ALAN MURRAY: Thank you. I want to welcome everyone to today's CFR meeting, which is part of the CEO Speaker Series. I also want to remind you to completely turn off -- not just put on vibrate, but completely turn off your cellphones. And I can see that there's a bunch of avid tweeters in this audience. I'm sorry, you're not going to be able tweet today. Also remind you that this session is an on-the-record -- on-the-record session.
Our guest this morning really needs no introduction. Rex Tillerson is the CEO of Exxon Mobil, the largest publicly traded oil company in the world. He's been in that position for six years. He was responsible for the big move into natural gas, the $30 billion acquisition of XTO Energy in 2009. In his new book, "Private Empire," Steve Coll refers to Exxon Mobil as a corporate state within the American state, with its own intricate web of international relations and, in a sense, its own foreign policy. So I think it's particularly fitting that Rex Tillerson is speaking to this group at the Council on Foreign Relations today.
He will speak for 15 minutes, then he and I will have a conversation up here for about 10 minutes or so, and then we'll open it up to your questions.
Mr. Tillerson. (Applause.)
REX TILLERSON: Thank you, Alan. And, Richard, thank you for the invitation to speak and address this group this morning. I spoke to this group -- I guess it's now been about five years ago, 2007. I was looking back and at that time talked about U.S. energy security, talked a little bit about, you know, how I thought our nation could strengthen trade in energy supplies through broader engagement, through education of the public on the importance of energy and how it affects their daily lives.
So here we are five years later. And you go back to 2007 -- now, these issues are still important today, obviously, but when I last had the opportunity to speak, a lot of things have happened since then. You know, oil prices from 2007, on the strength of a very robust global economy and a very robust emerging China, many of you will recall, ramped up to near $150 a barrel. Then we had the financial -- U.S. financial collapse. Oil prices collapsed all the way down to $40 a barrel.
Now, there's been in a prolonged recession and a kind of stumbling along economy, but China and other parts of the world have continued to do well with their economies, although slowing today, and oil prices crept their way back up to 120 (dollars), $130 Brent, and now with the overhang of the European economic problems, China beginning to slow a bit, which all of us I'm sure are seeing, prices pulling back in response to some weakening -- or weak demand, but also in response to a surge in supply. And I'm going to talk a little bit about that surge in supply.
So that's what's happened with oil prices, you know, during that time -- (inaudible) -- a little bit of demand. Well, in response to that demand and in response to those high prices -- and this is the way things work in our industry; everything has fairly lengthy timelines -- but the industry did respond to those high prices. The Saudis made massive investments to increase their capacity to meet that demand, because what shot those prices up, if you recall, to $150 was a -- was a shrinking surplus in global capacity. There's always been a big of a surplus that was fairly recognizable by the market. And that had shrunk to less than 2 million barrels -- somewhere in the million to million and a half barrel range. And the markets were very nervous about the absence of that surplus.
So the Saudis invested heavily, developed an additional roughly 2 to 2 1/2 million barrels a day of capacity, which they have been using of late to stabilize markets, and such that through that period of time, even throughout a lot of supply disruptions, the events in Libya, the Arab Spring, the uncertainties that have existed in the marketplace for a whole host of reasons, the markets have remained well supply (sic). No one anywhere, any place in the world, has not been able to get the crude oil they normally would need to fuel their economy.
So I think it's important to keep that in your mind and maintain that context; that, you know, these prices, while they swing around a lot, the system's quite efficient and it's quite effective at allocating the supplies that are available, even when they get very tight.
Now the second thing that's happened in response to that supply is what -- is what I'm going to talk a bit this morning, is what's gone on here in North America, which has been, I think, nothing short of extraordinary. And I would be less than honest if I were to say to you, and we saw it all coming, because we did not, quite frankly. We did recognize the potential of the shale resources in North America. We recognized there was technology solutions to a portion of that. We grossly underestimated the capacity of both the rocks, the capacity of the technology to release the hydrocarbon, natural gas from the shale gas and now oil from tight oil rocks. We underestimated just how effective that technology was going to be, and we also underestimated how rapidly the deployment of that technology would occur -- again, all in response to fairly high prices. Again, think back to natural gas prices in the United States. We were up in the 6 to 9 to higher dollar per Btu, dollar per KCF range, you know, depending on the time of the year or the seasons.
So again, market's pretty effective with our industry. Markets sends us a signal. People go out; they take risk; they find a way to develop resources that were previously not accessible, not available because of technological reasons. Now we've got a lot of other resource capacity that's not available for political reasons, but I'm just talking about when the industry has access to rocks, to ground, the places we can work, it has always demonstrated the ability to respond to the market's price signals.
It takes a little time. That's why you get these gyrations in prices, because they're not perfectly matched. But over long periods of time, that system has worked quite effectively to ensure the world always has the energy it needs.
So this morning I want to make a few comments about this -- transformative technologies that have enabled us to unlock a whole new array of resource capacity, oil and natural gas, in North America, the United States most particularly. But I want to talk a bit this morning in a North American context because, as I think about the future of energy policy for the United States, I think almost everyone would agree that the real objective is energy security. There's a lot of -- a lot of talk about energy independence, and people tend to get words interchanged. They're quite different. Energy independence and energy security are really two different things. And I think what the U.S. policy and what's in the best interest of American consumers has been and should be -- is securing access to energy in a reliable, relatively affordable way. And if we're able to do that, where it comes from should be of little consequence to us, if it's reliable, if I have a system of policies that ensure I have reliable, affordable sources of energy.
If you don't like the people you're buying it from, that's a different issue. That's a different issue.
