Fracking Revolution Transforming the Global Energy Landscape

Monday, March 3, 2014
John Browne

Author, Seven Elements that Changed the World: An Adventure of Ingenuity and Discovery; Partner, Riverstone Holdings, LLC; Former Chief Executive Officer, BP

Dennis C. Blair

Admiral (U.S. Navy, Retired); Co-Chairman, Commission on Energy and Geopolitics, Securing America's Future Energy; Former Director of National Intelligence; Former Commander in Chief, U.S. Pacific Command


Henry A. Kissinger Senior Fellow for U.S. Foreign Policy, Council on Foreign Relations; Coauthor, "America's Energy Edge: The Geopolitical Consequences of the Shale Revolution," Foreign Affairs March/April 2014

Increased petroleum production in the United States, fueled largely by recent technological advances in hydraulic fracturing and horizontal drilling, has had a profound effect on the U.S. economy and global energy markets. CFR's Robert D. Blackwill sits down with Admiral Dennis C. Blair and former BP CEO John Browne to outline both the economic and geopolitcal implications of the current U.S. energy boom.

MODERATOR: Hello, everyone. Good afternoon. Could I have your attention? Thank you. We're about to get started.

Just a few quick announcements. A reminder, today's meeting is on the record. It is being streamed live on and on the council's YouTube channel.

Finally, if you could take this moment, check your cell phones and electronic devices, and please turn them off so we have no interruptions, we would appreciate it. Enjoy the discussion. Thank you.

BLACKWILL: Good afternoon. I'm Bob Blackwill. I'm the Henry Kissinger Senior Fellow for American foreign policy here at the council. And on behalf of the council, let me welcome you to this particular event with Admiral Dennis Blair and Lord John Browne, on this, Strategic Consequences of the American Oil Boom.

The way we'll proceed is we'll have a conversation up here among the three of us for about a half an hour. And then we'll turn it over to you for comments and questions. And we will end promptly at 2:00. So, again, thank you for coming on this cold, wintery, New York afternoon.

Let me start, John, if I could, with you. We all read about fracking. I think not all of us are technologists in the energy industry. Can you tell us what exactly is it?

BROWNE: Well, good afternoon. Fracking was invented, I think, just off after the American Civil War by the Colonel Roberts Torpedo Company, rather a remarkable thing. It wasn't what we do today. It was using explosives to break up the rock.

I point this out in a book I've just written called "The Seven Elements." But it was later revived by Amoco Corporation, now a part of B.P., invented a way of forcing sand, high pressure, propelled by water, into rocks that needed space to let the oil and gas that's in them flow out. So it was creating pathways for flow.

The big thing that happened that changed everything was when you combine that with something called "horizontal drilling," which opened up more of the reservoir, the earth, as it were, underneath, so that when you fracked it, you opened up even more pathways for the oil and gas to flow.

And that's what is commonly now called "fracking." It's really horizontal drilling, with what is technically called "hydraulic fracking," using water, hydraulic, under high pressure, with sand in it, to force open the rock. And that's the state-of-the-art at the moment.

Let me say, it's only at the moment. Perhaps in the future, it'll be done with gas and low water. It used to be done with a cocktail of chemicals to make the water more slippery. And nowadays, it's not made with those sort of chemicals anymore. It's pretty benign stuff. So it changes.

BLACKWILL: Thank you, John. Denny -- and Admiral Blair has just co-chaired a national commission on this subject. How big a deal is this, this American energy boom?

BLAIR: It's a huge deal. It concerns both gas and oil. Oil, for instance, in the last -- last five years, the United States has increased its oil production using fracking, to the 3.5 million barrels per day. It's the largest increase in that time period ever in drilling. So that's big on oil.

On natural gas, it has taken an entire set of construction that was done in the last several years to be able to bring liquid natural gas into the United States, liquified natural gas, because we were going to be running out of gas. And it has made that completely obsolete. So this is hundreds of billions of dollars worth of a big deal.

BLACKWILL: Well, let me ask then, John, why didn't the industry see this coming? I remember, probably some of you do, too, that, I don't know, seven years ago, we were reading about shortages, and so forth. We weren't reading about this extraordinary boom in U.S. energy. Why didn't the industry experts see it coming?

BROWNE: When I was running B.P., I was very disappointed that we lost a case, I think, which eventually went to the Supreme Court, to build an import terminal for liquified natural gas on the Delaware River. I was delighted about the -- about the outcome of that case in retrospect.

I think almost every pundit around said that the U.S. had to import a lot of natural gas, because it was running out, and principally, it was running out because the new areas where hydrocarbons were found, the deep-water Gulf of Mexico, for good technical reasons, doesn't have much gas involved with the oil. So oil was doing OK, but there was no gas.

So everyone looked at the day, and they, I think, noted what Mr. George Mitchell was doing with hydraulic fracking, and being a lot of engineers, basically said, "Well, we'll believe it when we see it," and step by step. Because it all looked fairly risky.

So conservatism set in, and people said, "Well, really, we better ensure the future by importing gas."

