Volume 65, Number 2 Spring 2011 www.pesa.org

PESANewsIn THE nEwS

Membership Dinner July 26, 20115:30 p.m. to 8:00 p.m.InterContinental Hotel HoustonFYI: Meeting this year’s Foreign Service Officer Training Class. Speaker is TBD.

An Evening withJohn Hofmeisterand the AstrosAugust 30, 20114:30 p.m. RegistrationMinute Maid Park HoustonFYI: Speaker is John Hofmeister,former President of Shell, currentChief Executive of Citizens forAffordable Energy, and author of“Why We Hate the Oil Companies: Straight Talk froman Energy Insider.” Registrationincludes an Astros ticket, fooddrinks, and a signed copy ofHofmeister’s book.

For more information on PESAevents, please call (713) 932-0168.

Hofmeister: energy issues are self-made; we can fix themEditor’s Note: This essay wascompiled from John Hofmeister’spresentation at the 2011 PESAAnnual Meeting.

There is a critical issue withproduction. It is systemic andendemic, and if we stay on thepath that we are on, it’s notgoing to be good.

The path that we are on is notnew. During Richard Nixon’stelevised address on Thanksgivingeve in 1973, four weeks into theera of oil embargo, he pledgedenergy independence to the nation and put a seven year timetable on it. Eight consecutivepresidents and 19 congresseshave taken us not forward butbackwards. In 1973, we wereimporting 30 percent of thecrude oil we consumed. In 2009,it’s 65 percent. In the early 1970sand the early 1980s, we produced10 million barrels per day.

We are descending on ourway to 6 million barrels. If theGulf of Mexico operations comeback as quickly as we wouldlike, perhaps we can avoid someof that decline. This is while therest of the world is going North

in terms of demand. Think about where we are in

the U.S. and what we are doingfor our energy system. And thinkabout what China is doing.

Annual Meeting 2011

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John Hofmeister, Citizens for Affordable Energy

n See Hofmeister, Page 3

PESA ChairmanJohn Gremp, FMC Technologies, Inc.

PESA Vice ChairmanChris Cragg, Oil States International

PESA 1st Vice PresidentCharlie Jones,

Forum Energy Technologies

PESA PresidentSherry A. Stephens

PESA Vice PresidentMichael Perini

PESA Director of CommunicationsChris Evans

PESA, Petroleum Equipment Suppliers Association, and the PESA logo are allregistered marks of the Petroleum Equipment Suppliers Association.

PESA News is published by:Petroleum Equipment SuppliersAssociation1240 Blalock, Suite 110Houston, Texas 77055Phone: (713) 932-0168Fax: (713) 932-0497© 2011, PESA

2 PESA News Editorial

2011 is shaping up to be a productive year for PESA Our current newsletter reflects

the productive year we have hadso far in 2011—all of our programs reflect the involvementand excellent planning of ourPESA volunteer leadership.

In February, PESA staged itsfirst Washington Fly-In. In thepast, PESA officers have giventestimony and the Associationhas signed on to various lettersto Congress. This was a new andrewarding experience to havethe opportunity to visit Congressand share our concerns. We areall grateful to Bob Moran ofHalliburton for planning ouragenda.

Our district meetings in March

were outstanding and featuredRandy Limbacher of RosettaResources, Mark Ellis of LINNEnergy, and Stephen Thurston ofChevron North American E&PCompany.

This year’s annual meetingbrought not only a change invenue (Dove Mountain wasbeautiful) but an agenda overhaulas well. John Gremp, IncomingPESA Chairman and 2011 AnnualMeeting Program Chairman, extended the business session onThursday and the result was theinclusion of an additional panelof industry leaders and experts.We are grateful for the extra effort put into the program by

John and his committee to makethis an exceptional meeting.

Thanks to our speakers whoprovided presentations on thebasics of oil and gas operationsfor our 2011 Oil 101 seminar,sponsored by the EmergingLeaders Committee. Also inApril, PESA member companyrepresentatives had an opportunityto meet with Rep. Tom Reed(NY). Members shared concernson the failure of the governmentto allow drilling in the GOMand the problems caused by misinformation on fracking.

Upcoming is a presentation byBrad Eastman of Cameron, PESA’sCorporate Counsel Advisory

Committee Co-Chairman, onhow contractual indemnities arebeing viewed in light of theHorizon incident.

We are indebted to all of ourindustry volunteers who provideprograms that enhance the benefits of PESA membership.And one last thank you toCharles Currie (Schlumberger),PESA’s Membership Chairman,who has dedicated many hoursto reaching out to prospectivemembers to insure that PESA remains a strong and viable organization.

—Sherry StephensPESA President

PESA, with your help, is a crucial voice for the industryTrue change has come to the oil and gas

industry. Yesterday’s reality is no longertoday’s.

At the PESA Annual Meeting, ten executives from majors, independents, andconsulting groups discussed the industry’snew realities, ranging in topics from reputation to regulation to resources. Theyconfirmed what many of us suspected—thisisn’t just another cycle, this is the new normal and it creates incredible challengesfor our companies.

In addition to the traditional challengesthat our companies have faced, we now mustcontend with political, regulatory, policy, environmental, and public perceptionissues as a mainstay of everyday business.Our new challenges underscore, more thanever before, the importance of a capable andstrong PESA organization. Make no mistake, PESA is a powerful association—we are 184 companies strong with 400,000employees and a market cap in excess of$200 billion.

PESA is an important voice for the industry, and as is often the case, bigger isbetter. Thanks to Charles Currie (Schlumberger) and the Membership Committee, our voice is growing. Last year,the Committee added 30 new member companies, and have similar plans for 2011.

There are unique core strengths of PESA

that, given our new business environment,will be especially relevant moving forward.First is the opportunity to network with ourpeers. In tackling the challenges of our industry, we have two choices. We can facethem as individual companies, or we canleverage our relationships with our peers tocollectively deal with them, learn aboutthem, and understand them. The ability toshare and leverage our experience is critical.

The Annual Meeting is a great example of

the power of networking. Our individualcompanies could not gather such a group ofspeakers to discuss the new realities of operating in our industry. Collectively, PESAmember companies can. Our district meetingsand Explorers of Houston functions also provide opportunities to work together, meetwith clients, and share experience.

A new, but especially important additionto PESA is the Energy Educators Committee.It’s off to a great start under Pat Bond’s(Schlumberger) leadership. Lew Watts (LewWatts & Associates) told us that how the energy industry is perceived will determinewhat’s allowed—shaping how we are perceived is part of the Energy Educators’mission. Their work with the IPAA PetroleumAcademies, Texas universities, and localschools is an integral part of improving thepublic’s perception of our industry and contributing to our future talent pool. I believe this can be one of the best parts ofPESA, but we need our members’ support.

Building and maintaining relationshipswith local and federal governments are nowintegral to a healthy business climate. AsMarianne Kah (ConocoPhillips) says, whenleft to their own devices, governments willpick technology and fuel winners rather thanallow markets to decide. Through PESA, our

John Gremp, PESA Chairman

nSee Gremp, Page 3

China already is the largest energyproducer, the largest energy consumer, and the largest green-house gas emitter. Over the nextdecade, they will build 5 millionkilometers of new roads, 170new mass transit systems, and 5million new buildings with 40billion square meters of newspace under roof.

China knows that it can onlyproduce so much with its ownresources. But, China is notdaunted—they have a differentidea. In the last three years,China has been quietly, but Iwould say aggressively, contractingfor future oil production fromstate-owned oil companies of itschoice, using loans as the lure.

China has loaned Brazil $10billion; Venezuela $20 billion;Russia $25 billion; Kazakhstan$10 billion; Nigeria $23 billion;and Ghana, who just producedfirst oil this year, received $16billion. That’s to make sure thatChina has the oil it needs.

The Chinese energy industryis the most favored industry inthe country—it’s favored bygovernment policy and by asteady stream of graduates fromthe universities. This is becauseof the expectation that China’sdemand for crude oil will gofrom 9 million barrels a day to15 million barrels a day by 2016at the latest—that’s six millionnew barrels.

India is not sitting still either.They are perhaps a bit haphazardin their development relative to

China, but they are at 4 millionbarrels a day of consumption onthe way to 7 million in the sametime frame. That’s a 9 million barrel-a-day increase betweenChina and India. The highestglobal production that we knowof is 88 million barrels a day,and we’re at roughly 86 millionand change today. Add 10 millionbarrels to it and factor in the anticipated decline in Mexico,the North Sea, and Venezuela.

The time table doesn’t workfor Brazil, Kazakhstan, andother development areas tohelp—those are much later interms of development. So, as theCEO of Total said a couple ofweeks ago, we could likely seegas lines in Europe and the U.S.by the middle of the decade dueto the inability to produce theliquids that we need. The issuewe face is self-made—that’swhat makes it so hard to handle.

We face three issues with ourown government in addressingthis issue. Number one is partisanship, the consequence ofwhich is nothing happens. Nodecisions get made. No hardchoices are possible. And weplay that out over and over.

The second obstacle is that ittakes a decade or more to dothings right in this industry—adecade of thinking, planning,conceptualizing, inventing, engineering, and funding. Meanwhile, the elected officialswho govern us work with a twoyear frame of mind. And everytwo years, things change—I callit political time. Political timeand energy time are incompatible.

The third problem is the

manner by which we organizethe governance of energy. Imake myself a pain in the neckin Washington on this issue. Is itreally necessary to have thirteenCabinet-level officers governingthe energy system of the U.S.?Don’t we have a department ofenergy? And that’s just the Executive Branch.

If I go to Capitol Hill, I askmembers if we really need 26congressional committees andsub-committees to govern energy. And then the Judiciary—in particular the 9th Federal District Court in San Francisco—that has single-handedly stoppedmore oil projects than we cancount. Do we really need themto have the ability to decide energy policy, by ruling on acase which then has national implications?

In addition to that, we knowwhat the EPA is getting ready to

do on fracking. I think the federalization of fracking is theend game—we can’t trust thosestates to make judgments, andcertainly can’t trust the companies to make judgments.

So where are we heading?We’re growing the populationhere in the U.S., as is much ofthe rest of the world. We havewhat could be an incredible opportunity to build a 21st century energy system, but itisn’t happening. Last June, thePresident said ‘let the Gulf disaster be a reminder of the importance of a new energy system predicated on wind,solar, and biofuels—a lot of people want to believe him.

It can’t be done. Because wehave what we have today and itdoesn’t change quickly. This attempt at creating a mindsetthat oil and coal are past-tense,

3PESA Newsannual MEEting - day 1

HofMEISTERContinued from Page 1

companies have an opportunity to have ourvoices heard in government through strongand active relationships. We’ve done that for18 years with the Foreign Service Officerstraining program. The training has sent hundreds of government officers out acrossthe world, armed with a better knowledge ofour industry.

We held our first Washington Fly-In thisyear and learned the importance of visiting ourlawmakers. Senator David Vitter (LA) told us,“I know Washington isn’t always a friendlyplace for people associated with oil and gas,but it’s vital that you get in front of your representatives and tell your story.” PESAmembers who made the trip unanimously

said that the experience opened their eyes tothe potential that PESA has in influencingthe government process.

An item that was discussed both at theAnnual Meeting and Washington Fly-In isthe grass-roots mobilization of our 400,000employees. One solution is coordinated cooperation with other industry associations.For example, API has created a websitecalled Energy Nation, which can give employees a convenient way to reach out tothe government as well as provide information about important issues facingthe industry. I encourage you to contact Gerardo Uria (API) and discuss the potentialof a grass-roots campaign for your company.

Finally, another unique and successful partof PESA is Emerging Leaders. For years, wehave discussed talent in terms of “the greatshift change” and developing the talent

required to meet the world’s energy demand.Emerging Leaders gives us the opportunityto not only develop technical talent, butmore importantly, to develop leadership talent. The committee has been in place forfour years, it’s hugely successful, and I knowthat with each of your company’s continuedsupport, it will continue to thrive.

We are part of the nation’s largest industry,we are also among the safest, and we areamong the most important to the economichealth of our country. We are also faced withnew realities that could affect any of theabove. This is our new normal and, morethan ever, we need a strong PESA to bringour businesses together and serve as a voicefor the industry. I hope you’ll join me in supporting our organization.

—John GrempPESA Chairman

GREMPContinued from Page 2

John Hofmeister, Citizens for Affordable Energy

nSee Hofmeister, Page 16

4 PESA News annual MEEting - day 1 - First PanEl

New

Real

ityFundamental changes in oil & gasAn economist, consultant, & NOIA chief say yesterday’s realities aren’t today’s

Foreground to background: Randall Luthi (NOIA), Lew Watts (Lew Watts & Associates), and Marianne Kah (ConocoPhillips). Thepanel was moderated by Jim Wicklund (Carlson Capital, LLC).

