Corporate Meeting

Corporate Virtual Roundtable: Petrostates in Peril

Monday, July 20, 2020
Leonhard Foeger/Reuters

Head of Global Commodity Strategy and MENA Research, RBC Capital Markets

Senior Advisor, Warburg Pincus LLC; Director, ConocoPhillips Company


National Energy Business Correspondent, New York Times

Corporate Program Virtual Roundtable

Panelists discuss the geopolitical and economic ramifications of the current state of oil markets.

KRAUSS: Good morning. Welcome to today's Council on Foreign Relations meeting. I'm Clifford Krauss, national business correspondent for energy at the New York Times. We're in a historic moment. And a sidebar to this moment has been the oil story and energy at large. And it strikes me that we are facing a paradox. For decades since the Nixon administration, we as a country have been striving for energy independence and expanding our domestic fuel production. We reached this point, and now we have a collapse in demand, and so, in the face of coronavirus and the global economic downturn. So what does this mean for our country and the world and especially producers like Russia and Saudi Arabia? We know that Middle East producers cannot balance their books. What does this mean? We're fortunate today to have two fine experts to discuss, neither of whom needs a long introduction. Helima Croft of RBC Capital is one of the world's leading commodity experts. She knows energy and geopolitics and her commentary is closely watched by government officials and investors. And Arjun Murti is a senior advisor at Warburg Pincus and a director at ConocoPhillips. He is an advisory board member at Columbia University's Center for Global Energy Policy. So let's get on with it.

So, let's start with looking at this from thirty thousand feet. Saudi Arabia and Russia face a dilemma that has produced tensions within OPEC+. They would like to force down American oil production, but at the same time they want to lift oil prices that support, uh, at the same time they are lifting oil prices or wish to and that only supports shale production in the United States. How do they get out of that box? Arjun, you want to start?

MURTI: Well, so I think a lot of attention is placed on how Saudi and Russia are viewing U.S. shale. I think the interesting point to me is, U.S. investors, the public capital markets, had significantly soured on the shale E&Ps unrelated to what OPEC is doing or not doing. The shale E&Ps have been very successful in massively growing production. What they didn't grow was profits. Returns on capital were mid-single digit or worse, balance sheets for many companies are stretched. And so you had this issue where concerns about energy transition, what is the long term outlook for oil and gas demand, concerns about profitability, concerns about balance sheet help, all of these things are going to weigh on the shale E&Ps, actually irrespective of COVID-19. And irrespective what OPEC does or does not do, there's going to be a critical need, in my opinion for shale going forward. But investors funding these companies is a huge question mark. And I think the outlook for that is quite uncertain right now.

KRAUSS: And Helima, how about the geopolitical piece to this?

CROFT: Well, I think what's really interesting if we go back to what happened on March 6th, in Vienna, when we couldn't get an agreement between Russia and Saudi Arabia, I think part of the reason why Russia was reluctant to cut an additional three hundred thousand barrels of production and prop up the price then was because there was a view amongst some energy leaders in Russia that shale companies were weak and that they should not be giving a constant lifeline to these companies. And I think their view was, why should Russia continue to cut production, allow U.S. shale to grow, and allow a Russian energy company to be sanctioned? And so I think that part of the reason why they were willing to risk low prices, the view from Moscow was, could we potentially, you know, put some of these companies out of business and not have to deal with the foreign policy implications of having the U.S. believe that because of this resource endowment, that they could sanction companies and not pay a price in terms of U.S. consumers. I think for Saudi, it's a little bit different. I don't think that Saudi was primarily focused on U.S. energy companies, I think the Saudis were very focused on everybody having to basically pull their weight within OPEC and OPEC+, including Russia. I think Saudi is more willing, was more willing, to tolerate U.S. companies and their market share because Saudi I think, was more focused on getting a price that made their math work in terms of their budget.

KRAUSS: And Saudi Arabia had attempted that same strategy in 2014 and 2015, and it didn't work out. I'm just, I'm wondering, going forward, is there a tension between Russia and Saudi Arabia that seems to be alleviated for the moment? Are we going to see that bubble up again? Arjun, do you want to take that?

MURTI: Well, let me start with that 2014, 2015 didn't work out because why didn't it work out? The perception was the shale guys needed $80 or $100 a barrel, the price fell to $50. So that wasn't gonna work. There was, we were coming off a ten year, commodity boom in that period. There was a lot of fat to cut. It was early days in shale, so there was a lot of cost cutting, technology, drilling longer laterals, all the things that lowered the cost. The big kind of thing that didn't work out is the shale guys said, our wells work at $40 or $50 a barrel and they drilled accordingly and production ramped up massively. That was not accurate. Certain wells work at 40 to 50 (dollars). The vast bulk need $60 plus, you can see it in the full-cycle returns on capital. Again, companies were promising 30, 50, 100 percent, internal rates of returns on individual shale wells, they actually delivered 3, 4, 5 percent full-cycle returns. And so in 2015, capital markets flooded in to fund these programs that they thought were going to be very profitable. That did not work out at all.

And so this cycle, you have capital markets, in some respects aligned with OPEC. We don't want shale to drill as much. We want more disciplined companies. And so I think I get why people look at 2015 and say, that didn't work out. But there was massive equity offerings, we're not having that this time. Companies are going to spend within cash flow before they would overspend cash flow, and I think everyone gets that the well IRR math just simply failed for the shale E&Ps, and that a different type of business model is going to be needed going forward. So in that respect, I actually think capital markets are more in line with Saudi and Russia, I think Helima will be more insightful and that dynamic between those two companies, but I'd say it's a strategy. I do think the capital markets will be aligned with OPEC in terms of limiting CapEx into shale.

