Written by Larry Kudlow
Kudlow: Alright, drill, drill, drill. So here to talk about the whole energy situation is James Hackett, president and CEO of Anadarko Petroleum. Mr. Hackett, welcome. Let me just ask you, drilling, this big debate, you know all about it. Ending the moratorium. Decontrolling. Allowing us to produce more supply. First of all, let me get your quick take. How long would it take to bring some oil online if we go to the Outer Continental Shelf?
Hackett: Generally five to seven years from the initial leasing until you actually have production. And we’ve proven that in 8100 feet of water, in a platform that we operate in the eastern Gulf of Mexico right now.
Kudlow: So why are these senators – and I’m not even gonna even say which political party they’re from, because I would never politicize an issue – why are these senators saying it would take five to ten years and the price impact wouldn’t be felt until 2030? In fact, listen for one second, it’s a non-senator, I’ve got some sound from former Energy Secretary Bill Richardson. Hang on a second. Here he comes.
[Bill Richardson video clip courtesy of CBS/"Face the Nation": “I was Energy Secretary, and I can tell you that every bipartisan administration has opposed offshore drilling for pristine reasons, the ecosystem. But also, the fact that you’re not going to get any of this oil out offshore for the next ten years, and prices won’t go down till the year 2030 according to the Energy Information Agency which is part of the Department of Energy."]
Kudlow: Mr. Hackett, you heard him. Ten years to get it out and then nothing until 2030 on prices. What’s he talking about?
Hackett: Well, I think that it’s one man’s view. We happen to be operators in the Gulf of Mexico. I don’t think Secretary Richardson actually did operate a well in the deep offshore areas. As I mentioned, we’ve got a world class project that is the deepest producing well in the history of the world. It’s providing clean, natural gas to America, about 1.5 percent of all of our gas supply. Everyday it’s being provided from a football field and a half sized environmental footprint, a two-hour flight away from the shoreline. So it’s not in any visual contact with any human being. These platforms have gone through 200-year hurricanes, back in 2005, without any environmental consequences. It’s a bit of a fiction hoisted on us by people who don’t know better.
Kudlow: Alright, I hear you. People who don’t know better. What’s the price impact and how much is out there? I mean, there’s a lot of estimates. What is it, 86 billion barrels in theory, maybe 20 billion barrels are going to be available and provable. What’s your take on the volume that you could put on the market? And when would the price adjust?
Hackett: Well I think that the price would adjust actually as soon as you started drilling it. There’s a psychology with regard to speculative elements in any commodity market, whether it’s grains, or metals, or oil and gas. If the world really felt that there were plenty of places to go look for oil and gas, the markets would start trading as if that were a reality. Today it’s quite the opposite reality, especially with the geopolitical elements overlaying that. So, every time we say to the world, ‘We want energy security, but we want you to produce it, and we’re not going to do anything,’ the elements in the trading community say, ‘well that means that access is getting tougher.’
If you want the things that everybody says we want, we should go and open up our own shores to drill. We can do it environmentally well. We’ve got the proven technology. And we don’t know how much is left out there. Every time we go and find new resources, we find there are more than we thought there were. You could have gone back fifty years, and said that there were less resources, now there are more because we actually went and did good science, produced it responsibly, and have found new horizons in deeper and deeper areas of the horizon to be able to test and bring out.
Kudlow: What about this other argument that is sort of the political talking points of one of the two major parties, although nobody is really totally clean on analyzing this. The leases. I heard a U.S. senator on one of the talk shows yesterday say well, ‘there’s 41 million acres worth of leases out there, but they’re only using 10 million.’ What’s that all about? What is your response to that argument?
Hackett: Well one, it shows a very poor understanding of how the oil and gas business actually works. It’s a bit like the real estate development arena. If you were developing a real estate development, you wouldn’t just do it on one acre, you wouldn’t just build one house. To make it economic you’d actually buy, let’s call it fifty acres and you’d build a housing development. In our case, we don’t just take just one lease to get a well drilled. We actually take several leases if we’re lucky enough to get them. It’s all competitively bid. The federal government collects billions of dollars from this stuff. It’s as if they don’t get anything if you listen to the soundbites. We also pay annual rentals.
So we’re putting together an economically developable area, because remember, we’re drilling miles into the ocean sometimes, miles into the ground, without knowing there’s anything there. So to assume it’s on that one acre that you actually bought is crazy. And so what we’ll do is we’ll actually get ten or fifteen leases, and then we’ll drill, and then we’ll figure out if it’s there or if it’s on the next lease next door. And these things take time. You have to permit them. You have to shoot seismic to be able to do the right science, image it below salt. And then you go and drill it, if you’re lucky enough to get a permit, after you’ve done all your environmental studies.
But they’re talking about offshore. You go onshore, there’s places where we wait on permits for two months to two years. And even though it’s leased, it can’t actually physically be drilled. And that’s what people don’t really understand. With the environmental restrictions and environmental lawsuits, there are lots of places where we hold leases, [but] we’re not allowed to drill because the federal government that leased it to us actually won’t give us the permits.