Huge production challenges await industryThe oil market is tightening,

and the natural gas market willsoon follow.

Marianne Kah, ConocoPhillips’Chief Economist, says demandfor both commodities arequickly increasing, spurred bythe faster-than-expected globaleconomic recovery. Last year’sglobal growth rate matched

those of 2006 and 2007, but unlike those past years, the current economic recovery ishappening at two speeds.

“The industrialized world isgrowing at 2.5 percent a year,and the U.S. will be an exceptionthis year with 3 percent becauseof our huge fiscal stimulus fromlast winter,” says Kah. “But inthe developing world, growthwill be more like 5 to 6 percentper year, with China at 8 or 9percent. Energy demand willfollow this pattern.”

Downside risks to both economic recovery and energydemand include the debt crisis inEurope and local governmentdebt in the U.S., but the greatestrisk is commodity price inflation.She says that $100 per barrel oilis something the worldeconomies can absorb, but $120or $130 oil will have an impacton economic growth.

“Most of the growth is in thedeveloping world and they haveprice controls and subsidies,”

she says. “If the countries canafford them, these subsidiesaren’t going to go away afterwhat we’ve seen in Egypt—there were lots of long-termcauses, but the proximate causewas food price inflation. Othercountries will be wary about exposing the local populace toreal food and fuel prices.”

oil outlook

The world lost a significantamount of oil demand in 2008and 2009. But with the unexpected economic growthlast year, all of the lost demandwas regained and more. Kahsays that since nobody expectedthat level of recovery, the worldsupply-demand balance tightened faster than anyone hadanticipated.

Another contributor to a tightened market is slower non-OPEC production growth.

Marianne Kah, Chief Economist, ConocoPhillips n See Kah, Page 6

5PESA Newsannual MEEting - day 1 - First PanEl

The industry has a reputation problem,and it may have a profound effect on its ability to operate.

So says Lew Watts, CEO of Lew Watts &Associates, and Energy Practice Chairmanfor Regester Larkin, a reputation managementconsultancy. With hot issues like deepwatersafety, fracking, oil sands, and climatechange, many people view the oil and gasindustry as a necessary evil.

“If you don’t have reputation, you have nolicense to operate, either as an industry or acompany,” he says. “I believe this is going tobecome one of the most important things forour industry moving forward.”

You Know when It’s Gone

Watts first defined reputation and its implications.

Reputation is separate from brand andcorporate identity. Corporate identity is howthe organization views itself; brand is howcustomers view the organization; and reputation is how stakeholders view the organization. A stakeholder is anybody whoallows an organization to make profit, therefore, a stakeholder is anyone who canstop profits—they range from “Joe Citizen,”to regulators, to media, to employees, to customers, and beyond.

“You realize how valuable reputation iswhen you lose it,” says Watts. “It’s difficultto invest management time in something thatis perceived as not having value unless youlose it. But when you lose reputation, youlose.”

Reputation has nothing to do with what anorganization does, it’s how the organizationis perceived.

“RyanAir, a low-cost airline in Europe,unveiled a plan to pack more people into airplanes by having then stand up, andthey’re going to charge people for using the

washroom,” he says. “You might say that’sinviting a bad reputation, but their revenue isstellar. They are what they are—they don’tdo what they don’t promise.”

When reputation is gone, a business canquickly crumble. He cited Perrier bottledwater as an example.

“They had an issue with benzene that hadleaked into their water; they thought theproblem would go away, it didn’t and themedia got a hold of it,” he says. “It escalatedto a crisis, they didn’t know what to do, anda few months later they were taken over.”

Watts cited six means of maintaining reputation.

Never underestimate the power of reputation—“It’s extremely important toget your heads around it; just thinking aboutreputation issues, I would suggest to you, isa cleansing experience.”

Never think your only stakeholders arecustomers—“Think about who can stop youfrom making a profit. It doesn’t matterwhether you think you’re right, it’s whatpeople think.”

Never operate without total focus onHSE, ethics, and integrity—“You shouldbe managed in ethics and integrity to thesame degree as HSE.”

Do not operate without a fully testedcrisis management plan—“The best way togo out of business or lose reputation is tohandle a crisis badly.”

Do not allow any employee to behavecontrary to your promises—“One employeecan damage your reputation beyond belief.”

Do not partner with, sell to, or buyfrom any entity that does the above—“You’re as strong as your weakest link. It’sthe action of the weakest link in the systemthat progressively causes the deterioration ofthe reputation.

Last year, offshore drilling had few challenges … in fact, President Obama supported offshore expansion.

But last year’s reality certainly isn’ttoday’s, says Randall Luthi, NOIA President.After leading the association for a mere sixweeks prior to the Macondo disaster, hesays the entire world became focused on theoil and gas industry.

“April 20, 2010, I think, will probably beknown as the darkest day for the offshore oiland gas industry—11 men lost their livesand the world watched as the worst offshoreaccident in our history unfolded,” he says.“Never has it been more important for us torespond properly and show people that,‘Yes, we do it safely, and we do it well’.”

Even now, more than a year after, the industry is still trying to figure out the new“normal.” For good or for bad, says Luthi,most of that new normal will come fromWashington, D.C.

Congress

As 2010 unfolded, Congress discussed abroad array of legislation pointed not only atoffshore, but the oil and gas industry as awhole. There was talk of legislation requiring changes in BOP structure and howthey’re used; talk about exploration moratoriums throughout the coastal U.S.;talk of eliminating most, if not all, oil andgas tax deductions; increased scrutiny onexploration and development plans, andmuch more.

But Congress did not take a knee-jerk

Lew Watts, President, Lew Watts & Associates

Reputation: we are judged by weakest link

Offshore legislationunfolding; not asbad as predicted

Randall Luthi, President, NOIA

n See Luthi, Page 7

n See watts, Page 7

“We saw some new fields come online inRussia, which are one-time events that arenot likely to recur,” she says. “Therefore,non-OPEC production growth is likely toslow, particularly in the U.S. with slow permitting in the post-Macondo world.”

The Libyan uprising had a major impacton world supplies, further compounded byfears in the market of similar supply disruptionsin neighboring regions. Libya’s supply disruptions reduced OPEC’s stated surpluscapacity from 6 million barrels per day to 4 million barrels a day.

A further supply uncertainty is howquickly Iraq can bring on its new production.Iraq has stated that they will raise their production from 2.5 million barrels per dayto 12 million barrels. While Kah says thatnobody expects Iraq to reach 12 million barrels per day, they likely will achieve 4 to6 million barrels per day—the question istimeframe, which will make a huge impacton market balance.

“It’s a very different world environmentthan we saw just a year ago, so it’s hard notto be optimistic about how tight the oil balance is going to be,” she says. “We expect to have continued strong growth indeveloping countries, and we expect that resource access will continue to be constrained or worsen over time—that meansthe oil market will stay tight because the industry can’t increase supplies as we’d like.”

Kah says there is no shortage of resourcesin the world. The concern for adding supplyis resource access and field maturity, both ofwhich make oil resources more expensive todevelop.

“The price of oil will have to remainhigher or we won’t be able to develop thingslike deepwater, arctic, and enhanced oil recovery,” she says. “This tells me that it’svery unlikely we’re going back to a worldwith $30 to $50 a barrel prices. The pricehas to be high enough to elicit the marginalsupplies.”

natural Gas

Just like oil, natural gas had a surprisingturnaround in the global market, says Kah.Again, natural gas regained more demandthan was lost during the global downturn.

Early this year, the last of the large QatarLNG projects came online. Much smaller increases in LNG capacity are expected, sothe market is expected to tighten over thenext two or three years, says Kah.

“We will continue to see measured supplygrowth, and a large wave of Australian projects will come online, but we’re going toneed them to keep up with demand growth,”she says. “Some of the earlier LNG projectslike Malaysia and Indonesia are reaching the

end of their lives.Even though we’readding new projects,we’re adding to a declining base.”

Recent estimatessay the U.S. has a 100-year supply of naturalgas due to abundantshale resources. Globally,there are huge swathsof potentially similarformations.

“I don’t think it willhappen as quicklyoverseas as it did inthe U.S.,” she says.“Nearly all of theshale-intense areaslack significant pipeline infrastructure andnone have private mineral rights. One of thereasons that it happened so quickly here isthat it happened on private land with privatemineral rights.”

On top of slowing supply growth, the nuclear disaster in Japan has increased thecountry’s natural gas imports by 1 Bcf perday. While it’s unclear what that means inthe long term, Kah says that Japan’s importscould potentially climb to 2 to 4 Bcf per day.Further, no one can predict the future of nuclear development elsewhere in world, butthe effects on gas demand could be substantial.

The new-found abundance of gas in theU.S. and elsewhere will drive demand up onits own, she says, but so should environmentalmovements.

“It’s not guaranteed—we’re going to haveto fight with governments to choose naturalgas,” she says. “In the developing world,their inclination is to stick with coal becauseit’s often cheaper and they don’t have pollution control constraints. The industrializedworld is moving toward renewables, whichtends to squeeze out natural gas.”

The EPA’s Clean Air Act and new regulations may boost demand for gas byforcing the closure of older, inefficient coal-fired electric plants.

“No energy policy truly exists in the U.S.,we have environmental policies that impactenergy,” says Kah. “Between 30 and 70 gigawatts of coal plants might be shutdown, which is 10 to 20 percent of our coalfleet. It could mean as much as 4 to 10 Bcfper day of additional gas demand.”

Industry Challenges

The industry faces five major challengesin the near future, says Kah.

Number one is constrained resource access. Only 7 percent of world oil reservesare directly accessible to the international oilindustry, and another 14 percent to joint ventures with national oil companies. Overall, 75 percent is completely under the

domain of national oil companies with noaccess.

The second issue is driven by the first: replacing reserves is increasingly expensive.

“Because of the constrained resource access, you have a lot of players competingover a very small piece of the pie, which hasallowed governments to worsen their fiscalterms over the years,” she says. “Particularlywhen we see high oil prices, governmentstend to raise the taxes; they tend not to lowerthem when prices come down.”

Finding and development costs are also onthe rise. Costs came down in 2009, but arestill double their levels in the early 2000s.While some increases are due to producingmore expensive prospects and higher material costs, it’s becoming a big issue forthe industry, says Kah.

“Even though we’ve seen high oil pricesin recent years, we still have a lower marginavailable for us to grow with than we had inthe year 2000,” she says. “Government feesand F&D have eaten away all of those extrarevenues.”

Next are increased regulation and permitting difficulties. The permitting delaysso far in the Gulf of Mexico will likely cost600,000 barrels a day, she says.

“President Obama’s new energy plan has‘use it or lose it’ back in, and increasing royalty rates if it takes longer than a certaintime period to develop the project,” she says.“It really does take 10 years to explore anddevelop deepwater projects. We’re lookingat a 17 percent per year decline rate in theGulf of Mexico and if we’re not investingcontinuously, we’ll see much deeper declines.”

Finally, governments—especially in industrialized nations—are picking fuel andtechnology winners, and not allowing themarket to decide.

“We need to see a level playing fieldamong fuels—the government is moving theworld to more expensive sources like windand solar, and therefore, directly backing outnatural gas demand in most areas,” saysKah. “If you leave it up to the market, themarket is likely to choose gas.”

6 PESA News annual MEEting - day 1 - First PanEl

KAHContinued from Page 4

Marianne Kah

reaction to passing legislation. There arethree reasons for that, says Luthi.

“One is that there are some on the Hill thatunderstand that we should find out whathappened, and then pass legislation,” hesays. “Two is that the industry worked witheach other and did a critical self-examinationof what we can do. And three is the ecologicaldoomsday disaster apparently didn’t occur.”

The fall’s election brought a new politicalclimate and an even larger philosophical difference between the White House and theHouse of Representatives. In March, Rep. DocHastings, Chairman of the House NaturalResources Committee, presented three billsdesigned to encourage production on theOuter Continental Shelf. It sets a time limitfor approving permits, requires lease sales,and sets production goals for a five-year plan.

“On one side, Members of the House droplegislation to increase production withoutpenalizing oil and gas companies,” he says.“Yet you have an Administration that saysit’s important to eliminate some tax deductions because the oil and gas industryis doing just fine on their own.”

Among the legislation likely to pass is thestatutory approval of the restructuring ofMMS.