KRAUSS: So Helima, it feels to me like we have a different flavor here. And that is this morning, we have the reports of Chevron trying to take over Noble and, which is a relatively small deal, but maybe the beginning of a wave of consolidation, which would lower costs, eventually, if you have economies of scale. Is it possible that once again, the oil patch in the United States will accommodate this change from the international you know, oil patch?

CROFT: Well, you know, Arjun is actually the expert on the U.S. story as well. I might actually take a little bit back when you go to Russia question and can that marriage stay together. I mean, I think one of the you know, the key things in 2014 as Arjun talked about is I think Saudi Arabia was really surprised and the OPEC planners who decided to not cut production in 2014 that capital markets remained open to those companies. They were not aiming to have $30 oil in 2014 and 2015. When they made that decision, they were surprised that the companies were able to survive that downturn. And so remember, when Ali Al-Naimi the Saudi oil minister said, I don't care if it's $30, I don't care if it's $20. We're not cutting. I don't think the Saudi leadership ever believed that you'd be looking at a $30 or $20 scenario. They thought you'd be looking maybe at a $70 or $60 scenario, it can be shorts day and the companies would fold. And I think what they learned from that, what they would say they learned from that, is OPEC was not sufficient to deal with U.S. shale, at least that's why you needed Russia. So I think that what 2014 taught them was you needed to bring somebody else into the arrangement to have market share power in terms of being able to manage the market. So I always talk about OPEC+ Saudi and Russia as that sort of shotgun marriage driven by shale.

And I think that we had a test of it this year, clearly in March, in April, but when prices collapse and storage started to fill up, all the sudden people decided they needed to get their vows back together. And President Trump played a really important role in actually getting OPEC and Russia back together because when U.S. companies were threatened by the price collapse, and all of a sudden the American energy abundance and American energy dominance was threatened. President Trump had to drag that deal across the finish line and get everyone back together. So I think that is sort of where we are with Russia and Saudi, I think they're back because price dictated that they needed to get back. But again, the future in terms of a couple years from now will be determined. We don't know if this arrangement will last but right now I think they're in it. I will hand it back to Arjun to talk specifically about that Chevron-Noble.

KRAUSS: Well, yeah. Arjun? Yeah. I'm glad you put, good. I want to move on to other things but before I do, Arjun, to the point of consolidation, which is widely expected, is that going to save shale? Is that going to improve the economics of shale as we move from the independence to the super majors getting into this driving down costs yet again, is that is that going to happen?

MURTI: Not for the reasons typically articulated by the majority of folks. I think that and companies going out of business are the things most misunderstood. So there's always been throughout my thirty-year career, hundreds if not thousands of E&Ps and you merge a couple together, some of the management teams split off and start their own private equity or small cap E&P companies and that cycle just goes on and on and on. You're never, I mean, never is a long time but for, you're not going to have some super consolidated U.S. energy industry, there's just simply too many companies to do that. Consolidation in and of itself is only logical if you end up with a better company. If there are good assets to harvest that are at the low point of the cost curve that can be perpetuated, then it makes sense, but simply slamming two companies together in and of itself is not particularly relevant. As far as putting companies out of business, which is the other angle you always hear. I think that can be a fundamental misunderstanding of chapter eleven bankruptcy in this country, you go bankrupt, you wipe out your debt, you wipe out the equity holders, you simply have new equity holders, the company doesn't really go away. So what is needed here is either disciplined by capital markets for any number of reasons, discipline on the part of boards and managements to simply pursue their lowest cost assets that can generate good returns and good full cycle returns and free cash flow. And there are just too few companies today that do that, we need more companies that do that. And perhaps we'll see that going forward.

KRAUSS: I want to go globally again, to Helima. This is something that you've written a lot about. And that is the kind of fiscal pressures that are being faced by Russia, Saudi Arabia, Algeria and these producers. What are the potential political impacts? And are we going to see or may we see more instability in the Middle East?

CROFT: Well, you know, I love the question about, you know, people talk about bankruptcies for companies and can you put companies out of business? I think if Ali Al-Naimi was unsuccessful in putting a major U.S. shale company out of business, he put a country out of business. I mean that –

KRAUSS: (Laughs.)

CROFT: – price war essentially put Venezuela out of business.

MURTI: (Laughs.)

CROFT: We saw, I mean, really huge pain across the OPEC producers in 2014. And we think about where we stand now and it was extraordinary. If you look at 2012, the Middle East North African producers brought in $1 trillion in oil revenue in 2012. You go to 2019. That was $575 billion. In 2020, according to the IMF, the Middle East North African producers are expected to bring in only $300 billion. So in a span of eight years, we've gone from, you know, $1 trillion to $300 billion. And so that has really huge implications as you know Clif. I mean, the demographics of the Middle East, you know, where you have in certain countries, two thirds of the population under the age of thirty, very high youth unemployment, very high expectations of a social welfare safety net and employment opportunities provided by the state. And so when they don't have the revenue to provide those opportunities, you know, you really do risk social unrest. And if we look at what happened just last year, we saw multiple governments fall on the face of popular demonstrations over the failure to provide economic opportunity and poor governance, I mean Bouteflika and Algeria. He left the scene. You know, you had the government of Sudan fall, you had regime change in Iraq, and other places where the regime did not fall you have mass social demonstrations.