Now, this is not the first time the energy industry -- I think I'm qualified to say this -- has made a bit of a mess at forecasting the future. The recent ones were, of course, importing natural gas, which is no longer needed.

The one just before that was peak oil. Recall, we were going to run out of oil. I don't think we're going to do that, either. And then there were plenty of other similar themes, which became fashionable. But actually, the level of prediction, the quality of forecasting, very poor.

And I think it has probably to do with (inaudible) conservatism. I think we should remember that perhaps we are going in the other direction now, but who knows.

BLACKWILL: Yes. It does make one cautious about the forecast we read today, what you've just said.

BROWNE: I think if we were to base very important foreign policy on single-point forecasts, we'd be making a very bad mistake.

BLACKWILL: Good. Denny, why did it happen here, since I read that lots of countries -- and we'll get into this in a bit -- have the capacity to develop shale gas and oil. Why did it happen here?

BLAIR: I think it was a combination, one of George Mitchell's personal persistence, the clear demand in the United States for gas, but also, there's some technical -- there is some technical capabilities that the gas people talk about, the below-the-ground and the above-the-ground assets.

Below the ground, you're right, lots of countries have tight gas and tight oil. But above the ground, you need the right kind of companies. You need pipelines to be able to get the gas out.

If it's gas you're talking about, you need the right regulatory structure. You need the right legal structure, as to who owns the -- who owns the -- the gas and oil itself below -- below property owner on the surface. These things existed in the United States. They -- it remains to be seen whether they will be developed in other countries, so that they can replicate what's been done here.

BLACKWILL: Where else is it, John? And how likely is it -- or, chime in here, too. How likely is it also that other countries will replicate what we're doing in this regard?

BROWNE: I think one of the interesting things about the U.S. revolution in this area, is it was conducted not by Exxon, or B.P., or Shell, or Chevron, but by a lot of companies, perhaps some of you may know the names, but most people wouldn't, very small companies indeed.

The reason for that is that they have local skills. They have local skills, and local relationship skills embodied in a set of people called "land men," these are local negotiators, or through -- were probably laid off by the big companies when the big companies thought that there were better things to do.

So local is very important. I also agree that there are tremendous incentives for local owners to assist in development, because they take a direct economic interest in the success over development.

Now, in the rest of the world, there's a lot of shale, which is very perspective. I personally am involved with a lot of that through a company I chair, with tremendous prospectively for the future. The same technology can be applied.

But there are a couple of things to remember. First, is under the ground, all shales are different. One size does not fit all. And you have to spend time making it work.

Secondly, above ground, all the circumstances are different. So a crowded island, like the U.K., is not the same as the wide-open spaces in North Dakota. Just not. And it's been at development for a very long time.

So the technology above ground has to change as well. So rather than drilling a forest of wells, you know, one at a time over wide-open spaces, you have to drill them all from one little space, so preserving the above-ground, and keep -- as well as thinking about the below-ground, will make things happen.

Finally, you need to get incentives in place. And history's dealt a different hand, depending on where you are. I think most people realize that you have to spread around the benefits of any development in order to align a constituency.

And so that sort of activity is going to happen in a variety of parts of the world. But it will take time. But there's plenty of potential, and there's plenty of need for that potential.

BLACKWILL: I was in Oxfordshire (ph) over the weekend, and talking with my English friends about this, who were quite skeptical that the political will would be present in order to do it in England, for the reasons that you mentioned, or in Britain as a whole. Are you pessimistic about that?

BROWNE: No, because I'm a businessman, and I'm never pessimistic. I think if you are, then you get nothing done at all. I think that -- look, at the moment, the U.K. imports a lot of its -- its gas. It is actually importing the gas.

The balance of payments on the energy account is huge. That money's going not only to Russia and Norway, but also to Qatar (ph). And actually, wouldn't it be good if we could do our own thing?

And I think people understand that. Where they are concerned -- and here's the good news and the bad news about the U.S. The good news about the U.S. is it's opened up this great potential for the world. The bad news is that amongst all the people who've done it very well, there are also some bad stories of people doing bad things in the U.S.

And I think it's really true to say the good news always stays at home, and bad news travels fast elsewhere. So the bad news has traveled. And so we are, I think, at the point in Europe, generally, of needing to level-set, reset, the information base in an independent way.

No one's going to believe me, because I've got a vested interest. But they might believe other people who could say we can do this safely and securely. Again, a picture of North Dakota, (inaudible) sort of area, is not the same as you would see in Europe. Quite simply, you couldn't do it. A very different approach.

The regulatory base -- all great things need good regulation. The regulatory base is very good. And I think it's learned from the U.S. So let's see if the combination of all those things -- and I would say that all the political parties are behind it. But that may not be as good as it sounds.

BLACKWILL: I've read that Ukraine -- which is very much in the news these days for other reasons -- Poland, China, all have a lot of shale. Would you expect those countries to proceed along the lines that the U.S. has done? If so, what's that time line look like?

