessary, and then tamper with it as little as possible.] Decontrol nat. gas and then leave it alone.

Then we’ll have a policy thatallows the oil and gas industry to sit on its own bottom. If we can do that then we’ll have a policy that’s good for America’s energy security, good for the future our businesses, and [Text stricken: especially] good for our consumers.

Thank you.