You think about Iran, and Iran has been hit so hard by the combination of collapsing prices, but also sanctions. I mean, they've gone from being able to export, you know, over two million barrels a day to basically down to a couple hundred thousand because of U.S. sanctions. So it's not only their hit because of price, it's been hit by volume. And in that period, 2012 to you know, 2019 they've lost $80 billion in oil revenue. And so you know, countries like that really $40 Brent, the recovery of the $40s is not sufficient. I mean, RBC we estimate that the collective fiscal breakeven for OPEC+ is $90. And so this is recovery still means a lot of pain. It means going to the IMF for emergency funding. It means borrowing. It means cutting key social programs, tripling your VAT in the case of Saudi Arabia. So this is going to be an enormous challenge to get through this period of low prices. And then you think about a looming energy transition. And so the outlook is not great for these hydrocarbon states.

KRAUSS: I'm glad you brought up the sanctions, because if it weren't for all of this expansion of U.S. oil production in recent years, you wouldn't have had the same sanctions regime on Iran and Venezuela, the United States would not have been able to do that, at least not to this extent. And of course, in the end, any instability in the Middle East while we may be cushioned, China's not cushioned. They're very dependent on Middle East, on Middle East oil, Japan, Korea, the world is interdependent and so this economic, this economic or this energy independence is a chimera. It's not real. If you're reducing dependence, but we remain interdependent in this global economic system. Arjun, this is, I think your wheelhouse.

MURTI: I mean, you said it best. It's certainly better that we have some better balance between our production and our demand that that buffers extreme volatility, but certainly doesn't make us immune from it. You know, I think you noted earlier for the first time ever, a U.S. president as Helima mentioned actually helped support an OPEC deal that raised oil prices. I mean I'm fifty years old, that has not happened in my lifetime. And, you know, my former colleagues at Goldman Sachs, I think put out an analysis where these days, higher oil prices are a marginal net positive. Clearly the consumer loses on gasoline but the producing states benefit, it's, it's a marginal net positive from what years ago would have been a major net negative and it does allow us freedom to do things we didn't do before. But we're certainly not un-dependent on international markets. And if the price goes up some other part of the world, certainly consumers in this country will still, will still feel it. So.

KRAUSS: Right, in the past oil shocks were spikes in price. Now we have, I live in, I live in Houston. Now the oil shock is a decline in oil prices. Oh, Helima you're, you're nodding and smiling.

CROFT: I mean, absolutely. I think what's extraordinary is if you think about 2019, I remember flying into Abu Dhabi, and we had a report that you'd had tankers hit off the coast of Fujairah, that really important port, and oil didn't really move when you had, you know, potential disruption in the Strait of Hormuz, and then you went through a summer of 2019. We'll get pipelines attack, drone strike, tankers seized. And then on 20, September 14, we had a cruise missile and drone strike, knocking out more than half of Saudi's production temporarily, hitting the all-important Abqaiq facility, the world's largest oil processing facility, a facility that was seen as the nerve center of the global energy system. And you know, prices rallied, you know, one or two days, you know, ten bucks, but fell off. If you had said Cliff, ten years ago, Abqaiq is hit in an attack tied to the Iranians, where would you think oil would be? You'd think oil will be over $100. And you also would have thought the Carter Doctrine would have been invoked the doctrine that it was a core national security interest of the United States to protect Middle Eastern oil facilities. That doctrine has been in place since 1980. You would have thought an attack on Abqaiq tied to a sovereign state would have been enough to invoke the Carter Doctrine and President Trump was like, it's not an attack on the world, it's an attack on Saudi Arabia! Following up —

KRAUSS: (Laughs.) The Trump Doctrine!

CROFT: Right! Following up in January, I was actually in Abu Dhabi it was right after the killing of Soleimani and you had reprisal attacks on the Americans, you know, in Iraq. And you know, he said, we don't need Middle Eastern oil. I think that is what is really to me, which changes all the disruption and the attacks on facilities in 2019. Just didn't move the needle in terms of price and it meant the U.S. didn't feel compelled to have to intervene in a way it might have done so a decade ago.

KRAUSS: And now we have these mysterious explosions in Iran, and all of the turmoil in Iran. At the same time, China and Iran are talking about oil deals and other kinds of relations, and I'm wondering what you both think of that.

MURTI: Helima, why don't you start?

CROFT: Well, I think what's interesting is that, you know, when this, when the U.S. pulled out of Iran nuclear deal, there had been this view in the market, it was not going to be effective, the U.S. was going alone, and that China would essentially back up the truck and essentially take all of those discounted Iranian barrels. What has been interesting, despite the deals that we've seen China sign recently with countries like Iran, these big investment energy deals, is they still abided largely by the U.S. sanctions, because of the ability of the United States now to essentially say, dollar transactions will be targeted. And if you want to do business in the United States, you have to make a choice. And so we have seen the sanctions be more effective, even China to a large extent had to go along with them, because of the power of the U.S. to basically lever the dollar and basically penalize these other companies and countries for doing business with states like Iran. We saw with Venezuela as well, the Chinese largely abided by the sanctions on Venezuela. And so I think we like to focus on the idea that you know China will go in there and take this. They're all to sign these deals. But the Chinese still for now, watch what Treasury is doing with extraterritorial sanctions. For now, they still have fight. Some people are starting to speculate, are we going to see more non-dollar transactions to get around sanctions, but I think that is something just to bear in mind as well. Like even China had to largely abide by the U.S. sanctions on Iran and Venezuela.

KRAUSS: Arjun?

