THOMAS MATTAIR:  Well, I think we can start now.  I’m sure more people will trickle in.  I’m Tom Mattair.  I’m the executive director with the Middle East Policy Council.  Can you hear me?  Tom Mattair, executive director with the Middle East Policy Council.  And on behalf of the council, I’d like to welcome you here to our 60^th Capitol Hill Conference. 

 

I remember our first, in 1993, and so this is a milestone for us.  And I think we’re going to try to do about 60 more of these.  We have a – I think an important subject, a great panel, but before I turn to that, let me tell you a little bit about the Middle East Policy Council.  We are a nonprofit organization, a 501(c)(3).  Our interest is to examine the United States’ interests in the Middle East and that’s it.  And we do that three ways.  We publish a journal called Middle East Policy.  It comes out four times a year.  It covers a diverse range of topics and we had just published our 100^th issue of that journal last year.  Now, we’re up to about 104.

 

We also have this Capitol Hill Conference Series four times a year.  Again, we cover everything from the Arab-Israeli conflict to Iran to oil and gas or terror or virtually anything that is important for American national interests.  And we put it on our website immediately after the conference.  You can see the audio – listen to the audio, see the video, read the transcript.  And then it’s the first article in our journal.  So this will be the first article in the summer 2010 issue.

 

And then our third major program is called TeachMideast.  We have a Barbara Petzen who goes around the country training K-12 teachers about resources that are available for teaching about the Middle East, about Islam, about Arab culture.  And it’s a very successful program and we think because of the teachers we reach, in the past year and in previous years, we probably reach about 1 million students a year.

 

That’s what we do.  Today, our topic is Gulf oil and gas and we’re trying to examine what the producers are thinking when they make their calculations.  We want to look at the domestic – we want to look at the economic and political factors that influence their decisions.  The domestic economic factors would be their need for revenue, their desire to diversify their economies, their need to satisfy domestic constituencies.

 

And in the case of Iraq, the political instability that could challenge oil developments.  And in the international realm, the geopolitical forces that the producers have to take into account such as where is demand falling, where is demand rising?  Who do their most important customers have to be in a strictly economic sense and who are their most important political and strategic partners?  And we have some divergence taking place there now where the customers are in the East and the security partners are in the West. 

 

But the panel here is going to do a great job.  I’m not going to take more time to lay that out.  I think that for the sake of time because a couple of panelists do have to leave a little early and we do want a full question-and-answer session, that what I’d like to do is just say a few words about each one of them first instead of doing it before each one speaks.  And you can read their bios on the back of the invitation and they’re more extensive then what I’ll be able to say.

 

But Nat Kern is the president of Foreign Reports, Inc., which specializes on political developments that have a bearing on oil markets.  And his clients are oil firms and banks and trading houses.  And he has been involved in the Middle East for decades.  And actually, I think it’s interesting that his first experience there was a sabbatical from Princeton, when he rolled at King Saud University.

 

We also have Fareed Mohamedi, who’s a partner of PFC Energy, Petroleum Finance Corporation.  He heads the Markets & Country Strategies Group.  And he also heads the Oil Market Analysis Team.  And he has extensive experience, having worked for Moody’s and having worked for the World Bank and Wharton Econometrics and so he comes with tremendous background as well.

 

Herman Franssen was not able to come today.  But we were fortunate because we have Lucian Pugliaresi instead, and he’s the president of Energy Policy Research Foundation, which I take it, was Petroleum Industry Research Foundation in New York prior to this transition.  And he’s been working as a consultant in the field since leaving government service, where he has time on the National Security Council, the Department of State, the Department of Energy, Environmental Protection Agency.  Again, a real expertise that he brings to the table.

 

And our fourth speaker is Professor Jean-Francois Seznec from Georgetown University who is an author and writes about Arab-Persian Gulf politics and economics and oil industry.  And he’s also a senior advisor at the Petroleum Finance Corporation and also a founding member and managing partner of Lafayette Group, a private investment firm based in the United States.

 

And we have a couple of people here who have very recent publications that I think they’ll be able to talk about.  Mr. Pugliaresi on Iraq and Jean-Francois Seznec on how the Saudis might react to a military strike on Iran.  So without any further ado –

 

MS.            :  This mike is not working.

 

MR. MATTAIR:  It’s not working.

 

MS.            :  No.  (Inaudible, off mike.)

 

MR. MATTAIR:  All right, then.  Speak from your seat, please.  Would you like to speak first, Nat?

 

NATHANIEL KERN:  Great, thanks.  Good morning.  It’s a pleasure to be with you and share this panel with three very esteemed experts who’ll provide you, I’m sure, very valuable insights this morning.  We’ve all been asked to tell you what the oil and gas producers in the Arabian Gulf are thinking.

 

Obviously, none of us can speak for the governments in the region, but it might be a good idea if I kick this discussion off by describing some of the changes in the historic relationship that the United States has had with a key producer like Saudi Arabia and then look a bit to the future and what mutually beneficial mixture of hard and soft power each of the two countries bring to this relationship.

