?“We are clearly in a critical time in our industry and in the evolution of globalization and the global economy. This is a test of our institutions and our systems as to how we work through it,” says Thomas A. Petrie, vice chairman of Merrill Lynch, a unit of Bank of America.


At a recent distinguished speaker series hosted by the Independent Petroleum Association of Mountain States (IPAMS) in Denver, Petrie gave his views on a wide range of topics, from oil and gas markets to U.S. energy policy and strategic positioning of corporate players.


He likened aspects of recent global economic developments to “Black Swan” events, and cautioned listeners against the human tendency to think that low- or no-probability events are the same. Nassim Nicholas Taleb’s 2007 book, The Black Swan, discussed the potential for these large-impact, hard-to-predict events.


“When all of us in the room think that we don’t have to worry about an event because it probably won’t happen, then nobody provides for it—but a low-probability event that is not provided for has a high impact,” Petrie said.


“In the supply chain of energy there are lots of low-probability events, from wellhead to burner tip, and any combination of these can have a high impact in terms of supply availability and prices.”


The Obama administration has identified energy as one of its top three concerns to address. Petrie noted that every administration since Nixon’s has identified energy as a high priority, yet none has succeeded in meeting initial policy goals, because it has proven too difficult politically to do the right thing.


The ability of President Obama to persuade in this environment is proscribed by the macroeconomic pressures of the economic meltdown.


The credit crunch that began in 2008 has precipitated the sharpest fall in oil and gas prices in more than two decades, Petrie said. “We need to realize that the fundamentals behind …prices above $100 are still with us. Their relevance and immediacy are not quite as great but they will come back, and we will be dealing with them sometime in the first half of the next decade.”


Those fundamentals include conventional resource maturity; entrenched resource nationalism; and realigned national and economic security interests.


Also key: the “much-hyped environmental sensitivities” on the administration’s agenda as it addresses carbon cap-and-trade or a carbon tax, and other proposals to address emissions and pollution.


“The immediacy of peak oil and gas concerns may not be here for the rest of this year or next year, but don’t count on 2015 without it being the case,” Petrie said.


“We’ll be looking at a world where low-probability events that are not anticipated or provided for are part of the challenge.”


Petrie noted that commodity prices have gone from a “clear overshoot to an undershoot.” To emerge from this situation will require either the passage of quite a bit of time, to bring a supply contraction, or OPEC stepping in with a disciplined response.


That response is already under way, with 4.2 million barrels per day of OPEC cutbacks that Petrie calls significant. “Implementation of nearly all cutbacks that have been announced is under way, and it is impressive. We’ll find out…in the next 8 to 12 weeks, with weekly storage statistics. This is a time when those numbers will really mean something.”


If the drawdowns in oil storage are consistent in March, April and May, and OPEC’s discipline appears to be holding, then Petrie suggests there is a decent chance of oil prices reaching $50 to $60 this summer.
Another factor is how long the economic slide continues. Petrie looks for the recently announced stimulus package to help counter that slide. On other issues, he made these remarks.


The deepwater has become a more selective proposition. “Unless we get back to $60 to $80 per barrel with confidence that we won’t trend below that for an extended period, the filter has to be put on deepwater projects—there must be higher commercial thresholds of reserves to be developed and great productivity on individual wells.”


Canadian oil sands have become uneconomic. Petrie noted that eight upgrader projects on the drawing board in Alberta have been cancelled or indefinitely postponed.


Unconventional gas resources have also become more selective; while there are some prospects in the Haynesville, Woodford and Barnett that will work below $5 or at $4 per MMBtu, the more marginal areas and shales in evaluation stages will be delayed.


Alternative energy develop­ment, short of federal subsidies, will not proceed at the pace that was contemplated a year ago, hobbled by low commodity prices.


The natural gas production decline seen in the first half of this decade was fairly steady, but the big build-up in drilling in the past three years more than made up for that five years of decline.


Petrie noted that the Rockies Express Pipeline deliveries into the upper Midwest, and extending into Ohio and points east later this year, will create back pressure on traditional suppliers to the upper Midwest coming out of the Midcontinent and the Gulf Coast. Fayetteville shale supply is still building, while Barnett shale gas needs to move both east and west.


“We need new lines to open up markets in the Southeast as well as to bring Rockies gas to the West Coast.”


Liquefied natural gas could further complicate the gas picture. Basis differentials in the U.S. will be affected by LNG delivery coming into new facilities commissioned a year ago in Sabine Pass, Louisiana, and Freeport, Texas.


With the economic slowdown in the U.S. economy now linked to the Asian economies, LNG demand has fallen and supply delays that were developing are showing signs of reversal, he said. With new supply from Qatar and the imminent start-up of Sakhalin Island, LNG will again come out of the Pacific Rim primarily into the Atlantic Basin.


Energy policy is like resolving a Rubik’s cube that’s been unraveled. “Sequencing matters,” said Petrie. One of the real challenges for the Obama administration is how to get it right in the context of all the other pressures it must tackle in the policymaking arena.


Petrie addressed eight categories of what can be done to reduce dependence on foreign oil, as discussed in David Sandelow’s book, Freedom from Oil. These are fuel efficiency, biofuels, plug-in cars, coal, hydrogen, smart growth, use of the Strategic Petroleum Reserve, and diplomatic strategy.


Petrie foresees a major push for plug-in cars, which could save 40% to 60% of transportation fuel used by the U.S. fleet, or 3.5- to 5 million barrels per day. This could be a game-changer.


One drawback is that battery technology is not yet solved, and Bolivia is the main supplier of lithium for batteries. Further, until clean-coal technology is fully available, plug-in cars will trade coal pollution for gas pollution, Petrie said. Hydrogen’s drawback, on the other hand, is that it requires almost as much energy to produce as it yields.


Still, smart growth is coming, although the lead time is long in terms of public transportation and infrastructure changes to make the population more technologically intensive and effective in its consumption of energy, Petrie noted.


The debt markets are not completely slammed shut, and the equity window is also open to some extent, he said. Bank of America, Merrill Lynch has been involved in 22 debt offerings, with the majority in the energy sector.


The pattern has been to upsize deals because they have been well received, Petrie said. “Return on cash today is so de minimis that portfolio managers have come out of the shock phase they were in after the Lehman bankruptcy. They are recognizing they need to put money to work. Good solid debt issues are beginning to be well drawn with the kind of coupons involved.”


It will be several quarters more before there is a sustained recovery. And, we will continue to deal with things that, like Black Swans, are outside of our experience, said Petrie.