At a time when the unconventional oil and gas bonanza in the U.S. has brought about a painful and lingering period of oversupply and low prices, speakers at the University of Oklahoma Price College of Business Energy Institute’s annual Energy Seminar, held in late March, offered up sober and insightful perspectives.

In the keynote address, Adam Sieminski, head of the federal Energy Information Administration (EIA), told delegates that “the end of fossil fuels is not on the horizon.” David Gompert, former principal deputy director of U.S. National Intelligence, stressed that the ascendance of the U.S. as a top global energy supplier is a transformative development in world politics.

In particular, Gompert said that the current relationship between the U.S. and China “is a combination of competition and cooperation. It is also important to understand that the combination varies greatly from global to regional to local.”

Gompert sat on the opening panel, which addressed geopolitical and macro-economic issues. It was moderated by J. Mike Stice, dean and Lester A. Day Family Chair of the OU Mewbourne College of Earth and Energy.

Globally, the high level of cooperation between the two countries in areas as varied as climate change and trade relations has surprised Gompert. “Regionally, that is very different. The relationship is much more one of competition now that China is strong. They oppose our strength in the region. When they were weak, they welcomed a strong American presence as a foil to the U.S.S.R. or Japan. Now they are saying ‘we are successful and strong.’”

All the points of conflict represent crises waiting to happen, Gompert cautioned. “America cannot afford a policy of just making nice. Just as China once looked to the U.S. to balance interests, now our allies and other countries in the region are looking to us to balance China.”

At the University of Oklahoma’s annual Energy Seminar, panelists (left to right) Ed Morse, managing director and global head of commodities research at Citigroup; Bob Sheppard, former CEO of Soma Oil & Gas; Daniel Pullin, dean and Fred E. Brown Chair of OU’s Michael F. Price College of Business; Divya Reddy, director of global energy and natural resources at the Eurasia Group; Joshua Landis, professor and director of the Center for Middle Eastern Studies at OU; and David Gompert, former principal deputy director of U.S. National Intelligence, discussed U.S. energy policy.

There is a tremendous opportunity in an energy-supply relationship with China, he said. “Any opportunity to cooperate more and confront less is good for both countries. Adding an energy-supply relationship to everything else adds a moderating influence.”

Divya Reddy, director, global energy and natural resources at the Eurasia Group, expanded on that theme: “Low prices ease the energy security anxiety in many regions and allow for more cooperation between countries. The [environmental] agreement last year between the U.S. and China set the trajectory for diversification in power generation. In the short term there may be snags, but in the long term the trajectory is strong.”

The LNG market

The U.S.’s role as a significant player in the global oil and gas markets brings many benefits, noted Ed Morse, managing director and global head of commodities research at Citigroup. “The U.S. is the only seller of liquefied natural gas [LNG] that does not have a destination restriction,” he said. “That means the cargo can be resold.” As a result, U.S. LNG exports could have the effect that that “within a year or two, a spot market in deep-sea LNG will emerge, with Henry Hub as the pricing basis,” Morse said.

Abundant natural gas anchors U.S. influence in the global market. “If Pennsylvania were an independent country, it would be among the major gas producers in the world all by itself. Production is about 21 billion cubic feet a day and seems set to rise to 36 billion a day,” Morse said. “The rocks could sustain production of 40 billion a day for decades.”

Citigroup estimates that U.S. LNG exports could land in Europe and Asia at levels that undercut current prices in those regions, and still make a profit. U.S. LNG has upended more than a few cleverly crafted supply arrangements, Morse said. “China thought they were smart fixing the border price for gas out of Uzbekistan and other countries at $10/Mcf. That turns out to have been a dreadful decision. Meanwhile, U.S. and Australian LNG have unhinged global gas-price expectations.”

Turning to oil, Morse noted that while the other two or three top global suppliers would like to see the prolonged low-price environment contain U.S. production, that genie cannot be put back into the bottle.

“Because the U.S. [and Canada] have highly developed financial services markets, that means oil and gas have essentially unlimited access to capital to develop,” he said. “There is now a ‘frack-log’ of wells that have been drilled but are uncompleted. As prices recover, there will be a rush to complete those wells and bring them into production. I credit Harold Hamm [CEO of Continental Resources Inc.] and Congress for the work they did to lift the crude export ban. Those shipments only started last year, and already they are landing and having an impact on those local markets.”

A recovery of the U.S. oil and gas industry will take time, especially given severe cutbacks in the oilfield services sector, but when prices are again viable, the U.S. could increase production by 400,000 to 1 million barrels a day (MMbbl/d) of production within a year, Morse said.

Putting those numbers in context, Joshua Landis, professor and director of the Center for Middle Eastern Studies at the University of Oklahoma, noted that OPEC used to supply 60% of the world’s oil but now supplies just 30%. In terms of total production, not shipments, he said that Russia produces 10.5 MMbbl/d, Saudi Arabia, 10 MMbbl/d and the U.S., 9.5 MMbbl/d. The fact that the U.S. essentially doubled its production from 5 MMbbl/d before the unconventional boom has vastly changed the global energy market.

