In a CERAWeek interview, Dr. Daniel Yergin speaks with Sarah Ortwein, Timothy Dove, Mark Little and Lorenzo Simonelli about North American oil supply. Here’s an excerpt of their conversation:

Dr. Daniel Yergin: Good afternoon everybody. Welcome to the session on North American Supply: The Great Disrupter. We have excellent panel to discuss that. We have Sara Ortwein who's the Chief Executive and President of XTO Energy, which is a subsidiary of ExxonMobil. Tim Dove who's the President and CEO of Pioneer. Mark Little is the Chief Operating Officer of Suncor Energy, and Lorenzo Simonelli who's the Chairman and CEO of Baker Hughes, A GE Company. I think everybody's going to have some short statements to get us oriented in what we're talking about and then looking forward very much to this discussion, and I ask Sara if you would begin.

Sara Ortwein: Of course, I'm talking about the Permian Basin. It's a 90,000 square mile mineral reservoir in West Texas and Southeast New Mexico, and it's really now the engine that's driving US shale industry. Today, there are more rigs in the Permian Basin than anywhere else in the world. Production in the Permian currently account for a quarter of the production in the entire country and it continues to grow, pushing US production past 10 million barrels a day. For the first time in more than four decades.

All of this activity has spurred US job creation. An impressive economic development. One visit to Midland and you'll see what I'm talking about. Midland sits in the heart of the Permian and it's become really the home base for Permian operations. I first worked in Midland some 25 years ago as an Operations Technical Manager for Exxon at the time. It was the first of several assignments that I had where I was responsible for aspects of the Permian. Back then, we were really focused on secondary and tertiary recovery, and getting the most out of the wells that we already had in place.

We knew there was significant hydrocarbon resource still remaining in place that we weren't accessing, but the technology at the time really didn't allow us to extract that value in paying quantities. The resurgence that we see in the Permian today has been underpinned by innovation. We've been pumping oil out of the Permian for nearly a century, but recent advances in horizontal drilling and hydraulic fracturing are opening a wealth of new opportunities for us. IHS Markit now estimates that another 70 billion barrels could be recovered as technology continues to advance. Technology is not only increasing access to energy, it's also making production of the energy cheaper, faster, and much more efficient.

In fact, continuous innovation is a key reason that the Permian rebounded so quickly from the down turn and remains so profitable even as the market continues to fluctuate. It's clear now that ‘Permania’, as some have called it is not really just a passing fad. It's a lasting phenomenon with major implications for the entire global energy market. At ExxonMobil, we're so confident in the Permian's potential that we've recently announced plans to triple our production to 600,000 barrels a day by 2025.

Dr. Daniel Yergin: Thank you, Sara. Let me turn to Tim now if you have a few opening comments.

Timothy Dove: Thank you, Dan. The fact is, in the case of Pioneer, we have been in the first two great shale places in the State of Texas. Of course, I'm speaking of the Barnett Shale on the one hand, and the Eagle Ford Shale on the other, and these did great things for the state, and great things for the local economies as well, and to a lesser extent in that particular case, great things for the nation, but the change here to the great shale player of the Permian Basin is demonstrably different. The easiest way to capture it for you and Sara's done a good job, when you look at the aerial extent of the field, 90,000 square miles and you look at that in combination with the depth, and the size of the shales in most areas, 3,500 to 4,000 feet of shales.

In a lot of cases, 12 or 13 zones. With your own imagination, you can understand the extent of this opportunity. What I would tell you is what we're staring at below our feet in the Permian Basin cannot be replicated anywhere in the United States, that's a given. There's a lot of areas around the world would love to have the opportunity to develop a shale play, but they don't have the infrastructure requirements. They don't have the land ownership opportunities. They don't have the service companies that allow them to do so. We have the golden goose right before us, and it's our job as operators to perform at a very high level of efficiency to bring this to barrel.