BROWNE: So I would -- well, obviously, first, in South -- in the Western Hemisphere, places like Mexico and Argentina, have enormous potential resources. And I would expect certainly Mexico would be opening to spend -- to make (inaudible) to open that. And I think it'd be very, very good for everybody, and will add a further diversified source.

I think in Europe, people will pursue it. Russia actually has a lot of shale potential itself, probably as much as anybody. Ukraine does. Poland does. They all do.

I think right now to say that Ukraine will provide a stable source of gas in this area would be the wrong place to focus on. I think -- but there's a lot of places in Europe which can do this, and indeed, should do this.

It will, for Europe as a whole, add one more source of supply. And I think, you know, it sounds too simplistic. But as long as they're all economic, then the more sources of supply you've got, the better off you are. And I think that rule should never be forgotten.

BLACKWILL: Denny, now big a deal is this with the U.S. economy? You, in general, said it's billions. I think I read a McKinsey report saying it would add more than 2 percent to the U.S. GDP over the next 10 years.

And I think I remember reading a million and a half jobs would be created, high-paying jobs. But is that -- is that a conventional wisdom now, that it is going to have a big impact on the U.S. economy?

BLAIR: Those figures are about right. GDP is in the 1 to 2 percent. There's a big effect on balance of payments right now. As recently as a couple years ago, half of our overall -- overall balance of payments deficit every year was due to payments for petroleum overseas on the order of $300 billion a year. And that comes down rapidly, of course, when you -- when you're drilling it here.

There are jobs within the -- within the industry itself of that scale. And then of course, the availability of cheaper petrochemical feeds into chemical and other industries, lowers prices, adds jobs, makes -- makes more competitive. Then there are all of the spinoff jobs from that.

So it's really -- it's really a tremendous -- tremendous benefit to the U.S. economy, which we're seeing more and more every year.

BLACKWILL: John, you mentioned bad actors a minute ago. How much should we worry about the environmental effects of this? Because there are critics of it who worry about those effects.

BROWNE: Well, I think, as with almost anything that looks at resources, resource development, we should always worry about the environment. So whether that's coal, oil, gas, uranium, they're all bad, and they're all good. And they transform from bad to good through good regulation, and good practice, and good science.

And I think the same is true here. And it's very much a matter of getting the best practice in the right places. But done badly, you know, we could release a lot of methane into the atmosphere. That's not good. It shouldn't happen, because operators know how to stop that happening.

My personal experience in B.P., we spent many years tightening up valves, thinking about different ways of doing things, saving a lot of money, and actually reducing the amount of methane going into the air (ph), very small amounts.

It's about protecting water tables. So when you drill wells through a water table, you have to make sure you insulate the pipe from the water table. It's well-known technology, costs a bit. So if you don't spend the money, you may make a mistake. It's a few things like that.

So keeping -- having good regulation, stops freeloaders, you know, people taking a free ride on good practice is important. But actually, it's very clear you can do this with minimal impact on the environment. And what's more, you're producing gas, and sometimes oil, but gas, which is lighter hydrocarbon, and it's better for -- under all circumstances. It burns very efficiently, far better than coal, as a source of energy or electricity.

BLAIR: I would just add, Bob, based on -- in the armed forces, where I spent about 35 years, we carry a lot of really dangerous stuff around in small spaces all the time. And we have extraordinary procedures in order to make sure we could do that -- do that safely. When explosions happen, there are (ph) ones we cause (ph) on other ships, rather than ones that happen on our own ships.

And the keys to it are independence of your regulators, the qualification of your -- of your regulators, and the just dogged following through on the checklists continually as you go. There's no magic to it.

And every time we see an environmental damage caused by -- caused by resource extraction, then you go do the investigation, it turns out that you just weren't following the rules. So we've got to be -- we've got to be hard on it. You've got to put the resources and set up the right structures for it. But again, we don't...

BROWNE: We do have to come back, I think, to have a proper debate about what's information and what is pure made up -- made-up activity. A lot of this stuff about, you know, gas coming out of pipes in kitchens and catching fire, I think the state of Colorado has clearly demonstrated this as not on the basis of shale gas, as to it by (inaudible) gas. I mean, it's basically things rotting in the water system.

So it's getting the information right here, and having a debate and saying -- I think the industry all has to say, again, you know, "We agree, we want regulation, we want good regulation, we want independent supervision, and we want to be held to account."

BLACKWILL: A question I think will affect everyone in the audience in a direct way. What is this oil boom in particular going to do to the price of oil? And all of you can reach for your cell phones to call your brokers here about whatever he has to say.

BLAIR: If I could take a shot at that, we had -- in this study, we basically took four -- four different scenarios. And when you look at the variables within the scenarios, roll the dice, choose which one will be -- which one will be more important.

But the secular trend is that we need, on the planet, more energy, primarily driven by developments in China and in India, and in other developing countries. And the balance between that demand and the price of the fuels that produce it.

Traditional wells are fairly cheap, the deep-water drilling, fracking, and so on, is much more expensive. That will sort of play out in that area. So if I were to make a bet on a price, I would hedge it heavily.

BLACKWILL: But you're not willing to name a number? Maybe we can...