So for decades, I think here in North America we have shown, as I was trying to make (sic) with that little introduction, that we can sustain investments if you provide an environment that allows our industry to invest, allows us to take the risk. It is still a very risky business. People still go out of this business every day because they took too much risk. We still drill dry holes. We drilled a very expensive 250-million dry hole this year. It was quite painful. But it's what we do. We go out, we explore, we take risk. And our successes have to pay for all that.
But if you set the right conditions -- and I think there's, without question, enormous capacity in the United States and in North America to achieve that energy security, and it is now within the visible future. For most of my career, and I've been at this now more than 37 years, we also talked about it but it was never in what I would call the visible future. It's now in the visible future for us to achieve that, and it's just a matter of policy choices now as to whether we will achieve that.
You know, if you ask the average person on the street about U.S. energy, and U.S. oil, in particular, our situation, most Americans would say, oh, we're energy poor; we don't have enough oil, we don't have enough natural gas. And that's been the line for years and years. And yet the United States today remains the third-largest oil producer in the world, second only to Saudi Arabia and Russia, and a sizable gap between numbers four, five and six. We are an energy leader in oil production in the world. And if you look at the remaining resource base in the United States, adding in now what we know we can recover through these technology applications, we have sufficient resources to carry us well into the latter part of this century at current production rates.
Similarly on the natural gas side, United States, given the seasonality of the year, at any time is either the world's largest natural gas producer or the second-largest natural gas producer. We go back and forth with Russia. So to say the U.S. is energy poor is simply not accurate. And to say we don't have the capacity to pursue and achieve energy security is also not accurate. Again, it's just a matter of policy choices.
Now, with these new technologies that evolve always come a lot of questions. Ours is an industry that is built on technology, it's built on science, it's built on engineering, and because we have a society that by and large is illiterate in these areas, science, math and engineering, what we do is a mystery to them and they find it scary. And because of that, it creates easy opportunities for opponents of development, activist organizations, to manufacture fear.
And so as these technologies emerge, we know the immediate response from certain parts of interested parties out there is going to be to manufacture fear because that's how you slow this down. And nowhere is it more effective than in the United States. And so that's -- the pace at which these things occur oftentimes is our ability to deal with the manufactured fear, our ability as an industry, working with well-intended regulators and policymakers to address the fears.
It requires a lot of education, requires taking an illiterate public -- illiterate in the sciences, engineering and mathematics -- and trying to help them understand why we can manage these risks. And that's a very intensive, almost one-on-one process -- town by town, city council by city council, state by state. So it takes a while. And we're not particularly aided in our efforts by the broad-based media, because it's a lot sexier to write the fear stories than it is to write the here's-how-you-manage-it story.
Now, that's just a fact, it's not a complaint But it's part of why do things take so long. Well, that's one of the reasons it takes us a long time to get the policy solutions, because it all becomes then a political process instead of a scientific process.
There are important questions about the things that people worry about, and we have an obligation to address them, and we devote a tremendous amount of effort in addressing those. But I think if you look at the technologies that are front and center today around the shale resources -- hydraulic fracturing, horizontal drilling, the integration of those technologies, how we drill these wells, how we protect fresh water zone, how we protect emissions -- we have all of that engineered. And as long as we as an industry follow good engineering practices and standards, these risks are entirely manageable. And the consequences of a misstep by any member of our industry -- and I'm speaking again about the shale revolution -- the consequences of a misstep in a well, while large to the immediate people that live around that well, in the great scheme of things are pretty small, and even to the immediate people around the well, they could be mitigated.
These are not life-threatening, they're not long-lasting, and they're not new. They are the same risks that our industry has been managing for more than 100 years in the conventional development of oil and natural gas. There's nothing new in what we're doing, and we've been hydraulically refracturing (sic) wells in large numbers since the 1960s; first developed in 1940. So this is an old technology just being applied, integrated with some new technologies. So the risks are very manageable.
The fears are real. We don't discount that people's fears are their fears. We have to address that. We want to address it with sound science, we want to address it with real data, and somehow we have to overcome the manufactured fear which gets most of the headlines. The "Gasland" movie did more to set us back in this endeavor than anything else out there, and yet every aspect of that movie has been completely, scientifically debunked. Nobody's written that story. I don't know why, but nobody's written that story.
But looking ahead, natural gas is going to be enormously important to this country. It's going to be enormously important to the world. And that's for a number of reasons: its abundance, its affordability, its functionality. And natural gas, we expect, over the next 25 to 30 years is going to -- the world's demand for natural gas is going to increase about 60 percent. It's going to be the fastest-growing energy source in the world, and at that time it will satisfy more than 25 percent of total global energy demand.
Most importantly, it is functional into power generation because the fastest-growing energy demand sector in the world is power generation, electricity. In this country, it's a lot of electricity mix switching; but globally, electricity is what is growing the fastest. Large, large portions of global population still are not served with electricity. Electricity underpins their quality of life, but it underpins economic growth: industrial activities, manufacturing. So electricity is why -- demand for electricity is why natural gas is going to grow so rapidly.
Natural gas obviously brings with it a number of quality-of-life environmental benefits because it is a relatively clean-burning fuel. It has a CO2 footprint, but it has no particulates. It has none of the other emissions elements that are of concern to public health that other forms of power-generation fuels do have: coal, fuel oil, others.
We're already seeing a shift here in the United States from coal as a fuel into power generation, which has historically been the largest fuel into power generation, to natural gas. The International Energy Agency, I think, just put out some numbers here that U.S. emissions have fallen by 430 million tons, or almost 8 percent, since 2006. The IEA says this is the largest reduction of all countries or regions. This drop in emissions, according to the IEA, is due in large part to the shift from coal to natural gas in the power sector, and that's occurring elsewhere in the world.
So natural gas brings with it enormous quality-of-life and risk-management benefits in how we're going to manage risk around global climate change. So natural gas offers a number of hopeful solutions in our long-term energy outlook.