“The one thing I question is that the verything that Secretary Salazar was able to do—restructure MMS with the stroke of a pen—will never happen again, because thelegislation prevents a future Secretary fromdoing the same,” he says.

Another legislative issue is the Oil SpillLiability Trust Fund, which was created withthe Oil Pollution Act passed after the Valdezspill. Under the Act, any entity that spills oilis responsible for all clean-up and responsecosts. Secondary economic costs—such asfisherman, hotels, and restaurants—have aliability cap of $75 million, after which theOil Spill Liability Trust Fund begins payment. The fund is currently maintainedwith a fee to producers of 8 cents per barrel.

While there was talk of increasing the feeto 9 cents, 48 cents, and even 78 cents perbarrel, Sen. Mary Landrieu made anotherproposal: the liability cap would be raisedfrom $75 million to $150 million, and the industry would set up a mutual insurancefund, permanently funded at $2 billion totake pay damages beyond the liability limit.

The Administration

While Congress didn’t do anything to hurtthe industry, the administration did. Amongthe most damaging was the lack of drillingpermits and outright cancellation of leasesales: one in Virginia, four in Alaska, andLuthi says it appears unlikely that a leasesale will occur in the Gulf of Mexico this year.

“It’s lease sales that keep the process moving,”he says. “There are a lot of estimates outthere, but after a year of lost production, thelong-term loss in the Gulf is going to be huge.Offshore production will be down by 13 percent from last year, and we’ll lose asmuch as 500,000 barrels per day by 2017.”

Another part of the lease sale equation isfive-year plans, which are a process bywhich the government establishes plans for

lease sales in the Outer Continental Shelf. “We’re approaching the end of the five-

year plan that ends in 2012. It takes 18 to 24months to put together a five-year plan,”says Luthi. “We’re approaching the timewhere we could have a gap in plans if theadministration doesn’t start moving again.”

Many of the effects of both the lack ofpermits and lease sales are not yet defined.However, the Administration estimates aloss of 23,000 jobs.

“That has not yet happened, mostly due tocompanies putting employees to work onmaintenance or cleanup projects to wait outthe moratorium,” he says. “We do know thatLouisiana alone has lost more than 25,000jobs statewide since June 2010—though notall is due to the permitorium. There is alsoan 18 to 24-month-loss of momentum in developing oil and gas, so instead of new development and new discoveries, there is adecline in production from the Gulf.”

Another long-term effect of the administration’s policies are producer costs.The new regulations are expected to cost anadditional $1.4 million for each deepwaterwell and about $90,000 for each shallowwater well, excluding insurance costs.

There are positives in the situation, saysLuthi.

“The engineering challenges as a result ofMacondo are solved or they will besolved—every new report, even the BOP report, at least that gives us something concrete to focus on,” he says. “Technologyis going to make the difference and we stillhave a fantastic safety record. I look for theGulf of Mexico to be slower, but we’regoing to be okay.”

watts’ Experience

Watts gave four personal anecdotes about company reputation—three from his timeat Shell and one from Halliburton.The first involved him workingon the periphery of the BrentSpar situation.

“When you look back on it,and even Greenpeace admittedthis, Shell’s proposed solutionfor the Brent Spar was technically and environmentallythe best solution,” he says. “Itdid not matter, because the public became convinced thatdisposing of the facility at seawas a terrible thing to do. We’dlost the emotional connectionwith the stakeholder and the situation became a huge deal.”

The second anecdote occurredduring his tenure running Shell’s

operations in Africa and SouthAmerica. He inherited NigeriaLNG just as the plant was coming on stream. Early oneday, Watts received a call fromthe managing director of NigeriaLNG, saying “We have 2,000people that have come into theplant trying to take it apart withmachetes, and they’re just aboutto march on the camp.” Therewere two lessons learned fromthe incident, says Watts.

“One was that we had 16,000people on site when we built thefacility, and you would thinkthat we would’ve understoodthat when the plant was finishedabout 14,000 wouldn’t have ajob—we had nothing in placefor them,” he says. “The secondthing is that Nigeria LNG is an incorporated joint venture, andShell is just a shareholder. Noone had deemed who wouldhandle things in case of a crisis—was it Shell, Total, ENI,NMPC?”

Next, was Transredes, a gascollection company in SouthAmerica. The company had aproduct pipeline that ran overthe Andes at close to 12,000 feetin elevation. It ruptured andflowed 26,000 barrels of productinto a “super clean river,” whichflowed into a flood plain onwhich Evo Morales, the futurepresident, had his farm, and thenflowed into a “pristine alpinelake” where wild flamingoswere under study by the WorldWildlife Fund.

“The problem was the operator—trust me, Shell hadand still does have great crisismanagement capabilities,” hesays. “We hadn’t talked to themabout aligning our systems ifsomething went wrong.”

The last incident involvedWatts serving as acting CEOwhile the CEO of HalliburtonEnergy Services took vacation.On his second day, a helicoptercrashed in the Gulf of Mexico,

killing ten people, four of whichwere Halliburton employees.

“Unocal was the operator, andthey did a fantastic job,” he says.“The problem with it was, again,we had not aligned our crisismanagement capabilities withour client. They, being the leadparty, announced the death oftwo Halliburton employees andwe didn’t have time to tell theirnext of kin.”

The lesson of each of theseanecdotes, says Watts, is that nomatter how good each company’ssystem, the organization is partof a network. He adds that anymanager not currently thinkingabout reputation and its potentialeffects, should begin doing soimmediately.

“Your best strategies are useless if you’re not allowed tooperate,” he says. “We’re alwaysjudged by the latest offender,whoever that may be. So, if youlike, we’re at risk of being theweakest link in the system.”

7PESA Newsannual MEEting - day 1 - First PanEl

wATTSContinued from Page 5

LuTHIContinued from Page 5

The Beatles started the discussion: “Yesterday, all mytrouble seemed so far away.”

With the recession, Macondo,the moratorium, Japan, and unrestin the Middle East and NorthAfrica, it can seem as if the industry has been hit by every-thing at once, says Statoil’s VicePresident for Strategy, Helge

Haldorsen. Meanwhile, the “energy challenge” is growing—the world is expected to have 9 billion people by 2050 andneed 50 percent more energy.

He says that the world is notrunning out of oil or gas—infact, reserves keep increasing—but global markets won’t stopusing oil because supplies haverun dry; rather, alternatives willbecome more affordable relativeto oil. However, the world isrunning out of easy oil.

“There is a technology gapopening up in the Arctic, indeepwater, in the oil sands—youname it,” says Haldorsen. “Wecan’t take the foot off the accelerator; we have to do more,not less in technology. In themode of Windows, we have tokeep upgrading the industry tooil technology 2.0 going forward.”

The Right Stuff?

For the short term, much ofthe needed oil will come from

deepwater. Today, deepwater accounts for 6 percent of globaloil production, or 5.2 millionbarrels a day.

“According to CERA, in fiveyears we will be up to 15 millionbarrels, so we’re effectivelyadding one Saudi Arabia fromdeepwater in five years,” hesays. “That’s going to cost a lotof money, and this is where theservice and supply companiescome in—Andrew Gould ofSchlumberger estimates thatevery year for the next 25 years,the industry will need to investabout $450 billion.”

Living in Houston, Haldorsensays he’s heard many people usethe term, the “right stuff.” It’sappropriate for questioning thefuture of the industry—to meetfuture energy demand, does theindustry have the right technology,people, process, and servicesneeded?

“There’s a matter of who will

8 PESA News annual MEEting - day 1 - sEcond PanEl

The

Maj

ors

The future of deepwater oil & gasExecs from BP, Chevron, and Statoil discuss new realities for offshore production

From left to right: Doug Suttles (BP Exploration and Production), Gary Luquette (Chevron North America Exploration & ProductionCompany), and Helge Haldorsen (Statoil). The panel was moderated by Jim Wicklund (Carlson Capital, LLC).

Technology pioneers needed to further industry

Helge Haldorsen, Vice President for Strategy, Statoil n See Haldorsen, Page 10

The Macondo disaster was a tragedy; itwould be another tragedy not to learn everything possible from it.

In the days and months following the explosion, industry experts formed four taskforces to identify improvements to deepwaterdrilling that could be made in three keyareas: prevention, intervention and oil spillresponse. Gary Luquette, President ofChevron North America Exploration andProduction, chairs the governing board thatoversees the work of all four task forces.

“It was a tragedy that, in my view, waspreventable,” says Luquette. “We haveprocesses and procedures in place to preventthese sorts of things from happening, yet ithappened.”

Learning from the disaster is the first stepin winning back stakeholders’ trust.

“If you haven’t seen it—trust me as some-one that’s close to the inner circles of government, regulators, and the impactedstates—I can assure you that we have losttheir trust,” he says. “We have a lot of workto do. It took decades to build that trust andconfidence and it took one event to lose it.”

forming the Task force

After the Deepwater Horizon sank, the industry pulled together more than 200 people for the task force. These are, Luquettesays, some of the best and brightest in the industry. He says it was a full-court press, intersecting tight timelines, to start learningfrom the tragedy and trying to identify opportunities for improvement.

The first timeline was May 30, as PresidentObama asked Interior Secretary Salazar for a30-day report on Macondo. He wanted assurances that the situation would improve.

“We were about two weeks into formingthis industry group when the Secretarycalled and said, ‘Gary, if you want to be a

player in this 30-day report, you’ve gotseven days, because it’s going to take mystaff and me seven days to digest it’.”

Ten days after the incident, the group hadformed two task groups. One would lookinto equipment, specifically the safety systems, blow out preventer, and the inter-face between the ROV and BOP. The secondgroup would look into procedures.

“We knew this wasn’t supposed to happen,”he says. “We lost primary well control, sowe have to go back and understand whereour procedures are weak and where we haveopportunities to strengthen them.”

Six weeks into the effort, a third taskgroup was formed to investigate the complexities around intervention and containment of a damaged BOP on the seafloor in 5,000 feet of water. Finally, at theeighth week, a fourth task group was formedto investigate oil spill response.

Applied Learning

While all task force findings have yet tobe reported, Luquette gave two high-leveltakeaways from the group. The first is thatthe circumstances surrounding Macondo’sfailure were beyond anyone’s imagining.

“Despite the oil spill response plans, table-top drills, mobilization drills, and all of thework that went into being prepared for aspill, we just missed it,” he says. “Clearly,our oil spill response plans would have tochange.”

Second, as the group pulled together andbegan joint discussions with operators andsubsea equipment providers, they foundpractices that needlessly left little room forerror.

“We found a broad spectrum of processesand practices in play in the Gulf of Mexico—

9PESA Newsannual MEEting - day 1 - sEcond PanEl

Gary Luquette, President, Chevron North America Exploration & Production Company

Task force: learning from Macondo critical

United, proactiveindustry key topost-oil spill world

Doug Suttles, COO, BP Exploration & Production

n See Suttles, Page 10

n See Luquette, Page 11

Editor’s Note: This essay was compiledfrom Doug Suttles’ presentation at the 2011PESA Annual Meeting.

The Deepwater Horizon accident was ahorribly tragic event in every dimension. Iwas probably closer to it than anybody in theindustry: I spent 120 days on the ground inthe five states that were impacted; I attendedthe memorial service for the 11 individualswho lost their lives; and I met with theirfamilies. This was a tragic event by anymeasure.

I remember in the very early days of thespill, I used to get a lot of questions from themedia and government about the $75 million liability for oil spills. At ourpeak we were spending $80 million a day.We were committed to doing absolutelyeverything we could to minimize the impactto the environment and to the people of theGulf Coast. Money was not an issue. Wespent every single dollar that we felt was required—we tried many things that ultimately failed to create value or reducethe impact, but we tried many ideas becausethere was a chance that they would work.

Unfortunately, none of us can undo theevent. From the moment it happened, all wecould do was respond, and respond in thebest way we could. After it ended, the onlything we could do is learn everything wecould from it. None of us can take it back;none of us can make it not occur.

I know there has been some debate regarding the industry’s response to the spill.One option is to say it’s an issue that the industry needs to address proactively and

develop the needed technology and prove itup—a good example comes from shale technology,” he says. “George Mitchellworked on the frontier of knowledge, notknowing if he would be successful, for 18years until he cracked the code and it reallyworked. You can get lonely out there, butsomebody has to do it or we don’t get theimprovement we need, and look whatGeorge Mitchell’s work led to.”

Haldorsen used Norway’s Ormen Langefield as an example of needed technology.Pressure is dropping in the well, and beforelong, it will need compression to continueproduction—but there’s no platform onwhich to place compression equipment.