I bring you back historically to say even when you look at the Midland Basin, the first wells there in terms of development were being drilled in the 1940's, and from the late 1940's all the way to 2010, what we did is we drill every single well the same way, vertically. In some cases, adding some new zones. Then things changed, and now in the case of Pioneer, we drilled the most horizontal wells. We have the most horizontal oil production in the Permian Basin today.

Dr. Daniel Yergin: Thank you, Tim - The Non-Permian. Mark Little from Suncor.

Mark Little: Yeah, our golden goose is further north and wears a winter coat and winter boots. We call it oil sands and Suncor is the largest integrated energy provider in Canada. We primarily are focused on oil sands, but we also have off shore production off the east coast of Canada, in the North Sea, and we have 1,750 retail stations, and we're involved in wind and ethanol as well. This resource is globally cost competitive and increasingly carbon competitive. It's become that way through the application of technology and we're super excited about some of the breakthroughs that have been going on. Technology, quite frankly, has been the anchor and foundation of oil sands literally for our entire 50 years.

We talk about it as its part of the DNA of our corporation. Without technology, we wouldn't be where we are today. That technology and innovation not only applies to working environmental challenges, and the business driving the economics very similar to the shale side, but it's also involved in social innovation and things like how we're interfacing with our communities. How we're working with the First Nations of the country and the aboriginal people of Canada. In fact, we've just created our first Chief Sustainability role within the organization to continue to work our emphasis and engage on those fronts.

With all of those different dimensions, we're very excited about the future. We talked about the resource space associated with shale. We have 170 billion barrels of oil sands and next to the largest market in the world, and we're excited about the future and we continue on our journey.

Dr. Daniel Yergin: Thank you. Lorenzo, technology?

Lorenzo Simonelli: Technology and maybe just to kick it off. The title North America Oil: The Supply Disrupter and it aspect of a lot of the themes that you've heard from the speakers already: land and mineral rights, the political situation in North America being stable, the opportunity of knowing that the reserves are there and then technology. You mold all of these things together and when you look across the globe, it's enabled North America to really be in a unique situation, and from a perspective of Baker Hughes, a GE Company where we come in as the service provider, is really the cutting edge technology and I think what is different within North America versus other parts of the world, is really the entrepreneurship, the ability to try things out.

This industry has radically changed and over the course of the decades has shown that they can try new things quickly, pivot when they need to and when you look at the new frontier of artificial intelligence, you look at 3D printing, you look at robotics, and you look at the challenges we face even from an environmental perspective or a lack of workforce perspective, and people wanting to come into the industry, technology's going to be the enabler for us to continue to succeed and I think it's [00:16:30] an interesting theme when you put it all together, but it's really the mix that enables North America to be in a unique position right now, and what will probably take the discussion forward.

Dr. Daniel Yergin: Right, right. Let me begin Sara and Tim, do you feel comfortable sketching out what you think the potential other Permian is?

Sara Ortwein: Honestly, I think time will tell. I mean, clearly it's showing its potential now with nearly a quarter of the US production and it's just continuing to grow. As Tim mentioned, it's a series of reservoirs and landing zones, and some cases nine, thirteen different zones. Lots of continued potential. More and more we see that we're increasing productivity out of individual wells. The combination of more efficiency, lower cost, and higher productivity from technology and from trying new things is continuing to increase its potential. Estimates will see how much that grows.

Clearly there's somethings that are needed to enable that potential. Smart regulation, a good permitting path forward for infrastructure, pipeline takeaway infrastructure, and other infrastructure in the area the Permian to enable that production. Then I think the third thing that's key is qualified talent, people needed in the region in order to be able to grow the area to its potential.

Dr. Daniel Yergin: Right. Tim, do you want to go out on a limb?