But you take these same technology down to the U.S., and you move them over to oil, and most of you have heard of the Bakken shale development that's going on in North Dakota. Four years ago we were producing about 10(,000) to 15,000 barrels a day from the Bakken shale. It's now producing more than half a million barrels a day in a very short period of time. Obviously that has completely transformed North Dakota's economy. It's created tens of thousands of jobs. It's elevated North Dakota to now the second leading oil-producing state in the nation -- they overtook Alaska -- up from eighth place in 2006. And depending on your view of the levels of industry activity, the pace of things, many are expecting that the Bakken will produce in excess of a million barrels per day within the next few years, less than five, and some view it has the capacity to go beyond that.
So these are technologies in our industry that we think are providing that pathway to that energy security future that all of us have hoped for for most of our lives. Similarly, if you step back from North -- U.S. and think about North America, Canada, our neighbor to the north, is possessed with enormous oil and natural gas resources. A lot of that is in the oil sands, which here again is -- gets a lot of press and a lot of manufactured fear, in my view.
When you think about all of these resources -- and I've given you example in the shales and the tight oil -- whenever people identify risk around these resources, you should be assured and know that we know that those risks are there too. And if we choose to invest in those resources as a corporation or as a company, we've taken that risk on. So we invest a lot in research and technology development to overcome, mitigate and manage those risks. In the oil sands, the concern has been over the amount of emissions, because it's a very intensive form of oil production associated with developing that resources.
Well, our industry is never standing still. We're always working on new technology solutions. And our Pearl Sands oil shales project development that's under way in Canada, one of the largest, that will start up production end of this year, the first phase -- in preparing for that, we recognized we had to come forward with a different technology solution to lower the overall emissions associated with developing that resource.
So we did. So we developed a different methodology of separating of the bitumen from the sand. It's basically a mining operation until get ready to then have to separate the bitumen from the sand. And the bitumen is what we produce and ultimately take to the refineries to refine into the products that we all use as consumers.
So we developed technologies around that separation process that are very low in energy intensity and technologies around transporting the bitumen to already existing refineries so we don't have to refine this bitumen twice. The largest oil sands project in Canada, the Syncrude project, was one of the first.
And at the technology that we had at that time, 25 years ago, we had to build an upgrader on the site -- it's like a massive refinery. So we separate the bitumen, but it's still not of quality that any refiner can use it, so we upgraded it to what's called a synthetic oil, Syncrude. It's not really synthetic, we just have beaten the tar out of the molecules and turned them into a different chain the refiner can now use them.
So then it gets -- so it gets refined twice. Well, a lot of energy consumption and a lot of emissions with that. So one of our quests, when we took on the Pearl Sand, we told our technologists, you got to do this in one step. We got to rid of that second refinery, because that's where all the emissions are coming from. And we have successfully done that, the point being there are always technological solutions to these challenges and the risk associated with resource development. Some of them take a long time. And we've been working on the oil sands for more than 30 years to get to this point. So we're never standing still.
And so when people manufacture this fear that we can't allow this to go forward because our answer is yes we can, because we will have a technological solution and we will have risk mitigation and risk management practices around those resources to ensure they can be developed in a way that mitigates risk -- it doesn't eliminate it, but when you put it into the risk versus benefit balance, it comes back into a balance that most reasonable people in society would say, I can live with that. I get in my car and get on the road everyday; I can live with that. It's a risk calculation that people make.
So again, coming back to North America and the size of the resource endowment, Canada has a huge resource endowment; the United States has a huge resource endowment; Mexico has a huge resource endowment. All three countries manage that resource endowment differently, but these three countries also have a long-standing historic relationship in free trade through NAFTA and, because of NAFTA, have a close relationship through their economies, through co-investing in one another. And certainly between the three of us, there's a long historical relationship in energy supply.
Canada and Mexico have long been important suppliers of oil and natural gas, from Canada to the U.S. Well, with these technologies that are now available and being deployed throughout Canada and the U.S. -- and we're hopeful that Mexico, as it continues its pathway to reforms around how it manages its own oil and natural gas resources through continuing reforms around PEMEX, that that will open up opportunities for greater partnerships and collaborations and bringing technology to bear on the huge resources that Mexico has as well.
And certainly if you listen to the presidential candidates in Mexico, all of them have said we support continuing reforms of PEMEX that will lead to a greater development of their domestic resources as well, important for their economy, important for their energy security, important for the growth of their nation.
But as I think about energy policy and this question of energy security, I have always felt that if we stepped back and said -- and could look in North America -- we said, now, we approach energy policy and energy security from a North American perspective, the resource base, the technologies that are available and the like-minded policies that could be put in place could rapidly achieve that energy security that we have been in quest of for all of my career. The resources are there, we understand the resources, we understand the technologies necessary to develop those resources, and we understand the risks that are associated with that and how to manage them.
So it's my hope that at some point energy security can become a policy issue in our foreign policy discussions with Mexico, Canada and the United States. Between the three of our countries today, we produce 15 million barrels of oil a day. That is a force to be dealt with in global oil markets. Our expectation by the year 2020 is that North America will be producing 18 million barrels a day, and there is more capacity in the system to go beyond that, and to go beyond it at even potentially a faster rate.
So within the North American countries, we have a unique opportunity, because of this technology that has now emerged just in the last less than a decade, in the last five or six years, to, I think, get on a pathway to that energy security that we have all wanted and hoped for.
It's simply a matter of policy. It's simply a matter of choosing. You know, John F. Kennedy once said in a speech that to lead is to choose. Well, we need to choose. We need to choose. Are we going to have energy security and are we willing to deal with the real fears, the real concerns, and manage the risk and acknowledge that we can do that, and when we put it in the scales and the balance of what's in the best interest of society and our peoples, we're going to have a policy that allows this to happen.
