Cazalot: US at risk of losing energy security race

Judy R. Clark
Senior Associate Editor

HOUSTON, Nov. 17 -- The US is running the risk of losing the global race for energy, said Marathon Oil Corp. Chief Executive Officer Clarence Cazalot at a recent American Petroleum Institute meeting in Houston.

Cazalot said it is crucial that US government officials and the public be educated to the energy challenges facing the nation and its energy providers, along with the most effective solutions, because some proposed governmental policies could result in unintended consequences that exacerbate the situation rather than remedy it.

"'Energy security' isn't just some glib phrase" that is used by the energy industry, Cazalot said. "It's what our work is all about. Few industries have contributed more to the well-being of the world than ours."

But increasing global energy demand, driven by explosive population growth and rapidly developing economies, is intensifying competition for energy worldwide. "The 6.5 billion people today will be 8 billion by 2030," he said. And although today's difficult global economic situation is impacting demand, "the fundamentals haven't changed, and this is really just a temporary phenomena. The prognosticators say 2009-10 will be a time of economic downturn, but we need to stay the course because we are already seeing, in our service stations, demand coming back."

Meeting demand will require a substantial increase in all forms of energy, he said, to ensure security of supply, while guarding the environment and maintaining economic competitiveness. "Not letting [the US] standard of living slip will take a strategy fully consistent with the climate change plan," Cazalot insisted.

What is needed, he said, is "a rational, fact-based approach that taps the leadership and finest thinking of people across the entire spectrum" to solve the energy problem.

"President-elect [Barack] Obama and all of us must join together to find solutions to the global challenges," he urged. "It doesn't matter what your ideology or political affiliation is; the time is now to tackle our energy issues together. If we fail to do so now, America is at the very real risk of losing the global race for energy."

Competition for energy
The US Energy Information Administration projects energy demand will increase more than 50% during 2005-30, with 70% of that from developing countries relying primarily on fossil fuels.

The demand growth is not unconstrained. In making the projections, EIA built in efficiency improvements and a reduction in energy intensity.

Meeting this demand will require a substantial increase in all forms of energy.

Fossil fuels comprise 80% of global usage and will continue to do so until 2030, Cazalot said, mainly because of the infrastructure advantage. Of that supply, oil and gas are 55%, and coal is 25%.

All other forms of energy such as nuclear power, biofuels, hydroelectric power, geothermal, and wind, represent the remaining 20% of global energy consumption.

Coal and gas consumption are growing the fastest, driven by rising demand for electricity. Coal demand rose by 35% during 2000-06. "China builds two new coal-fired 500-Mw power plants every 7-10 days," Cazalot said.

Energy security strategy
Cazalot outlined a three-pronged strategy for addressing the energy challenge:

-- Initiating energy efficiency and conservation.

-- Developing supply diversity.

-- Investing in technology to ensure environmental protection and sustainability.

Energy security does not mean energy independence, "which is neither possible nor desirable," he said. "Calling for energy independence creates uncertainty in our global trading partners around the world and hinders both their investment and ours."

He defined energy security as "having an adequate, reliable, and sustainable supply of energy to meet the needs and aspirations of private citizens, commercial enterprises, and public sector functions while ensuring environmental protection and sustainability.

"Secondly the cost of our energy must be comparable to that of other nations, so we can maintain our economic competitiveness, growth, and stability," he said.

Conservation
Energy efficiency and conservation are the quickest and cheapest forms of demand reduction, Cazalot said. "A 6% reduction in energy use over all [of the] petroleum base, would reduce US crude oil imports by 29%." Efficiencies should focus on key areas such as improving fuel economy, reducing energy consumption in residential and commercial venues by applying new building codes and appliance standards, and increasing efficiency of the industrial sector.

He said US oil and gas firms are making solid progress toward a pledge made in 2002 to the government to improve energy efficiency by 10% over 10 years.

In 2006 alone, US refineries saved the energy equivalent of taking 528,000 vehicles off the road. Marathon estimates that "over the last 5 years our seven refineries have improved energy efficiency by over 4.5% and are on track to achieving the 10% goal by 2012," said Cazalot.

Supply diversity
The second energy strategy component is diversity in supply sources or geographic diversity and the forms of energy used, he said.

US access to resources is becoming more difficult and costly due to an intense wave of nationalism in countries that hold the bulk of the world's resources. National oil companies (NOC) have access to world class technology and the full backing of their respective governments, but the US enacts restrictive policies against its industry, partly because of the perception of "Big Oil."

