Marianne Kah spent 25 years as chief economist at ConocoPhillips, where she developed market forecasts and led scenario planning at the multinational giant. Today she is an adjunct senior research scholar and advisory board member at the Center on Global Energy Policy at Columbia University, and calls Santa Fe, New Mexico, home.
In a recent discussion with Capital & Main, Kah took a 30,000-foot view of the fossil fuel landscape with a focus on New Mexico, the nation’s No. 2 oil-producing state. She talked about the upcoming presidential election, President Biden’s energy actions, Vice President Harris’ policy shifts and former President Trump’s “Drill, Baby, Drill” energy policy. She also talked about the renewable fuels landscape and the need for wealthy countries to step up their spending on climate change adaptation.
This interview has been edited for brevity and clarity.
Capital & Main: Let’s talk about the rhetoric around oil and gas policy compared to what is actually happening, and maybe some prognostications about the future. Where is the industry headed?
Marianne Kah: People are accusing the Biden administration of reducing oil production from what it would have been. And, of course, there was that lease ban on federal lands, which had a direct impact on New Mexico. But I would argue that everyone in the industry saw it coming, and everyone stocked up on leases.
Now, had that ban lasted longer, it eventually would have had an impact, particularly since the only area that’s growing in the United States is the Permian Basin and the growth area really is in the New Mexico side. So that would have had an impact, but it didn’t last long enough to have an impact given that people stocked up.
You could also argue that the Strategic Petroleum Reserve was drawn down to keep oil prices lower than they would have been otherwise. And then you could also argue that the Biden administration has [implemented] a carbon emissions tax. Those are rules on methane emissions that the bigger guys were probably already complying with but the smaller companies — and there’s a lot of small companies in New Mexico — would have trouble meeting.
But to me, you add all that up, and it’s not that much. I think the oil industry is producing whatever it would have done, even if Trump was president. And the reason is I think that oil companies have been focused on capital discipline, share buybacks and consolidating.
Remember, the industry is focusing on consolidation, and that’s what they’re doing now, and there was substantial growth in U.S. production this year.
“A market has to develop for low-carbon natural gas because if there isn’t a premium for it, it will be hard for companies to have the money to invest to do it.”
Particularly in New Mexico. The rate of acceleration appears to be flattening, but production growth continues.
You’ve already drilled up the best acreage. And when companies consolidate, they high grade their portfolio so they spend less money or invest less money than the old two companies would have spent.
I don’t think productivity has come to an end. I think we will see, through artificial intelligence, more productivity improvements. But those are going to be slower.
In the Permian Basin, producers currently don’t know what to do with the natural gas they are producing.
That’s right, because it’s associated gas. And if you don’t have anything to do with that gas it eventually will choke off your oil production.
The one area, though, I think that the Biden administration has had an impact is on natural gas. This liquefied natural gas [export] permit pause, I think, is problematic. It’s trapping gas in the U.S. Gas prices are going to be much lower because there’s no market for the gas. And this is like a medium-term impact, though. It’s not going to happen in the next year. And Canada and Mexico are taking market share that the U.S. might have gotten.
The reason for the administration’s pause on liquefied natural gas export terminals was based at least in part on studies showing that the process leaks an awful lot of methane. Are you expecting companies to dramatically reduce methane emissions in the process?
I think they will. A market has to develop for low-carbon natural gas because if there isn’t a premium for it, it will be hard for companies to have the money to invest to do it. But I think that is underway, and I think we will see that.
Also, it’s hard to believe that liquefied natural gas exports have more methane emissions than coal. Methane is a far more powerful greenhouse gas in the short term than carbon dioxide. But in the long term, it disappears faster. So when people look at the methane intensity or comparing coal emissions to gas, they’re not really comparing apples to apples.
If you want to set a target and get to [an atmospheric CO2] target in 2050, methane is a lot better than coal, because it will disappear and coal emissions won’t.
But that short term is the most important time frame. It’s pretty clear from all the climate policy I’ve read that fossil fuel emissions have to be net zero by 2050 if there is to be any real hope for containing catastrophic climate change.
I think that is reasonable, but I view it as an opportunity. If we could reduce the methane emissions in the oil and gas industry now, that would actually be an opportunity for reducing greenhouse gasses. But when people compare gas to coal and say gas is worse than coal, that’s where I say, “Wait a minute.”
“If you have ‘Drill, baby drill,’ we’ll have too much production and very low prices.”
The various rules the Biden administration put in place didn’t really have any influence on production in the Permian Basin, the nation’s most productive oilfield. Do you see either Trump or Harris having an effect on production?
They can influence it by [tapping] the Strategic Petroleum Reserve. That drawdown lowered oil prices. But when I hear the “Drill, baby, drill” coming from the conservative side, I think, well, that’s not really good for the industry. If you have “Drill, baby drill,” we’ll have too much production and very low prices.