Timothy Dove: No, I'll just add to Sara's commentary. In doing so, you realize there are some really great companies in the Permian Basin who are now there and are active including XTO Exxon, but also Chevron, the likes of EOG, and Arko, Shell. The list goes on and on really. Actually the top 16 operators run 55% of the rigs, there's also another 100 people who drill wells, but when you listen to the top 16 operators, they say over the next few years they're going to drill 110,000 wells. That's their IR materials or a little bit optimistic, but let's say it's not and the 110,000 wells generate substantial growth. In our case, tripling or quadrupling production over a matter of nine or ten years, the major's doing the same in terms of relative percentages.

I think literally hundreds of thousands of barrels and we today represent probably 10% of the rig count, something like that. A little over 10, 12% of the rig count. If we can do that, multiply that times eight, now you're talking about the potential to add say five million barrels a day when it's all done. Our challenges there are many, not unlike the ones that Sara outlined, but we will certainly become a very major factor when it comes to exported oil around the world and it's going to give the United States this massive amount of power when it comes to controlling its own destiny in dominating the energy sphere of the world both, of course, in gas as well as oil. It changes everything, but I think the size is very, very large as to impact and probably is really measured in decades as it grows. I think at least for the next 10, 15 years, the rates can grow, and reach that incremental 5 or 7 million barrels a day I think.

Dr. Daniel Yergin: On top of what it's already...

Timothy Dove: On top of what it's doing today, yeah.

Dr. Daniel Yergin: Right. Mark, what has shale done to oil sands?

Mark Little: It's interesting because they're both manufacturing businesses in a lot of ways. I think there are a lot of similarities. In some ways oil sands was one of those that's a manufacturing business, but it's hard to see that in other E&P organizations around the globe. I think what you're starting to see is in North America being blessed with enormous resource that's different and I think complimentary. One of the things that are different about the shale business is huge resource, but you need to keep drilling. The decline rates are relatively high. In oil sands, we literally we're just starting the Ford Hills project that has an expected life of 50 years, and it can produce for a huge period of time.

The resource behind that project is 3.4 billion barrels. I think what we'll start to see is when you're looking at providers and technology, and some of the analytical tools, we're going to find a lot more support because we could use them both in the shale side as well as in the oil sand side, I think also in the logistics. There's a lot of work between the countries and such around building pipelines and such. As you see shale go, it's created some responsiveness in the US market about, "Okay, how do we move this faster? How do we shorten the timelines? How do we get pipelines in faster?" We see that as positive for oil sands.

Dr. Daniel Yergin: I guess, but when the oil prices went down, people thought oil sands are finished because they're really high cost, but somehow you've really brought down the cost.

Mark Little: Yeah. It's changed a lot over the last five, six years. In fact, we were working on our cost structure, and first of all, we needed to get it reliable and that's been a bit of a struggle because there's a lot of sand and such that goes through the facility. We worked on reliability. The next piece was driving down the cost structure. If we had the same cost structure as we had six years ago in our oil sands business in 2017, it would have cost us 2.4 billion dollars of additional cash just to produce what we produced in 2017. It's incredible.

Dr. Daniel Yergin: Right. What's your estimate for growth in oil sands?

Mark Little: Oil sands, quite different than the cycle times associated with shale. It takes a long time to get an oil sands project off the ground. In many cases, it's a decade, by the time the infrastructures built, the Fort Hills project we've been building literally for a five year period. It has enormous potential. We're right now sitting right around 3 million barrels. I think oil sands will grow probably in the 300 to 350,000 barrels this year with the projects that are coming on, but the big thing for oil sands for additional capital be going in access to markets is huge and that's going to be a bit of a constraint here until some of the pipelines get sorted out.

Dr. Daniel Yergin: Tim and Sara, how important are exports to shale, particularly Texas shale?