BLAIR: $80 to $120 a barrel?

BLACKWILL: So what do you think, John?

BROWNE: I've spent 45 years trying to avoid this question, or the answer to the question. I don't think I'm going to change too much.

I think, you know, what's interesting, is every time you think something's going to happen, of course, unintended, unexpected events happen. So today, in the world, there's quite a lot of oil which is shut in as a result of issues to do with various countries in the world. And you, as members of CFR, are well aware of many of those issues.

So there's sort of 3 million barrels just shut in because of issues to do with governance, and war and conflict. And there's probably a bit more available, which is managed outside the system.

So it looks like there's a lot of oil around. So in theory, it should reduce the price. In practice, it hasn't.

And then there's a limit to the amount the price might drop, because of the immediate needs of many countries that just produce hydrocarbons as their primary source of economic activity, and the rate of expenditure. So the so-called break-even number is quite high for many countries, including Russia, who spend a lot of the money that they make by exporting hydrocarbons.

So what was one thing and another, the best forecast is kind of today's price. You know, you say, "Well, I can't -- there's so many things that will change."

And I do think, for example, the world will get better and more efficient at using energy. But whether that efficiency will be used to reduce the amount they use, or will simply take the efficiency and spend it elsewhere, you know, (inaudible), remains to be seen.

Whether there's a moment in the world where there's no conflict, that also remains to be seen. Not seen that recently. And whether there are more discoveries to be made, which makes even more oil available in the world, that also remains to be seen.

It's very important just to remember portions. The most important source of oil in the United States is the deep-water Gulf of Mexico, not shale. And that is to be remembered. And it looks like that's going to be the case for quite a long time.

So everything counts here. We focus on one thing, but actually, a lot happens. So I would always prompt for, you know, looking at the -- look at today's price and say -- around today's price, "Not a bad number," at least for the short term.

BLACKWILL: You see the cost shown on the part, probably quite thoughtful caution on the part of our colleagues here, if you look at the literature, there's really a very wide spectrum of projections.

There are, I would say, if not the majority, at least a substantial number of the serious studies, right about $70 a barrel oil, $70 to $80. But there are so many imponderables here as Denny and John have said.

Denny, the United States is clearly a big winner in this technology. Are there losers out in the world? As John said, if Russia has to deal with oil at $70 a barrel, this is a different set of Russian problems than they have now. Do you -- one thinks of the Saudis, Venezuelans, the Iranians.

Are there losers out there in the -- among the oil producers? And are there winners as you look forward?

BLAIR: I don't think the big secular trends are starting out losers in hydrocarbon producers. This -- this political floor on oil for countries that are heavily hydrocarbon-dependent, certainly does have an effect.

But the $70 or $80 a barrel projections that you see are pretty optimistic. They're based on being able to produce a lot of that conventional, relatively inexpensive oil. That's almost all OPEC, Middle-Eastern, North Africa, producers.

It depends heavily on Iraq coming online in a pretty big way. And somebody who forecasts a peaceful Iraq in the future is taking quite a chance. So I think that the losers -- I think there's sort of a self-regulating system there, and that as the price goes down, the companies who are -- the countries that are the swing producers, which are primarily in the Middle East, North Africa, will do what they've done in the past, is try to ratchet down on their variable ability to produce it in order to keep the price at what they need it in order to make -- make their federal budgets.

So it's hard to see a scenario, really, of tremendous supply, restrain, demand, price going down, with the sort of political floors on oil that we see by the national oil companies and the countries that depend on it.

BLACKWILL: John, what about OPEC? Is OPEC affected at all over the long term by these developments?

BROWNE: Well, let me (inaudible) if I may. I want to -- what Denny said. The most important thing, actually, is natural gas. If you think about the U.S. situation with natural gas, natural gas for a unit of energy, is 75 percent cheaper than the energy which comes out of oil. So it's a 75 percent discount. And this is dramatic.

So anyone who is dependent on expensive gas that is priced on the same basis as oil is actually spending three times as much as it could do as the U.S. does for a piece of gas. Since gas is the fundamental driver for electricity and for petrochemicals, all these sort of things, it's a very big disadvantage not to have domestic supplies that are big enough to compete to allow gas to compete with itself, to decouple it on the price of oil.

So I say that, because I don't know quite how that will work out in the long term. But right now, it's given huge advantages to gas that gives the manufacturing, industrial base, this huge advantage that is, in my view, affecting Europe hugely at the moment. It is being disadvantage by the cost of its energy.

So OPEC, OPEC is one of those things which, I mean, everyone's written the obituary of OPEC more often than I can remember. Wishful thinking says that we'd like it to go away. And indeed, one of the founding members is about to decouple -- Mexico is about to decouple its industry from (inaudible) to take control.

So I think the main point is that OPEC is not -- not a well-oiled machine, to coin a phrase. But it certainly responds when things get tough for people whose livelihood is based on oil. And from time to time, it comes into the frame to say enough's enough.

