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Douglas A.


PO Box 6603
Lincoln, NE 68506
(510) 432-1452
July 21, 2015

Members of the Senate Committee on Energy and Natural Resources

Lisa Murkowski
709 Hart

Jeff Flake
413 Russell

Maria Cantwell
511 Hart

Elizabeth Warren
317 Hart

Lamar Alexander
455 Dirksen

Cory Gardner
354 Russell

Al Franken
309 Hart

Ron Wyden
221 Dirksen

John Barrasso
307 Dirksen

John Hoeven
338 Russell

Martin Heinrich
702 Hart

Shelley Capito
172 Russell

Mike Lee
361A Russell

Mazie Hirono
330 Hart

Bernie Sanders
332 Dirksen

Bill Cassidy
703 Hart

Rob Portman
448 Russell

Joe Manchin
306 Hart

Angus King
133 Hart

Steve Daines
320 Hart

James E. Risch
483 Russell

Debbie Stabenow
731 Hart

Re: Oil Refining - Considering future eventualities versus the myopia of the present (letter #19)
Dear Members of the Senate Committee on Energy and Natural Resources,
As you create a comprehensive energy policy and legislation, consider this: If you believe
ExxonMobils diversification strategy will help them survive, what happens to downstream
refinery feedstocks as upstream production declines due to continued low prices of crude oil?
Whether the international or domestic price of crude is held down by over supply in the U.S.,
Saudi Arabia, Iran, or OPEC in general, you know what will happenindeed, what already is
happeningas downstream feedstocks decline and dwindle to a trickle. ExxonMobils (and
others) downstream end of the boat will sink right along with the upstream end of the boat.
A great strategy? ExxonMobil has that covered with its plan to survive on gasget out of oil.
What about the consumers they leave hanging with insufficient supply? Will chaos reign?
I can see the headlines now: ExxonMobil CEO Leads Big Oil to Massive Fleet Acquisition
of Electric Vehicles as LNG Exports Drive Profits.
Ironic outcome. Is it what the Senate Committee on Energy and Natural Resources envisions?
I dont see the petroleum industry making decisions in the Pubic Interest or National Interest.
I believe that We the People need to take control of oil industry decisions. It is in our interest.
Sincerely yours,

Doug Grandt


Why You Should Short Public Oil Companies

BloombergView | Carl Pope | July8, 2015 |
U.S. coal companies have lost about 75 percent of their market value during the bull
market that began in 2009. Oil and gas companies, which account for60 percent of U.S.
carbon emissions, and about 84 percent of fossil fuel market cap, have fared much
better. But risks abound.

Publicly traded oil and gas companies have access to only 10 percent of the worlds oil
reserves. As it happens, their reserves are often located in deep water far from shore or in
the complex geology of tar sands, making them among themost dicult-- and
expensive -- to extract. Readily accessible, inexpensive crude reserves in places like
Russia and the Persian Gulf are set aside by governments for their own national oil

That didn't seem to matter when prices were high.From 2004 to 2013 the real price of oil
almost tripled. Demand jumped by 13 percent. Customers kept driving and flying even as
costs soared. Pumping $25/barrel crude and selling it for $40/barrel is a good business.
Selling it for $120/barrel is a spectacular business. Saudi Arabia, Russia, Kuwait, Norway,
Nigeria and Venezuela reaped bonanzas. So did the oil majors -- BP, Chevron, Exxon
Mobil, Eni, Phillips, Shell and Total profited from legacy oil costing them only $30 to $60
per barrel.

In 2012 Bernstein analystsproduced a sobering lookat the industry fundamentals. With

oil above $100/barrel, Bernstein found that the 50 largest, publicly traded, non-OPEC oil
and gas companies were under financial stress. Average net income margins had
dropped to 22 percent, 30 percent lower than when oil was priced below $40/barrel. The
replacement cost of oil -- the long-term marginal cost of production -- had increased by
44 percent in a single year. Easy oil had already been found. When replacement costs
were factored in, the average marginal cost for non-OPEC producers was $104.50/barrel.

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Net income margins in the sector are now at the lowest in a decade. This is not
sustainable," the Bernstein report stated. "Either prices must rise or costs must fall."

