VAIL, Colo.—In mid-March, with temperatures on the ski slopes at 50 degrees and snow on the wane, the Vail Global Energy Forum, now in its fourth year, again delivered the stimulating mix of speakers and topics it’s become known for—a “mini-Davos on energy,” in the words of executive director Carl Colby.

The audience, a blend of faculty and students from Stanford University’s Precourt Institute for Energy and other universities, citizens, energy consultants, media, researchers and executives, gave an enthusiastic welcome to keynote speaker and former Secretary of State Condoleezza Rice. She spoke on the U.S.’ lead role on the global energy stage and the foreign policy influence at stake.

Exxon/Mobil’s annual energy outlook to 2040 framed the discussions over the next day and a half. Notable was the diversified giant’s conclusion that while the U.S. economy has been growing, U.S. demand for oil is flat to down except for the industrial sector. Globally, energy demand is expected to grow by 35% to 2040, but only by .8% annually for oil, and by about 1.6% annually for natural gas. Renewables and nuclear will take an increasing portion of the energy demand pie.

On a panel about North American energy security and independence, Encana Corp. president and CEO Doug Suttles and Anadarko Petroleum Corp. chairman, president and CEO R.A. Walker appeared heartened by a recent trip to Washington D.C. with the lobbying group Producers for American Crude Oil Exports, or PACE. The group is composed of 21 North American independent producers. They visited with members of the Senate and the White House administration to advocate lifting of the U.S. crude export ban.

Also on the panel were TransCanada Corp. president and CEO Russ Girling, and Drew Leyburne, director general of the Energy Policy Branch of Canada’s Department of Natural Resources. Tom Petrie, chairman of Petrie Partners LLC, moderated.

Suttles called the reception and education levels in the nation’s capital good and said the economic argument for lifting the ban was generally understood despite concerns about “the politics of the argument.” The D.C. audience connected most closely with the geopolitical piece, he said, as the producers asked if the world wouldn’t be “a better place, a safer place, potentially, if the U.S. could export crude to countries that currently have to buy it from places like Russia and Iran.

“The argument is pro-consumer, pro-economy, pro-national security, and it’s a bipartisan issue,” Suttles said.

Walker pointed out the disconnect between the global (Brent) and the domestic (WTI) prices for crude, which at press time posted a more than $10 differential, in Brent’s favor. Congressmen may worry about consumers’ price at the pump, Walker said, but not all of that $10 delta—if crude exports were allowed and the WTI rose to match Brent—would flow to producers. “Upwards of half goes to local municipalities, states, and royalty owners, among others,” he said.

“It’s a revenue tax, not an income tax. If the ban were removed, it would encourage up to $1 trillion of investment, increasing jobs in all areas of the economy.”

Girling focused on the vast infrastructure buildout under way to accommodate surging North American production. With Canada’s crude production at about 1 million bbl/d, “We’re approaching where we don’t need offshore barrels,” he said. Combined with the expansion in natural gas production, the world has changed, he said, opening up the opportunity for Canada to supply Asia and Europe. Some $40 trillion in investment is needed to build out infrastructure worldwide, he said, with the biggest chunk to be spent in North America in changing out the coal fleet, growing renewables, bringing on natural gas-fired plants, building gas liquefaction facilities, and more.

The bad news? “We are mired in regulation,” he said, “and the Keystone Pipeline is the poster boy for that.”

TransCanada has $50 billion in projects approved by its board of directors and underpinned by contractual support from producers and customers, he said. In context, the Keystone Pipeline is an $8 billion project. The oil reserves will produce for 30, 40, 50 years, he said, and there is a pipeline of potential projects worth $50 billion more under consideration by the industry at large to further enhance infrastructure and supply. The idea that not building Keystone will stop Canadian oil production, which is anchored on one end by $85 billion in refinery investment already made on the U.S. Gulf Coast and on the other end by hundreds of billions of dollars already spent developing the oil sands, is “the craziest thing I’ve ever heard,” he said.

Sounding The Retreat

The impact of the current crude price downturn on E&Ps like Anadarko and Encana, both of which have large exposure to the commodity, was an additional topic for the panel. E&Ps have sharply revised their capital allocations for 2015.

Walker said a radical change in cost structure in the industry during the past decade with the marriage of horizontal drilling to fracking technology has driven E&Ps’ capex response. When the industry was drilling mainly conventional resources, about 70% of the cost was in the actual drilling of the hole, he said, and completions absorbed just 30% of the overall cost. “Today, those costs are absolutely flipped.

“With few exceptions, you’re seeing the upstream sector reduce budgets by anywhere from 30% to 40% or more,” he said. “In many cases, particularly with larger companies, we’re willing to drill but not complete the holes. We will wait to use that last 70 cents until we have an economic case to invest it to get an acceptable rate of return. Many companies will increase their inventory of drilled but not completed wells in the course of 2015.”

Oil prices continue to fall, he pointed out. “Concern is mounting that as our industry pushes out more and more and more completions, we’ll push out the recovery of the price of oil as well. From a capital allocation standpoint, I run a company that is 80% onshore U.S. and GoM and the rest is international. This [crude price drop] pushes me to put more capital to work outside the U.S., increase employment of people outside the U.S.”

Exemplifying international allure is Anadarko’s giant Mozambique gas discovery offshore, where it has found upward of 100 Tcf of recoverable reserves. By the mid-2020s, Mozambique could become the third-largest exporter of LNG, he said. “We get a very different rate of return because of world prices for LNG and natural gas than I can trying to figure out where price of oil is going to be next year for activity here in the U.S.”

Anadarko breaks down capital allocation into short term (year to year and a half to achieve returns); intermediate (about a two- to three-year horizon to achieve returns); and long cycles, which involve exploration, deepwater and frontier plays, where it may be four years or more from first discovery to first production and cash flow. The company will push off short-cycle investing and reduce its overall capital spend “until we see a time we can invest that last 70 cents onshore the U.S and make a good rate of return.”

Suttles said last year the North American industry invested about 130% of its cash flow, “so as you can see we actually spent more money than we brought in. You can imagine how when the price of product fell in half, that created a pretty big issue when you’re running a business, so we had to react strongly,” he said.

Differentiating this downcycle from the three previous he’s experienced is “how quickly we’ve all responded,” Suttles said.

“The second thing is, the industry actually hurts its price all the time because we are constantly trying to get better and better at what we do. Just in my company, in one of our big plays in Canada, we’ve cut the cost of development in half in one year. In the Bakken and Eagle Ford plays, we’re still seeing improvements of 10% to 15% per year in the cost to develop a barrel of production or barrel of reserves. What’s interesting is, we can’t stop ourselves. It’s technology. It’s innovation.”

As crude continues to weaken, the threat of hitting storage capacity looms large. “The reality is the market has to balance,” said Walker. “People are predicting we could see domestic price start with a three, with global prices still staring with a five or a six. The world consumes about 92 million barrels per day and it will get fed from some place. Supply and the price will balance.

“Most people don’t believe $50 is sustainable, but part of the problem that led to this dramatic drop is that $100 probably wasn’t required, either. You see the market rebalancing, and this is where government policy can have a dramatic impact. An outdated policy [the export ban] is preventing markets from working efficiently.”

As to when the ban might be reversed, Walker said, “How we get there is still undetermined.” Currently, Congress is taking up the budget. “We don’t feel it will be a standalone bill, but rather an amendment to another bill, probably not until 2016, maybe 2015.”