MURTI: Clifford, the only thing I'd add is really these large oil importing countries of which China is the most meaningful one today, India is growing up in this world as well, is they're gonna have to figure out ways to ensure there is sufficient capital investment outside of the OPEC country. So if you go back over fifty years, OPEC production has gone up and down. But I would defy anyone to point to any individual country within OPEC that has had sustained production growth. Russia, part of OPEC+, has demonstrated that, Saudi has raised and lowered their production between eight and ten and a half million barrels a day numerous times, but never sustainably grown beyond that we know about Iran, Venezuela and so forth.

And so whether it's shale, whether it's deep water, or whether it's other areas we're at a time of significantly diminished CapEx. It doesn't matter today, because demand is weak, and we've got COVID. But whether it's three years, five years, ten years down the road, I think people better hope there's an energy transition, because right now, investors significantly dislike the energy sector and there's very little capital investment going in and there will be a supply price to pay at some point, again it may not matter for the next couple years, but that deficit is coming. And so you look at China, they've generally been pretty smart about filling up their SPR when oil prices have been weak. So I think they certainly have an impetus to continue to expand that to try and provide their own buffer. But we are going to need more CapEx in the sector at some point by someone.

KRAUSS: Well, well, when prices go up as presumably they would, wouldn't capital flow follow?

MURTI: It should follow. I will say right now, when you look at how out of favor the sector is, I think companies are going to have to demonstrate again, I've said this a few times, they're gonna have to be more profitable going forward. But I think there's uncertainty even in shale development. We don't know what future administrations are going to do in terms of allowing fracking, in terms of allowing leasing and all these kind of things. There's always been challenges in many other areas, but I don't think you could just take it as a given, which is what I think people do. I think people presume prices going up and supply will be there. And undoubtedly, it probably will. But, but it can be a challenge. It just doesn't bubble out of the ground for free. It takes real companies with real effort and real capital markets backing and we have almost none of that today.

KRAUSS: So, Arjun let's presume that production is in decline, well it is in decline and it remains lower in the U.S. And exports which are lower, remain lower. What does that mean, not just for the industry, but for energy independence in the U.S.? And then Helima, maybe you would also chime in on that.

MURTI: You know, we probably have seen our peak minimum dependence, if that's the right word?

KRAUSS: (Laughs.)

MURTI: Or we've been sort of energy independent. And it does seem like it's going to be a little bit more challenging achieving that going forward. You know, we still are looking at, on my numbers at least, in the worst case of flattish U.S. demand outlook, once we recover from COVID. You can build in a slight growth or maybe even a modest decline, but something that does call for sort of continued healthy levels of demand going forward. And that may be hard to fill with domestic supply. I think you said it again earlier, Clifford. We're still part of the global energy world and so we might be a little less energy independent, going forward, but all these geopolitical risks, all this sort of dearth of CapEx, all these questions about timing of energy transition, the efficacy of the energy transition is going to be a big issue that we face.

KRAUSS: Helima, this is a big idea. Please, speak up.

CROFT: I always thought that there was a weakness, the whole American energy dominance argument that the Trump administration was making, because every time they had to call Saudi Arabia and ask them to put more barrels on the market. Like we saw that in the summer of 2018, when the U.S. pulled out of the Iranian nuclear deal, you had that rise in prices over the summer as they had talked about ending exemptions for importers of Iranian oil. We had Libyan supplies off the market temporarily. And we had President Trump putting a lot of pressure on Saudi Arabia that summer OPEC meeting to put a million extra barrels on the market. And so I always feel like if you have to still call Riyadh, it means that you are not independent. And then of course, the price collapsed when you had seven or eight exemptions offered in the fall. And I think that was the sort of back and forth between OPEC and Trump in terms of, we'll help you but we don't want to tank the old price.

And again, we saw this year the fact that President Trump who'd been a critic of OPEC was having to basically at the eleventh hour, when the big deal to cut 9.7 million barrels was on the line and the Mexicans were stalling. The fact that President Trump was calling Lopez Obrador and Mexico and doing a workaround arrangement to get this thing across the finish line, again, shows that American energy dominance or that shale was always supported by an OPEC lifeline. There was always this interdependence between shale on this OPEC floor. So I think interesting enough going forward, I think the question is, are, is the U.S. going to be as willing to use the unilateral sanctions, you know, apparatus. I mean, are we going to be looking to do again what we did to Iran, on another country? I think those will be interesting questions. I do think a Biden administration, if we do get an incoming Biden administration, will look at sanctions in a different way. I think we could be thinking about next year, you know, not more sanctions on Iran, but potentially Iranian barrels coming back on the market if they react to the Iranian nuclear deal. So I do think we may have reached the kind of peak American energy dominance narrative, but again, I think that was undercut by the price collapse and the fact that shale needed that almost very explicit bailout from OPEC.

KRAUSS: We'll open up for questions from our participants in just a moment. But let me ask one last question before we do that, and that is on Saudi Arabia. There's the other news this morning. The king, maybe ill, maybe having an operation. Why do, why should we care? Helima?

CROFT: Well, I think we care because we still care about stability in the Middle East, irrespective, you know, we're not independent in terms of oil price of what happens in the Middle East. But we still care more broadly about stability in the Middle East. We still have troops in the Middle East, we still find moments where there is unrest in the Middle East and the U.S. is drawn back into the region. And I do think that it's a really important inflection point for the kingdom right now. I mean, one of the things about, you know, Prince Mohammed bin Salman, the Saudi Crown Prince is you know why there was initially so much enthusiasm about him? Would he really correctly assess the challenges facing Saudi Arabia and that they had to find a way to make this transition away from sole dependence on oil because it wasn't going to be able to fund future generations and so Vision 2030 was an accurate diagnosis of the problems that ailed Saudi Arabia. And so I do think that, you know, right now, it's a real inflection point in terms of will they be able to generate the millions of new jobs to accommodate, you know, university leaders in that country? So I think people will be watching if a potential sensation story comes. And of course, you know, a lot of these leaders are very old in the Middle East anyway. So we are looking at, you know, next generation leaders and Saudi Arabia is just so critical to the overall stability of the region.