It's not clear to me that we are. It's not a foregone conclusion that we will. It's very much an open question. But I think it's an important question for not just the United States, it's an important question for North America. And we can get into a whole wide-ranging discussion of the impacts that would have on the U.S.'s global foreign policy as well.
So it has -- it can have a dramatic impact, and I think we have a terrific and wonderful opportunity in front of us. And I hope, as a person who spent his life in this industry, that I'm going to be around to see it happen.
Thank you. (Applause.)
MURRAY: Thank you.
I'd like to stay on this topic of energy security as distinct from energy independence. There's a story on the front page of the Journal this morning -- it's somewhat below the story about the breakup of News Corp., so it took me a while to get to it --
TILLERSON: (Laughs.) Right.
MURRAY: -- but I did get to it. And it says at current trends, we will halve our imports of oil from the Middle East by the end of the decade; that, obviously, a move towards both security and independence, right? That has to be a good thing.
TILLERSON: Well, I think clearly -- back to this energy-security question -- that clearly, having our supplies come more from North America, where you have less geopolitical disruption, lower geopolitical risk, has to move us up the security curve.
Now, having said that, again I want to remind you of something I said early on as well. Throughout all the disruptions of the past five years since I was last here -- revolutions in major oil-supplying countries, threats to major oil-supplying routes -- the oil markets have stayed well supplied. So some of the fears around energy security, I would say, are not well-founded in fact either, but clearly, more supply coming from North America, a more stable region than other parts of the world, has to improve your energy security.
MURRAY: So you could get close to the -- yeah, I mean, we are within sight of something close to energy independence, if we wanted it, for North America.
TILLERSON: Well, I -- when people say "energy independence," that's an interesting phrase. And you wonder: What do they mean?
Canada has been a net exporter of energy for decades. What do you think people in Canada pay for their energy? They pay the same thing we pay. It's because they allow markets to work, they allow free markets, they allow free trade.
So the translation of the cost of energy -- if people are thinking energy independence means low prices -- and that's the way a lot of people seem to want to have the conversations; when we get energy independent, we wouldn't subject to these price swings that happen every time the guys over there that don't like us, you know, do these things, they do it to us -- and the truth of the matter is, they don't do anything to do us. I mean, it's just -- it's just natural supply/demand, ebbs and flows, and these long timelines for supply to respond to those demand signals.
So if people are equating energy independence to some kind of price stability or narrow price band, then they have to be putting that in a context of a very rigid policy and regulatory control around that system, because otherwise it's going to continue to move with the global prices.
If they're putting it in the context of I don't have to worry about a supply interruption and therefore that may take some element of the price forward curve out, then it may have a positive effect.
MURRAY: But I think also people would ask the question, if we halve our reliance on oil from the Middle East, does that reduce our involvement in the problems of the Middle East?
TILLERSON: Well, that -- and that's -- that's a very interesting question, too. If you -- if you said the U.S. never, ever again needed to import a barrel of crude oil for -- through the Persian Gulf, then it becomes a national security question. It changes our economic interdependencies with that region because that is really the source of our economic interdependencies, is our energy dependency. There's not a lot of economic activity between us -- some.
Now it becomes a question of what's our national security interest in the region, because you have an enormous -- as all of you know, enormous national defense footprint in the Middle East because of our interest in the area.
So if then the U.S. said, well, we can now redeploy those defense resources elsewhere in the world, the question you have to ask is, well, then who steps into that void? And most likely it's going to be a large consuming country is going to step into that void.
If that happens --
MURRAY: You mean a China?
TILLERSON: Well, they're a large consuming country. (Laughter.)
MURRAY: (Chuckles.) OK. Right.
TILLERSON: So -- well, they step into the void, and given the history of the region and all of the issues and challenges of the region, and how that has spilled over onto us, the American people, is that a good thing, from a national security standpoint, that someone else then steps into that void, or is it a bad thing? Well, I'm not expert enough on that one to say, but you have to anticipate what happens then and what do you -- and when you say we're no longer dependent on them, so it changes our relationship, well, it may redefine the priorities of the relationship, but does it fundamentally change the relationship and our interest in the region and our interest in that -- those peoples and their issues?
MURRAY: So oil doesn't drive those relationships and won't even if we could wean ourselves from all their oil.
TILLERSON: I have never felt oil drove the -- were the only underpinnings in those relationships. It is important not just because we get our oil, because if you really look at the amount of oil we physically get, it's important, but we could replace it with a little higher cost. It's more a question of the importance of that region to global economic stability. And we're going to still be interested in that. So if you have a supply -- if we're no longer getting any oil from the Middle East because we're secure here, a disruption of oil supplies from that region will have devastating impacts on global economies. Now is that important to us? Probably so.
So I'm not sure it changes the relationship dramatically. I think it may redefine the priorities around the relationship, but I'm not sure it changes it dramatically.
MURRAY: But there is this sort of broader issue -- which a lot of people in this room have spent a lot of time thinking about -- that we live in economies that are driven by oil, and oil tends to come from some of the least stable countries, nations in the world. I mean, you're investing heavily in Russia, you've got problems in Iraq, in Kurdistan. Is there an opportunity in this explosion of resources in North America to alleviate some of those issues that we've been dealing with for the past century?
TILLERSON: Only if you think the rest of the world doesn't matter. (Laughter.) It goes back to what I said about the Middle East. You said that oil is so fundamental to economic growth, and you're absolutely right. You know, energy is fundamental to economic growth, and oil is fundamental because to this point in time, we have not found, through technology or other means, another fuel that can substitute for the role that oil plays in transportation, not just passenger, individual transportation, but commercial transportation, jet fuel, marine, all the ways in which we use oil as a fuel to move people and things about this planet. And we've just not found a good substitute for that.