And that's very much in the hands of Saudi Arabia, primarily, and a couple of other fellow travelers. But I think we would be wrong to say it's dead. It's still -- it hasn't actually been in use for some time.

BLACKWILL: Denny, let me ask you a final question, and then we'll ask our colleagues to chime in. I've read some commentary that suggests that with less or no American dependence on energy from the Middle East, where entrenchment (ph) is possible, advisable even, from there, what's your feeling about that?

BLAIR: The study that we -- that we conducted, I referred to address that exact -- exact question. And the answer is that although greatly-increased U.S. domestic production of oil gives us more options, it doesn't give us that -- that option.

The oil market is still an international market. The United States transportation sector is still some 90 percent dependent on that. So if there's a supply interruption and a price spike in oil around the world, it affects the U.S. -- U.S. economy.

We saw, for example, in 2011, when Libya -- Libya's oil production went off the market. It's only a little over a million barrels per day, but that basically stalled the U.S. recovery from the 2008-2009 recession that was going on at that time. And we plateaued for about a year, until in an agreement to release strategic petroleum reserves in the partial resumption of production in other areas, the price came down, and we got back on track.

So the United States has opportunities. But until we can change the basis of the transportation sector from oil to natural gas and electricity, which in turn, is based on a variety of sources, including natural gas, we will be subject to international oil market, and the swing producers will be in the Middle East, primarily Saudi Arabia, other countries. So we'll have to pay attention to what's there.

So it's good news, but it does not enable us to walk away from that area of the world. But there are -- but there are lots of things we can do to make our economy less susceptible in the middle -- medium term.

And then over the long term, we should change the basis of our transportation sector away from oil. And then we are truly -- and we are truly secure in that area.

BLACKWILL: I suppose we all think about the other issues having to do with the Middle East; the terrorism, much of which emanates from there, nuclear weapons, state of Israel, and other reasons the United States should stay involved.

I want to now turn to you all, and to invite members to join our conversation. Just to remind you, this meeting is on the record. Wait for the microphone. Speak directly into it, if you would. Please stand, state your name and affiliation, and if you could actually ask a question, we'd all be grateful. And perhaps, only one.

So who? Right back here, we'll start here, this gentleman. And then we'll just go back and forth around the room. Sir?

QUESTION: Steven Blank (ph). Given the deeply-integrated nature of the North American energy industry, shouldn't we really begin looking at these issues that you've raised in this volume in a North American perspective?

BLACKWILL: Danny, you want to...

BLAIR: Yes. In fact, the entire -- the entire energy market is interconnected worldwide, much less within this country where we can run pipelines back -- back and forth. And in fact, the U.S. and Canadian -- U.S. and Canadian hydrocarbon resources are quite -- quite interconnected. Whether they will be a bit more interconnected with a large controversial pipeline coming down, we will -- we will see.

I think the -- I think probably the bigger change would be with Mexico, and whether these changes in the governance of the Mexican -- the Mexican national oil company will in fact make a difference in terms of accepting -- accepting other North American partners in order to do mechanical fracturing, or the other -- the other techniques, whether the financial and technical cooperation there can in fact bring Mexico into a bigger role in the North American system.

BLACKWILL: Over here, please?

BROWNE: If I may.

BLACKWILL: John, go ahead.

BROWNE: I think your question is a question that almost every government in the world is being asked, and no one's able to answer it, which is, what energy policy and strategy do you have?

And the answer I think most people would say is we really want lots of choice. And I think that probably is about the beginning and end of it. We want lots of choice, and then we either -- and fill in the gap -- we either want to do it reducing carbon dioxide emissions, or we don't care about them.

So other than that, there are very few things. And we want it as cheaply as possible. So it seems to me that, cheaply as possible, and secure as possible, you need as much interconnection as possible around the world.

The U.S. is still heavily dependent on imports of products that aren't made here, and exports of products that are made here, that aren't needed; diesel, for example. The U.S. is very dependent on electricity, which comes from Canada. And indeed, oil and gas, from Canada.

Europe is interconnected completely. But I think we just need to understand that these interconnections will get more complicated, not simpler, and that we need to understand how to make them work for the future.

BLACKWILL: Right here?

QUESTION: Carol Brookings (ph), former USCD at the World Bank. I picked up on something that Lord Browne raised, which was that with hydraulic fracturing, the enormous uses of water, which is another issue in the world today, and -- but that there -- but you indicated that there may be some opportunities in the future to use gas to propel the sand, as opposed to water.

I understand, though, there is enormous work going on in the oil and gas industry on technologies for recycling that water. And I'm wondering if that's going to be one of the good effects of this technological breakthrough, which will apply to other areas also, such as agricultural irrigation, as the oil and gas industry is able to better reuse and clean waters. Thank you.

BROWNE: Indeed, I mean, the amount of water used is large. But I think it's rifled by the amount of water used to water golf courses, which I think is a rather larger user of water. So we need to get things into perspective here. And I think that -- and you all may have a different view of which you prefer. But nonetheless, I think that is the case.

So recycling is critical, cleaning up and recycling, and then substitution. And I think the other one, or the other area of course is the use of less water by technologies which allow you to target the fracking into places more accurately. And over time, that's possible as well.