In eect, publicly traded oil and gas companies had become dependent on ever higher oil
prices to match their ever higher costs of discovery. Even the biggest and richest of them,
Exxon Mobil, increasingly taps expensive unconventional sources to maintain
production.From 2006 to 2013 the percentage of Exxon Mobils proven reserves made
up of tar sands and heavy oil increased from 15 percent to 32 percent. Relying on a larger
share of more expensive oil reduced Exxon Mobil's margins and returns. Its stock value
trailed the S&P 500 by 40 percent during those seven years-- even as the company
used the vast majority of its profits to buy back shares to sustain their value. Two years
ago the situation was suciently dire that the Economistproclaimedthat the day of the
huge, integrated international oil company is drawing to a close.

From 2004 to 2014 oil companies kept investing more than a half trillion dollars a year in
finding and developing new fieldsfor which the break-even point would be $75-to-$125
per barrel. Development completed, companies started pumping the new crude. Demand
didnt rise as fast as expected; supply outran it. In the summer of 2014 the oil market was
suddenly glutted. A 5 percent shift in the supply-demand ratio cut prices by more than 50
percent, from $110/barrel to below $50, then back into the $50-to-$60 range.

Chevron cancelled its stock buy-back program, but even so is in anegative cash
flowposition. Goldman Sachscalculatedthat more than half of the new oil projects
awaiting investment go-ahead would be uneconomic at todays prices, leaving in limbo
$750 billion in investment and 105 million barrels a day of potential production.

As prices fell, the first Canadian tar sandsoil companiesbegan to file for bankruptcy.
About 1.4 million barrels a day of tar sands projectswere put on hold or cancelled.Oil
and gas revenues in Alberta are down almost 50percent. Independent U.S. oil
producers scrambled for cash to service their debts. Bankers worried that oil and gas
debtcould be the next sub-prime crisis.

Many new projects are losing money. Due to sunk development costs, however, their
owners keep pumping to generate cash flow -- keeping the market soft. North American
explorationdropped by 35 percent; the U.S. rig countis down more than 50
percent.Oil majors slashed their exploration budgets by up to one third. Productivity and
output kept rising. (Meanwhile,BP just agreedto an 18.7 billion settlement of claims
stemming from the Macondo oil spill in 2010.)

The market initially didnt seem particularly worried by all this. Exxon Mobil stock, for
example, is down only 10 percent from its peak. But if public oil companies couldnt make
robust profits when oil was priced at more than $100 per barrel, how will they fare longterm if a barrel of oil is priced in the $50-to-$80 range? Capital and operating eciencies
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may be leading to greater productivity, creating the potential for the break-even point to
drift down the price range. But how low can they aord to go?

Worse, the world is not especially eager to remain hooked on oil. California has committed
to cutting oil consumption by 50 percent. Electric vehicles have tiny market share, but
saleshave more than doubledevery year for three years. Natural gas as a U.S. trucking
fuel isgrowing15 percent a year. Along with radical increasesin vehicle eciency, these
trends will all combine to undermine growth in demand for oil for years to come.

A looser oil market wouldnt end global use of oil. But demand growth could easily slow
enough that legacy production, along with new OPEC and Russian fields and the most
ecient U.S. shale deposits, could satisfy the market. Prices would fall even if demand
held steady. In that situation, any public oil company that continued to invest heavily in
expensive new projects would be burning up shareholder value.

It could get grimmer still. The Saudisjust suggested-- before retracting the statement -that the era of fossil fuels might end in the middle of this century. Suppose they actually
believe it -- and even hedge against it? Suppose the Kingdom tries to sell o its oil before
the price collapses. What would that do to the market for Shells costly Arctic drilling? For
the complex, dirty extraction of Canadian tar sands? Ultra-deep Brazilian pre-salt wells in
the South Atlantic? Even some of the more expensive U.S. shale wells?

It wouldn't take much to send such a market spiraling down. By contrast, the reverse path
back up to profitable $100+ prices seems very steep.

For some time to come, oil as a commodity will still enjoy powerful incumbency
advantages. But as market pressures intensify, publicly traded oil companies will be
increasingly squeezed by OPEC, Russia, electric vehicles and other competing energy
sources. Barring another revolution in shale technology, the majors would have access
only to the highest-cost segments of a potentially oversupplied market. That market is
inherently volatile, and the industry is vulnerable. Divestment from oil may be a moral
cause for some investors. Others -- those seeking profit over the long term especially-might want to follow suit simply to save their shirts.

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