"But on a global scale, US companies are really quite small compared to our competitors," Cazalot said. The total of US companies, from Exxon to the smallest, hold only about 6-8% of the world's proved oil and gas reserves compared with NOCs and their host governments, which control about 80%.

"It is important for Washington and the American people in general to realize that our nation is in a tough global competition for oil and gas. US oil and gas companies are allies of the American people," he said, "and it makes no sense to hinder our ability to compete by unfair taxation, excessive regulation, and unreasonably restricting access to oil and gas that could supply our nation for decades."

Required investment for new discoveries, enhanced oil recovery, and development of unconventional fuels will reach $10 trillion by 2025, he added.

Technology, investments
Marathon is investing $8 billion this year—twice what it earned in 2007— to increase refining capacity, upgrade other refineries, and participate in oil sands projects.

"We are investing heavily in something called 'gas-to-fuels,'" Cazalot said. "We are in the start-up phase of a pilot plant near San Antonio, which basically will take natural gas and turn it into clean, sulfur-free diesel and gasoline. We would be able to use [that technology] around the world and turn gas into transportation fuels on site."

Unconventional oil and gas resources include an estimated 175 billion bbl of oil in the oil sands of Alberta. About a year ago, Marathon invested $7 billion to acquire interest in the Athabasca oil sands project. It also is investing $2 billion in upgrades to its Detroit refinery to process that bitumen.

In addition, US oil and gas companies in 2000-07 invested $121 billion in new technology for producing shale and oil sands and in emerging technology such as fuel cells. These investments are more than double that invested by the federal government, he said.

Refiners used 6.85 billion gal of ethanol in 2007, 46% more than legally mandated, Cazalot said. "In 2008 the volume will jump to almost 9 billion gal. We can blend to a 10% level of ethanol in all our gasoline across the US."

Cazalot expressed concern over prescriptive renewable fuel requirements signed into law in December 2007 requiring an increase to 36 billion gal/year of renewable fuels in 2022, including 15 billion gal/year of corn-based ethanol and 21 billion gal/year from advanced biofuels.

The technology to manufacture 21 billion gal/year of biofuels has not yet been established, which creates additional uncertainty in the industry. "Fourteen years is a very short time given all that must be done," Cazalot said. "The potential is very high for negative unintended consequences not seen by legislators, such as the impact on food and water supply."

Technology also is vitally important in meeting supply, moderating demand, and protecting the environment. "No area of innovation in technology is of higher priority than carbon capture and sequestration (CCS)," said Cazalot. While technology exists for CCS, much must be done to improve the capture stage on a large scale and to lower the cost.

Volatility in oil and gas prices also makes it difficult to formulate long-term plans, he said. And looming threats such as a windfall profits tax and other punitive legislation will have a chilling effect on much needed investment required to build and enhance US energy security.

Getting the message out
"I remain optimistic that the new administration will want to have a truly rational, fact-based strategy," said Cazalot. "I'm of the personal opinion that whether it is health care or energy, immigration or national security, the president must bring together the finest minds we have in this country, completely nonpartisan, and keep politics out of it. We need comprehensive answers to come up with the right kinds of solutions. I remain hopeful because I believe people understand that we are running out of time; we've gone for a long time without an energy strategy in this country. Global competition is just too great."

He added, "I have to believe that…logic will prevail. It's not gong to be easy; we're going to have to spend a lot of time educating people on the facts. That it takes time to develop leases we already have, for example. You pay a bonus, you have to run seismic, then you drill multiple wells and build platforms and pipelines. It takes years to get all that done."

People know how much ExxonMobil Corp. earns, he said, but they don't realize the investments the company must make and the risk it takes. "So educating people is a battle every day; we have to keep fighting," he said.

When asked about actions being pushed by House Speaker Nancy Pelosi (D-Calif.), Majority Leader Harry M. Reid (D-Nev.) and Sen. Barbara Boxer (D-Calif.) against the industry, Cazalot responded: "[We] just have to have access to them to tell our story. We all have a common interest. They'll do what they have to do, say what they have to say, but…they've got to get to what they are convinced are the right answers.

"I have to believe…the people who are elected to those offices want to do the right thing; if I didn't, I don't think I could get out of bed in the morning."

Contact Judy R. Clark at judyrc@ogjonline.com.

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