So I think it's -- while it's an important consideration, should be dealt with responsibly, I do not believe it is a constraint, if handled properly.

BLACKWILL: Right back here. Yes?

QUESTION: Thank you. (Inaudible), (inaudible) University. You mentioned this around, that the energy content of natural gas is about 25 percent of that of oil. Given the law of economic arbitrage, how does that persist? What are the costs of arbitrage, and what is the long-term outlook for that discrepancy?

BROWNE: Well, of course, two things. First, we have to -- I think everyone has to believe that will the relative pricing meet the price BTU -- price per unit of energy -- will it last? And people are always very uncertain about that, so they're not prepared to commit to this gap lasting for very long time.

But even if they are, then a lot has to happen to infrastructure. You can wish to have natural gas vehicles all over the place. But the time it takes to get that to happen is very long. So people are -- will always worry about the capital expenditure required to make these changes.

Some of that is happening. Some has actually happened over the long-distance past. But I think the arbitrage exists for quite a long time because the markets for the use of the different products are so separated. And that, I think, is what's happening. So I think it will last for some time.

Question, I think, in the rest of the world, is why is -- why are the markets so linked that oil and gas, for example, are priced on the same formula? But again, they're actually used in different markets. They used to be used in the same one, both used to in the end be put so-called under the boiler, to make electricity. But that doesn't happen anymore.

So that's a question people are asking in places like Europe and Japan, same thing there, about why should we price gas on the same basis as oil?

BLACKWILL: Right here, down front.

QUESTION: Thank you. My name is -- very good. My name is Sadi Guseny (ph). I'm with Safe (ph) and also Rock (ph) Withholdings. It's obviously the stated policy of the U.S. government that you're not going to allow it onto (inaudible). In case the current negotiations fail, it seems that the only option would be a military option.

Can you educate us that in such an event, what should we prepare for, what do you think will happen? And as a businessman, obviously, what should we expect? Is it a short-term period, can we keep the state of (inaudible) open, and things like that? Thank you.

BLACKWILL: Is this a price-of-oil question? Is that what you have in mind?

QUESTION: I'm talking about price of oil, supply, and also the duration. Is this something that can be contained in a month, or would it be a six-month event?

BLAIR: Well, the military situation is that a Naval coalition led by the United States could handle whatever Iran could do to try to close that strait within a matter of a few weeks, and could physically keep it -- keep it open.

If you look at the history of events like that, there -- as the political temperature heats up, there's a spike in oil, because people -- a lot of uncertainty, people fear what might -- what might happen. Then, as happened in the late '80s and so on, when it's clear that the rest of the world that depends on oil coming to the Strait of Hormuz can in fact keep it relatively safe, insurance rates come down, price comes back down, I think we would see -- I think we would see that again.

I think that -- I think that the scenarios that come out of the Middle East that really keep the price high are these series of events, reactions, and other events, which give sort of an uncertainty that the whole situation there, which is interconnected -- what happens in Syria is connected to what happens in Iraq, is connected to what happens in Iran, is connected to what happens across the Gulf.

And it's -- I think it's sort of the frequency and the size of these individual military political events in that part of the country that sort of keeps the price high and spiking. It would be of most concern over the long term.

But if you look at any individual event, there are (inaudible) forces that come to bear pretty quickly to take care of it. But then there's another one, there's another one, and another one. So I think -- and then those are almost impossible to -- almost impossible to predict.

And that is where the world's -- you know, roughly 15 percent of the world's oil comes from. And virtually, all of it's backup supply, it's (inaudible) supply.

BLACKWILL: Over here?

QUESTION: Christopher Dickey with The Daily Beast. Could we come back to Ukraine for a minute? Ukraine supposedly has huge reserves of shale gas. Poland was supposed to have had huge reserves, but it seems they didn't pan out. I think the estimates went from 44 down to 9 trillion cubic feet in a year.

Is there any hope that Ukraine can gain some kind of energy independence from Russia in the near future? And how do you see the whole Ukraine dynamic playing out with Europe? If we're talking about sanctions against Russia, because of what's been happening, is there any prayer that Europe can wean itself off of Russian gas anytime in the near future? Thank you.

BROWNE: Let me -- I think we should take this together. Let me start, I think with, first, resources. Ukraine clearly has shale -- potential shale gas. Not been tested, but it seems on most analysis that it's got a significant resource.

Poland has a resource. It's unclear quite what size it is. And I think it would be a little -- a little wrong to write off the scale of Poland on the basis of I think 10 wells in total, I think, in the entire country.

It's a little bit too much of a reaction. I don't know what the answer will be. Right now I'd say keep an open mind. There may be something there.

Ukraine, of course, today, worry about Ukraine is that it is -- of course, it takes a lot of gas from Russia. And Russia can change the price of that (inaudible) easily (ph). It is so-called sold at a apparent discount to the Ukraine, whatever that means.

