Executive Q&A: API's Cavaney: Winter fuels issues point to need for energy policy

Red Cavaney, the American Petroleum Institute's president and CEO, recently discussed the nation�s winter fuel supply outlook and energy policy options in an interview with OGJ Online Managing Editor Patrick Crow.

Red Cavaney, the American Petroleum Institute's president and CEO, recently discussed the nation�s winter fuel supply outlook and energy policy options in an interview with OGJ Online Managing Editor Patrick Crow.

OGJ Online: The energy issue of the day seems to be the winter fuels supply situation. What do you foresee happening?

Cavaney: At the end of the day, weather is the big determinant. Obviously, the colder and more broad-based the winter is, the more of a challenge we have. What is particularly sensitive is of course, the Northeast US, because of the absence of a pipeline up there to move products. You have to move products to the New England states either over roads or by barges up the rivers. The problem we experienced last year was not really one of inventories. It was a lack of preparedness on the part of the communities up there to get the barges through and keep the trucks running. API has talked with Energy Sec. Bill Richardson and volunteered to put together a working group that would meet biweekly to focus principally on the 90% of the heating oil that moves directly from the refinery to the end user and bypasses the inventory stage. It's important that we focus on the 10% that comes from inventory, but at the end of the day, if you don't get the 90% right due to logistics concerns or something, the 10% isn't going to help you.

The refining industry has set three records in the production of home heating oil in the last couple of months. Clearly, industry has responded (to the problem of low stocks) and is shifting over to produce more home heating oil. It's very clear that products are moving into secondary and tertiary storage. We're certainly not at a point where we should relax at all, but I think that industry is responding with higher refinery runs. This has never been�although it's been characterized by some�a crude oil availability problem. The crude oil has been there at whatever the market price has been. I think the question is whether we can get the crude through the refineries and address all the logistic problems. I feel reasonably good about that. If we get a winter like the last couple, I think the industry will deport itself well. But there's always the outage you didn't plan for, and the possibility of a colder-than-normal winter.

OGJ Online: Have the oil industry's just-in-time inventory practices exacerbated the supply problems?

Cavaney: If you look over the past several years, the companies have totally remade themselves. When refiners met recently with Sec. Richardson, a lot of the companies around the table at that meeting raised a very good point. They said that the Energy Information Administration evaluates home heating oil stocks using a chart that depicts a range, or a band, of historic inventory levels. The companies said, "We don't look at all like that now. We don't operate that way any more. We are a lot more efficient and we can do a lot more with a whole lot less." They recommended that EIA review whether the historical bands are relevant to the way the market operates now. If you rely on those EIA charts, there may be more of a perceived problem than there really is. It may be difficult to gauge how much more efficient industry is now at producing home heating oil and getting it to market, but that's clearly what you need to do. You need to get EIA and people on our staff who work and live with those numbers to take a look at it.

OGJ Online: What about natural gas supplies this winter?

Cavaney: The other thing that we don't have a good handle on is the whole issue of interruptible (gas supply) contracts, although some states have taken steps to try to get their arms around the problem. What will happen if, for some reason or another, we do get a cold snap and some of these public utility companies and other suppliers decide to exercise interruptible contracts? Then you have industrial concerns looking for other energy supplies, and where are they going to turn? Obviously one source will be heating oil. I think we didn't appreciate the significance of the fuel switching factor before last year in the Northeast, when for the first time it became evident what was going out there. We don't have very good figures on how much fuel switching is out there. But its something API is looking at, and the American Gas Association has been very cooperative. We want to have the best understanding we can of the interface between natural gas and heating oil. Although those fuels are bitter competitors, they're more connected in the marketplace than they ever have been before.

OGJ Online: Why has API urged the federal government to draft a national energy strategy next year?