So to the extent that that is important to economies, and global economies are important to our economy, which we all know they are, you never divorce yourself from that. And this is back -- that's why I say this energy independence and energy security discussion it seems to me to get --
MURRAY: Get it wrong?
TILLERSON: People get the terms interchangeable, and they're really not.
MURRAY: Let's go back to the price issue for a minute, because you talked about a global price for oil, which there is. There isn't a global price for natural gas. I mean, we're paying $2.50 or $3. In China they're paying, what, $15, $16? I mean it's significantly higher.
TILLERSON: Well, actually, in China domestically they're paying about $4, because the Chinese control the price.
MURRAY: But they would pay for imports.
TILLERSON: The little bit of imports that they are making, natural gas, they're paying this kind of -- Japanese price.
MURRAY: So I was with the CFO of Siemens yesterday, who was basically lecturing a group of American businesspeople, saying you have an historic opportunity right now to rebuild the American economy on cheap natural gas. Do you agree with that?
TILLERSON: Well, generally I do. I'd maybe say that we have a historic opportunity to rejuvenate the American economy and rejuvenate and restore American manufacturing competitiveness because we now have long-term, secure, stable supplies of natural gas at some price. Cheap is a -- I mean cheap is in the eye of the beholder.
MURRAY: Relative, yeah.
TILLERSON: It will be supplied at whatever its cost to supply will be. And what I can tell you is the cost to supply is not $2.50. We are all losing our shirts today. You know, we're making no money. It's all in the red. And so right now, we're enjoying the overhang, which again, it's this -- we're not -- the system is so enormous, the price supply/demand signals are always slightly out of sync. They're always doing this -- (gesturing) -- you know. We just can't quite hit -- we can't hit a bull's-eye. Hopefully, we can hit the backboard. (Laughter.)
But today we're seeing these very low prices because the industry overshot when we had those $6, $7, $8, $9 prices, and we overdeveloped the supply, and now people are just -- they're getting by on cash in some cases. I can tell you it's negative earnings, by and large, and some people -- or it's negative on cash for them, depending on how efficient they may be. So today's price is not sustainable to deliver that energy security.
What -- you know, what the price is that's necessary to do that, the market will seek it and it will find it. It's not $9, I can tell you that. And so, clearly, in a global -- if you're thinking about what others are paying for natural gas and those that are importing LNG, liquefied natural gas, it will be substantially below the cost of that to maintain a secure supply.
MURRAY: I want to open it up to questions from the group, but before I do, I think I should probably ask about your media comments. At the time of the Deepwater Horizon oil spill, folks in your company urged us not to treat all oil companies the same. So I wonder if I could ask you if perhaps you're painting with a very broad brush when you talk about media covering hydraulic fracturing.
TILLERSON: There's probably a couple of camel hairs in the brush that I would say don't apply. (Laughter.) But this is an ongoing dialogue I've been having with people in your profession now for some time; that for whatever reason, a large number of people in the journalism profession simply are unwilling to do their work. They're unwilling to do the homework. And so they get something delivered to them from the manufacturers of fear; it makes a great story. I mean, it -- I mean, it does. It makes a great story. People love that kind of stuff. The consuming public loves it, because it goes to what, you know, their fears are.
What I would wish and hope that people would do is return to a journalism standard that says, you know, I need to check and see what's what before I run with this. And there's not a lot of that going on, quite frankly. And it's not because we're not trying. We provide a lot of information. There are a lot of sources of science-based information. There are a lot of sources that can debunk claims that are made specific -- you know, specific examples.
Farmer Joe lit his faucet on fire, and that's because there was gas drilling going on, you know, in his back (porch ?). And we can go out there and we can prove with science that that is biogenic gas; it's been in the water table for millions of years; it finally made its way Farmer Jones' (sic) faucet, it had nothing to do with any oil and gas activities. And part of when you're dealing with the subsurface strata is you've got to -- you got to understand that Mother Nature has done a lot of things in the subsurface that have nothing to do with anything man has done. And it changes. It moves around all the time. So what once was will change.
And we encounter this all the time. And we deal with it from a risk management standpoint, because these present risks to us as well. We have to understand what's going on. So I just -- you know, it's a question of will people -- will people do their homework? And what I'm finding is that a large segment are just lazy. They just don't do their work. It's as simple as that.
MURRAY: Let's open it up. (Laughter.)
TILLERSON: You asked. (Laughs.)
MURRAY: I did. I did. Wow. Lot's of questions. Roger. Well, I'll try to get to as many of them as possible.
QUESTIONER: Mr. Tillerson, we read that some fleets -- trucking fleets and other fleets are starting to convert to compressed natural gas as a transportation fuel. Tell us how far you think that can go and whether it can ultimately spread to average Americans using natural gas, in effect, as a transportation fuel.
TILLERSON: Well, we've done that analysis, and when you take into consideration conversion costs or cost of a natural gas engine or a flexible engine -- because what most people are going to want, most commercial truck drivers, and certainly what passenger vehicle people want, is they want flexibility because they certainly don't want get caught somewhere where they can't refuel. It's similar to the hybrid today. So you can call the natural gas vehicle a different kind of hybrid.
When we look at the economics around that, and the likelihood of a broad-based infrastructure to serve the fuel disposition needs, we think it's highly unlikely that it ever becomes material. Now, we have, and I have had calls from CEOs of companies that are considering, who have large fleet vehicles. And I have advised them, if you have a fleet situation, you should -- you should definitely evaluate that, because it makes a lot of sense. So if you're a UPS or you're an AT&T, huge service vehicle fleets that go back to central location every night, you can afford to put in your own infrastructure to refuel, standard spare parts, you can lower the cost of maintenance. You can do all that -- all those things because you have economies of scale.