But Ukraine also is the conduit for gas to parts of Europe. That is much less than it used to be, because of other pipelines, Nord Stream, for example, being another one which has taken away the dependence of one bottleneck for Europe to have.

So that's, I think, the fact. I think the other fact is that for the principal part of Europe, as what I call -- it's not mainland Europe, but Europe as we know it, has not had a gas interruption resulting from Russian action. (Inaudible) I think is the case is Georgia and the Ukraine.

But as to the rest of Europe, I think since 1975 -- and I'm not trying to be an (inaudible), I think there's been no interruption in gas supply. So the question we have to ask ourselves is, will there be one, given this long track record, over many different types of regime indeed?

So thirdly, Europe has to, I believe, open up its shale gas resources. They could be very significant. They will take time. We're dealing with decade-plus time. But, you know, a decade was a decade, whether you delay another year or not. And so you have to start to get to the end.

So I think developing European shale gas is very, very important. Europe's also developed a large number of import terminals for energy, which is diversified its sources. And it still has a lot of domestic and indigenous natural gas, not least in Norway, for example.

So the diversification is taking place in one way or another. I think it must not stop. We should continue to diversify sources, not least because it will add to retention of -- retention of currency. I mean, the balance of payments will be satisfactory. And also, potentially, if there's enough gas, it can help the price a lot.

BLAIR: That's quite comprehensive. But there's one other aspect of diversity which is important, not just where you get the different types of gas or oil from, but it's the diversity of how you can use energy sources for its different purposes within the -- within a country.

Right now, the U.S. transportation sector, as I mentioned, is 90 percent dependent on oil, refined petroleum. Diversity within that mix of the transportation sector would be good in the United States, as it would be good in any other industrialized country, so that if there's -- because we can't predict the future, because things may get tight in one sector, or in one -- or in one type of petroleum (ph).

And you want to have as many different ways to work around that as you can. And Europe has been working to reduce its dependence on Russian gas for a long time. It can also look at other ways to reduce its dependence on gas for one -- for heating in houses, which is has the greatest effect.

And so this sort of internal diversity of energy use, as well as external diversity of energy sources, is really the only key for an individual country, or a region, to be able to be proof against some of these political or economic events that tend to really cause big problems.

BLACKWILL: I think the kernel, Christopher, is that it's unlikely that shale gas in Ukraine is going to have any effect on the current crisis, or the one that follows that, or the one that follows that. Although, in the long term, as John and Denny have said, it might substantially add to Ukraine's capacity to defend itself over time.

We'll go right -- let me go back, the furthest one back. Yes, sir? Exactly.

QUESTION: Lester Wiggler (ph), Morgan Stanley. Do either of you see any meaningful role for any of the green alternatives, like solar or wind generation, to play a major role in providing energy? And would it be sufficient without the major subsidization which it is currently receiving?

BROWNE: Well, it's -- I think most people -- I think it's worth just looking at the global data. As far as the world's concerned, of course, more electricity is produced from renewable energy right now than it is from nuclear energy, in the whole world. So it is quite big already, very important.

Sustainable production of electricity from renewable energy requires renewable energy to get cheaper. And that's what has to happen. Over the last five years, the price of electricity from solar has gone down by about 50 percent, and from wind, between 10 and 20, however you calculate it.

There's absolutely no reason why that wouldn't happen again. In fact, it would be amazing if it didn't, given what trends in engineering.

So you'd expect renewable energy to get cheaper over time. We have to invest in the technology. And you'd expect different countries to have different levels of subsidy or not subsidy, depending on its cost and their sense of security, and so forth.

I'll give you a little example. I mean, in Chile, for example, their alternative cost of energy is importing LNG from Brunei, right across the Pacific Ocean. So -- and they've got a lot of wind, better -- more (ph) solar. So it's obviously very beneficial.

But I think putting wind turbines where the wind hardly ever blows, or you put solar panels where the sun hardly ever shines, and you rely on subsidies to make up the difference, is I think not a good idea. In the end, you've got to get the resources right.

And that's where I think subsidies have been really taken not what they should be. So I think it's going to be -- it's here to stay. And I think it will become a bigger proportion of the world (inaudible), from my point of view, a good thing, and I think it can be done. And in my own experience, since I have run a very large renewable energy (inaudible), the world's largest, I can tell you that you can do it and make it profitable.

BLAIR: I would only add that if -- when you think about the role of government, in the larger role of government in the energy sector, we talked about regulation, extremely important. Make sure it's done -- done safely. We just talked about the renewable energies, in terms about security and in terms of the environment.

But I do think that there is a stronger government role available for security, and in ensuring this diversity of supplies that we -- that we talked about. To simply say that the market will handle it is just going to lead to bad results. It has to be smart action by the government.

But if you allow the market, as far as we can see it, to determine your gas and petroleum import -- import picture, you will leave tremendous national security vulnerabilities and economic vulnerabilities. I think we need to look at the whole picture, not just that whether we can increase renewables at an affordable cost.

BLACKWILL: Right here, sir?

QUESTION: Gerald Pollock (ph). My question concerns the transportation sector in the future that you see for the all-electric car. I see that Mercedes and BMW is now producing an electric car. Nissan has one also, and of course, there's the Tesla.