Right now we’re in a situation where OPEC [the Organization of Petroleum Exporting Countries] has 6 million barrels of production a day that they’re trying to bring back into the market. And if you look at future demand growth, the U.S., Guyana, Brazil and Canada fully satisfy that demand. So there really is no room for OPEC to bring that production back in the market. The world oil market does not need more oil now.
There are some bad things that could happen. When President Biden mentioned that one of the options Israel has was considering going after Iran’s oil infrastructure, that could really cause prices to go up. I mean, not that much, because, again, there’s 6 million barrels a day of spare capacity with OPEC, which doesn’t include Iran.
The problem would be: What does Iran do in response? If they use one of their proxies to attack Saudi or Abu Dhabi’s infrastructure, that is really what the worry is about. So we can go from a weak market to a tight market fairly quickly depending on what happens. Remember, if Iran decides to mine the Strait of Hormuz, 20% of the world’s oil exports go through there.
So if it weren’t for this whole Israel-Iran [conflict], you know, we’re in a fairly weak market.
So you think it’s unlikely that either a Trump or Harris administration would have a huge effect on production in the Permian Basin in, say, the next four to five years?
Yes. I think that’s true. Although it may have a slight negative impact if it was the Kamala Harris side, because of greater environmental regulations that some of the small producers and the small wells, like the stripper wells, can’t deal with.
So would new regulations from a possible Harris administration have much of an effect going forward, or would it only be with small producers?
For example, there’s a tax on methane emissions, and if you can control them and don’t have them, you don’t pay the tax. But some of the small producers, I think, are going to struggle. These are the ones that have just been venting and flaring, who haven’t even tried to get their gas in a pipeline. Or maybe they don’t have a large enough balance sheet and have trouble signing up for pipeline capacity — long-term pipeline capacity. So I can see some of the small producers struggling in that environment.
Now, should they be let off the hook just because they’re small? I mean, I know I have my personal opinion, but I won’t say what that is. I believe that every company should produce responsibly.
On the other side of “Drill, baby, drill,” the Biden administration opened bids for new drilling leases in the Gulf of Mexico and Alaska, but the industry didn’t really bite.
I had the opposite reaction. I thought there was more interest in the Gulf of Mexico than I’d expected, actually, in terms of just looking at the activity that’s going on there now.
But many of the federal leases didn’t get bids.
That is true. But with existing leases you’re seeing activity which you hadn’t in a long time. But why would you invest in something that takes seven to 10 years [before it’s operational] when you can invest on land in New Mexico and have production in 18 months?
I would say the Gulf of Mexico is not going to be able to compete with the Permian if you want to invest in the U.S. because of that short cycle time of U.S. land production. And the companies with the biggest interests offshore are BP and Shell, and they don’t have good land positions.
“There’s a long history of high gasoline prices causing people to lose elections.”
So is that part of what is driving development in the Permian Basin? It’s easier to make your investment back quickly because of fracking and the shale geology?
Well, it’s good geology, but most importantly, it’s close to market. And there’s highly developed pipeline infrastructure to get oil and gas to market. Gas takeaway periodically becomes a problem, but then you can still build pipelines there and take the gas away.
So I would say that’s why the Permian’s been successful, because it does have the most prolific wells. But it also has the infrastructure and the regulatory climate that probably allows it to flourish. And I’m talking about the Texas side, probably.
New Mexico is catching up. The only real drawback in New Mexico…
New Mexico has stricter environmental regulations than Texas does.
Yes. And production keeps going up.
Yes! Because it is very prolific.
Texas does have a growing problem with old, abandoned wells geysering oil-laden brine in west Texas ranchlands.
The abandoned well issue is a huge issue throughout the country. Absolutely. I can tell you what I would do if I were queen, but I’m not.
I’d love to hear what you would do if you were queen.
I would have higher upfront payments [against future potential abandonment]. But again, everything you do to help these problems particularly hurts smaller producers.
But these problems are part and parcel of this business in the first place. You can’t pick and choose your problems because you’re a small business.
It’s a business and you have to operate sustainably. It’s not only company size, it’s the fact that you have a lot of stripper wells, which are barely economic. So it’s hard to add extra costs to the stripper wells. That’s really the issue. And the smaller companies tend to have more of those wells.
You know, ConocoPhillips had a health, safety and environment department. That’s all they did. These small companies don’t really have whole departments that deal with environmental things. Maybe that’s yet another reason why the industry is consolidating, and it’s probably a good thing for this reason.
How much control does a president have over day-to-day gasoline prices? And would that somehow be different under a Trump presidency or a Harris presidency?
I don’t think it would. I think it’s very limited.
There’s a long history of high gasoline prices causing people to lose elections. That’s what Biden worries about because of the election. Which is why he’s drawn down the Strategic Petroleum Reserve, which I would not have done, given that it’s really of a limited size. And the world is getting even more volatile.