“We have a race going on with many contractors to come up with high-volumesubsea compression,” he says. “We hope toachieve that, and then, of course, the industry again has a new technology that canbe deployed all over the world.”

“We have to engage with each other to develop these technologies,” he says. “Thereare many examples of gaps between whatwe can do, and what I wish we could do.Statoil has many technology agreementswith super companies, suppliers, and contractors—I think producers and supplierscan do more together.”

on Statoil

For Statoil, 2011 will be the year ofdrilling high-impact prospects. Looking tosharpen its exploration focus, the companyplans to drill 40 wells with a CapEx estimateof $16 billion with $3 billion toward exploration—among the 40 wells, nine areconsidered high-impact.

A number of the high-impact wells areoffshore Angola. Statoil was awarded fiveblocks—about 31,600 square kilometers—

two of which are operated, and three non-operated.

“We’re hoping for Brazil-equivalent deepwater acreage,” he says. “This could bevery promising—we hope to get the type ofnews that you saw in Brazil’s Campos Field.It’s a very important addition to the exploration portfolio.”

One of Statoil’s primary directives is tomaximize its home turf. This year, theirhome turf expanded via border negotiationswith Russia.

“The border between Norway and Russiahas been disputed for a long time—the argument was the mid-line principle versusthe sector principle,” says Haldorsen. “PrimeMinisters Medvedev and Stoltenberg agreedon new lines, and the new Norwegianacreage next to the North Sea is a big chunkof real estate compared to what we had before.”

In the Gulf of Mexico, he says it’s beendifficult to see rigs idled for a year. Statoil’s

rig left the Gulf to drill a well in Egypt’sNile delta, but since the company received apermit from BOEMRE, the rig plans to return to the Gulf.

“I think everybody today has a sharedgoal in the Gulf of Mexico—we must havesafe operations going forward.”

Three Ideas

Haldorsen suggested three improvementsto operating and government procedures inthe U.S.

He says that in many other areas of theworld, countries have annual explorationbudgets. For example, a company will forman agreement with the government to drill awell—the company can drill the well at anytime during the year.

“In the Gulf of Mexico you have 30 daysto decide if you are in or not,” he says. “Wefeel that with the current risk profile and rigcosts, this is totally unacceptable. It mayhave worked onshore and in shallow waterwhen wells cost $21 million, but it doesn’treally work anymore.”

Another imported idea from other parts ofthe globe is an exploration committee. Theoperator runs the committee and presents theprospectus, casing design, plans to drillthrough salt, and more. The operator then invites the committee to comment on the plans.

“It’s a vehicle for best-practice sharing,”he says. “This may work its way to joint operating agreements in the Gulf of Mexicogoing forward.”

The third idea is dedicating a portion oftotal spending to research and development;Norway, for example, requires it. Haldorsengave a hypothetical example of how the ideamight work in the Gulf.

“Let’s say that Chevron is the operatorwith two partners and they spend $200 millionon a license,” he says. “A percentage of thatcan go toward a mutually agreed-upon R&Dproject and develop more technology thanwe have done in the past.”

progressively. Another is to saythat this was an act of a rogueplayer, in which case we simplytell the world we’re going to remove the rogue player fromthe field and move on.

Even if you believe it’s true,the rogue player argument is notpolitically acceptable. The politicians aren’t willing to say,“it was just BP, it could neverhave happened to anyone else.Everything is fine if we movethem off to the side.”

There is a great deal to be

learned by the event. As wethink about this accident and itshorrible consequences, it’s important that the industry embraces that it occurred andchanges will have to happen.But, we will lead those changes.

A great example of leadingchange is the API’s Center forOffshore Safety Institute, whichwas created in response to thePresident’s commission on theDeepwater Horizon. In my view,this shows that the industry haspicked up the pace and is beingprogressive and proactive in responding to the spill. That’swhat we have to do, becausechanges are going to happen

whether or not the industry participates.

By working progressively andproactively, we can make thosechanges as effective and as efficient as possible. If, on theother hand, we’re not progressiveand proactive, changes are notlikely to be as effective. That’snot a knock on our government,it’s simply a case of they don’tdo what we do. They cannothave as deep an understandingof our business and its activity aswe have.

Moving forward

We’ve always been able to

meet demand for a growing pop-ulation. The only time therewere gas lines, the culprit was anembargo—it wasn’t a physicalsupply shortage, it was a politicalsupply shortage. We have a greattrack record of innovating, usingtechnology, and creating newsupplies. Moving forward, I seesix key factors determining thesuccess of the industry.

Relationships. We’re only allowed to operate where governments give us permission,even the United States. For producers, relationships withyour host government are critical.In the service sector, the criticalrelationship is with your client.

10 PESA News annual MEEting - day 1 - sEcond PanEl

HALDoRSEnContinued from Page 8

SuTTLESContinued from Page 9

Helge Haldorsen

all legal and regulatory compliant—and inthat broad spectrum, you had some approaches that gave you a very low marginfor error,” he says. “It became clear that, asan industry, we have to do a better job ofcoming together toward a more common approach representing a more conservativedesign.”

On equipment, while there is no short-term solution, there are opportunities to improve deepwater technologies.

“Clearly there are opportunities to improve the technology in our massivelycomplicated and sophisticated blowout preventers,” he says. “We need to ask ifthere should be any such thing as non-

shareable technology in BOPs—can we figure out a way to share anything andeverything that is through that stack?”

Further, the interface for the ROV on aBOP stack should have ample capacity toshut in the well. In addition to mechanicalinterface, some areas of the world useacoustic signals to shut in wells—the taskforce is looking into whether it would be appropriate for the Gulf of Mexico.

In procedures, the task force issued a newcement standard that API released as a recommended practice. Luquette added thatanother recommended practice for a robustwell casing design is in the late stages ofrewrite and will soon be issued.

In the area of intervention and containment,the industry now has both the Helix and theMarine Well Containment solutions.

“Those are not competing solutions, they

are complimentary,” says Luquette. “Weknow that if we have an incident, all available resources will be deployed. I knowdifferent companies are using different solutions as part of the permit process, but itwill be good to have redundant capacities.”

The new normal

The convergence of extraordinary itemslike Macondo, new regulations, and newtechnologies are leading to true change inthe industry.

“These are the most challenging times thatI’ve faced in my 33 years,” says Luquette.“We are facing a new normal and we aredefinitely going to be facing a much different scenario than we were before Macondo.”

Regulations are becoming more difficultand the industry is pursuing more challenging resources. Meanwhile, the expectations of the industry’s stakeholdersare ratcheting up, he says.

“When I talk with the Board of Directorsof Chevron Corporation, they ask toughquestions about governance, protecting ourpeople, protecting the environment, and capital stewardship,” he says. “The expectations of the public have changedafter Macondo and with media attention tohydraulic fracturing.”

Luquette’s work at Chevron centersaround difficult resources—unconventionalrock in West Texas, tight gas in the Rockies,shale in the Marcellus, and a large positionin the deepwater Gulf of Mexico’s lower tertiary.

“All of these things are in complex environments—it would be difficult to makeeach of these work and make them profitable, but you also have to put it in context with everything else,” he says. “Thisis going to be a very challenging stretch, butour industry has risen to the occasion before,and I am confident that we will rise to thechallenge again.”

11PESA Newsannual MEEting - day 1 - sEcond PanEl

LuquETTEContinued from Page 9

It’s based on trust and confidence,and trust creates opportunity—much of the innovation in ourindustry has been created withlong-standing partnerships builton trust.

Technology. The strategicwinners in our industry have always been those who havebeen on the front edge of thetechnology. We’ve never seenpeak oil because we cannot predictthe technology boundary—everytime we think we find it, wemove past it. A telling exampleis shale production. I’ve been inthis business for 30 years and Iremember being disappointedwhen I found shale—now those

source rocks are a major sourceof supply. There will always be aprize to chase, be it in the deepwater, Arctic, or increasingproduction percentages.

Capability. We are a technologyintensive industry, but people areby far our most valuable assets.We have to be able to attract andretain the brightest to go out andfind, develop, and produce thesenew opportunities safely and effectively.

Predictability. Almost everyproject we do now starts at $1billion and $5 billion is not really expensive anymore. Youtake risks when you enter acountry, when you acquire land

and, when you explore, andwhen you drill—actually, youhope by then that the major financial risks have been reduced at drilling time. But inmany difficult environments,such as deepwater or high pressure, that isn’t always thecase.Will it happen on time; willit work as expected; will it be reliable? When you look at theprojects that have been problematicfor our industry, predictabilityhas been the core of the issue.

Reliability. As we move thetechnology frontier forward, weneed to have confidence that ourequipment will perform as wellin year 20 as it did in year 1.

Deepwater is an excellent example—the problem you’refixing may cost a few hundreddollars, but the intervention isextraordinarily expensive, on topof which are the costs of stoppedproduction. Reliability will setthe pace for future developmentin the industry.

Affordability. There has to bean economic incentive to dowhat we do. We weren’t chasingsource rocks 25 years ago becauseoil was $9 a barrel. There is alink between the technologiesthat are required and what is affordable. Our industry has tocreate a profit for our shareholders and stakeholders.

Gary Luquette (center)

The shale gas revolutionbrings certainty, uncertainty, andastonishment all in one packagefor one industry executive.

“We’re in certain times for resource availability, but wehave uncertainty around parts ofour business like market cycles,regulation, and costs,” says JohnRichels, President & CEO of

Devon Energy. “Somethingthat’s astonishing and a littlescary from a market point ofview is that we at Devon produce1.2 Bcf per day just in the Barnett Shale—it shows you thequality of resource that we have,and there are shale basin oppor-tunities all over North America.”

However, a number that’sconstantly on Richel’s radar isthe country’s 1 to 2 Bcf per dayoversupply of natural gas. Whilethere are many factors contribut-ing to the oversupply, the currentcycle includes two dynamicsthat Richels has never seen inthe past—easy access to capitaland skewed cash flows.

“The easy access to capitalmakes it hard to figure out whatthis industry is going to look likein the future,” he says. “In 2009,you could raise as much equityas you wanted; in 2010, the debtmarkets—especially high yielddebt markets—were wide open.There’s an enormous amount ofmoney available.”

The easy access to capital,though, is allowing companiesto secure expiring acreage andpursue sub-economic growth.

“People are continuing todrill; a great example is the Haynesville where we still have120 rigs running,” he says. “Alot of that is pursuing sub-economic growth and they justify it with half-cycle economics, saying that they’vealready invested in land. It’sskewing the market today.”

Hedges have skewed the industry’s cash flow for the lastcouple of years. In 2009, half ofthe industry was hedged at$8.50; in 2010 it was $6.50.Richels says similar hedges willnot be available for 2011.

“I spent a lot of time withWall Street, and I get a strongimpression that they are gettingweary of funding growth at anycost—you’ve seen it with a couple of producers who talked

12 PESA News annual MEEting - day 2 PanEl

Shal

e

Game change for U.S. IndependentsVast shale gas discoveries bring certainty, additional challenges for producers

From left to right: Bruce Vincent (Swift Energy), John Richels (Devon Energy), Susan Cunningham (Noble Energy), and moderatorSteve Jacobs (Decision Strategies, Inc.).

Regulation, costs among uncertainties for gas

John Richels, President & CEO, Devon Energy n See Richels, Page 14

Offs

hore

&

Editor’s Note: This essay was compiledfrom Susan Cunningham’s presentation atthe 2011 PESA Annual Meeting.

With every challenge comes opportunity. When the tragedy at the Macondo well unfolded, we were actively drilling. Therewas a reaction within the company thatsaid, ‘what are we going to do?’ All of asudden one of our four core areas may notcome back. We quickly ran into a victimmentality. But after we complained for awhile, we decided that we were not goingto be victims. We would instead turn ourresponse into a positive that wouldstrengthen the entire company. And that ishappening.

We proactively engaged with Washington,environmental groups, and industry members to figure out how to get back towork. We didn’t go in and say, ‘everybodyis wrong.’ Instead, we made a commitmentto understand everybody’s perspective. Wewouldn’t be able to do this alone, so weneeded to bring together the collective experience of the industry. We looked hardat our own processes and searched for ameans of getting the industry back to business, which really meant helpingWashington figure out what to do.

A permit was the goal—if we could getthings going, then concern about the deepwater Gulf would turn into a positiveand we would focus on that. If it didn’twork, at least we knew where we stood.We partnered with industry members tocreate solutions, and one of our majorachievements was to create a comprehensiveand rapid deepwater well containment system. One company cannot take all thecredit or take all the blame. It’s everyoneworking together to find solutions thatmeet everybody’s needs.

