Speech March 12, 2015 Building a Future of Energy Leadership Rex W. Tillerson Chairman and Chief Executive Officer Economic Club of Washington, D.C. Washington, D.C. It’s an honor to be back at the Economic Club of Washington, D.C. It is a special pleasure to address the Club at what I view to be such an historic moment for the energy industry – and at a time when our nation has an extraordinary window of opportunity before us. Over the past few years, the achievements of the energy industry have become better known than perhaps at any other period in our history. Our industry has deployed technologies and techniques that are unlocking vast new supplies of oil and natural gas. The result of this sustained investment, innovation, and entrepreneurship has been a New Era of Abundance in North American energy. Over the past few months, the impact of these innovations has become especially clear to the world energy markets. We have, in turn, seen markets adjusting to fundamental changes in the global supply and demand for oil. Yet, despite the enormous economic potential of these new supplies, the future does remain uncertain. That is why I appreciate speaking to this gathering. We are meeting in a city whose public policy decisions will have a powerful influence on the energy sector and on the potential for greater innovation in the future. It is no exaggeration to say that these policy decisions will help determine the destiny of billions of people around the world who are seeking better lives – lives that require access to reliable, affordable energy. In the months and years ahead, the public discussions of energy policies will only grow in importance. These policies will not only be shaped by the relationship between Congress and the president, they will be influenced by – and will even help frame in all likelihood – the race for the White House. In short, now is the time to discuss the promise of North American energy and to deepen our knowledge of the policies the world will need to unleash growth and opportunity for the decades that lie ahead. So, tonight, I will briefly discuss the innovations that led to this historic moment because I think it is important to understand that; how these innovations have contributed to our nation’s economic growth; and why our industry – and the global economy – will need sound economic reasoning and more sensible policies to fully leverage this moment to meet the energy and the environmental challenges of the future. Innovation and the Creation of a New Era Contrary to some claims – and many sensational headlines – this New Era of Abundance is not the result of a single technology, nor is it the result of one source of energy, nor is it even a lucky break. This moment is the result of decades of sustained investment, innovation, and collaboration across the industry – really across the whole world. It is the fruit of innovative work on many frontiers, and it is a tribute to scientists, engineers, and entrepreneurs who labored on time horizons few outside of our industry can comprehend. In Canada, industry innovations have made it possible to safely and responsibly develop that nation’s vast oil sands. Technology has enabled access to proven oil reserves of approximately 170 billion barrels. And despite what some claim, the greenhouse gas emissions from oil sands development are similar to many other heavy crudes which we produce from places like California or that we are importing from places like Venezuela. In the deep waters of the Gulf of Mexico, advanced technologies have opened up unprecedented opportunities in offshore exploration and production. In less than a generation, we have progressed from engineering concepts that used to hand-drawn on drafting tables to sophisticated rigs that are controlled by sophisticated computers and GPS systems that can operate in ultra-deepwater depths of more than 10,000 feet with wells that extend five miles below the ocean floor. With these capabilities expanded through new investments, we project that over the next 25 years, deepwater oil and gas production worldwide is going to double. In the United States, we have seen another remarkably unexpected – and far-reaching – breakthrough firsthand: The advanced integration of hydraulic fracturing and horizontal drilling. These technologies and techniques have enabled the development of our nation’s shale gas and tight oil resources. In just a few years, they have rewritten the North American energy story – and with it, the future of global energy markets. The United States is now the No. 1 producer of total energy coming from oil and natural gas. And when combined with our neighbors to the north and the south, the impact of our innovations are even more striking – and more promising. Mexico, Canada, and the United States are well positioned for unprecedented energy production. And with Mexico’s historic energy reforms now in motion and the hope that U.S. policy can respond to the opportunity before us, North American energy leadership can continue to grow through peaceful trade and cooperation. A New Era and the Impact of Energy For our nation, our industry’s investments and innovations are fueling economic growth, they are increasing manufacturing competitiveness, and they are providing environmental benefits. During a period of recession, slow growth, and falling labor participation rates, the energy industry has been an economic engine for the entire nation. According to one study by the Perryman Group, the total economic benefits of oil and gas exploration-and-development activity (including the multiplier effects) are estimated to include almost $1.2 trillion in gross product per year, as well as more than 9.3 million permanent jobs in the United States. The study also found that the economic benefits of oil and natural gas production have more than doubled over the past 10 years even after accounting for inflation. Although the industry – including spinoff activity – is about 6.7 percent of the U.S. economy, it has accounted for more than 30 percent of the growth since the trough of the recession. Domestic energy production is bringing extraordinary economic benefits in energy-producing states like Texas, Pennsylvania, North Dakota, and Oklahoma. But, as IHS Consulting has