Natural Gas – The Gift Remarks by Jim Mulva CERA Conference March 9, 2010 Thank you, Dan.

I remember 20 years ago when a bright young man wrote a book about oil. He named it “The Prize” – and the rest is history. “The Prize” captured a fundamental truth, oil is a precious commodity that powers the world economy. There was little mention of natural gas. Historically, it never matched oil in importance. But look at gas today – the world’s third-leading energy source, with room to grow. In fact, if oil is “The Prize,” then natural gas is “The Gift.” Nature’s gift to the people of the world. For many outside our industry, it is an unexpected gift. They believe that renewable energy will quickly and easily replace hydrocarbons, and cure all that ails us. But it is clear from the experts that carbon-based fuels, though in cleaner forms, must keep carrying the load. Renewables just can not ramp up fast enough to replace them. But where will this energy come from? Fortunately, Mother Nature, human ingenuity and technology have provided the answer. That is, if we are allowed to unwrap the gift. Let’s consider what gas can mean for the future. The real future, not the pipe dreams of the “hydrocarbon deniers.” These are the well-intentioned people who support renewables at any cost, and oppose hydrocarbons at any consequence. They seem not to realize that platitudes are not BTUs. That it will take abundant and affordable energy to enable further human progress. Let’s spin the clock forward 40 years, to 2050, and look at a possible future if government chooses the right policies. By then, it will be a different world, with 9.2 billion people, 35% more than today. It will need more energy, not less, despite higher efficiency and conservation. And tomorrow’s energy must remain affordable. The idea that all forms of energy are needed will long be accepted. So will a sense of shared responsibility for environmental stewardship. Many people will drive electric cars. Fleet vehicles, trucks, buses and trains, will use natural gas to reduce both emissions and maintenance. Housing will use active and passive solar power, and smart meters. Living “off the grid” will be popular. In our industry, we will drill wells with, who knows, perhaps laser beams. There will be technological advances that would seem inconceivable today.

Natural Gas – The Gift


Vast arrays of wind-powered turbines will be online. So will solar and nuclear power. But they will not be the biggest electricity sources. After all, there are only so many places where massive development is economical, and publicly acceptable. And only so much government funding to subsidize the renewable sources. Natural gas will remain a leading base-load power generation and heating source, due to its cleanliness, abundance and reasonable cost. Through its flexible reserve capacity, when the wind dies or the skies are cloudy, gas will backstop wind and solar power. Here in the U.S., gas production will be more national in scope. New York, Pennsylvania, Virginia and other states will join the major producers. They will gain the job creation and industrial development for which Texas is known today. On the oceans, an expanded fleet of liquefied natural gas tankers will tie the world together. Neither remote supplies nor consumers will remain stranded. Coal will remain essential too, through its abundance and low cost. But it will be used in more advanced ways. Among them, through oil industry technology, it will be converted into gas or liquid fuels. Oil will continue as a transportation fuel, wherever alternatives are impractical. And it will be essential for lubricants and petrochemicals. Supply will largely come from unconventional sources, like Canada’s oil sands, and shale rock in Colorado, Utah and Wyoming. To facilitate recovery, natural gas will provide clean heat and power. And everywhere, new technologies will reduce greenhouse gas emissions, with processes in place to capture and sequester carbon. So by 2050, natural gas will have potentially helped meet four great energy challenges: ● First, achieving both national and world energy supply security. ● Second, providing consumers with affordable energy. ● Third, driving economic prosperity and job creation. ● And finally, reducing greenhouse gas emissions. Now, the first question the hydrocarbon deniers would ask is, “Where will all that gas come from?” The Natural Gas Resource Base To answer, let’s consider the rebirth of a once-dying U.S. industry. Natural gas consumption here peaked nearly 40 years ago. Over the next three decades, it fell by 25%, and reserves fell by nearly half. Conflicting, changing and short-sighted government policies played a major role. As recently as 2003, the National Petroleum Council as well as others warned that imported LNG would be increasingly necessary. But since then, the entire market has turned: ● Production capacity is rising,

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Prices are down, Reserves are growing, and We foresee a century of domestic supply.

Some people even forecast the U.S. becoming an LNG exporter. What happened? Never underestimate the power of technology to drive human progress. There are few remaining conventional gas prospects here. At least, not in the areas where we are allowed to drill. So the industry turned to the less-desirable unconventional reservoirs. These typically have “tight” rock, which does not flow nearly as well. To make this rock productive, over a 60-year span we developed new and sophisticated technology. Completion techniques, hydraulic fracturing, drilling and seismic imaging all advanced. As a result, unconventional gas is now a key part of U.S. reserves. Then in the 1980s, we realized that coal formations, which often contain so-called “mine gas”, might be made productive. A new process called “cavitation” enabled the gas to flow. We also became better at finding the best sites to drill. As a result of all these steps, unconventional gas and coalbed methane helped stop the decline in U.S. gas reserves during the 1990s. Demand began to grow. ConocoPhillips increased our North American gas exposure, and so did others. Meanwhile, another technology came along – horizontal drilling. Today, lateral extensions up to 8 miles are possible. A single well can have several, spread like the fingers of your hand. These techniques are expensive, and feasible only in certain situations. But again, technology opened new horizons. Now, another truism. Never underestimate human ingenuity. It occurred to the industry to reexamine shale – a common source rock that was too tight for production. But horizontal drilling exposed more rock to the wellbore. And fracturing enabled gas to flow. This opened new drilling trends and revolutionized the industry. And rather than being expensive, shale gas is often the low-cost source, commercial at $4 to $7 per Mcf. The same success now appears possible in Canada. And these technologies can be applied elsewhere. Exploration for tight gas, coalbed methane and shale gas is under way in more than a dozen other countries. More will follow. Consider the ramifications. The world uses 107 trillion cubic feet of gas a year. Proven conventional reserves are 6,500 TCF, a 60-year supply. With undeveloped conventional resources, there is potentially more than a century of supply. Now, adding unconventional gas expands total resources to more than 38,000 TCF, or multiple centuries of supply.