KRAUSS: Right, and will MBS have the support of the royal family going forward? This is, this is his moment, potentially.

CROFT: Again, he has I mean, he has built his base of support on young Saudis. I mean, he's offered, explicitly offered, young Saudis a different at least social contract in terms of, you know, offering them more social freedom. And so it's a question of will he be able to generate the jobs to meet their economic ambitions as well?

KRAUSS: At this time, I would like to invite participants to join in our conversation. A reminder, this conference call is on the record. Operator, may we have the first question.

STAFF: (Gives queuing instructions.)

Our first question comes from Mark Schaltuper.

Q: Hi, Mark Schaltuper with AIG. I'm very interested in what you said earlier about, I guess kind of to rephrase it the cost benefit of CapEx versus transition that somebody mentioned, that you kind of better hope that transition accelerates. Would you mind commenting a little bit more about that? I'm just very curious in terms of the next couple of years, if more of the burden of maintaining access to reliable supply falls on China or other countries away from the U.S.? Is it going to be easier for them to accelerate that transition? Or are they going to have to kind of flex their own muscles to make sure that they have access to these strategic reserves? Thank you.

MURTI: I mean, maybe I can start on that. So you know, I think energy transition is a huge topic. Clearly there is a need for the world and all countries to take positive steps to addressing climate change. But it's easier said than done. And so where you look at where energy transition, I think is most logical, and maybe has a clearest path and I still think it's going to take a long time is on power generation. We've always had many different ways to generate power. Coal, nuclear, in the old days diesel and residual fuel oil, today solar, wind, and you can like or dislike any of those, but you have choice. And you have opportunity. And clearly solar, wind, and some of these newer renewable forms, they're going to need battery storage going forward. But you can see a trend there where that makes sense. Where I am still very uncertain on how quickly this will happen is in transportation fuels. And so I am the proud owner of a Tesla Model 3, I will never go back to personally buying a gasoline car. But I also know I'm very lucky in my life. I did work at Goldman Sachs and I'm able to afford this Model 3. I think outside of Tesla, I defy anyone to point to car companies that are currently making cars that people want to drive. It's not that they won't, BMW, Mercedes, VW, all these folks will figure it out over time. That takes a while.

And if you're someone in China, if you're someone in India, if you're someone in other parts of the developing world, the fossil fuel gasoline car is going to be overwhelmingly cost effective for you and you're gonna want the same benefits that we enjoy here in the United States and Europe. And so the transition when it comes to crude oil, I think it's actually much longer term, unless you have a much weaker economic environment, which is possible. Maybe global trade is peaked. At the same time, in crude oil, if you don't invest, supply declines. Not really true on a lot of those power generation alternatives. Some it's true, a lot it's not. In crude oil, if you don't invest, you're gonna have somewhere between a 5 to 10 percent annual decline in supply. It doesn't matter when we're in the heart of a pandemic.

But I think there's a presumption, energy transitions here, we care about ESG. We care about all these things for sure. But you're still going to need a massive amount of CapEx to ensure especially the developing parts of the world have a chance to enjoy the same types of economic benefits we enjoy in the United States and Europe. And I think there are big question marks on that. Energy, traditional energy, traditional gases, very out of favor. Some of it's self-inflicted. A lot of it's self-inflicted, you don't generate good returns, but oil is $100. Why should they trust you when oil is 40 or 50 (dollars)? But you're going to need it, you're going to need CapEx. And I think there's so much emphasis on energy transition ESG I think we're at the risk of having a significant CapEx shortfall that again, may not matter for a couple years, but I think will bite at some point in the future.

KRAUSS: Helima, you want to chime in?

CROFT: I just want to follow up on Arjun's like terrific point about energy access, because we both go to these conferences all over the world. And I keep hearing from you know certain parts of the developing world, particularly in sub-Saharan Africa, the whole idea that we still need access to energy. I mean, if you have millions of people using biomass to heat their home, they're not talking about going out and getting a Tesla. And so there is some pushback in some of these capitals in the developing world, where they say this is essentially Europe and the United States basically, putting a ceiling on our ability to basically grow our middle class. Like they still are deeply, deeply concerned about getting access to affordable energy. And so I do think there is this sort of tension in this debate that isn't accurately captured, because we're still missing the fact that there are really important parts of the world that still want sort of cheapest forms of energy and believe it's their right to have a stable, cost effective, you know, supply of energy to lift people out of poverty.

KRAUSS: Let me, let me bring the conversation back to the pandemic for the moment, its implications for the future. I think we can expect some rather large stimulus packages around the world to get us out of this and it's probably going to take several years. Will that stimulus go make a difference for the development of alternative energy and conservation and the kind of things that we need to do to stem climate change? Arjun or Helima?