found, the positive economic effects are being felt in every one of the lower 48 states, including those that do not produce any oil or natural gas. Meanwhile, because natural gas emits up to 60 percent less carbon dioxide than other major sources when used for power generation, our abundant and reliable supplies have been instrumental in reducing our nation’s carbon dioxide emissions to levels not seen since the 1990s. What’s even more remarkably, these gains have come despite the fact that our economy is 60 percent larger and there are 50 million more consumers of energy in our nation today than there were in the 1990s. These vast, new supplies of oil and natural gas being produced from America’s shale regions are also creating energy diversity, greater reliability, and increased flexibility for the global energy portfolio. North American energy has come online and helped offset the production losses due to geopolitical upheaval and economic mismanagement in some of the world’s key oil-producing countries. In fact, North American supplies have gone beyond providing price stability. We have actually seen a significant decline in prices since last summer. For the consumers and economies of the world, a New Era of Energy Abundance will continue to bring benefits. But for nearly every participant in our industry, the current downward swing in prices has created new pressures. In the short and medium term, our industry will have to work more effectively and efficiently than we have ever before. Companies will need to have a relentless focus on things we control – like costs – and an ongoing emphasis on fundamentals throughout the commodity-price cycle. We will need even greater investment discipline. We will need to create our own margins. And we will need to find ways to work together to apply new technologies and innovative thinking. For the companies that find these efficiencies and these competitive advantages, there will be tremendous opportunities ahead. The reason is simple and undeniable: The world’s demand for energy is not diminishing. In fact, it is expected to grow significantly in the coming decades. Building a Brighter Future But all of these energy gains – and our economic dynamism – are at risk if we fail to seize this historic moment. We need sound energy policies – policies that are equal to the innovation that has redefined the modern energy landscape. We have no reason to keep policies in place that reflect an age of scarcity and fear. It is time to build policies that reflect our newfound abundance – that view the future with optimism, that recognize the power of free markets to drive innovation, and that proceed with the conviction that free trade brings prosperity and progress. In this New Era, government and industry each have a very specific role to play. First and foremost, we in industry has a responsibility to build and maintain public trust by upholding the highest standards of safety and environmental protection – from the way we plan and execute our investments to the way we construct and complete our projects. I believe our work in some of the most challenging regions of the world and in some of the most delicate ecosystems has shown we share the American commitment to responsible environmental stewardship. Second, and just as important, government has a responsibility to promote the rule of law, maintain a level playing field for all competitors, and enable the investment that makes long-term planning and innovation possible. In short, North America’s energy leadership is more than simply a function of the continent’s resource endowment. As so many other parts of the world have shown, innovation in the energy sector depends on the stability and rationality of the tax, legal, and regulatory frameworks that are put in place by government. Government is also needed to open up markets, strengthen international ties, and promote free trade, particularly when this means eliminating unwise barriers it had previously erected. I see three areas that would help lock in our energy gains and further strengthen our North American energy leadership. We need to promote free trade in natural gas and crude oil, approve critical infrastructure projects, such as the Keystone XL pipeline, and we need to return clarity and transparency to our regulatory processes. I will say a few brief words on each of those. Our vast new supplies of energy from the nation’s shale regions demand that we apply the best of economic reasoning to this opportunity. And that reasoning tells us that it is time to end the bias against energy and allow for free trade in oil and natural gas. Whether we are talking about the export of liquefied natural gas or ending the ban on crude oil exports, economists and leaders from across the political spectrum agree that free trade in energy will lead to increased investment, increased job creation, and, importantly, increased energy production. Clearly, more supplies in the marketplace will also help ensure reliable, affordable energy for all consumers. Allowing more LNG exports would also put the United States in the position of contributing to further reductions in greenhouse gases by making it possible for more nations to turn to cleaner burning natural gas. Applying sound economic logic to energy would also mean allowing free markets to determine the viability of our infrastructure projects. Unfortunately, the industry has had to grapple with tremendous uncertainty, delays, and an ongoing lack of transparency in the effort to advance infrastructure projects. This is not consistent with our highest democratic ideals or with the openness and integrity that make free markets work. Nowhere has this been more apparent than in the way the Keystone XL pipeline has been handled. The United States and Canada both need this vital pipeline for delivering oil from Alberta to refineries on the Gulf Coast. Keystone XL would improve U.S. competitiveness, increase North American energy security, and strengthen the relationship with one of our most important allies and most valued trading partners. But approval for the pipeline has been taken out of the hands of experienced career officials, and it has become a tool of political manipulation. It’s important to remember the rigorous requirements