 

As we go forward, the U.S.-Saudi relationship is likely to be less oil-centric and based more on shared policy goals in the region.  The U.S. is still the indisputable master of hard power – military superiority in the region – but Saudi Arabia has developed a surprisingly strong hand in exercising soft power.

 

I think U.S. companies can be expected to profit from their own soft power – their knowledge-based assets – by working with the Saudis as they advance a knowledge-based economy where Saudi Arabia is actually contributing hard assets like competitive-priced feedstock and a geographic advantage with the companies providing more of the knowledge-based assets.

 

For many decades, the U.S.-Saudi relationship has been described as a relationship between the world’s largest oil consumer and the world’s largest oil producer, with the U.S. consuming one-quarter of the world’s oil and Saudi Arabia possessing a quarter of its conventional oil reserves.  People have called this a partnership based on oil for security.

 

Since the end of World War II, Saudi oil production has grown in pace with the U.S. demand for oil imports.  In 1950, the U.S. imported about half-a-million barrels a day and that was what Saudi Arabia produced.  By 2008, U.S. crude oil imports and Saudi petroleum liquid production were both about 20 times higher – 10 million barrels a day.

 

Saudi Arabia first became the number one supplier of crude oil to the U.S. in 1970.  After the sharp price increases of the late ’70s, both U.S. oil imports and Saudi production fell, but then they rebounded during the 1990s.  At that time, Saudi Arabia adopted a politically-driven policy of maintaining its position as the number one or number two oil supplier to the U.S.

 

To some degree, this policy kept U.S. oil prices lower than the rest of the world’s and thus may have kept world prices lower than they otherwise would have been.  The main U.S. import markets on the U.S. Gulf Coast and mid-continent became the epicenters of price competition between Saudi Arabia, Canada, Mexico and Venezuela.

 

Saudi Arabia ended this policy in September 2003 for a number of different reasons.  For some months during the latter half of last year, Saudi Arabia slipped to fifth place as a source for U.S. crude oil imports behind Canada, Mexico, Nigeria and Venezuela.  At the same time, Saudi Arabia has emerged as the largest supplier to China, where Iran, which used to hold that position has recently slipped to fifth largest.

 

World demand has become increasingly globalized.  In 1950, the U.S. consumed 55 percent of the world’s oil.  Today, it’s about 22 percent.  More than half of Saudi oil exports now go to Asia.  The main source of future oil demand growth is expected to be in Asia with the U.S. and the OECD projected to have flat or perhaps falling demand.

 

Of course, even if the U.S. imported no oil from Saudi Arabia, it almost certainly will remain the largest oil importer in the world for a long time.  As such, its oil relationship with Saudi Arabia will continue to be critical to the U.S. economy as long as Saudi Arabia has spare capacity and remains the ultimate arbiter of world oil prices.

 

These historical statistics illustrate how much changes in the world have changed the realities of the U.S. interests in the Gulf.  We rely less directly on oil from the Gulf than we used to and Asia will play a larger role in providing incremental demand for Gulf oil.  But as President Obama noted last week at the nuclear summit here, the U.S. has vital national interests in reducing conflicts in the Middle East.

 

He said, I quote, “It is a vital national security interest to the United States to reduce these conflicts because we remain a dominant military superpower and whether we like it or not, when conflicts break out, one way or another, we get pulled into them.  And that ends up costing us significantly in terms of both blood and treasure.”

 

The president was making the case that an end to the Israeli-Palestinian conflict was a vital national security interest to the United States because, whether we like it or not, we’re stuck in the Middle East.  I think you can also say that Saudi Arabia’s leadership knows, whether it likes it or not, that the U.S. is the only power that can provide a robust defense for the GCC against the military aspirations of Iran.

 

This unavoidable interdependence goes beyond oil and is one reason that the U.S. and Saudi Arabia have been seeking to institutionalize across-the-board cooperation over the past five years, basically working to help each other out.  The two countries launched a strategic dialogue in April 2005, when Crown Prince Abdullah visited President Bush at Crawford.

 

They wanted to identify and work together on shared policy goals.  Now, we have more than 20,000 Saudi students in the U.S.  U.S. companies are pouring away the largest investors in Saudi Arabia.  Saudi Arabia has significant tangible and financial investments here and the U.S. is Saudi Arabia’s largest trading partner.

 

Saudi Arabia is also a vital U.S. partner in combating terrorism, in part because it learned the hard way that it had to understand the mindset of Islamic terrorism in order to defeat it.  It probably has the most sophisticated understanding of any government in the world of the mindset of the Islamic terrorists and it’s got religious authority to counter it.

 

Across the entire region, Saudi Arabia supports moderation against extremism, whether it’s in the Israeli-Palestinian dispute, intra-Palestinian disputes in Lebanon and Afghanistan, in Iraq and in Pakistan.  It’s no secret that when President Obama and his top Cabinet members visit with Saudi leaders, they spend most of their time coordinating over regional issues, not bilateral ones.