Do you see that this has a bright future? And is it going to make much difference in the energy balance, considering that electricity has to be generated in some fashion?

BLAIR: Yes. I think it would make a -- would make a tremendous difference. The price of energy has basically gone down in recent years, unlike the price of oil, which fuels our sector. And with natural gas, an abundant U.S. supply, as the price of energy in the United States will continue to be down. So there's an economic argument in that sense.

The problems with electric -- electric vehicles are well known, price and range. Both of those have to do with batteries. About half the price of an electric car is in the batteries. The batteries now are limited in their range.

Range depends on infrastructure, where the recharging points are, how fast they can recharge the car, and you can get back on the -- you can get back on the road. All of these are manageable -- manageable problems. We're not talking about going to the moon here.

We are talking about setting up the structures right in order to -- in order to get it there. And the benefits are just tremendous. If you look at from 2001 to, say, 2012, the money that was returned to the American taxpayer to the average family in terms of tax rebates, payroll taxes, and so on, was exactly matched by the amount of money that that same American family had to pay for the gas overseas. In addition to price spikes in oil have kicked our economy off.

So the benefits are tremendous if we can get off of oil as the 90 percent fueler (ph) of our transportation vehicles. And I would just add that in addition to -- in addition to electrical vehicles, which are the answer for light trucks and cars, for the fleet vehicles, busses in cities like New York, and for the 18-wheelers that are on the interstates, either liquid natural gas, or a compressed natural gas itself can be a good fuel.

So we can -- we can do this. And the benefits to the country, both from a national security point of view, and from an economic point of view, are very, very compelling.

BROWNE: If I may, we've been involved in several ventures in this area. And I think the problem is this, that of course, most people don't buy a Mercedes, and they don't buy a BMW, and they don't buy a Tesla. All they really want is a very cheap, small (ph) car, which is not too small, that will work under all circumstances in all prices.

Always amazed at the piece of technology called an automobile. You basically buy it, turn it on, and it works. And you have to -- not to set it up in any way.

So getting to that point -- cheap, affordable, reliable, always ready -- is going to take some time, I think. And it's unclear to me whether we'll actually get there with electric cars, or whether we'll get there with gas cars, or whether the internal combustion engine will get so efficient that we'll use only a fraction of the gasoline that we use today to drive a car.

I think there'll be a mix. But right now, I'm not sure that what the Tesla's doing, which is great, is an indication of the future.

BLACKWILL: I'm afraid we're near the end here. So perhaps, one more question, and then -- way in the back. I'm sorry, but we haven't heard from this quadrant over here. So way in the back?

QUESTION: Thank you very much. Christine Bater (ph) formerly of B.P., author of a forthcoming book about my time there. I'm hoping you all can talk a little bit more about the social and environmental risks.

We've mentioned smart regulation. We've mentioned hiring locally, getting good information out there. Could we talk a little bit more about what does smart regulation look like? And internally from the corporate perspective, what do companies need to do to have -- perhaps to better integrate some of those considerations into how to go about their business?

BLACKWILL: Big question. Two minutes. So whoever wants to take that one?

BROWNE: Well, I think it seems to me the best regulation, of course, is one which is not written by industry, but one which is informed by industry practice, science, and engineering, and then the general public. So it takes time to get it right.

I think it all has to be around economic tradeoffs as well. There are no absolutes here. Something -- since you've mentioned your book, I'll mention mine, which I talk about in my book, "The Seven Elements," which I think starts with a very simple viewpoint.

In my experience, right across the mining and petroleum space, is that, you know, everything is bad, and everything is good. What stacks the deck is the ability to contain it through great regulation. And there's no other choice, of course, available to us.

BLAIR: I would just add that based on my experience, we've been -- we spend too much time thinking about the regulations as they're written and published in the federal register, and commented on. And to my mind, the key to good regulation is good regulators.

And that means that these cannot be the castoffs from the industry who couldn't get a job on the rig, and therefore, they're hired to inspect their cousins who did -- were smarter, and did get the job. You have to -- you have to have -- you have to pay your regulators maybe off the civil service scale in order to get really good ones. You have to have a continual retraining capability.

And they have to have -- if they walk into a mine and find something that's bad, they bring it to a halt and say, "I'll be back next week to see if you have it back up to snuff or not."

You can't screw around with a $50,000 penalty and think that you're going to get a response. So I'd say the quality of the inspectors, which means training and compensation, and I'd say really high teeth (ph) in the tools that they are given in order to make sure that best practices are being followed.

BLACKWILL: Well, I think we've reached the end. Perhaps some of you are struck by the fact that we sit in this room often, and walk away hearing disturbing, troubling, and worse news. We actually had a session today where we heard a lot of optimistic news.

And I want to commend Lord Browne's book. I read it in preparing for this session, and it's elegantly written, and a very creative, interesting read; and also, Admiral Blair's commission report, which will tell you a lot more about this subject. So let's thank them, and thank you all for coming.



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