Energy Security and Climate Change policy ,
- by James Mulva, January 13, 2009
Energy Security and Climate Change policySecuring
By: James J. Mulva Chairman and CEO,
ConocoPhillips National Press Club Washington,
D.C., Jan. 13, 2009
Ladies and gentlemen, as a visitor to Washington, I feel a keen sense of history in the air. On Pennsylvania Avenue, workers are putting the final touches on the grandstands for next week’s inauguration. In just seven days, our new president takes office. President-elect Obama is personally very impressive. His confidence and calmness are reassuring. The transition process has been smooth. Talented people are joining his staff and cabinet.
Meanwhile, on Main Streets across America, the public recognizes that we face staggering challenges that cannot be deferred. The global economic slowdown, the U.S. recession and job losses, as well as the financial and credit crises, are affecting everyone. And the world’s geopolitical hot spots continue smoldering. We must meet these challenges head-on. There is a thirst for new leadership. I know I speak for everyone here in saying that we all want success for the new administration. We all want to see our problems successfully overcome. The question is, how should we go about it?
A year or even six months ago, with gasoline prices triple what they are today, energy security was on the A-list of vital issues. So was climate change. Now, they have taken a back seat, replaced by the new challenges. But complex issues are often interrelated. For example, by restricting energy development at home, we export dollars for oil imports. Which means we also export jobs. The trade balance worsens. The dollar weakens. Government tax revenues fall. Otherwise-minor geopolitical events in oil-producing regions become urgent strategic threats.
One of the solutions that President-elect Obama has suggested – the creation of a Green Energy Economy – is intended to help address energy security, climate change and job creation. We agree that we must reduce the environmental footprint of energy production and consumption. But we must be realistic about the cost of green energy. Also about its true potential and how long it will take for commercial-scale supply contributions. We must also be realistic about society’s needs. Our economy requires readily available energy today – not just the promise of it 10 or 20 years from now. This energy must be reasonably and competitively priced, when compared to energy costs in other countries. And finally, we must avoid inadvertently creating unattainable public expectations. An energy transition will not occur overnight, at little cost and with no inconvenience.
National Energy Policy
How can we reconcile these realities with the concept of a Green Energy Economy? We should start with the basics by enacting a balanced national energy policy. You may be surprised to learn that the U.S. does not already have one. There have been a number of constructive energy bills passed by Congress over the years. But taken collectively, they did not ultimately solve the country’s dilemma. The problem is that none of these bills dealt comprehensively with all the issues surrounding energy sources and uses. They never encompassed all forms of energy. They never took the opportunity to incent and inspire increased supply – while also lowering demand by encouraging greater energy efficiency. Instead, they chose winners and losers. They focused on the supply sources that were popular at the time. They ignored, or even penalized, other potential sources. For example, today’s popular and politically appealing choice is alternative and renewable energy. But what about the other sources that actually make up the bulk of our supplies?
Given our past history, it should be clear that we need a different approach. We need a comprehensive policy that incorporates four principles:
• Broad supply diversity.
• Greater energy efficiency.
• Technological innovation.
• Sound environmental stewardship, including addressing climate change.
I’ll explain, starting with supply diversity. We need more energy in all forms. ConocoPhillips strongly supports development of alternative and renewable sources, like solar, wind and geothermal power, biofuels, and others. But there is, to borrow a well-known phrase, an inconvenient truth. We also need more fossil fuels – oil, natural gas and coal – as well as more nuclear power. Alternative energy cannot come on line fast enough at the scale required to replace these sources, not for decades to come.
So the U.S. must encourage more domestic oil and natural gas development. It could easily do so by opening for exploration some of the promising areas that are now off limits. The public overwhelmingly agrees.
Although the 26-year-old offshore drilling moratorium has expired, there are still needless restrictions. And some in Congress even want to reimpose the ban. This would be a mistake of historic proportions. The central and western Gulf of Mexico yield 25 percent of domestic production of oil and natural gas. This keeps hundreds of billions of dollars at home that would otherwise go for imports. There also may be substantial potential in the eastern Gulf and off the Atlantic and Pacific coasts. It is time to find out. A comprehensive energy policy should also encourage development of nontraditional fossil fuels, such as oil sands, oil shale and natural gas hydrates. These sources are abundant and are located within our borders or nearby.
For example, Canada’s oil sands are one of the world’s largest hydrocarbon deposits. They hold more than eight times current U.S. reserves. And available volumes could grow with new technology. The U.S. is the logical market for this oil. It already flows to refineries in the Midwest for processing. It creates domestic jobs, generates income and tax revenue, and increases regional fuel supplies. But there are some who want to stop this oil from coming here. They object to its carbon intensity and the impact of development.
Canada and its citizens have already weighed the pros and cons. They are devising environmental standards that will account for the resulting greenhouse gas emissions. So the oil sands will be developed. Either we can bring this oil here to the U.S. from a secure and friendly source, or watch it go to other countries instead.
The second tenet of a comprehensive policy must be improving our energy efficiency. Since the 1970s, the U.S. has doubled its economic output per unit of energy consumed. We can still do more. The public is driving less, so gasoline demand is down. There is also greater awareness of the need for energy efficiency at home and work. Government can inspire further improvement through public education and by enacting broader efficiency standards.
Third, the new policy should promote innovation by encouraging research and development. Industry is making substantial investments already. Government can encourage further private investment by granting incentives. We also need public investment in technologies that cannot be funded by industry. Such as those that require long lead times or highly advanced science. Examples include natural gas hydrates, nuclear fusion and fuel cells. We would benefit, too, from greater support of the educational system, particularly in the scientific and engineering disciplines. Otherwise, we anticipate a severe shortage of industry technical personnel in the future.