$50 is the new $100

“The reality now is that $50 a barrel is the new $100,” said Landis. “Producers here in Oklahoma can work at $40 to $50 a barrel. The breakeven price for Saudi Arabia is $96 a barrel, but Saudi is unlikely to ever see $100 a barrel again. The breakeven point for Oman is $92; for Iran it is $70; for the Emirates it is $60 to $70.”

Although recognizing that unconventional production from North America has changed the calculus for global oil and gas markets, Landis said that the new level of U.S. influence is not without limit. About 20% of China’s oil comes from Iran, and China will not be shy about securing supply.

No discussion of the global supply-demand balance is complete without an analysis of how countries beyond the U.S. are responding, said Bob Sheppard, former CEO of London, U.K.-based Soma Oil & Gas. Significant questions about the future of Russian production remain. Hydrocarbon exports account for about half of all Russia’s revenues, so the sector is clearly one of elemental importance to the country, he said. However, the Russian economy as a whole is shrinking, and the strategic expansion plans for production, such as in eastern Siberia or the Arctic, are fabulously expensive. There are also vast new supply commitments to take into account.

“Russia is now at its post-Soviet peak of production, but there is a lot the country can do in good oilfield practices to improve both its production and its efficiency. That is before any expensive or complex changes,” he said.

Russia’s new deals with China reflect a pivot east and are a reaction to Europe’s souring on Gazprom. “Europe has finally twigged to the fact that maybe Gazprom is not the most reliable supplier. But then we have been telling them that for years. What has been shown in Gazprom’s dealings [changing rates, terms and even cutting off supply] is proof that energy policy is inextricably connected to foreign policy.”

The Russian intervention in Syria is a case in point. “They got in, were able to evaluate their military hardware, shore up an ally, and got out before it turned into a quagmire. But they also got some leverage on Saudi Arabia,” he said.

Russia is not the only player with veiled interests. “Iran’s return to the global market is inconvenient to the rest of the Middle East, but it is a dramatic problem for Russia,” said Citi’s Morse. “That is because Iran is primarily a supplier to Europe. In the past, Iran has suspended agreements with the large refiners in Europe, but all sides on that clearly want to re-engage.”

Iran’s re-entry also affects Saudi Arabia. “The Saudis saw that they were losing share when China started offering pre-export financing but only for chunky amounts of supply,” Morse said. “In a low-price environment, the petro-states have an underbelly that is particularly vulnerable. That is their domestic social situation.”

The Energy Seminar’s attendees heard viewpoints on the effects of abundant natural gas, which anchors U.S. influence in the global market.

Lower, longer

Since oil prices began tumbling the focus has been on oversupply, but Sieminski honed in on demand in his long-term outlook.“There are a billion people in the world without electricity,” he said. “I have been to the slums of Mumbai. Those people deserve electric light and propane to cook. Those are basic human needs.”

EIA data show that natural gas for power generation and crude oil for transportation and heating fuel are the most efficient and economic ways of meeting those needs in most regions. But while that outlook was heartening for energy executives, their more immediate focus is on crude prices and the near-term prospects for recovery.

“We just revised our outlook for crude oil,” said Sieminski, “and we expect West Texas Intermediate crude to remain low as compared to recent levels. The projected price for next year is $40/bbl, which is down from $50 in our previous outlook. Also, the confidence band on that projection is very broad,” reflecting a high degree of uncertainty.

In a glimmer of hope for the near term, Sieminski noted that inventory accumulation has decreased. “The EIA believes that supply is still greater than demand, and that inventories are still building, but that the rate of that building has slowed.”

The turning point could be next year, at least in global markets. “It could take until the end of 2017 for worldwide supply-demand in crude oil to come back to some balance,” he said.

“If that happens, then about six months prior to the physical markets coming back into balance the financial markets will start to react. That means that about this time next year we could start to see some indications.”

EIA data show that North American oil production is falling by 500,000 bbl/d but that OPEC production is growing. Sieminski is not looking for massive new additions from either Iran or Iraq. “They are starting to top out in terms of current production. Iran will get a bit of a bounce from the lifting of the sanctions, but they will have trouble attracting capital” to increase production further.

Another country to watch is Venezuela, he advised. “If you are looking for a geopolitical challenge, then it could be Venezuela. Their production is 3 MMbbl/d, of which 800,000 bbl/d comes to the U.S., mostly heavy sour crude to the big Gulf Coast refineries.”

Significant potential production is being held back in the U.S. in drilled but uncompleted wells (DUCs), Sieminski noted, but he cautioned that bringing those barrels to market isn’t a matter of just flipping a switch.

Indeed, he emphasized the prolonged effects of capital destruction in the U.S. oil patch. “There will be $200 billion in assets written down this year, and over the long term, debt-to-equity ratios are rising while return on equity is falling.”

The EIA projects that renewables will account for an increasing share of the growth in energy consumption over the next several decades. Still, fossil fuels are anticipated to remain a major portion of the global energy equation for the foreseeable future.