If you draw that down, you lower crude prices, which lowers gasoline prices. But we have a limited amount of it, and we’ve taken it down quite a bit, and it makes me nervous, given how volatile the world is.
“I would say, if anything, the energy companies have been hesitant to take any federal money because people will chastise them over it and demonize them over it.”
Doesn’t drawing down the Strategic Reserve also lead to increased gas prices when you fill it back up?
That was the intent. And the Biden administration, in all fairness, said that when oil prices got below a certain level — I think it may have been $75 a barrel — they would start refilling it. So, yes, I think they have been trying to refill it.
But the problem is events keep happening like this latest one with the fear of disruption of oil infrastructure in the Middle East.
How do you think the green energy, renewable strides that are being made, particularly under the Biden administration, are affecting what happens with fossil fuel production? Exxon and BP both had plans to become broader energy portfolio companies, rather than simply fossil fuels. But they dropped those plans.
Because they lost money doing that. Part of it was the high interest rates. But also I think they bid too high to get into some of those projects, because their shareholders — with the European companies, particularly the shareholders — were pressuring them to do that. And so they spent too much money on these projects and therefore got low returns on them.
It’s not clear to me that the oil majors are the best people to invest in renewables. They’re not good at dealing with regulatory environments, and the power market is certainly all about that.
The one thing I would say is for wind. They’re landowners, so they can invest [in wind farms] just because that’s their competitive advantage. But I don’t necessarily think that they are the ones who should do that investment. I think we need that investment, and I like the Inflation Reduction Act, and I’m glad that we’re incentivizing that investment, but I don’t necessarily think that [oil companies] are the right people to do it.
Exxon is investing in carbon capture and storage because there’s a direct competitive advantage because they’re good at doing down-hole things. But I saw an article the other day saying that some of the major producers were saying that they don’t want the Inflation Reduction Act to go away. They want to use it.
And the environmental side says that oil companies are seeing billions of dollars in free government money from the Inflation Reduction Act and going for it.
But that’s exactly what the Inflation Reduction Act is about! Getting companies to invest in things that they weren’t investing in. That is exactly what it’s for. So I agree with it.
You’re framing it in a way that it’s like they’re doing something wrong. In fact, I would say, if anything, the energy companies have been hesitant to take any federal money because people will chastise them over it and demonize them over it.
“The problem isn’t that you need four hours of backup if the wind isn’t blowing. The problem is you may have a season with low wind. Then what do you do?”
Do you think we may be at a point where renewable energy production is taking a bite out of fossil fuel production?
It certainly doesn’t affect oil production. It affects [natural] gas production, because gas is the marginal fuel you would add to have more grid power. And if you’re replacing that with renewables, you’re going to be backing out gas, because natural gas has the highest variable cost of all the power plants.
Think about it. You’re buying gas as opposed to coal, which is cheaper, or nuclear, which is all capital and has zero variable costs. You’re going to roll out the natural gas plants last. So they’re not operating very high, because wind and solar have taken some of their market share. So that’s one of the reasons why we have weak natural gas demand in the U.S.
I still think we need those investments. And I think with artificial intelligence and all of those big data models, we are going to need gas and more power in the future. You can’t keep adding intermittent supplies to your grid unless we can find a way to have batteries be lower cost and actually last.
The problem isn’t that you need four hours of backup if the wind isn’t blowing. The problem is you may have a season with low wind. Then what do you do? And we don’t really have a good mechanism for replacing gas with renewables for that, so that is going to be a problem balancing the grid. Particularly if we’re going to go to electric vehicles and depend so much on the electric grid. I think we do have a big problem with that.
But we do need to find a way to make renewables work. Absolutely. We need to find a way to deal with the intermittency and have a better grid.
The big question we haven’t talked about is that scientists say the only way to get a handle on global warming is to stop burning fossil fuels. So how do we do that? As you have pointed out, the demand for fossil fuels keeps increasing.
That’s why I say you need to do everything possible. You need huge investments in renewables. You need big investments in carbon capture and storage. And you ought to be doing them as fast as possible.
If you could turn carbon and hydrogen — using renewables to get hydrogen — into a gasoline equivalent that you would actually put in the pipeline system … I mean, it’s expensive, but we know how to do it. I think we need to advance all of those things as quickly as possible — but not stop investing in oil and gas until you actually are seeing that impact. Otherwise you’re going to have a supply disruption.
I also think people need to focus more on spending money on adaptation, because it’s not obvious we’ll be able to do enough, fast enough. Seriously, we are not spending enough money on adaptation, or hurricane relief or hardening the grids so people don’t lose power for weeks at a time like I used to when I lived in Houston. You know, we need to be spending more money on that. And it doesn’t mean you stop investing in renewables. I think you need to do all of the above.
I don’t believe governments can do enough fast enough to prevent [global warming]. So I think we need to start spending money on adaptation right away, and much more than we’ve been spending.
