Cavaney: Industry needs to reconcile good with bad

Oct. 16, 2006
The oil and gas industry faces a huge paradox as executives from its biggest companies gather in Washington, DC, for the American Petroleum Institute’s 2006 annual meeting Oct. 15-16.

The oil and gas industry faces a huge paradox as executives from its biggest companies gather in Washington, DC, for the American Petroleum Institute’s 2006 annual meeting Oct. 15-16.

On one hand, the business itself is in excellent shape. Profit margins are good not only in exploration and production, but also, for a change, in refining and marketing. Efficient operations and dedicated employees kept disruptions from Hurricanes Katrina and Rita last year from being worse, and the recovery since has been impressive.

On the other hand, the industry has a bad public image. The Gallup Poll listed energy as No. 4 in its Top 10 2006 election issues on Sept. 21. “The oil and gas industry receives the most negative ratings of 25 US business and industry sectors rated in 2006. This suggests that government efforts aimed at controlling and regulating the oil industry will be met with high levels of public approval,” it said in an article posted on its web site.

Industry leaders are very much aware of this paradox, API Pres. Red Cavaney says. In fact, they have been trying to address it for some time, he told OGJ in an interview before the trade association’s meeting. Until fairly recently, natural resources industries traditionally did not consider external communications a top priority but concentrated on operating their businesses, he explained. That approach seemed to work when there were three commercial television networks and more daily newspapers.

The growth of cable television, to a point where viewers could select from hundreds of channels, and the arrival of the internet changed all that. API and its member companies had been trying to improve their external communications for 3-4 years when Katrina and Rita slammed into the Gulf Coast late last summer. The effort intensified following the hurricanes, Cavaney said.

Don’t expect kudos

The industry “did a Herculean job of keeping supplies going despite a horrendous loss of production and refining capacity,” he said. It didn’t expect kudos. But it also didn’t anticipate being widely portrayed as a group of opportunistic price manipulators exploiting a natural disaster to fatten their profits.

That was when API and its members concluded that politicians and the public may not fully understand how the business works, Cavaney said. “We had to become more vocal. Our friends were telling us they couldn’t go on being the only voices,” he said.

Cavaney emphasized that what API and its members are undertaking is an educational advocacy effort, not an image campaign. “At our coming annual meeting, we’ll ask the board and membership for reaffirmation that the industry needs to carry forward over several years to try and get a more balanced perspective in developing national policies,” he said.

“It’s an incredible dichotomy,” Cavaney observed. “From an operations standpoint, companies are at the top of their game. From a public policy standpoint, the industry is in a severe downdraft. Mistrust on a broad scale allows people to believe the worst. This has to be a long-term effort.”

He expects API members to support continued aggressive educational advocacy. “The industry leadership has clearly recognized that it can’t sustain strong operating and financial performances if public policy is working against it,” Cavaney said.

Antioil sentiment intensified following President George W. Bush’s “oil addiction” reference in his 2006 State of the Union address. Cavaney said it was a catalyst for groups and individuals opposing the use of oil to aggressively promote alternatives as ways to achieve energy independence.

‘A fool’s errand’

“As a long-term goal, it might be worthwhile. But looking at what the US economy faces over the next few decades, the idea is a fool’s errand. None of the current technology will accomplish this,” Cavaney said.

He said control of the US House of Representatives, and possibly the Senate, could move to the Democrats, and their energy strategies may rely more on mandates than the marketplace.

“We’ve seen this movie before. After the oil embargo in the 1970s, government tried to develop several programs. It did a pretty good job on energy efficiency standards initially but just about everything else, from price controls to the windfall profit tax, failed,” he said.

At that time, he said, there was enough spare productive capacity that the industry could continue to supply consumers. “Now, there’s such a passionate search for the successor to oil and gas that we’re concerned that policymakers could direct efforts toward perceived solutions. But what if they fall short of their goals and the oil industry has been so marginalized that it can’t step up to fill the void? Our national economy would be at a serious disadvantage,” Cavaney said.

He said he would like to see national energy policymakers emphasize energy security, instead of independence, by first, recognizing the value of conservation and efficiency, particularly with growing demand overseas from emerging economies; second, increasing and diversifying supply sources, both domestically and globally; and third, increasing government’s support of technology research and development.

Cavaney said the industry has been doing its part to foster research and development. Of the $135 billion of US expenditures for emergency energy technology from 2000 through 2005, he said the oil and gas industry spent 73% of the total, government spent another 4%, and the remainder came from other businesses, academia, and special foundations.

“If we are marginalized with burdensome taxes, we’ll lose our capacity to reinvest,” he warned.

National oil companies

Cavaney also pointed out that the worldwide oil industry has changed in the last 30 years as national oil companies have become dominant, reaching a point where they own 79% of the total reserves. “If US policy formulas for energy marginalize publicly held oil companies and make them noncompetitive, who does that leave to supply consumers?” he asked. Cavaney said that for every example of successful government-driven energy efforts, such as automotive fuel efficiency and the removal of lead as a gasoline antiknock compound, there are several more failures.

“Most economists agree that command-and-control schemes don’t work as well as a free market. Many say that while there is no totally free market in oil and gas, it still is preferable to mandates,” he said.

API’s president observed that while free and transparent energy markets are preferable, “at the end of the day, energy is driven by government policies-from where you can drill or build facilities to the composition of fuels. There has to be a constructive partnership between industry and government.”