But this may only be the beginning. Up to 700,000 TCF of methane hydrates lie beneath the ocean floor and the Arctic. They have never been produced commercially, but research is getting us closer. It may even be possible to liberate the methane by pumping carbon dioxide into the formations. That would be a dual energy and carbon storage solution. ConocoPhillips is in the early stages of researching this. The full magnitude of nature’s gift is now apparent. Natural gas is more than a bridge fuel. It is part of the long-term energy solution. There is an old U.S. saying, “Don’t look a gift horse in the mouth.” It basically means, “Appreciate what you have been given.” But we face two big obstacles in delivering the gift of natural gas. We must overcome the opposition of the hydrocarbon deniers. And government must find the political will to address long-term energy needs pragmatically. Answering the Hydrocarbon Deniers The idea that gas is abundant challenges beliefs that fossil fuels are running out. So the deniers raise the warning flags of price volatility, environmental impact and greenhouse gas emissions. These may sound compelling. But every energy source poses challenges. Wind and solar power have their own problems: cost, reliability, visual impact, land and water use, bird strikes and massive power-line rights of way. Current-generation biofuels require a lot of land and water, impact food prices, can increase greenhouse gas emissions, are vulnerable to crop failure, and require subsidies. Coal is carbon-intensive. Nuclear faces waste disposal, proliferation and public acceptance issues. So let’s look realistically at the objections to natural gas. During the recent severe winter, U.S. prices hardly reacted. The rising abundance of gas reduces the risk of long-term price volatility. Short-term volatility has also moderated, due to several factors. The industry has added new storage facilities and supply pipelines. The nine LNG terminals now in service can quickly increase deliveries. Also, shale gas is developed through highly repeatable long-term drilling programs, in virtually a manufacturing-type approach. This raises efficiency and lowers costs, and thus enables low prices. And drilling can ramp up quickly in response to any change in the market. Another advantage offered by gas is that development requires a small land-use footprint. It’s only 1/20th that of equivalent wind or solar power. Gas-fired combined-cycle power plants have low water consumption, particularly compared to some renewable sources. Yes, gas is carbon-based. But it burns cleanly, and produces practically no nitrogen oxide, sulfur dioxide or particulates. So there is less threat of acid rain and smog. In terms of climate change, gas-fired power plants produce half the carbon dioxide of coal-fired units. Their waste heat can be captured to produce steam for industrial applications. This further reduces the carbon footprint.

Also, substituting gas for other fuels is the fastest and most cost-effective way to reduce greenhouse gas emissions. Cost matters. Or at least it should. Now, let’s address the final obstacle, government vision. Government Vision The U.S. needs coordinated policies on energy and climate. Policies that establish certainty through the years, regardless of who is in office. And that encourage development of all energy sources. Otherwise, energy initiatives ping-pong back and forth whenever the political pendulum swings. Currently, the U.S. government strongly supports renewable energy. Unfortunately, it also proposes higher taxes on the natural gas industry, and is tightening resource access. Perhaps it has not yet learned that if you tax something, you get less of it. Less supply security, fewer jobs and lower reinvestment. Another concern is the mandated use of renewable energy for electricity generation. This could prove very expensive. Why not instead implement clean electricity standards. Then let renewable energy, natural gas, clean coal and nuclear power compete. Look at China. Yes, they support renewable energy. But they are also pragmatic. They recognize that all sources are needed. They do not oppose fossil fuels. They believe in technology. They will soon begin assessing their shale gas potential. With assistance, I might add, from the same U.S. government that has ignored the shale potential here. U.S. energy policy brings to mind a famous Winston Churchill quote, “A riddle wrapped in a mystery inside an enigma.” For example, the U.S. government holds 2.4 billion acres of mineral estate. That is larger than the land area of any of the world’s countries, except Russia and Canada. Of this, 3%, yes, only 3%, has been leased for energy development. Like our parents told us, “It’s not what you say, but what you do that counts.” The shale gas revolution here occurred on private and state land, not federal land. Think of the economic development and job creation potential if more land was opened. And if less red tape tied up the acreage that is leased. In closing, I want to emphasize that ConocoPhillips supports development of all energy sources. We recognize that in order for the world to prosper, energy must be abundant and affordable. Our core businesses are carbon-based because these are the only sources that currently meet these criteria. We also support legislative enactment of a sound, mandatory federal climate policy. For all these reasons, we are aggressively pointing out the benefits of greater use of natural gas. It truly is nature’s gift to the people.

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Gas can enhance energy supply security through its abundance. There is enough to meet industrial, residential, commercial and power generation needs. Gas should remain very affordable to consumers. Gas offers the energy base upon which to build economic development and job creation. And gas offers a viable and cost-efficient way to reduce greenhouse gas emissions.

Thank you. END