MURTI: I mean, you know, the foundation for good clean energy programs is always going to be a strong economy first. So if people are in an economically secure position, I think you're more likely to have these things. Now Europe's enacting a very strong green stimulus program. Those kind of things probably are helpful. Under the current administration, that seems far less likely here. You can argue these kind of things do make sense in terms of going forward, but they're still very long term in nature. They end up being, with apologies, a drop in the bucket, if you will. I think what is most important is that you continue to spend money on the R&D and trying to push these technologies that enable people to have the choice. So if there are ways to incentivize auto companies as an example, to continue to pursue electric vehicles, ensuring you have much tougher fuel economy standards. Keep in mind, we've had almost no fuel economy gains in this country because people have subsidized, substituted SUVs for cars. And so yeah, the current SUVs are more fuel efficient than ones twenty years ago. But that SUV is still far less fuel efficient than a car, so we make lots of choices every day. And there's no evidence of that changing. People still generally buy the most luxurious car they can buy. And fuel economy tends to be probably the last reason people buy a car.

KRAUSS: Consumers are not on board.

MURTI: They, not, they, people don't actually spend their money that way. That's unproven. So can you force it through government action? Perhaps? I think it's hard to force seven billion people in a certain direction. Without the technic- again, Tesla's proven that those cars are not less expensive. They're more expensive.

KRAUSS: So that's a fascinating contradiction.

MURTI: Can you make something people want to buy? Then they'll buy it. They're not buying, no one buys a Tesla for green reasons, not even clear how green it is. But that's a different argument. You got to make things people want, or it has to be significantly cheaper and we've not seen that combination yet with clean energy.

KRAUSS: Helima, you're smiling.

CROFT: No, I have nothing to add to that, you know, great analysis.

KRAUSS: I think there's a, I think there's an interesting dilemma and paradox here and that is the investors see one thing, and the consumers seem to see another. They still want a gas guzzling, gas guzzler. They may not see it that way. And the investors are not putting the money into the oil companies because there's a disconnect between the gas guzzlers and making a profit. I'm wondering, um, these tensions between the United States and China, what impact does that have on the world trying to push forward with the Paris Climate Agreement and coming to some kind of collective effort. Is that a problem?

MURTI: I would say the thing I worry most about in terms of the energy outlook, all forms of energy, would be have we had globalism? And are we moving towards more nationalistic instincts? And you mentioned China - U.S. that's clearly one example. But global trade has been very good, or at least positively correlated with energy demand is probably the right way to say it. I think there is risk that for any number of reasons, those trends are changing, and the more you have protection, you know, the less you have free trade, you know, that could cast a pall on global economic growth and hence energy demand growth.

CROFT: Yeah, the only thing I would add, which is interesting on this topic of protectionism, is I feel like the one place that we saw is countries are moving more inward thinking about securing supply chains because of COVID-19, you know, health care, food. We actually saw this in the case of energy, you know, when prices collapsed, we actually saw, you know, the G20 become this forum for addressing, how do we have an oil price that works for consumers and producers? Like I felt like energy in this one instance, was this one place when everyone was on the same page. Negative prices was not in anybody's interest. So you know, whether this holds or not remains to be seen. I actually think energy was the outlier as more countries become more inward looking. What we saw at least this post COVID-19 world at the beginning was an effort to sort of work together to stabilize prices for everybody.

KRAUSS: Without embarrassing either one of you with an endorsement of a presidential campaign. We're not going to go there. But what difference could a Biden administration make for the energy transition or relations with oil producing countries? We've touched on Iran just a little bit, but there's also Venezuela and there's Russia. Let's think about that scenario, because it's coming up in a few months, possibly.

CROFT: I mean, I'm not totally taken on the sanctions issue. And I certainly think when we think about physical bounces in the oil market, like what could potentially change in terms of a new administration, I do think, you know, there'll be a lot of stipulations on how do you resurrect the JCPOA nuclear deal, but I think that the door would be open to potentially resurrecting that deal if the Iranians would make, you know, significant concessions on enrichment levels and becoming once again compliant with the terms of that agreement. So I do think the path of you know, getting that deal resurrected would be there with the Biden administration. And that's, again, significant quantities of oil. I mean, we're talking about a loss of close to two million barrels of Iranian exports because of unilateral U.S. sanctions. And so I think that is something we would watch very carefully in terms of what could change physical market balances, but also, would we be as willing to sort of unilaterally sanction again, countries like Venezuela to really target their ability to sell their oil to essentially get you know, lending by basically foreign banks and debt restructuring all those things we've gone after in terms of punishing these countries would a Biden administration work more in concert without, I mean would they use the sanctions tool in the same way? I think that could really change under a new administration. It may even be there wouldn't be that the same type of focus though on OPEC, I don't think necessarily that would maybe be as front and center as President Trump was very focused on sort of managing the market. I actually think you could make a case if President Trump became the de facto secretary general of OPEC, I'm just not sure that will be as much of a Biden administration focus.

MURTI: The only thing I'd add Clifford and that is a great point by Helima is, if I look at it from the perspective of U.S. oil producers, since you asked about the U.S. election. I think there's a perception that Republicans are good for oil and Democrats are bad for oil. And I don't think you can actually show that that was true in history. I mean, your two biggest oil crashes. This is probably coincidence. We're in 1986, President Reagan, and then the most recent crash to negative $37. And maybe with a crash in 2014 under President Obama, but the point being, you've seen oil companies do well and poorly under both Republicans and Democrats. The shale boom started as a gas boom under President Bush. It clearly expanded and turned into an oil boom under President Obama and then it sort of continued, but now petered out under Trump.