In a commercial truck -- semis, tractor-trailer fleet -- there will be -- they'll be some conversions. What most -- or many are doing are they're going to liquefied natural gas as opposed to compressed natural gas because you get some economies of scale on the vehicle itself, higher density of energy in a liquid form. And then they also have their own LNG refueling sites along their routes where they can refuel. But I think overcoming the infrastructure cost and the build out, overcoming the conversion costs put it pretty unlikely to me that it becomes material as an alternative transportation fuel.
MURRAY: Yes, question in the back. Just hold on for the microphone and identify yourself before you ask your question, please.
QUESTIONER: Hi. My question -- I'm John Levin of Levin Capital Strategies. My question follows exactly Roger's, and that extremely interesting answer. Does the same logic apply, however, to using our natural gas reserves to put it through our underutilized power plants at night to try to produce power to power electric or hybrid cars? The assumption is the transportation has been run by oil. And the assumption of some of us is that that could be substituted through our utility plans, which are not utilized, to an entirely new auto industry.
TILLERSON: Absent -- I mean, it certainly could. And as with any power generation source, whether it's wind, solar, or natural gas, the issue with electric cars is not so much the source of the electricity, although if you're going to do a -- if you're doing this for carbon CO2 issues management, you do want to undertake what we call a well-to-wheels analysis, which means go back to the -- to the raw source of the energy going into power conversion, what's the thermal efficiency of the conversion, what's the thermal efficiency of conversion through the vehicle all the way to turning the wheels. And when you do that, some of those systems have some promise and some don't.
The bigger issue with the electric vehicle is with the vehicle itself still. The technology simply has not advanced sufficiently to make those vehicles attractive for most individuals. So large-scale deployment to passenger use -- we think, it's going to be -- continue to be pretty slow, and it has to do with the battery technologies. And while there's been a lot of research and there have clearly been incremental improvements in battery technology, there have been no fundamental breakthroughs in batteries.
We've been funding research out at Stanford now for almost 10 years, and one of their research areas is they're trying to -- they're studying the battery -- somebody's got to come up with a different architecture for the battery. And we're waiting for that breakthrough, and they're doing a lot of really interesting things -- (chuckles) -- with battery architecture.
MURRAY: Do you think we're close?
TILLERSON: No, I think we're not, which is why I'm not optimistic because it is a -- it's a very, very difficult science-physics problem to overcome. But having said that, we do believe -- in our own energy outlook, we accommodate an ongoing penetration at a fairly healthy rate of hybrids, and we do think the hybrid electric does hold a lot of promise.
It still suffers from many of the same deficiencies in the battery. But we think the public -- the part of the problem with the battery's the public's not going to put up with it -- (chuckles) -- basically in a -- in a broad deployment.
MURRAY: There's a question over here.
Yes, sir, right there.
Well, I was pointing to him, but that's all right. Since you're there, let's do this one, and then we'll go there.
QUESTIONER: Hi, I'm David Fenton (ph).
Mr. Tillerson, I want to talk about science and risk, and I agree with you that's the way we must proceed. So, as you know, it's a basic fact of physics that CO2 traps heat, and too much CO2 will mean it will get too hot, and we will face enormous risks as a result of this not only to our way of life, but to the world economy. It will be devastating: The seas will rise, the coastlines will be unstable for generations, the price of food will go crazy. This is what we face, and we all know it.
Now -- so my question for you is since we all know this knowledge, we're a little in denial of it. You know, if we burn all these reserves you've talked about, you can kiss future generations good-bye. And maybe we'll find a solution to take it out of the air. But, as you know, we don't have one. So what are you going to do about this? We need your help to do something about this.
TILLERSON: Well, let me -- let me say that we have studied that issue and continue to study it as well. We are and have been long-time participants in the IPCC panels. We author many of the IPCC subcommittee papers, and we peer-review most of them. So we are very current on the science, our understanding of the science, and importantly -- and this is where I'm going to take exception to something you said -- the competency of the models to predict the future. We've been working with a very good team at MIT now for more than 20 years on this area of modeling the climate, which, since obviously it's an area of great interest to you, you know and have to know the competencies of the models are not particularly good.
Now you can plug in assumptions on many elements of the climate system that we cannot model -- and you know what they all are. We cannot model aerosols; we cannot model clouds, which are big, big factors in how the CO2 concentrations in the atmosphere affect temperatures at surface level. The models we need -- and we are putting a lot of money supporting people and continuing to work on these models, try and become more competent with the models. But our ability to predict, with any accuracy, what the future's going to be is really pretty limited.
So our approach is we do look at the range of the outcomes and try and understand the consequences of that, and clearly there's going to be an impact. So I'm not disputing that increasing CO2 emissions in the atmosphere is going to have an impact. It'll have a warming impact. The -- how large it is is what is very hard for anyone to predict. And depending on how large it is, then projects how dire the consequences are.
As we have looked at the most recent studies coming -- and the IPCC reports, which we -- I've seen the drafts; I can't say too much because they're not out yet. But when you predict things like sea level rise, you get numbers all over the map. If you take a -- what I would call a reasonable scientific approach to that, we believe those consequences are manageable. They do require us to begin to exert -- or spend more policy effort on adaptation. What do you want to do if we think the future has sea level rising four inches, six inches? Where are the impacted areas, and what do you want to do to adapt to that?
And as human beings as a -- as a -- as a species, that's why we're all still here. We have spent our entire existence adapting, OK? So we will adapt to this. Changes to weather patterns that move crop production areas around -- we'll adapt to that. It's an engineering problem, and it has engineering solutions. And so I don't -- the fear factor that people want to throw out there to say we just have to stop this, I do not accept.