Our work with Washington was interesting.We found that the people who were

figuring out the regulations were just aspassionate about what they felt they neededto do as we were. Our approach was thatwe needed to help each other find commonground to meet both sides’ needs. It wasthat approach that helped us receive thefirst deepwater permit. As a company, welearned from this process and decided wewould implement the same standards globally, even if the requirements aren’tthere.

Another core area is the Eastern Mediterranean, and the above-ground riskis really interesting here. We’re currentlyproducing offshore Israel in the Leviathanfield and developing Tamar, along withdrilling plans in Cyprus.

The greatest risk in Israel is political.When we first entered Israel, the exploration terms were some of the best inthe world. Many of us in the industry knowthat when terms are really good and youfind something, terms change and usuallynot to your advantage. We expected thatgoing in.

You can imagine the way Israel’s community has reacted to having significant hydrocarbons is different thanalmost any other place in the world. Theynow have enough hydrocarbons to meettheir own needs and potentially enough toexport. Now the conversation is workingwith the community to earn the right to operate and what that means, short andlong term. Getting our brand out in Israelbecame very important, which led to reputation, and it has to be very positive.

Our industry typically doesn’t think ofthe community as customers, but it’s animportant factor in Israel. This is anotherlearning moment for the company—viewingthe community as a customer is really

13PESA Newsannual MEEting - day 2 PanEl

Susan Cunningham, Senior Vice President for Exploration, Noble Energy

Victim mindset a non-starter for success

American treasuryof gas is a meansfor partnerships

Bruce Vincent, President & Director, Swift Energy

n See Vincent, Page 15

n See Cunningham, Page 14

Today’s industry is very different fromjust two years ago, and on a completelydifferent level from a decade ago.

“There has been a paradigm shift in ourbusiness,” says Bruce Vincent, Presidentand Director of Swift Energy. “Technologicaladvances, leading to the discovery of whatI call an American treasury of natural gas,have triggered a new reality for our industry.”

The greatest change is the U.S. resourcebase. Vast shale resources have provided along-term energy source that is reliable andpredictable in a way that it never has been.

“Its identifiable nature actually createsthe opportunity of work partnerships andalliances with our equipment suppliers andservice providers in a way, quite frankly,we couldn’t do before,” says Vincent. “Wecan work together to improve technologies,get more out of the ground, and do it moreefficiently.”

But the industry has overachieved over-supplying the market. As long-term priceforecasts predict a flat natural gas price foryears, the industry must now learn to livein a lower price world.

“I don’t see gas prices going to $7 or $9anytime soon,” he says. “So we’re going tohave to focus on the cost side—that’swhere it becomes important for us to partner and build alliances that improvetechnology and efficiency in a way thatdrives down cost.”

Just as the natural gas market was redefined, a similar opportunity resides inshale oil. The country can greatly increase

about increasing gas supply andwere immediately penalized byWall Street,” he says. “Whileyou can place hedges above thestrip, you do it on the basis ofgiving up a lot in the future.”

The natural gas side of the industry is an untenable situa-tion, he says. Forecasts predict aflat gas price for the next threeyears, yet costs are going up. Hecited an example of Devon’s po-sition in East Texas that is notunder production or expiringacreage terms.

“We’re often asked what gasprice we need in today’s cost environment to make that playeconomic,” he says. “We’re

spending zero on it now becauseit doesn’t make sense, but wethink we need about $6 to createa 20 percent after tax rate of return. That includes the fact thatwe already had the land held byproduction and we have an 18percent royalty rather than the25 or 30 percent that folks gavein the last few years.”

The country’s abundant natural gas supplies are comingjust as the world needs cleanerfuels. Electrical power generationis the future for natural gas inNorth America, he says. Virtuallyno new coal plants can be permitted; new nuclear plants,following the Japanese disaster,may never be built here; andwhile Devon endorses wind andsolar, one has to understand thereality of it. Today, natural gas

prices are $4—or $24 barrel ofoil equivalent (BOE)—wind andsolar require about $200 BOE inorder to be economic.

“I talk to CEOs in the electricalgeneration business and allthey’re talking about these daysis natural gas fired plants,” hesays. “I think that’s an areawhere we’ll see a significant increase in demand, and we’ll beable to access our natural gassupplies fairly quickly.”

In adjusting Devon to the newrealities of the industry, Richelsled the company through a hugemove. The company divested alloffshore and international assetsto focus on North America.

“We realized that our NorthAmerican asset base was biggerthan we could tap and we hadway more opportunities than wehad either capital or people,” hesays. “So we focused on ourhighest risk-adjusted area, anddecided to compete where wethought we could be the mostcompetitive.”

Moving forward, Richels expects North American activitylevels to remain high.

“I can tell you that we’respending more in 2011 than wedid in 2010, and I don’t see thatgoing down,” he says. “In thelonger term, I think there has tobe some adjustment on the natural gas side. It can go on fora while but either cost has to adjust or prices have to adjust.”

saying that we need to listen towhat their needs are as much asthey need to understand ours. Ifyou work together to find solutions, the community willwant you.

We never would have expected that the regional political risk would work to ouradvantage, but it has. Until westarted producing natural gas,most of their energy feedstockwas from Egypt. Terrorists blewup the energy pipeline, or atleast shut them down. The result is that our gas is evenmore valuable and Israel hasthe security of supply. So Ithink this is one of the fewplaces in my career where political risk is actually a positive.

One thing I’ve learned is thatit’s really easy to feel victimized by the changing realities, the different thingsthat are not business as usual. Anatural human response tochange is to initially feel thatthings aren’t in your controland, therefore, to be a victim.

But you have to turn itaround. The people by whomyou feel victimized are going tothink that you’re telling themthey’re wrong. Just like whenwe’re told we’re wrong, it doesn’t make us say, ‘okay, Ifeel good about that. I can goforward and be positive.’ Instead, it makes us retrenchand not listen.

I think the challenge for us isto recognize that everybody isjust as passionate about makinga difference and doing the rightthing as we are. We have to findthat common ground, listen toeach other, and work togetherwhether we agree or not. It definitely played a part in ourgaining the first permit in thedeepwater Gulf—we workedwith the regulators and environmental groups andfound that they eventuallycalled on us to provide ideasand solutions.

We turned the Gulf’s closureinto an opportunity that hasstrengthened our company’s capability and improved ourstandards globally.

14 PESA News annual MEEting - day 2 PanEl

RICHELSContinued from Page 12

CunnInGHAMContinued from Page 13

John Richels

After each session, members often continued the discussions outside. Fromleft to right, speaker Gary Luquette, Ron Higgins (World Oil), Russ Laas(Hart Energy), and Wayne Richards (Global Oilfield Services).

production and reduce imports—the difference is that the oil market cannot beoversupplied.

An area that gives both opportunity andchallenge are the new communities in oiland gas production. The industry is now active in areas that are not traditional production communities.

“This has become much more importantthan any of us realize, whether in the confines of New York, Pennsylvania, orother places that aren’t used to our business,” says Vincent. “We develop commodities, so we’ve never really worriedabout the customer—we need to look atcustomers and all of our stakeholders.”

These new communities require recognition that the industry has morestakeholders than in the past—consumers,land owners, local government agencies,state agencies, regulatory bodies, and federal agencies in Washington, D.C.

“Stakeholders can be our friends and ourpartners, but they also can be our enemies,”he says. “We must work together there developing a common message, and bettercommunicate at the grass roots level aswell as places like Washington.”

Further, Vincent says the industry needsto make an effort to partner and communicatewith end-use consumers, particularly in

new communities. The anti-frac movementhas already targeted this group in areas likePennsylvania, New York, and Maryland.

“We need to help them understand thathydraulic fracture stimulation is safe, it’sbeen with us for 62 years, and there is not asingle proven case of contaminated freshwater resources,” he says. “Consumers areimportant to us and we have to take time tospeak with them.”

To that end, Vincent—also Chairman ofIPAA—supported funding of a multi-yearEPA study to investigate the safety of fracking.

“We just wanted to be sure it’s done correctly, that it’s done based on science,and it’s done involving all the stakeholders,including the states and the like,” he says.“That study has just begun, and it will probably take another year to complete.”

There are new realities in taxes, energypolicy, and regulation. For example, theAdministration has sought to increase theindustry’s taxes by $30 to $40 billion, primarily through the elimination of long-standing tax deductions.

“Every single tax benefit that the producer side of the industry has is on thetable—that impacts our cash flow, whichimpacts the amount of capital we have toinvest and drill wells,” he says. “Most aredeductions for ordinary costs that we incurin our business like intangible drillingcosts.”

Vincent likens intangible drilling costs to

any other manufacturing business expensing the consumables used to make aproduct. They are not subsidies, they arecost recovery mechanisms, he says.

He adds that President Obama’s legislative agenda will probably be limitedfor the next two years—the likelihood ofanything meaningful from the White Housemoving through the House and Senate isslim.

“The President recognizes that, so instead he’s using regulatory agencies toimplement policies in a way the regulatoryagencies, in fact, weren’t designed to do,”he says. “It could dramatically impact ourbusiness and a lot of other businesses inthis country.”

The most important defense is the industry’s people. He stressed that everycompany should encourage every employeeto speak up and get involved in the government process.

“Don’t ever think your voice doesn’tmatter—we appreciate PESA coming up toWashington for the Fly-In,” he says. “InHouston most of the Congressmen supportthe oil and gas industry as do both our Senators.”

“I’ve talked to those Congressmen, andthey want to hear from you, it helps them.There is nothing better than a real, live, voting constituent communicating anecdotal stories about how Washington’spolicies affect their business. Every voice isimportant.”

15PESA Newsannual MEEting - day 2 PanEl

VInCEnTContinued from Page 13

Thank you to our Annual Meeting sponsors

16 PESA News annual MEEting - Friday night

friday night—This year’s Friday-night celebrationshunned tuxes and ties in favor of amore casual atmosphere, matchingthe resort.

Among the couples attending were,from above right to left: Saeid andShelley Rahimian, T-3 Energy Services,Inc.; Roy and Barbara Markum, PennWell; John and Patty Royall,Gulf Publishing Company; and Garyand Pamela Halverson, Cameron.

The evening’s entertainment was theRaspyni Brothers, a comedy and juggling routine. Among their skitswas a session in which the Brothersjuggled long knives around JohnRoyall while spinning discs on theirmouths, standing on one foot, andspinning a disc on the other foot.

is floating with the constituency that hehopes will re-elect him in 2012. So, we areright back to where we started. Politicaltime drives energy time, when it should bethe other way round.

We should draw from our history andmake this right for energy. I testified in February at the House Sub-Committee forEnergy and Power that the nation should seta target to re-establish the production of 10million barrels a day. One of the benefits ofthat goal—knowing fully well that we havethe resources to produce that much fordecades—is that it creates 3 million newjobs. If you want jobs, look at jobs that can’tbe exported. Developing natural resources inthis country is one way of doing it.

Here is how we fix our energy problem—get politics out of energy.

I propose the creation of an independentregulatory agency through a CongressionalAct—we’ll call it The Federal Energy

Results Board. In addition to establishing anational energy plan, the Board will set theparameters on energy supply for short, medium,and long term with four empowerments.

First, it will decide how much energyfrom each resource—such as hydrocarbons,wind, and solar—will be produced over atime period. The industry then has an ideawhat they can go work on, and they knowthat they can keep working on it because it’spart of the national strategy.

Secondly, it will make some of the hardchoices that Congress and the Presidentcan’t make. We can decide how to use technology for energy efficiency, DC versusAC, or even abandoning the internal combustion engine. It will set the parametersfor the future so that the industry can go towork and do what it does, which is makingthings happen. And government can do whatthey do best, which is commanding at thehighest level.

Third, it will get energy regulation out ofthe EPA. The EPA is hopelessly turned intoan organization of zealots who are driven bypolitical parameters from the White House,

whoever the President is. The 21st centuryenergy system cannot handle the kind of reg-ulation for strangulation that we see happening today.

The fourth empowerment would be to setthe parameters for the interstate and regionalinfrastructural requirements that the nationhas. Without infrastructure, you can’t takeenergy from where it’s produced to whereit’s consumed. We don’t seem to have theability to build infrastructure in a timely, affordable way.

I’m not looking for a Republican solutionand I’m not looking for a Democratic solution—I’m looking for an American solution. The only way to make that happenis with Americans. It’s you, your families,your friends, your employees, and everybodyyou know. People need to rescue the nationfrom itself, which is how we got started inthe first place. And we need to do it onemore time in the energy space. The citizensof America need to explain, influence, or demand that its elected officials fix the problem—and this is one way it can bedone.