And so yes, there'll be different areas of regulation that you'd expect from Biden versus a Trump probably a different emphasis positively on clean energy versus traditional fossil fuels. But whether that is actually good or bad for the U.S. oil industry specifically, I would push back that there's some automatic one side to the other side in fact. I don't think it's proven historically, I think you'll have different areas of emphasis. And maybe there is a competence in running government that one might look forward to under future governments, whoever that is that we've lacked here. Look at the examples of the DAPL pipeline and some of the pipeline blockages. You know, you've had steps taken that I think haven't been super helpful to the oil industry, even though that might have been the original intention. The point being, I don't think we can judge these automatically as good or bad. We'll see what the policies are.

KRAUSS: Certainly enough to talk about, but I just want to remind participants that they can ask a question by clicking the raise hand icon. One point, when I got on this beat fourteen years ago, we were wondering where we were going to get the next barrel of oil. And now suddenly, there's the possibility that there's not only more oil out there in the ground, but if there was if there was a change in Iran, or a change in Venezuela, or a change in in Libya, that you would have millions of more barrels of oil coming on the market, which might be nice for consumers at the pump, but could be a disaster for American oil companies. Arjun, do you see that as a possibility?

MURTI: I mean so I'd say, even during my most bullish days at Goldman Sachs during the height of the supercycle, our view was never that we were going to, quote run out of oil. I've never bought into the peak supply argument. I suppose it's true in some ultimate multiple thousands of years sensitives?

KRAUSS: (Laughs.)

MURTI: But there are clearly numerous places to continue to develop oil. It's always been a question to me of, is the investment climate favorable or unfavorable? So where I've been less favorable in OPEC in terms of their ability to sustainably grow supplies, I don't think the countries have had the types of investment climates, either for their own companies, or for foreign investors, whichever you prefer is fine to become a countries choice, but neither opportunities had the chance to develop the oil reserves. Venezuela had a favorable investment climate in the 1990s under Luis Giusti head of PDVSA was the oil minister and they went from some small amount of production to three and a half million barrels a day and then under Chavez and the current regime, three and a half down to effectively zero investment climate. But we've generally had a favorable investment climate in the United States through both Republican and Democratic administrations. North Sea has been a little more volatile, some of the West African countries very positive. But that's where you are, I think in all this. We are not running out of oil, we are very unlikely to run out of oil in anyone's multiple generational lifetime. It is a question of whether the investment climate is favorable or unfavorable. Today, it's unfavorable. Today, investors are out of, out of favor, while these countries are facing challenges. And again, I think that does create supply risks going forward.

KRAUSS: Well, I wasn't referring to the geology, Helima I'm gonna set you up here. Not referring to the geology, I'm talking about the political situations in those producing countries.

CROFT: Well, I say, I should say Arjun was a total legend at Goldman Sachs. I can tell you when I started my career in the U.S. government in 2001, you know, right after 9/11 with permanent energy security group at you know, U.S. government and you know, there was this sense. Matt Simmons was, you know, people were still reading his work and there was a sense of being dependent on foreign supplies and what does that mean in terms of U.S. policy? And I certainly, I was covering Nigeria, I mean part of the reason I can have a career in the U.S. government covering Nigeria was there was this hope that, you know, Nigeria, all these other Gulf of Guinea producers would grow their production, and we would be less, we wouldn't have concentration risk, wouldn't have to be as dependent on regions like the Middle East. And so I remember there was this expectation, Nigeria in 2001, was producing over two million. There was a view that by 2010, Nigeria will be producing 4 million barrels a day, and that was seen as good for the United States because 10 percent of our imports came from Nigeria in 2001. We wanted to grow that share. It was talked about in terms of political terms. Nigeria was a transitioning democracy. It was seen as favorable to the United States. We liked the new leadership there.

 You know, what I think has been really interesting is is that the shale revolution has meant that we don't really need those barrels in Nigeria anymore. Are we as invested in the stability of that country as we were when we thought of ourselves as sort of needing that oil? And I was on actually a CFR task force. I was a visiting fellow at CFR, I was on the task force on energy and national security. I remember, the opening of that report was, you know, we'll never be able to draw our way out of dependence on foreign oil, we have to manage our dependence on these producer states, and that was pre-shale revolution, that report came out, but I certainly feel like we felt the U.S. government, you know, after 9/11 that we needed, not that we were running out of oil, but we needed every barrel because we wanted to make sure we weren't dependent on certain regions alone. There was a huge emphasis on energy security through multiple producers bringing that supply on, I think that's what has shifted.

KRAUSS: So we have instead of peak oil, peak demand, potentially. But what I was, what I wanted to get at is we have, you know, large producers out there with political problems that may resolve themselves, at least to a point like Libya, like Iran, like Venezuela, if any one of those countries suddenly resolve the issues that they have, maybe not overnight, what would that mean, for the world?

CROFT: Well, I think Cliff, a concentration in Libya, you know, we've missed... the trend line in Libya seems to be, you know, in many ways getting worse as more and more countries become involved in this sort of great game for Libya's natural resources. I mean, there was a fantastic piece in the Financial Times over the weekend, looking at Turkey's geopolitics of energy and their entry into the Libyan conflict as part of an ability to try to secure, you know, gas supplies out of the region. And so I, I guess I'm not as excited or optimistic that Libya can off-ramp as easily but certainly now in a situation where you have two million off of Iran, it could maybe come back with sanctions being removed. If you could have a settlement to Libya to get a million back. I think Venezuela is still a long way back, even if you have sanctions removed. I mean, that country has been in structural decline since Chavez, you can't flip a switch and bring those barrels back. But certainly, you know, as we're working off of the COVID-19 effects in terms of demand, if we start to get a million back from you know, Iran or half a million back from Libya, that certainly puts the burden back on OPEC to try to balance this market and not have it, the market soften further.