I do believe we have to -- we have to be efficient and we have to manage it, but we also need to look at the other side of the engineering solution, which is how are we going to adapt to it. And there are solutions. It's not a problem that we can't solve.
MURRAY: But let's stick with that for just a second. I mean, Exxon Mobil, before you became CEO, was very aggressive and overt in challenging and mounting a public relations campaign against the sorts of things that Mr. Fenton (sp) just managed. You changed that when you came in. But I guess the question I'd ask -- I was at my daughter's graduation last weekend, and the graduation speaker said that global warming is the great challenge of your generation. Do you agree with that? Would you agree that it's in -- at least one of the top five challenges of the generation, or do you personally think that it's been way overblown?
TILLERSON: No, I think it's -- I think it's a great challenge, but I think it's a question back to priorities. And I think, as I just described based on our understanding of the system and the models and the science and that there are engineering solutions to adapting, that we think it's solvable.
And I think there are much more pressing priorities that we as a -- as a human being race and society need to deal with. There are still hundreds of millions, billions of people living in abject poverty around the world. They need electricity. They need electricity they can count on, that they can afford. They need fuel to cook their food on that's not animal dung. There are more people's health being dramatically affected because they could -- they don't even have access to fossil fuels to burn. They'd love to burn fossil fuels because their quality of life would rise immeasurably, and their quality of health and the health of their children and their future would rise immeasurably. You'd save millions upon millions of lives by making fossil fuels more available to a lot of the part of the world that doesn't have it, and do it in the most efficient ways, using the most efficient technologies we have today.
And we continue, and have for many, many years, talked on our energy outlook about the importance of ongoing energy efficiency, continuing to carry out economic activity with a lower energy intensity. And we've been very good as a country at doing that. We've been very good globally at doing that. And there's more potential in it.
QUESTIONER: I'm Paul Steiger with ProPublica. A sort of nearer-term issue, and much smaller and, I think, much more manageable is as the development of shale gas and oil proceeds, which uses enormous amounts of water, how do we protect the water supply and in particular make sure that makes this water comes back up from the ground that it's carefully managed and either recycled or stored someplace where it can't get into the water table? And when you got into the natural gas field, when you made your big purchase, there was a lot of enthusiasm because you guys are strong operators; you pay attention to environmental issues. But what kind of regulatory structure needs to be in place to make sure that the lesser operators also take good care to incur the cost and make sure that the water is carefully managed? Shouldn't there be EPA regulation of the water issues connected with shale?
TILLERSON: Well, first -- and I'll try to start at the beginning of all that. That was -- there was a lot in that question. If you look at the water consumption per unit of energy that's provided, shale gas development is one of the lowest water consumptions of any form of energy we can provide you. If you look at the water consumption around coal, the water consumption around a lot of other conventional sources of energy, it is much higher.
The numbers sound large. When we say we're going to pump, you know, 2 1/2 million gallons of water down this well to hydraulically fracture it, that's a -- sounds like a lot of water when you look at your monthly water bill. In the grand scheme of water consumption, it's actually pretty low.
I'll give you a little trivia factoid -- and water is a big concern, I know, to a lot of people. They're worried about water scarcity. There is plenty of water. It's just not in all the right places. That's the issue. It's not that we're -- have a water resource problem; we have a water distribution problem, challenge.
More water flows out -- freshwater flows out of the mouth of the Hudson Bay in eight seconds than all the water we used to hydraulically fracture all the wells last year. That's how much water is available. It's a question of how we use it.
Now in terms of how we protect it, we use the same methods that we have used for years and years in handling produced water. In conventional oil and natural gas production, you always produce a lot of formation water, and it's crummy water. It's real salty. It's got heavy metals in it. It's got bad stuff in it.
And we have been handling and managing that water system for decades in terms of how we clean that water up, separate the things that are useable to us out, take the waste product water and dispose of it, either dispose of it through reinjection or dispose of it through reuse or clean it up in other ways and then, through permits, dispose of it through surface disposal.
So we have many, many ways we can deal with that, and so it's not a new -- this whole flow-back issue is nothing. We deal with massive amounts of water in the conventional system today.
In terms of the regulatory question, we have long advocated that when it comes to regulating hydraulic fracturing -- and if you think about the kind of issues that you worry about, which is public -- you know, protecting the water resources, proper disposal of the water, either reinjection or at the surface -- we believe that is best left to the state, state regulatory bodies, because state regulatory bodies are responsible for their water resources, their public drinking resources. They're responsible for land management. And they know -- they know those issues in their state better than anyone else does. And they're not the same from state to state. So much of it is a function of geology, topography, the climate that you're operating in -- harsh, not harsh. So we -- writing a federal standard to apply across a whole range of these conditions we don't think is the most efficient way to go about it.
So -- and there are -- there are good operating state regulatory models that have functioned well to protect the public interest. We have been promoting -- transferring those best practices to some of the new states and emerging states, Ohio and others. Exxon Mobil, working with General Electric, has put -- we both put a million dollars apiece into a fund to train state regulators at Penn State, at the Colorado School of Mines and at the University of Texas at Austin; train regional regulators, send them down there and have them be trained by geologists and engineers, so they understand what the issues are, what they should be looking for, so they can be competent regulators. We want competent regulators.
Competent regulators is what gets to your last part, which is, how do you make sure every operator performs well? Well, we've published standards, so everybody has a road map of how you do this well, engineering best practices that we know work. If you follow these, you're not going to have any issues. Regulators then are competent enough to oversee that and say yes, everybody's following the standard and they're following the regulation.
So it's a -- we all have our role to play, and we want competent regulators, so that they can play theirs.