HofMEISTERContinued from Page 3

17PESA Newsannual MEEting - golF & tEnnis

The Jack Nicklaus Ritz-CarltonDove Mountain GolfCourse—home to the Accenture Match Play Championship—provided theHigh Sonoran Desert backdrop for the 2011 AnnualMeeting Golf Tournament.

Golf Champs

First Place (Score: -16)Frank Smith (Valerus), LarryKerr (Gardner Denver), LanceMcArthur (Wood Group), andBob Greenwood (Bestolife).

Second Place (Score: -15)Chuck Davison (Oceaneering),Scott DuBois (Premier Pipe),John Perkins (Harbison-Fischer),and Burk Ellison (National Oilwell Varco).

Third Place (Score: -14)Galen Cobb (Halliburton), JimStradinger (Holland 1916), andCharles Currie (Schlumberger).

Longest Drive (Men’s)Michael Shook

(Endeavor Management)

Longest Drive(Women’s)Caryl Noelken

(wife of Dave, Caterpillar)

Closest-to-the-pin(Men’s)

Don Greenlee (Oil States Industries)

Closest-to-the-pin(Women’s)Lisa Kinsey

(National Oilwell Varco)

Tennis TournamentLeft: Linda Newman (wife of Dan, NorrisProduction Solutions) swings away at avolley.

Below: Eric Hollingsworth (Wells Fargo)kisses the champions’ trophy. The finalmatch pitted Hollingsworth and WalterWeathers (Cameron) vs. Kathy Zay (wifeof Tom, Boyden) and Kathy Richards(wife of Wayne, Global Oilfield Services).

Golf TournamentFirst Place

Second Place

Third Place

Thank youto our sports tournamentsponsors:

18 PESA News Washington Fly-in

PESA’s founding directivewas to establish and maintain aworking relationship with thefederal government. This year,the Association returned to itsroots.

Sixteen executives flew intoWashington, D.C. to meet andeducate policymakers and makethe service and supply sector’svoice heard. PESA membersmet face-to-face with many lawmakers including Sen. DavidVitter (LA), Rep. Doc Hastings(WA), Rep. Steve Scalise (LA),Rep. Tom Reed (NY), and Rep.Kevin Brady (TX) in addition toa host of Congressional staffersand industry leaders.

“The main takeaway from theFly-In was that we have to constantly educate and reinforcethe value of our industry tothose working in Washington,D.C.,” says Galen Cobb, VicePresident for Industry Relations,Halliburton. “Many do not fullyunderstand the role of the service and supply sector andthe contributions we make inrevenues, jobs, and technologydevelopment. The unified voiceof PESA was well received andwe all gained a better understanding of how D.C. politics can affect our daily operations and business interests.”

The Legislators

Sen. David Vitter (LA) saysthat oil and gas industry trips toWashington, D.C., like PESA’sFly-In, are essential to the government process. He suggested that PESA strive tonot only involve as many members as possible, but include suppliers as well andspeak as a unified voice.

“It’s vital that you get in frontof your representatives and tellyour story. It takes time andmoney, and I know Washington

isn’t always a friendly place forpeople associated with oil andgas, but it’s very important,”says Vitter. “Something thatmany businesses don’t do is mobilize their suppliers—thinkof all of the small businessesthat depend on you around thecountry—get them to tell yourstory as well.”

The importance of PESA’svisit lies in total job and economic impact of the association’s member companies.While oil and gas production isexpanding to new states such asPennsylvania and New York, theimpact of 184 companies andtheir suppliers is felt in everystate. Rep. Steve Scalise (LA)

PESA memberstell the industry’sstory in D.C.

Washington Fly-In

Rep. Tom Reed (NY) and PESA ViceChairman Chris Cragg (Oil StatesInternational, Inc.) discuss frac legislation in the Marcellus Shale.

Right: Rep. Doc Hastings (WA), PastPESA Chairman Robert Workman(National Oilwell Varco) and PESAChairman Bill Coates (Schlumberger)discuss the possibilities of naturalgas as a fuel of choice.

Below: Former PESA ChairmanGalen Cobb (Halliburton) talks withSen. David Vitter (LA) regardingwork stoppage in the Gulf of Mexico.

19PESA NewsWashington Fly-in

Three national mega-issues—the MiddleEast, debt, and jobs—intersect with issuesin the Gulf of Mexico.Right now, our policy in the Gulf ofMexico is working exactly in the wrongdirection.

— Sen. David Vitter

“

”

If you can get us examplesof real companies inother states, and I tellthat story to a colleaguein that state—theywill realize they areaffected by the workstoppage in the Gulf.It’s not just Texas,Louisiana and the obvious states.

— Rep. Steve Scalise

“

”

It’s absolutely foolishfor us, from an energyand national securitystandpoint, to ignorewhat we know are theresources of this country in federal lands,the Outer ContinentalShelf, and Alaska. Weshould utilize all ofthese resources.

— Rep. Doc Hastings

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”

When dealing with thestate legislature andstate drilling moratorium,there is a vocal minority who think theindustry can’t be trusted.I know that is not true.We have a long way togo and a lot of work todo, but we’re standingwith you.

— Rep. Tom Reed

“

”

shared an example of an unexpected impact of reduceddrilling in the Gulf of Mexico.

“A company that makes helicopters in Connecticut—normally people in Connecticutwon’t care about oil and gasproduction—had to cancel orders for six expensive helicopters, which affects jobs,”says Scalise. “If you can get usexamples of real companies in

other states, and I tell that storyto a colleague in that state, theywill realize that they are affected by the work stoppage inthe Gulf. It’s not just Texas,Louisiana, and the obviousstates.”

The protracted lack of exploration and production inthe Gulf was a primary topic fordiscussion. PESA Chairman BillCoates (Schlumberger) shared a

story with Sen. Vitter, which became a theme for much of theFly-In.

“I’m worried becauseSchlumberger used to have2,000 people working in theGulf of Mexico, almost all ofthem living in Louisiana. Todaywe have 530,” says Coates.“They’re not unemployed—they’re in Angola, Kazakhstan,Russia—all over the world. Tobring those people back will bea slow and painful process. Iworry that the longer this goeson at this measured pace, themore difficult it’s going to be torestart operations in the rightway. I think we’re getting to thetipping point where the Gulf ofMexico will never recover, soI’m extremely concerned aboutwhat I see as a lack of care byBOEMRE and the administrationabout what’s happening to theindustry and the Gulf. Time isof the essence, and I don’t sensethat the urgency is there.”

Sen. Vitter agreed withCoates, adding that the situationhas made him “distraught formonths.”

“Several weeks ago, Michael

Bromwich was asked when wewere going to be back at thelevel of permitting that we wereprior to the Macondo disaster,and he said, ‘I don’t think we’llever get back.’ Every week thatgoes by makes it tougher to return people to the Gulf and getback to work,” says Vitter.“We’ve always talked about international companies makingjudgments about political risks,and the political risk is nowworse than Angola, Nigeria,Brazil, and lots of other places.That’s not a great statement onthe business environment in theU.S.”

Rep. Scalise answeredCoates’ theme in two steps.First, he says to tie the industry’seconomic impact to governmentfinancial health—the royaltiesand taxes paid by energy companies are the largest sourceof federal income outside ofpersonal taxes.

“We have a deficit problem inthis country and many peopleget that—you solve deficit issues through revenue generation, not taxes,” says

n See fly-In, Page 20

Doug Polk (Vallourec & Mannesmann USA Corporation), questions Rep. SteveScalise on the pacing of Gulf of Mexico drilling permits.

20 PESA News Washington Fly-in

We’re under no illusionthat we’re going backto the same rate ofoffshore permitting asbefore last year, butJudge Martin Feldman’sruling spelled it outwell: any kind of delayis unreasonable andunlawful.

— Garrett GoldingCongressional Staff

“

”

Last year, there werenot a lot of challengesfor offshore—that hasall changed. There is awhole new regime, awhole new challenge—a lot of people talkabout the new normal,but we’re still tryingto figure out what it is.

— Randall LuthiNOIA

“

”

We’re moving to culturesthat have no understanding of drilling.Much more than before,we have to be at thedrilling point with citizens, with peopleat townhall meetings,with the city council,and local land use groups.

— Alby Modiano USOGA

“

”

We’re seeing an onslaught against thedevelopment of natural gas because ofthe high profile it hasreceived for its potentialto provide a long-termenergy solution. It’s awell-funded and orchestrated effort.

— Lee FullerIPAA

“

”

Scalise. “You generate new revenue through job creation,and if you open up new areasfor leasing and drilling, you create new jobs and billions innew federal revenue. That’show you balance the budget. Weneed to quantify the loss in federal revenue from not onlyshutting down production, butalso the failure to open up newareas for leasing.”

Second, he says, “One of thethings we’ve tried to do is educate our colleagues acrossthe country about the work stoppage in the Gulf. Without acommitment to an ‘Americafirst’ energy strategy, gas priceswill continue to skyrocket, andthousands more jobs will be runout of our country while simultaneously making us moredependent on Middle Easternoil.”

Rep. Doc Hastings (WA) addressed the issue as a concernfor national security. He saysthat it’s in the best interest of thecountry to recognize that energy

is an integral part of the economy and therefore, the U.S.should be energy independent,or at least less dependent.

“As you know, OPEC controls the majority of theworld’s crude, so what if OPECdecides to just turn it off? Nobody knows what’s going tohappen in the Middle East, but Iwould guess that it’s not goingto be friendly to us,” he says.“It’s absolutely foolish for us,from an energy and national security standpoint, to ignorewhat we know are the resourcesof this country in federal lands,the Outer Continental Shelf, andAlaska. We should utilize all ofthese resources.”

The second major issue forthe Fly-In was developing shalegas resources, specifically theenvironmental issue of hy-draulic fracturing.

Though his state is engulfedin a natural gas fracturing moratorium, Rep. Tom Reed(NY) says that the vast majorityof his district’s citizens andmany lawmakers are behind theindustry.

“The majority of my constituents I hear from are

receptive to the idea of developing our domestic energyresources,” says Reed. “Peoplesee hydraulic fracking as an unknown, and they want information. That’s why we developed the Marcellus ShaleCaucus—we want to bring together scientists from the industry and environmentaliststo give people the real information,because that’s what’s lacking.”

At its heart, the fracking issue

is a question of regulatory over-reach, says Garrett Golding, aProfessional Staff Member withthe House Energy and Commerce Committee. TheCommittee’s focus for the nextseveral months will be theEPA’s regulations, which hesays will be subject to intensereview, or in many cases, refusal, by Congress—thatpower is derived through theCongressional Review Act

fLY-InContinued from Page 19

Duane Morgan (Gardner Denver, Inc.) discusses his company’s manufacturingfacilities near the home district of Rep. Tom Reed (NY).

21PESA NewsWashington Fly-in

Topics that will havean outsized role inevery Congressionaldecision are spending,debt, and the economy.We think this works inour favor. This industryexcels in economicgrowth, job creation,and energy security.

— Marty DurbinAPI

“

”

The EPA can do whatever they neednow that they have aSupreme Court decisionbehind them. They arefree to pursue any regulatory stance untiland unless Congressstops them.

— Frank VerrastroCenter for Strategic andInternational Studies

“

”

You can make a difference by linkingdomestic energy policywith economic development. Ourproblems are not inthe Middle East, they’rehere because we haven’ttaken advantage ofour country’s resources.

— Jay TimmonsNAM

“

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We’re trying to moveforward with a renewedemphasis on safetyand environmental protection. We areaware of the pain thisis causing and areworking as hard as wecan to get back to thenew normal.

— Bob LaBelleBOEMRE

“

”

(CRA), which allows Congressto nullify regulations issued by afederal agency.

“On fracturing, we haveMembers that are sympatheticto disclosure of fracking fluids,not from a formulaic side, butfor the materials used in thefluid,” says Golding. “I doubtthat any agencies will go afterfracturing as strongly as they’retalking about—but if they did,we’d pull an immediate CRAbill on it.”

Rep. Hastings added “I thinkthese policies are dead wrongand we’re going to do everything in our power to expose them with oversight. Wewill ask the questions over andover, we’ll have hearings, andwe’ll express our views.”

The Industry Groups

In preparation for PESA’svisit to Congressional offices,PESA members heard from sixindustry groups. Like their legislative counterparts, eachstressed the importance of continued participation in thegovernment process.

“I cannot overemphasize how

important it is to have someoneother than me and my counterparts visit the Hill. We’rethere regularly, and they hear us,but it becomes like whitenoise,” says Randall Luthi,President, National Ocean Industries Association. “Whenyou come in from their districtand have job stories to tell, theylisten. It puts a human face onindustry that has a hard timedoing so.”