Sara Ortwein: From an export standpoint, I think the Permian and the liquids production in the tight formations have completely changed the game. Export will be a key component. You get back to your infrastructure question related to oil sands, take away capacity for gas, NGLs, and crude is going to be very, very important for the Permian Basin, and you've seen recently in the news several midstream announcements that are coming out. We recently purchased a terminal at Wink that will allow us to conduct connect our production at both the Delaware and the Permian up ultimately to the Gulf Coast. I think we're expanding our Gulf Coast refining in chemical capacity, but also be looking to take some of that Permian production to the export arena as well, but infrastructure is going to be crucial.

Timothy Dove: Markets for crude oil, I think are relatively simple to figure out, unless you're ExxonMobil because you got your own refining system. For us, we believe that the US market in general is going to be satiated pretty quickly in terms of the need for light, sweet crude oil. The balance of it, the majority of it will be exported. Fortunately, there's a lot of simple style refining capacity in China for example, right now. It's totally unused today as a result of all the new builds. This falls right into our allies, the quality of crude oil we're producing, which is very high quality, low sulfur oils for transportation fuels. Again, another benefit.

Dr. Daniel Yergin: Let me turn to environmental questions. I want to ask you Sara about methane and Mark, I want to ask you about carbon footprints. You've made methane a major initiative. How are you going to do it?

Sara Ortwein: We're looking at a lot of different means to make sure that we understand equipment. Where it needs to be repaired. What we can learn from it, but then new facilities, designs as well and not related to methane, but along the environmental front, one of the things that we're working hard is water recycle, which I think is going to be critical in both the Midland and the Delaware Basin. Figuring out how to use brackish water for fracks and then recycling that water versus pulling on the fresh water of the region.

Dr. Daniel Yergin: Right. Mark, one of the major points of opposition to oil sands and pipelines that would transmit the product is of course carbon footprint. What's happening with your carbon footprint?

Mark Little: Yeah. That's a great a question. It's interesting the way we look at the business, as we look at the economics, the environmental side and the social side, and yes carbon is an issue. You can imagine we're developing a lot of this resource right in the backyard of a lot of our First Nations. They are also concerned about thing like water usage, land reclamation, our tailings, and those sorts of things. We try and look at this whole piece holistically and work with our First Nations and such to do that. One of the things we're doing right now for instance, this project that we're just bringing on, the Fort Hills project. It's interesting.

We literally are going in and altering the carbon content of the barrel so when we ship it to market, it has a different carbon footprint than what it did if we just produced the barrel and shipped it to market. As a result of that, we're taking in on a full cycle basis wells to wheels, that barrel is now landing and getting used and it's basically in line with the average carbon footprint of the barrel that's being run in US refining today.

Dr. Daniel Yergin: Lorenzo, is the environmental issues part of what you guys are addressing too?

Lorenzo Simonelli: Yeah, if you look at again, from a solution perspective, there's really sensitivity around the environmental reduce to carbon footprint, also from the equipment that we provide. You're emitting CO2 when you're using a turbine, when you've got mechanical drives. Being able to reduce that footprint, make it more efficient, and there is an Ecomagination campaign across the value cycle. Both in the way in which we operate our facilities, but then the way in which we impact our operators as well. Through the value chain, you're able to reduce the carbon footprint, and I think during the launch, also Bob Dudley mentioned the BP with the goals that they have.

It's an outcome metric and how do you look at it from the beginning all the way to the end, and that's what we got to do collectively as an industry. I think if we confront it, it's also a way to make the industry more appealing. It's probably the one thing from a public image perspective that is still tainting the industry.

Dr. Daniel Yergin: Right. Thank you. Well, Sara, Tim, Mark, Lorenzo, we've been talking about what is a really big disruption and one that was not anticipated five years ago changed the global market, it's changed the focus. We can see it here at the conference, and thank you all for helping to illuminate what this all means.

Explore additional CERAWeek sessions and see the full session of North American Oil: The supply disrupter with Timothy Dove.

This is an excerpt from CERAWeek 2018 and has been professionally transcribed as accurately as possible. Please note, some words and phrases may have been unintentionally excluded.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.