that have already been met by the Keystone XL. More than six years ago – six years – the process for approval began. Since 2008, government and industry have held more than 100 open houses and public meetings, and gathered thousands of pages of information and documentation in response to questions submitted by local, state, and federal agencies and stakeholders. Throughout the process, the State Department studied 14 different routes and issued a draft environmental impact statement (EIS), a supplemental draft EIS, a final EIS, and a final supplemental EIS. After all this work and public comment, the State Department’s own findings indicated that the pipeline would pose no undue risks to people or the environment. In 2012, the inspector general of the Department of State followed up, determining that the three-year process for evaluating the pipeline’s route was conducted appropriately. Since then, the project has been in limbo – even as industry has responded to each new demand, including finding a new route to avoid sensitive areas in Nebraska. Despite these agreements, the State Department recently hit the reset button once again by asking for further reviews from federal agencies. Even as the recent February 2 deadline for further review came and went, the State Department refused to disclose agency comments. The EPA, however, did share its opinion: a recommendation for further review. As the Toronto Sun declared in a headline, such a move was “political, not scientific.” At the end of last month, the president vetoed the congressional legislation to authorize Keystone XL – extending the limbo status of the pipeline indefinitely. Unfortunately, the regulatory delays and legal wrangling over the Keystone XL pipeline are not an outlier. It is just the poster child for a lot of other regulatory processes that are broken. They are a symptom of a much deeper problem affecting our nation’s infrastructure, trade, and our ability to compete. Increasingly, the U.S. regulatory process stifles development and innovation. Its complexity – from costly delays and re-works to duplication of oversight and approval – often means it takes years and millions of dollars to acquire necessary permits. Even then, the recipient of the permit or the agency issuing the permit may be challenged in the courts, further jeopardizing projects in our national and economic interest. Infrastructure projects and even clarifications on rulings have too often become mired in political gamesmanship or bureaucratic uncertainty. Such developments defy our nation’s shared commitment to transparency, accountability, and the lawful and respectful resolution of policy differences. The inconsistent and capricious handling of regulatory approvals is all the more concerning given the growth in the regulatory burden. For instance, in 2013 alone, the federal government finalized 3,659 new rules and had proposed another 2,594. It is a fundamental responsibility of democratic governance to provide a clear and certain pathway to regulatory compliance. And as regulations multiply, it is imperative that we encourage bipartisan discussion of the costs and benefits of regulations. But as many of you know, in Washington’s current climate of partisanship the idea of meaningful cost-benefit analysis for regulations has become controversial. It should not be. In fact, comprehensive and science-based cost-benefit analysis should be the foundation for respectful, constructive, and meaningful bipartisan problem solving. As a study from the Business Roundtable recently found, “As the number of federal regulations continues to rise, cost-benefit analysis plays a vital role in helping policymakers strike the right balance between the need to regulate and the need to foster innovation and economic growth.” For this reason, we must support efforts to enhance transparency and public access to data, strengthen oversight, and improve accountability in the development of regulations. This will help create smarter regulations – regulations based on evidence-based science, that adequately consider costs and benefits to society, and that are the product of robust and replicable methodologies. In addition, regulatory programs – especially major ones – should undergo periodic review, with review efforts focused on identifying areas of duplicative, obsolete, or overlapping regulation. Economists Nicole V. Crain and W. Mark Crain recently found that the price tag for all these regulatory burdens reached more than $2 trillion a year in 2012. And when the National Association of Manufacturers surveyed U.S. manufacturing, nearly 90 percent identified federal regulations as a barrier to their business. The Business Roundtable has warned that the cumulative cost of federal regulation has reached a “tipping point,” and the consequences are taking a heavy toll on businesses, consumers, and the broader economy. There is a reason that new business formations are at a 35-year low. Now is the time to rebalance the equation to encourage entrepreneurs and job creation. Reform must require federal agencies to justify any regulatory action by demonstrating a compelling public need caused by a significant failure of the private markets. Conclusion: Rebuilding Public Dialogue With free trade in energy and common-sense regulatory reforms, the U.S. energy industry can strengthen U.S. energy security and this has enormous foreign policy implications as well. We can continue to pioneer the innovations that make possible the safe and responsible development of energy. No one can say for sure how the industry will evolve over the next few years or where it is going to go. But one of the enduring lessons of our industry is that sound policies reward wise and disciplined investments. These policies spur economic growth and improved environmental performance. And they lead to greater peace and prosperity. In the months and years ahead, we must all work to enrich and inform our public discussions about energy. By increasing understanding and encouraging respectful, science-based dialogue, I am confident we can achieve our shared aspiration to build a nation of growth and opportunity for all – while serving the needs of the rest of the world by lifting them out of poverty. I thank you for your kind attention.