Hydraulic fracturing was theprimary concern for several industry groups, as potentialover-regulation of the technologywould have dire consequencesfor many of today’s best land resources. The issue is new cultures, says Alby Modiano,President of the U.S. Oil andGas Association. The industryhas moved east, and oil and gascompanies are encounteringareas that have no experiencewith drilling.

“Much more than before, wehave to be at the drilling pointwith the citizens at town hallmeetings, city councils, andlocal land use groups,” saysModiano. “We need to communicate the revenues that

we bring to communities—wehaven’t lost Pennsylvania because most of the state leadership understands that theindustry is a source of revenueand jobs.”

There are increasingly aggressive efforts to not onlydisclose frac fluid content, butchange the Safe Drinking WaterAct to exclude fracking. Well-funded, competent, and dedicated environmental groups

are behind the drive, says LeeFuller, Vice President of Government Relations, Independent Petroleum Association of America.

“Environmentalists are causing anxiety about the safetyof drinking water, especially inNew York City—their water isfrom an aquifer on the edge ofthe Marcellus,” says Fuller.

Robert Ryan (Stallion Oilfield Services) asked Sen. David Vitter (LA) about theBOEMRE’s “moving goal posts,” specifically the Gulf’s spill containment systems.

n See fly-In, Page 22

22 PESA News Washington Fly-in

“The groups played into NewYork politics, and the state frozeMarcellus development.”

Now that water is the centerpiece of the anti-fracmovement, the industry shouldhave a self-acknowledging response, says Marty Durbin,Executive Vice President,American Petroleum Institute.

“We need to say that yes, weare concerned about constituents,but you need to know that theindustry takes its responsibilitiesseriously, we’re never done, andwe’re always looking for waysto improve across the board. Weknow that we can develop theseresources safely.”

The Deepwater Horizon explosion brought a new realityfor offshore production, essentiallyclosing development and permitting for nearly a year.

“The administration cancelledfour lease sales, two of which—Alaska and the coast of Virginia—will not come back,”says Luthi. “I think we’ll belucky if there’s a Gulf of

Mexico sale in 2011, and weshould be concerned, and soshould the government becauseof the revenue lease salesbring.”

Frank Verrastro, Director forthe Center for Strategic and International Studies, says production losses in the Gulf areestimated to 250,000 barrels perday for 2011, and another250,000 barrels in 2012. By2012, the 500,000 barrels perday loss equates to $9 billion inrevenues.

The last issue for industrygroups was proposed taxes, bothin the elimination of tax incentivesand new taxes specifically targeting oil and gas. Any taxthat increases the cost of energyis not in the best interest of thecountry, says Jay Timmons,President and CEO, NationalAssociation of Manufacturers.

“Manufacturing consumes 30percent of the nation’s energy,so an increase in the cost of energy means fewer jobs,” saysTimmons. “Affordable energysupply is vital for a growingeconomy and the long term ability for this country to compete on the world stage.”

The tax issue is a problem ofperception, says Durbin. TheAdministration has presentedthe tax issue to the public as agive-away to the industry, notlegitimate business expenses.

“There is no question theycan get a big chunk of moneyby repealing 199 or some of theother incentives—these proposalswill give another $5 billion peryear in taxes from the industry,”

he says. “That view is short-sighted. It will give governmentrevenues a quick bump in theearly years, and then nothingbut declines going forward dueto decreased productivity.”

The BoEMRE

The Fly-In gave PESA members a unique opportunityto speak with a senior official in

My greatest takeawayis knowing that theCongressmen that Ivisited understoodwhat the oil and gasindustry—specificallyPESA members—means to their constituents in theform of jobs.

— Duane MorganGardner Denver

“

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The unified voice ofPESA was well-received and we allgained a better understanding of howD.C. politics can affect our daily operations and business interests.

— Galen CobbHalliburton

“

”

There were manygood ideas raisedabout special projectsand town hall activities that PESAmay want to pursue. Ilook forward to examining these ideasand putting some intopractice.

— Bob MoranHalliburton

“

”

I have always enjoyedpolitics and business,but was a little naive onthe politics of business.I have made contact witha few of my colleagueswho I anticipate willjoin PESA and use the Association’s influencefor the greater good.

— Josh LowreySunbelt Steel Texas

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”

PESA Chairman Bill Coates (Schlumberger) at center posed a question that became a central theme for the Fly-In—whether the industry capabilities haddecreased along with drilling permit rates.

fLY-InContinued from Page 21

23PESA NewsWashington Fly-in

the newly formed Bureau ofOcean Management, Regulation,and Enforcement (BOEMRE).The questions heard the most, ofcourse, are regarding the pace ofpermitting in the Gulf of Mexico.

“We don’t yet know what thenew normal is,” says Bob LaBelle, Deputy Assistant Director, BOEMRE. “In thepast I could quote statistics onhow long it takes to approve anaverage well, but given the additional work that both industry and regulators have,our goal is to be able to processpermit applications within 30days.”

While some in the industryhave questioned the 30-day goalas a mechanism for BOEMREto continuously “re-set theclock” and drag out permitting,LaBelle says that is not the case.The group’s director has saidshould a permit need morework, he would rather thatBOEMRE officials hold onto it,work with the company, and approve it in 35 or 40 days.

“He’s definitely discouragingthe tendency to send it back torestart the clock,” he says. “Thefirst few are undergoing extensive legal review, andrightly so, as we don’t want toget out there and have a wellfail. It’s not at all unlikely oncewe get over those first few,we’ll have our guidelines setand the others will move faster.”

PESA Members

PESA members found a receptive ear for service andsupply companies at each visit,as well as coming away with aneducation in the workings ofWashington, D.C.

The visit was coordinated byFormer PESA Chairman GalenCobb (Halliburton), and PESAGovernment Relations Chairman Bob Moran (Halliburton) and his staff inWashington, D.C.

“These meetings helped high-light some of the good thingswe can accomplish as PESAmembers when we work together,” says Moran. “Therewere many good ideas raisedabout special projects and townhall activities that PESA maywant to pursue. I look forwardto examining these ideas andputting some into practice.”

Paul Butero, President of the

U.S. Land Region for BakerHughes Incorporated, echoedMoran. “It was a tremendouslearning experience for me and Ibelieve the synergies of thegroup will drive greater PESAinvolvement and action.”

Many PESA members weresurprised that Congressionalleaders, on the whole, sidedcompletely with the industry.

“My greatest takeaway isknowing that the Congressmenthat I visited understood whatthe oil and gas industry—especially PESA members—means to their constituents inthe form of jobs,” says DuaneMorgan, President for the Engineered Products Group,Gardner Denver. “It was also refreshing that the Congressmenreally wanted the industry to tellthe ‘real truth’ of fracking anddispel the untruths that arepresently being told by themedia.”

For other members, visitingCongressional leadershipspurred a call to action—JoshLowrey (Sunbelt Steel Texas)returned to Houston and immediately joined the PESAMembership Committee withthe goal of adding to the industry’s voice.

“The Fly-In has influencedme tremendously,” saysLowrey. “I have always enjoyedpolitics and business, but was alittle naive on the politics ofbusiness. I have made contactwith a few of my Pennsylvania,Wisconsin, Oklahoma,Arkansas, Louisiana, Illinoisand Ohio colleagues who I anticipate will join PESA anduse the association’s influencefor the greater good.”

Finally, Cobb says the Fly-Incould not have been bettertimed. PESA’s visit coincidedwith a similar Fly-In fromIPAA.

“The industry was out inforce as we ran into some of ourcustomers,” he says. “Of note,the first post-Macondo deepwater drilling permit wasapproved during our visit. I suppose we can’t take credit forthat, but, nonetheless, we werehappy to be a part of the effortto get the industry back to workin the Gulf of Mexico.”

Charles Young (Oceaneering) discussed PESA government relations potential inSpeaker of the House Rep. John Boehner’s office.

Many members, including Doug Polk (Vallourec & Mannesmann USA Corporation), at left, took time to have short one-on-one discussions with Congressional leaders such as Rep. Steve Scalise.

Johan Pfeiffer (FMC Technologies, Inc.) frequently led discussions on offshoredrilling permits and the potential decline of expertise in the Gulf of Mexico.

24 PESA News nEWs

Tournament Champs

Craig Trosclair (Lake Charles Rubber),Jerry Lastovica (Flexitallic), KeithMiller (Flexitallic), and Brian Vincent(Lake Charles Rubber).

Second Place

Tim Carlton (Wood Group), JimRenfroe (Wood Group), WeldonMire (Private Consultant), and KayeMaxwell (Merrill Lynch).

Third Place

Tom Wisler (Cameron), Joe Herzog(MRC), Greg Cain (Wilson), andMark Cordell (Cameron).

Longest DriveCraig Trosclair (Lake Charles Rubber)

Straightest DriveRon Marshall (Enterprise)

Closest-to-the-hole (#7)Roy Galvan (EOG Resources)

Closest-to-the-hole (#18)Tim Carlton (Wood Group)

Explorers Golf 2011Weather was virtually perfect for PESA’s Explorersof Houston Annual Golf Tournament, held March 3at Redstone Golf Club. The event was chaired andorganized by Committee Chairman Charlie Jones(Forum Energy Technologies).

Above: Jim Wright (Cameron) finishes his swing ona short wedge shot.

Right: Mark Cordell (Cameron) makes a short, buttricky right-to-left putt. His team placed third inthe competition.

Bottom Right: Hugh Forque (Capgemini) judges thegreen to finish a long Par 4.

Below: Isaac Joseph (National Oilwell Varco) connects with his tee shot off of a short Par 3 hole.

25PESA NewsnEWs

Mark Ellis (LINN Energy) says his company operates a simple business plan: executives look at thespread between the commodity price and the amount of cost required, and lock in the price viahedges. The plan has grown the company from $1 billion to $9.3 billion since 2007.

LINN Energy operates in a unique space.The company acquires mature assets,

develops them, maximizes capital, and thendistributes much of the cash flow to investors. Another way of saying it, saysMark Ellis, Executive Vice President andCOO, is that LINN Energy is a C-corp thatpays a very high dividend.

About three years into that businessmodel, the process is working well. Since2007, LINN grew from a $1 billion companyto a $9.3 billion company. In 2010, LINNincreased production by 22 percent, bought$1.4 billion in assets, and replaced 321 percent of its production at $0.79, all whilegenerating an investor return of 47 percent.

With a nearly even split between oil andgas, Ellis says he’s often asked whether thecompany is a gas, oil, or all-of-the above acquirer. Essentially, he says any commodityis fair game and the business model is simple—executives look at the spread between the commodity price and theamount of cost required.

“We simply lock in the spread for thatmarket through hedging,” he says. “We’rebuying a cash flow stream, and the more reliable it is, the more we’ll pay for it.”

As LINN Energy pays out between 40and 50 percent of its cash flow in distributions, Ellis says the one thing thecompany can’t afford are price dips.

“We’re 100 percent hedged through2013—not only our current production, but

what we perceive our growth will be,” he says.“On the off-chance that natural gas pricesrise to $10, then we will have left money onthe table, but more importantly, we’velocked in our economics and guaranteedcash flow regardless of the market price.”

Much as the rest of the industry, LINNhas steadily moved from a nearly all-gas inventory to more oil in the past two years.However, Ellis says that for his company, itwasn’t a conscious decision to pursue oil,but something that was driven through theacquisition market.

“Early in 2009, we bought a lot of oildeals because they were the only transactions where seller’s and buyer’s expectations were similar,” he says. “Thosewho were trying to sell gas assets at the timepriced them for an $8 gas world. Today, I’dsay it’s not a bad time to buy gas assetsgiven where those properties are trading.”

Especially in oil, acquisition activity isslow—the average dollar paid per barrel offlowing oil has steadily crept up over thepast 18 months. With a lull in the acquisitionmarket, LINN Energy will grow organically.

“It’s a little bit different than the past, butwe’re blessed with a good inventory from adevelopment standpoint—it’s generatingvery high returns,” he says. “We have largeinventory of lower risk development opportunities in the Granite Wash, the Wolfberry, and the Bakken.”

It’s safe to say that Randy Limbacher likeshis company’s chances in the Eagle Ford.He’s bet the company on it.

Limbacher, President and CEO, RosettaResources, Inc., took over the company a little more than three years ago. He inheriteda conventional gas company with presencein the Gulf of Mexico, Sacramento Basin,and the Rockies. Other than the logo, thatcompany is gone.