Cavaney: Well, the current administration feels it has a comprehensive national energy strategy, and it's going to stand pat. But the new administration, whether it's led by George W. Bush or Al Gore, is going to have to deal with revisiting the question. For one thing, there is a major disconnect between this nation's heavy reliance on natural gas and the question of where we are going to find new supplies. That, at the end of the day, is going to be the overarching public policy focus for this industry. Another problem is the fact that the energy infrastructure in this country is stretched as far as you dare stretch it. If we continue the kind of growth that we've had in this country the past 5 or 10 years over the next 5 or 10, we've got to make some major overhauls in the policies that determine energy production�and everything ought to be on the table in that discussion. API isn't prejudging what should be discussed, but we do have some principles that we think should be considered. And it's very important that we need to have a broad discussion so that everybody understands what's at stake. All the stakeholders should be at the table. When you make decisions there should be a seat of the table for the producers, consumers, and environmentalists. Most anybody who has dealt with federal energy policy of late can tell you that the most clout has rested with the environmental wing of the government. Energy production hasn't been able to get an equal standing. And the consumer is given virtually no standing in a number of cases.

OGJ Online: What should be in the final energy policy?

Cavaney: Well, the current administration has said, and properly so, that they're very focused in delivering to the consumer the maximum product at the lowest price. That's good and works over the short term, but will it do the job over the long term? We're discovering there are some challenges there. That's one thing that should be considered. Number two, we clearly need to streamline the permitting process. We have to improve the infrastructure. Permitting remains a budget breaker, a very difficult one. The "not in my backyard" phenomena is not helpful and people need to understand that.

Another thing is that the industry needs greater access abroad. Access to public lands for exploration, as I said before, is a major concern for the domestic oil and gas industry. And the US unilateral sanctions keep us away from some of the best nations where there are (oil and gas) supplies. We need to diversify our international supplies so we can have more leverage in terms of competing in the global oil market. We say those four issues should be on the table. There are many more we can think of.

You really do want to have a good wide-ranging discussion about these things because there are going to be trade-offs. For instance, when you look at all these problems we have with the Northeast and heating oil, its obvious that they're the only part of the country that doesn't have a products pipeline. Would that (shortage) situation be a whole lot different if they had a pipeline? Well, probably. But they don't, and it's their choice. But did they understand that when they made the choice? That's why we think having a discussion is really more important than having the focus on implementing the policy this year or next year.

Government should listen to industry when it drafts a policy. A lot of these upcoming environmental regulations that are being put forth are being characterized one way by advocates. We think we understand some of the impacts on consumers, but our view or perspective on the impacts on consumers is discounted because we have a stake in the issue. But somebody has to ask tough questions like, "If we invest this much money how much production are we going to get?" And questions like, "Is that where we ought to put our money?" The diesel fuel regulations (limiting sulfur content) is a classic case of that exact thing. Is it worth the risk of having some supply shortages in order to meet rules that require technology that we don't know about yet?

It's all but unavoidable that, regardless of which candidate wins, the next administration is going to have to roll out some comprehensive energy policy in its first term. Whether they want to call it a national energy strategy or whether they address it in pieces, I think they're going to have to revisit the energy producing sector of the economy. But just having a strategy, of course, isn't the same as being committed to one.

OGJ Online: Do you foresee any new directions for API?

Cavaney: Not just API, but also other associations, are finding more and more of their member companies are doing work abroad, and it's bringing new challenges for us, challenges that not all of us fully anticipated. One of the things we're trying to do is reach out and talk with our counterpart associations and with people in the companies on how we can do a better job to help them. For instance, if a large integrated company is doing business across the globe, it is going to get regulated in Japan. It's going to get regulated in Australia. And in other nations too. And at the end of the day, it's probably paying three or four times what it needs to pay for various forms of research that has to be brought into these rulemakings. Are there collaborative things that API and they could be doing, so that the (government) regimes could say, "If you do research in this area, it will be accepted in all of these nations"? The supply companies and independents are finding the rules of the game are different overseas. They spend a lot of time asking us, "How do we do this?" If we can help them within the framework of our charter, it's good for them and it's good for us. In the near term, our charter is not an obstacle. In the longer term, we may need to use a different structure.

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