MURRAY: A question right here. I'm going to -- if the council folks are OK with it, I'm going to keep going. Mr. Tillerson took a little more than his allotted time, and there are a lot of questions out here. Can we take a couple more questions?
Right here, then right up here.
QUESTIONER: Ed Cox, a director of Noble Energy. Mr. Tillerson, with respect to Saudi Arabia and your comments on oil supply in the world, do you believe that Saudi Arabia has a policy of letting oil prices drop? And if so, what do you think the geostrategic reasons are for that?
TILLERSON: Well, I think the Saudis have been about as transparent as I think it is in their interest to be, and the Saudi oil minister, Ali Naimi, has from time to time indicated where they believe -- they have a price at which they believe the global economy is comfortable, and most recently he said around $100.
What I can tell you is I think from the Saudi perspective, and I've spent a lot of time with them, they do feel a real responsibility to stabilize the markets. They feel that responsibility, obviously, out of a certain self-interest, because they lived through the last time; they didn't do that well and it wasn't good for them. So they take their responsibilities to maintain stability of the marketplace, and to do that, they do it through supply, which is why they invested heavily to reinstate a surplus capacity, so they've invested billions of dollars in capacity that they don't use, on purpose. They do it to stabilize the market.
So I think they have been forthright in trying to signal to the global economy this is kind of where we think things work well. And they do a lot of analysis. It's not set arbitrarily. And it's set more -- from my view, it's set more from a perspective of what's going to support the global economy and less from a perspective of what do I need for my national budget; not that the second is unimportant to them.
MURRAY: A question right here, and then we'll take this question right here, and then we'll wrap it up.
QUESTIONER: Hi. Kassia Yanosek with Quadrant Management. And my question is about jobs. I used to work for an oil and gas major, and about five years ago there was a real concern about the dearth of skilled engineers in the industry. And I'd like to see if you could comment on that and if that's changed at all with the revival of oil and gas industry in North America, or if you're finding that you have to import talent, and how you can contribute to job growth in America.
TILLERSON: Well, the availability of scientists and engineers is a real challenge in our country, not just for our industry but for American competitiveness broadly. If you just look at the number of graduating scientists, engineers, and in particular postgraduate degrees -- masters and doctorals -- it's largely dominated by foreign students. So we are having to go to a lot of sources to meet our own talent needs. Because we are a global company, we recruit outside the United States. We recruit heavily in Europe; we recruit heavily in Asia.
But it is a serious challenge here in the United States in terms of the number of graduating scientists and engineers. If you watch any of our ads, that's what we're trying to do with a lot of our advertising, is draw attention to that issue. And it's not just at the university level. The problem backs all the way into our primary and secondary education processes. We're not -- we're not providing the basics to young people and we're not providing the motivation for them to seek careers in these areas. So, you know, we have a lot of effort personally in our company around that, but also collaboratively within the business community.
Yes, we are filling a lot of our needs elsewhere; as I said, recruiting elsewhere. And in terms of what we're going to do about it in the future, it really is -- it really is tied up in this very broad education debate that's going on in the country today, because it all gets back to the quality of delivery of education to young people. If we fix that, I'm confident the science, math, engineering demands of our country will be met. So it's really grounded back here in a problem upstream of the university, even.
QUESTIONER: Thank you. And thank you for a very lucid and illuminating presentation. My name is Paula DiPerna. I'm with the NTR Foundation.
Just to go back to demand side and incentivizing and maximizing the high-risk dollars that you're investing, I wonder if you would describe for us the most recent successes you may or may not have had in advocating for a serious, coherent energy-efficiency policy, not only nationally but globally, since that is also a patchwork, mixed bag and, if in place, could certainly leverage your money.
TILLERSON: Well, I think there's -- from my perspective in the time that I've really been in a position to work closely with policymakers, I've been encouraged by the amount of progress we've made on, first, educating policymakers of how powerful efficiency is in the total energy balance.
And that was where we had to start was making sure there was an awareness in -- on their part, and beginning to see now policy decisions taken to emphasize efficiency, some of which we agree with, some of which we may not agree with, but I think the point being there is a much better awareness among policymakers of how important efficiency and incentivizing efficiency -- putting policies in place to do that, how important that is to the overall -- to an overall energy policy.
And you see it in this country, whether it's through the -- you know, the higher CAFE standards, some of the building code standards, a number of steps that are now being taken, all being driven by this recognition that if we improve the efficiency -- and I would say most of it is more to the greenhouse gas question -- there's a recognition that if you improve the efficiency, you'll lower the emissions. But we also say if you improve the efficiency -- (chuckles) -- you improve your energy security as well. So they're -- you know, they're very consistent with one another.
So I'm encouraged. And there -- is there more that could be done? There's always -- you know, it's a question of how do you want to incent that. We are free market, free trade advocates. And so, you know, what we'd like is for market forces to incent that and for technologies to make their way into that space that consumers recognize, that's a good value proposition; I'm going to buy that; I'm going to use that, as opposed to mandating certain answers.
When you mandate certain outcomes -- I have long stated and I believe to be true that when you mandate certain outcomes, you actually inhibit innovation. If you leave the field wide open, the greatness of entrepreneurial spirit in the United States and the creativity and innovation of young people to find a solution to something because they think they can be the next billionaire is pretty powerful. So we don't like mandates. We don't like those kinds of solutions because we think they block innovation pathways, and rather let -- you know, let markets work, let things work, and we'll continue to improve. And again, our record is pretty good on energy efficiency.
QUESTIONER: (Off mic.)
TILLERSON: That's a tough one.
QUESTIONER: (Off mic.)
MURRAY: OK. Thank you all for coming.
Mr. Tillerson, thank you very much. (Applause.)
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