Kudlow: Yup. Alright before we break, let me just ask you a couple others. What would cap-and-trade do to drilling?
Hackett: Cap-and-trade would probably hurt drilling. Because there’s a lot of risk that it would not actually be implemented properly. And the unintended consequences of a very complex system, that’s administered by governmental agencies, would have to be one that I would predict would actually make supply harder to get to consumers which I think is a mistake.
Kudlow: What about those who are saying now the energy business in general is much too profitable, it’s time to charge a windfall profits tax and use the proceeds of that tax for consumers so they can buy more gasoline at the pump? What’s your response to that one?
Hackett: Well first of all, I hope any American that is as old as I am, and was around in the ‘70s, realized that failed once. We actually started importing about 13 percent more oil, after we slapped a windfall profits tax on it. That money is much better spent within the private enterprise sector that’s good at finding new supplies. You’re actually discouraging supplies from being developed. A much healthier tax is actually opening up access, where you actually generate tax revenues for the government from the additional drilling. You get supplies, plus you get additional taxes. And that’s where we ought to be headed. It’s good for consumers.
Kudlow: Do you have a problem giving some of those royalties to the states if they let you drill off their shores?
Hackett: We’ve been huge supporters of that because it provides them an incentive to provide education, coastal restoration or any kind of fish and wildlife type of activity. We’ve been very active as part of our association, we’re trying to get that done.
Kudlow: What about the shale story? President Bush talked about shale in his speech the other day. Green River Formation, they’re talking about maybe 800 billion in recoverable barrels equivalent. Some people like the Rand Corporation have said close to 2 trillion. And also the Bakken Shale formation, which is to the north of that. Are you doing any shale? It’s not drilling, I guess it’s extraction. Are you in that business? Is that a promising business?
Hackett: Well we have huge amounts of shale exposure if you will, because of our old land grant with the Union Pacific Railroad. But I think it is a long-dated technology. We tried it in the 70s. We will try it again ultimately if oil stays high. I think there are other answers we should be searching for as well. But I think everything is up for consideration in an environment where we ought to be looking for more supplies and more alternative fuels. Just remembering that we’ve got a bridge we’ve got to make until we get to that ideal future of alternative energy. And recognizing that gasoline doesn’t come from wind power. Gasoline doesn’t come from solar firms. Gasoline comes from sometimes, really bad alternatives like corn-based ethanol. And we’ve got to be real careful not to prescribe political solutions, as opposed to funding research and letting science lead us to the right answers.
Kudlow: …What do you say to the peak oil crowd? You don’t sound like you believe in peak oil.
Hackett: I think that the peak oil is determined by price. And I think that it is also determined by what you allow to be alternative forms of energy. I think there are places in the world where peak oil has not occurred. I do think that oil will not be able to grow to the sky in terms of supply, forever and ever. I think it’s harder to get. It’s getting more expensive to get. I think that we need to continue to develop a broad based fuel sourcing, including nuclear energy. But prices are having some effect. It’s both impacting demand, which we all need to conserve a lot more than we do. We’ve become a very lazy country since the late 70s. Nobody talks about conservation. They’re talking about taxing the oil industry, instead of talking about turning off your air-conditioners, or driving smaller cars, which is what we really need to do. It has that immediate impact.
Kudlow: Well isn’t the high price a blessing? Doesn’t the high price cause conservation? And doesn’t the high price cause production, if it were deregulated?
Hackett: Absolutely. It’s Economics 101. We don’t have to have the government necessarily solve this for us. But it’s not to say that anybody likes [higher] prices. Because it’s not necessarily good for companies like us. It’s not good for demand. But it is having the intended effect. People are riding in buses. They’re taking mass transit. And they’re [creating a smaller] environmental footprint by virtue of doing that. We are finding new supplies in more and more remote parts of the world where you can’t do that at $30 oil.
Kudlow: Alright, I got to take a commercial break Mr. Hackett. You’re gonna stay with us. I really appreciate your time very much, sir. Our distinguished panel is going to join us to drill down – pardon the phrase – on many of these issues we’ve discussed. By the way, Mr. Hackett is chairman of the board of directors of the Dallas Federal Reserve. So we might even go in that direction too. We’re for keeping America on the right track. You heard Mr. Hackett, we have a lot of drilling, profitably, to do. We can get it done. This is America. America first. Let us stay away from Saudi Arabia. We can do it right here. Kudlow and Company straight ahead.
Lawrence Kudlow is the host of CNBC’s Kudlow & Company (M-F, 7pm/ET), a host of WABC's "The Larry Kudlow Radio Show" (Saturdays 10am-1pm/ET), a nationally syndicated columnist and a former Reagan economic advisor. Larry is also a regular guest on Hugh Hewitt's nationally syndicated radio show every Friday night. CNBC's Kudlow & Company also airs on Sirius (ch.129) and XM (ch.127) weeknights at 7pm ET. More about Larry