Today, the company focuses on unconventional plays, nearly exclusively inthe Eagle Ford. Rosetta has a market cap of$2.5 billion, produces 50.2 Bcf over 763wells with proved reserves of 479 Bcf.

“We took advantage of the changes intechnology in horizontal drilling and stimulation, shut down natural gas drillingfor a year, took the money, and put it intobuying new land in the Eagle Ford,” saysLimbacher. “We sold everything else off.”

The company holds about 415,000 acres,but focuses nearly all of its $360 millionspending on the Eagle Ford. The reason,says Limbacher, is that the play is a game-changer for small companies like Rosetta.

“Inventory wise in 2007, we had about100 Bcf in reserves, which was only twoyears of production,” he says. “Today in theEagle Ford alone we have about 2 Tcf ofidentified drillbit projects.”

More than just small companies takingnote—Shell, BP, Statoil, and CNOOC are invested in the play. The lease cost has risenfrom $200 per acre in late 2007 to $10,000per acre today. Limbacher speculates the reason being that the play has sophisticatedlessors, well-capitalized players, and relativeto other parts of the globe, the U.S. is a goodplace to do business.

In 2010, the Eagle Ford generated close to$2.9 billion in revenue, supported approximately 12,600 full-time jobs, andprovided nearly $47.6 million in local government revenue. Over the next ten yearsmore than 5,000 new wells are expected tobe drilled, generating more than $21.5 billionin total annual economic output, supportingroughly 68,000 full-time jobs in the area.

“It’s a world class reservoir. What’s amazing is that regulators look at our industryand say the oil companies are just fine—Idon’t mind that, but we’re talking aboutnearly 70,000 jobs in just one play and theimpact to the community is outstanding.”

Estimated hydrocarbons in place for theEagle Ford is about 1,600 Tcf equivalent,and estimated ultimate recovery is about 150

Nearly all RosettaResources’ capitalbet on Eagle Ford

n See Limbacher, Page 28

LINN rides ‘simple businessmodel’ to meteoric growth

n See Ellis Page 28

26 PESA News nEWs

Chevron’s world is dividedinto four equal pies.

If “the sun isn’t shining” inone part of Chevron’s world—all four contain about 11 billionbarrels in reserves each—thecompany will simply go some-where else until better days return. By anyone’s estimation,there haven’t been many sunnydays in the Gulf of Mexico inmore than a year.

Despite that, Chevron is notgiving up on the Gulf, saysStephen Thurston, Vice Presidentof Chevron North America E&P.Indeed, amid the uncertainty offuture production in the Gulflast year, the company sanctioned$14 billion for three major capital projects.

Now they’re waiting to drill.

Commitment

According to Wood Mackenziereports, the Gulf of Mexico issecond in yet-to-be-found resources amongst global deepwater basins—Brazil isfirst. Coincidentally, Chevron issecond in terms of reserves andresource potential in the Gulf—BP is first.

“We’re committed to thedeepwater Gulf ,” saysThurston. “We have a hugeportfolio and we have a lot ofwork to do—we’re a year behind in our plans.”

The company’s plans were ofcourse stalled due to the Macondo disaster. At the time ofthe explosion, Chevron wasworking on its Moccasin exploratory well. More than 200days later, the Moccasin wellwas the first Chevron permit approved under the newBOEMRE regime. The companyhas several major capital projects in queue and 47 exploration drilling projects.

Among the major capitalprojects are the $14 billion insanctions for 2010: Tahiti 2, anexpansion of the Tahiti project;the Jack/St. Malo, the first largedevelopment in the WilcoxTrend; and Bigfoot, a 200 million-barrel discoverythat will use an extended tension leg platform.

“All these projects are moving forward, but the issue is

that we’ve got to get some wellsdrilled,” he says.

As was the case throughoutthe moratorium, Chevron currently has three deepwaterdrillships in the Gulf—the company plans to add a fourthand fifth at the end of 2011 andin 2012. The first new arrivalwill be the first commercializeddual-grade deepwater drillship.

“We’re going to need everybit of that capability to get thejob done, especially the workthat we missed during the moratorium,” he says. “We’reindebted to our business partnersand service providers that havehelped make it happen for us.”

Good news for All

To ramp up production in theGulf of Mexico, Thurston saysthat the industry must convincegovernment officials that exploiting the resource is safeand economically valuable.

“We in the industry know thatthe Gulf of Mexico is a world-class oil basin with tremendouseconomic value for producers,workers, the government—that’s good news for us,” saysThurston. “The concern is ourgovernment questioning

whether it’s good news forthem.”

But, he says those questionscan be answered definitivelywith a few key facts: One-quarter of the country’s oil isproduced from the Gulf alongwith 11 percent of the naturalgas while placing $22 billionper year in federal coffers.

“This domestic productionhelps overall economic valuefor the country—if you’re notbuying from U.S. producers,you’re buying from foreign producers. It changes the balance of international investment versus the nationalbenefit in our favor.”

He illustrated the economicbenefit of two of Chevron’s latest deepwater projects, BlindFaith and Tahiti, which were installed in 2008 and 2009.

“Those projects alone contribute about $5 billion peryear to reduce the U.S. balanceof payment,” he says. “Theypaid about $1.15 billion in taxesand royalties in the first year ofproduction and provided morethan one thousand jobs.”

The overall industry in theGulf provides 91,000 direct jobsand 292,000 supporting jobs.The direct employment jobs are

worth $30 billion, which generates $70 million in value-added economic benefit.

Back to work

There is light at the end of thetunnel, but the tunnel is verydifferent, he says. If the entireindustry continues to work together, the momentum canswing back in the industry’sfavor.

One of the greatest pendingchallenges, however, is not simply the huge backlog of permits within BOEMRE. Thechallenge is in the make-up ofthose backlogged permits—onthe whole, they are all approvedplans from preceding years.

“Our business thrives aroundnew exploration plans,” he says.“We’ve just seen the first revisedexploration plan approval wonin a year. There is a threat that,once we get started, we’ll haveanother fall-off because theplans for the next wave ofdrilling aren’t approved.”

Chevron has 15 wells in thepermitting process in addition toten exploration plans.

“The uncertain timeline hasus worried about our major capital projects,” he says.“We’re concerned about building $7 billion worth offloating production systems forthe Gulf—how many wells willbe approved when the systemsare installed—that’s part of ourchallenge.”

Another challenge is the lastpart of the new permittingprocess—proving the well design is compatible with theavailable containment plans.Thurston says it’s no minor effort to show that the well canbe completely capped and withstand the worst-case discharge flow.

“It’s calculation and modelingthat has to be very detailed toconvince them, well-by-well,that this is something that canbe done,” he says. “I think it’s abit extreme during these firstpermits—we think that overtime, we’ll swing that pendulumback a bit but right now, it’scausing time, more redesign,and it’s causing us to run a lotmore pipe.”

Stephen Thurston (Chevron North America E&P) says that despite last year’smoratorium, “permatorium,” and long-term uncertainty, Chevron invested another $14 billion in the Gulf of Mexico.

Chevron committed to Gulf of Mexico

27PESA NewsnEWs

Oil 101The Emerging Leaders Committee sponsored the

sixth session of the highly anticipated Oil 101. The

course featured experts from member companies

outlaying the drilling process from geology to end-

of-life reservoir issues.

Speakers for this event were:

Layout of the IndustryLisa Kinsey (National Oilwell Varco) 

History of the IndustrySteve Jacobs (Decision Strategies)Economics of the OilfieldSteve Jacobs (Decision Strategies)

Introduction to Geology and SeismicJames Geary (Hess Corporation)

Rig Systems and Drilling the WellDavid Reid (National Oilwell Varco)

Completions and Flow EquipmentMark Teel (Schlumberger) 

Well Servicing and Well End-Of-LifeWes Heiskell (Schlumberger)

Subsea Drilling & ProductionJohn Lyons (FMC Technologies, Inc.)

Refining & TransportationBrian Hadley (Mustang Engineering) John Lyons (FMC Technologies, Inc.)

Wes Heiskell (Schlumberger) James Geary (Hess Corporation)

Mark Teel (Schlumberger)

Tcf equivalent. Oil productionfor the play is expected to reach2 million barrels of oil per day.

“We have a nice position inthe play—about 65,000 acres—which may sound small, but as apercentage of market cap, wehave more exposure than anyother operator out there,” hesays. “We’ve tested about45,000 acres, and so far we haveeconomic profiles in nearlyevery section.”

In Rosetta’s Gates Ranch area,the company has 240 wellsslated for drilling.

“To finish those wells, we

have to spend another $2.5 billion,and our market cap is only $2.4billion right now, so there aresome challenges to financing,”he says. “If everything turns outto be good and we developeverything, we would need tospend $5 to $6 billion. These aregood problems to have.”

Conservatively, Limbacher estimates that the company willrecover about 7.2 Bcf equivalentper well, about 60 percent ofwhich is liquids. The wells alsorequire only one-third of the costto produce than hnother proper-ties in their portfolio.

“Once we saw numbers likethese, we sold off everythingelse to focus on the Eagle Ford,”he says.

A typical Eagle Ford well forRosetta descends to 7,800 feet.From there they begin a 5,000-foot lateral with 14 to 16 fracstages—each stage requires10,000 barrels of fluid and275,000 pounds of ceramicproppant.

Well costs have risen by morethan 20 percent in the past yeardue to both design factors andcost inflation. The company increased its laterals from 3,500feet to 5,000 feet and stage fracsfrom 10 to 15. Early on, theyspent about $5.35 million perwell and have climbed to $8.37million per well. About 50 percent of the well cost is theavailability and cost of stimulation services.

Fortunately, says Limbacher,the recovery increase has for themost part offset the increasedcosts.

Finally, he added that amongthe major needs in the play arehuge capital investments, morerigs and stimulation equipment,better water recycling technology,and health and safety vigilance.

“I’ve worked at three companies with significant presence in South Texas, and myexperience on the safety side isvery good compared to otherareas,” he says. “Last year, wetripled our contractor man hoursand our recordable incident ratewent down from 2 to 1.25.That’s a trend we need to figurehow to prolong.”

PESA NewsPetroleum Equipment Suppliers Association1240 Blalock, Suite 110Houston, TX 77055

First ClassUS Postage Paid

Houston, TXPermit No. 04805

JAN FEB MARBrazil 101,335 72,942 74,699Singapore 42,258 47,366 48,906Korea 33,300 36,367 48,265U.K. 19,577 18,974 23,834U.A.E. 26,516 16,249 15,457Canada 21,701 17,865 17,954Ecuador 10,034 6,956 38,022China 14,405 16,739 23,592Saudi Arabia 15,403 18,460 17,085Colombia 18,922 12,454 18,801Russia 11,674 19,206 14,283Mexico 14,336 13,661 12,058India 7,942 4,549 10,395Netherlands 3,154 5,874 12,484Italy 1,596 1,973 10,618

Subtotal: 342,153 309,634 386,452 All Other: 278,692 259,808 216,512 Total: 620,845 569,443 602,965

U.S. Oil and Gas FieldEquipment Exports

Top 15 Destinations for Q1 2011(in U.S. $1,000)

Source: U.S. International Trade Commission

28 PESA News nEWs

LIMBACHERContinued from Page 25

Ellis believes that many E&Ps are spending their cash flow, be it to maintainacreage positions or meet growth targets. Ifthose companies continue the trend, they’llneed additional cash flow, which means selling their mature assets. Eventually, LINNwill step in.

“We hope to be the ones to take over thoseassets,” he says. “Though right now, it’sslow—I haven’t seen many companies witha strong interest in selling their cash-flow

generating assets.”The largest of LINN Energy’s acquisitions

is in the Texas Panhandle’s Granite Washplay. The company has four rigs runningwith 204 drilling locations identified.

“We’re drilling about 35 operated wellsper year here,” he says. “From an initial production standpoint, these are goodwells—anywhere from 20 Mcf per day to 60Mcf per day, which is quite a bit higher thanour original estimates.”

Another major acquisition—their first intooil—was the Permian Basin. From the summer of 2009, LINN’s production increased from zero to 12,000 barrels per

day. Their position has 88 million barrelsequivalent proved reserves, 78 percent ofwhich is liquids.

The newest addition is in the WillistonBasin, part of the Bakken play. In anotherfirst for the company, they bought a non-operated interest.

“It would have been difficult for us to buyan operated position when we don’t have theservice company relationships or the equipment needed to develop the resource,”he says. “In a basin like this, if I can ride onthe coattails of a really good operator and accelerate my knowledge in that play, it’snot a bad way to enter the basin.”

ELLISContinued from Page 25