KRAUSS: Operator, I think we have a question.

STAFF: We do. We'll take our next question from Tracy Roou.

Q: Hi. Good morning, everybody. I had a question on the title of the series today, petrostates in peril. But talking about or thinking about Russia in the OPEC+ agreements or disagreements in there. Would, do you put Russia in that category of a petrostate in peril right now? Thank you.

KRAUSS: Helima?

CROFT: Oh I'll...and then I'll hand it over to Arjun, I mean I think —

MURTI: Helima has to start.

CROFT: I think in March, when they made that decision, I was in Vienna, when the Russians basically said, we're not going to do it. We're not going to cut an extra three hundred thousand. Let's put the burden of adjustment on to shale. I think part of their calculation was that they had a lower fiscal breakeven than the rest of OPEC, they basically said, we're more diversified. We can balance our budget in the fifties. But what we're willing to risk a collapse to the fifties. I think even the Russians though, there were prices that fell through $50, and you started having storage fill up, that is not what they had anticipated, and the Saudis could borrow. I mean, that's one of the differences is that Saudi Arabia is not under sanction. And so while they have a higher fiscal breakeven they can access capital markets. It was harder for the Russians to borrow because of international sanctions. And so I do think that, you know, the Russians quickly had to understand that, you know, sustained low oil prices was putting their regime in political peril as well. I think that is why they were quick to get back to the negotiating table to take a cut that was three times larger than the one they had initially balked at, and why they are for the most part, much more compliant with OPEC than they had been since 2016. I think they saw what the future looked like in terms of price. And that was not going to work for the regime.

KRAUSS: Just one point before Arjun, you get to add in. I just want to point out that one of the reasons why the Soviet Union collapsed, was a decline in oil prices. So Arjun?

MURTI: I would just add to Helima's comments that I've always thought of the petrostates, they have a somewhat better business model in that they have these handful of sort of government owned, sort of private, but at least independently financed oil companies that ensures relative health to the oil industry, that you don't quite see in some of these other countries where there's one state and one state owned oil company, and they might be very dependent on allocations of dollars either from a monarch or some congress, or some other avenue that often isn't there because they have to do all the social programs and so forth. So there has always been this buffer in Russia that has allowed them a rate of oil production increase that you don't see elsewhere. I mean, only the U.S. frankly has achieved it on any sort of sustainable basis. Clearly, the government is still very dependent on the oil price and oil export revenues. But as Helima mentioned, they have lowered their fiscal breakevens to a much better degree, than you've seen in other parts of the world as far as the oil companies go, they've got a very inverse correlation where oil prices are high, more of the profits go to the government, but when oil prices are low, the taxation is much less so it's created a healthier oil industry, again, relatively speaking, than what you've seen in any of these other petrostates. And it's  to the credit of how Russia has run things, again, at least relative to some of the peer countries.

KRAUSS: So Helima, do you want to respond to that, add to that?

CROFT: Well there are a couple other things I would add to Arjun’s great points is they have exchange rate flexibility. And so their ability to adjust to lower prices initially was better if you look at 2014, I think they weathered that price collapse better. I think that again, what they didn't expect when they made that fateful decision in March. I think that they believed that the Saudis would blink first. I think they held stoically. I think they thought the Saudis would blink, they look at the Saudi fiscal breakeven being much higher. And they thought either shale collapses, or Saudi will have to just bear the burden themselves. And we're going to be off the hook on this one. And I think they just didn't anticipate that the Saudis would basically be prepared to borrow to basically door low prices to force the Russians back to the table. And again, I think it's been remarkable that even though they have a lower fiscal breakeven, even though they have these companies, that they still, for the most part are now compliant with this agreement.

KRAUSS: So I think they may have also underestimated the power of the coronavirus and the impact —

CROFT: Oh yeah.

KRAUSS: —that it would have. And they're not the only ones that it would have on demand.

CROFT: No absolutely, Cliff. I was inside. I was actually in the kingdom in Saudi Arabia for a big international energy conference that major stakeholders were at and there was a view in mid-February that coronavirus was basically contained. That it was contained to China, that we were seeing recovering numbers, and it had yet to spread to Italy. And I think that also influenced the calculus of the Russians, not wanting to cut they did not anticipate what was happening was going to happen in Europe with lockdown conditions.

KRAUSS: Good, staying on Russia for a moment, if we have a prolonged period of moderate to lower oil prices, and then oil prices could go down from here, for sure. What impact could that have on Russia, its stability, and its outreach in foreign policy, which has been so aggressive in recent years? Including on elections.

MURTI: Helima you want to start?

CROFT: Well, I think it's, it's an interesting question again, I mean, they have lower fiscal breakevens. And, you know, we just had an OPEC meeting Cliff, and the Russians, were basically I think, happy that OPEC is going to start putting some more barrels on the market. And so I think that they believe that we're kind of in a sweet spot that sort of works for them, where you can keep shale depressed, and you've had a recovery from negative numbers. And so obviously, if we were to get a major reversal of fortune, I mean, I think it's really important to watch do we get re-position of shelter in place policies that are mandated that have a second wave effect on demand. And I think the Russians, again, they are in better shape than a lot of the OPEC producers, but they're not going to be in a good position if we head back into the twenties. Certainly.

KRAUSS: We could go on and on, but it is unfortunately time for us to conclude. I want to thank you all for joining today's virtual meeting. And thank you to our speakers.


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