And fourth, we must achieve these priorities while serving as good environmental stewards. As part of this, our industry must invest in cleaner forms of energy. For example, ConocoPhillips is one of North America’s leading producers of clean-burning natural gas. We blend ethanol into our gasoline. We produce renewable diesel fuel from surplus animal fats and vegetable oils. We are researching next-generation biofuels. We are developing new materials for the lithium ion batteries in electric cars. We are also considering investments in other energy sources.
To summarize, we believe that as the U.S. pursues a Green Energy Economy, its policies should encourage development of all forms of energy. They should promote energy efficiency, technical innovation and environmental protection. Oil and natural gas have a vital role to play. They will continue as our leading energy sources for the foreseeable future. They will help bridge the gap from today until alternative and renewable energy become fully available. By producing more energy here at home, we would strengthen our national industrial base and help lead an economic recovery. We would create jobs, and generate government tax and royalty revenue, and help relieve the balance-of-trade deficit. Conventional fossil fuels can also be relatively green themselves. Natural gas is abundantly available today. Hopefully, gas from hydrates will prove viable in the future. A stronger domestic energy industry would also be an even more effective technology incubator. For example, ConocoPhillips has developed a proprietary technology to turn coal into a cleaner-burning gas. We are researching biofuels that would utilize existing infrastructure, such as refineries, pipelines and marketing outlets. This approach would make the new biofuels less expensive and less disruptive to our way of life. In addition, the industry’s expertise lends itself to the development of carbon capture and storage capability. This could become one of the key solutions to greenhouse gas emissions.
National Climate Change Policy
This brings me to climate change, which is another interrelated issue. We believe that the public will not allow new energy development unless the resulting carbon impact is addressed. Conversely, the public will not favor reductions in carbon emissions if, as a result, energy prices are forced upward too much or too fast. Both issues must be addressed together. ConocoPhillips belongs to the U.S. Climate Action Partnership. This is a coalition of businesses and environmental groups that share a vital belief. We believe that time is not on our side in terms of climate change. That each year the U.S. delays controlling its emissions, the greater the future risk. So USCAP is calling for a mandatory national framework to slow, stop and then reverse the growth of greenhouse gas emissions.
In the absence of this framework, ConocoPhillips is voluntarily managing our emissions. We are improving the efficiency of our refineries. We have a climate change plan that calls for new control processes and technologies. It also calls for identifying potential investment opportunities in low- or zero-carbon businesses. Additionally, we actively trade carbon in Europe and Canada. But voluntary efforts are not enough. And neither is the current patchwork of state initiatives. They vary widely and create overlaps and inefficiencies. Instead, we need a single, consistent national program. In two days, USCAP will release its comprehensive climate policy recommendations. These were hammered out during two years of hard work, analysis, debate and compromise. They should convey a high degree of credibility and merit because of the broad and diverse membership of USCAP. It includes manufacturers of products from cars to medical devices to pharmaceuticals. There are energy producers and electric utilities. There are companies engaged in mining, financial services and consulting. There are prominent environmental organizations.
In short, there is broad representation of business and industry and of the environmental community. So the consensus recommendations are neither a one-sided, pro-industry approach nor a solely pro-environmental approach. They are balanced. They can and should serve as a guide to Congress as it crafts climate policy. I will not pre-empt USCAP by providing specific details. But I can tell you that the recommendations will be widely communicated to Congress, the Obama administration and the public.
The Energy Industry’s Place in Society
There is one final area in which the energy industry must do more: addressing our place in society. Society needs energy. It powers nearly all economic activity. That will not change even as the sources evolve over time. There will always be entities that supply energy. And energy will always have some cost associated with it.
Unfortunately, our industry has been tarred by misperceptions on energy prices and profits. It is tempting to blame us whenever energy prices rise. However, prices respond to world supply and demand, as should be clear now. Some of the public understands this, and so does the media. Unfortunately, too many in government choose to ignore the facts and ignore that U.S. policy contributes to supply challenges and thus price increases.
There also is a lack of recognition of the size and scale of the projects necessary to bring on additional supplies and a lack of knowledge of the development time that major projects require. Investment decisions must be made and billions of dollars spent years in advance of the project startup. As for the “record profits” of the past few years, they have now deflated. Few people know that since 2000, oil industry returns on investment only kept up with the average of the S&P 500. They had lagged behind for many years. But the concern over the absolute size of profits has inspired a fixation on taxing the industry. Our effective tax rate is already twice that of manufacturing companies in general. As an example, the recent financial bailout contained three new tax provisions that impact only the oil industry.
We are relieved at President-elect Obama’s recent statement that a windfall profits tax is no longer on his agenda. We further urge that future legislation not single out the oil and natural gas sector alone to pay for alternative energy or reducing carbon emissions. This is vital, because we must retain adequate financial capability. We need to continue making new investments, providing jobs, developing new technology, and finding the oil and natural gas that our country needs. Our industry should be recognized for what it is – an asset that is essential to national securityand economic health.
Conclusion
As we look forward to the coming week, I want to stress once again that ConocoPhillips is ready, eager and willing to work with the new administration. We join in congratulating President-elect Obama on his historic achievement in winning the presidency. And we offer our support for his efforts to address the country’s challenges. We understand the current intense focus on economic recovery. But we urge Congress and the incoming administration to remember the economic importance of sound energy and climate policies. They are key to the long-term prosperity and well-being of our country. We need comprehensive, well-thought-out policies. And we need them soon.
Thank you.