“We think that gasoline-only vehicles will retain their current share of the transportation fuels mix,” he said. “The growth in new vehicles will skew to those powered by natural gas or electricity. Natural gas will grow most strongly among all fossil fuels, and by 2030, natural gas consumption could be greater than that of coal worldwide.”

Of total world energy consumption, about a third is liquids, mostly oil, which is primarily used for transportation fuel.

U.S. fuel demand was about 90 MMbbl/d in 2014, and it is projected to grow to as much as 120 MMbbl/d by 2040. In terms of production, unconventionals have taken a central role.

“Half of our oil and gas comes from hydraulic fracturing,” noted Sieminski. “There is also considerable production of NGLs. Actual crude oil production in the U.S. is about 80 MMbbl/d, but total liquids production, including NGLs, is close to 96 MMbbl/d.”

Power consumption in the U.S. is shifting in response to environmental regulations and abundant natural gas supply. According to the EIA, U.S. generating capacity will grow from 4 trillion kilowatt hours (Tkwh) in 2014 to 5 Tkwh by 2040. In that same time frame, the fuel mix will change. Gas-fired power will rise by half, from 26% of total generating capacity to almost 40%. Renewables will double, from 13% to 26%. Nuclear will remain flat in kilowatt hours but will decline in relative percentage, and coal will decline from 40% to 20%.

Echoing price point analysis presented earlier in the seminar, Sieminski said $40/bbl is unsustainable. “That just won’t work for too many producers. But $50? $60?”

He left the question open, explaining that production costs are more variable in the U.S. than anywhere else due to local costs of operation, technology applications and the type of investors involved.

Technology is an increasingly important factor in the cost of production and in total volumes lifted, Sieminski said. “That was one of the things that was terribly wrong with the whole ‘peak oil’ idea. It discounted technology and then continuing innovation within technology,” he said.

Even within hydraulic fracturing technology there has been continuous innovation, Sieminski said. “Fracturing used to be done the entire length of the wellbore. Now it is cut into segments. Multistage fracking is much better; you get more oil and gas for the same effort.”

Roughly speaking, 80% of the hydrocarbons come from 20% of the fractures, Sieminski noted—another example of the ubiquitous 80:20 rule. “If some smart person could find a way to identify in advance what those highly productive fractures are going be, then we would see another quantum leap in production technology.”

Policy lags, but so does debt

The panel on energy strategy and policy issues underscored the importance of both in catching up to the new reality. Geopolitically, “U.S. suppliers to Japan, Korea and China will have influence that they do not currently have,” stated Mark Snell, president of Sempra Energy.

“But with LNG we really all need to take a deep breath and wait to see what happens. These shipments have only just started. By the end of 2019, there should be about 8 Bcf/d to 9 Bcf/d of exports. That is a lot of gas. That could increase to as much as 12 Bcf/d to 15 Bcf/d by 2024.”

As those volumes move offshore, “gas will become the predominant producer of power in the U.S.,” said Snell. “We do not have to put ourselves at a disadvantage to achieve a healthy energy mix. For example, we figure each new electric car is equal in demand to half a house. But if all those cars are being charged between midnight and 5 a.m., when demand is lowest, there may not be need for new infrastructure to support that demand.”

Scott Sheffield, chairman and CEO of Pioneer Natural Resources Co., stressed that upstream variables remain. “At $50 oil, the industry cannot grow. The industry needs $60 oil to grow domestic production.”

Even when that level is reached, Sheffield added, there is some serious reckoning to be done regarding debt. “Our industry carried roughly $200 billion in debt two years ago, and that grew to $550 billion before the downturn. That is just way too much debt. Even when prices come back, the industry will have to pay off a lot of debt before we can all start growing again.”

Growth in the industry is mostly predicated on growth in demand for the resource, which is now bound up in environmental policy, said Mark Mills, president of Digital Power Group. “It is obvious that humans are having an effect on the planet,” he said. “There are lots of humans using lots of hydrocarbons. The debate is not whether or not there is an effect, but the degree of that effect” and what to do about it.

Speakers on the panel agreed that natural gas and oil now play very different roles in the global energy mix, and the U.S.’s growing presence as an exporter of both commodities is beneficial both domestically and internationally.

“We are going to be pushing a lot of [high-priced] gas out of the global LNG market,” said Rusty Braziel, president of RBN Energy LLC, “just as we did with crude. That is a good thing for buyers. Also, Canada does not take much of our gas, but we are taking less of theirs, which enables them to export elsewhere.”

Beyond the lack of destination restrictions for LNG from the U.S., Snell added another attraction. “We are the only gas exporter that also has significant domestic demand. That is a huge advantage for buyers. When you are buying from a U.S. supplier, you are only committing to the cost of liquefaction, about $3/Mcf. After that, if you don’t need the gas, you can release it to the local market. That means great flexibility and security.”

Bruce Stover, moderator of the panel and president of BHS Enterprises and member of the OU Energy Institute’s board, summed up the U.S. energy industry’s achievement. “Our country has never been in as good a position as it is today in both breadth and depth to effect positive change in the world in terms of economics, policy and the environment.”