 

One of the current goals, obviously, is opposition to the regional aspirations of Iran.  I know that Jean-Francois has written very eloquently about his conviction that the Saudis are more worried about potential U.S. military action against Iran than they are about Iran’s ability to obtain nuclear weapons.

 

I’d have to leave it to the Saudi government to agree with or contradict Jean-Francois or even they may want to remain silent on the subject.  Recently, we read in the papers that Secretary of Defense Robert Gates wrote a memo on Iran in January identifying the next steps in the defense planning process where further policy decisions would be needed.

 

I am sure it would be a mistake to assume that the next steps in defense planning are limited to a decision to attack or not to attack Iranian nuclear facilities.  Enhancing defense capabilities in the Gulf region is the ongoing focus of what they’re doing in the Pentagon, but these efforts could be magnified many times over.

 

It’s quite clear that neither the Saudis nor the GCC states would like to become subservient to a nuclear Iran.  Iran does have potential to exercise nuclear blackmail over the Gulf.  Iran doesn’t hide its belief that it aspires to be the dominant power in the Gulf.  It does want to call the shots there.

 

Ahmadinejad, three times in the past four months, since they first started enriching uranium to 20 percent, has given rather grand speeches about the importance of the Middle East, which he argues, because of its oil, is the way to control the world.  And he insists he cannot control the world without Iran.

 

His last speech last week, he actually offered President Obama a generous offer to join with Iran so that they can control the world together – told him not to worry about the Jewish vote, he didn’t need it.  (Laughter.)  As far as I can tell, this guy’s living in a different planet from the rest of us.  But he does have this vision of – he wants Iran to be a great and powerful country in the region.

 

I think this vision – and the closer he gets to it – is possibly one of the explanations, besides the very harsh repression, that the opposition in Iran seems to have diminished quite rapidly.  I can certainly make a logical case that most people want their country to be great.  Most Iranians want Iran to be great. 

 

They may despise Ahmadinejad, but if he’s going to be instrument that’ll help make Iran great and he looks like he’s getting closer to a nuclear capability, you can hold your nose and still support him.  I throw that out as one possible explanation for the rapid diminishment of the opposition.  Obviously, repression has been very harsh, but I think that’s something worth considering.

 

The diminishment of the Iranian opposition – its, almost, disappearance – obviously removes one thing that was hanging out there – the possibility that Iran wouldn’t go nuclear because it was going to have an internal change of government.  If you remove that, say the diplomacy that the Obama administration tried didn’t work, I think it’s obvious that whatever sanctions may come out of the U.N. Security Council are almost certainly not going to be crippling.

 

Iran’s not going to buckle under them right away.  So we’re left with rather stark choices.  Either the United States opts for containing an Iran that may be going nuclear or containing Iran once it goes nuclear or military action against facilities.  The only thing I’d point out is that there are many different levels of containment.

 

During the height of the Cold War, we had, I think it was 15,000 nuclear weapons pointed at Russia.  That’s what I call a robust containment.  I don’t know if I’d use that kind of level against Iran, but there are different ways.  It’s not just issuing a proclamation of, “Don’t you dare use that weapon!”  And I think that’s the kind of things that Gates was referring to.  Those would have to be major decisions. 

 

Another thing – if we go back to the last decade of the Cold War, President Reagan started a very – a fairly aggressive policy of trying to roll back Soviet gains outside its own territory.  I think that Saudi Arabia and the United States share an interest in trying to roll back some of the advances Iran has made, be it in its Hezbollah in Lebanon as one of its proxies.

 

Certainly, we share an interest in Iran not having enormous influence in Iraq.  There’s a question of whether Iran has some influence with the Hutis in Yemen, I don’t know.  But there are a number of areas where the U.S. and Saudi Arabia share that joint interest.  And that’s where, I think, Saudi Arabia brings a degree of soft power that we don’t really have in the same way.

 

In Lebanon, there are a couple of different kinds of soft power that Saudi Arabia has.  Unfortunately, cash plays a very big role in Lebanese elections.  A lot of voters – they want to be paid to vote one way or another.  We, as a country, don’t dole out money to voters to influence their votes.  After the Hezbollah didn’t do as well as it thought, their leader, Nasrallah, gave a speech and he said very frankly, look, Saudi Arabia outspent Iran.  (Laughter.)  That’s why we lost.

 

And he said, you know, they spent so much that the Lebanese now want an election every year, not every four years.  Okay?  (Laughter.)  And it’s not just – it’s not just the cash.  Saudi Arabia obviously is very close to a number of Lebanese leaders.  You know, you think of Saad Hariri as the prime minister is one example. 

 

But you get Walid Jumblatt, the leader of the Druze – and that’s fulcrum party in the parliament – he was asked the other day in an interview, would you go to Iran if you were officially invited?  He said, oh, wait a minute.  I’d have to check with King Abdullah first.  He said, I would consult a friend and great brother, namely, King Abdullah, who has been a friend to the extended Jumblatt family since the 1970s.  He has been a great brother all the time.  Out of courtesy, civility, I would have to consult the king before I would go anywhere like that. 

 

But that’s the sort of relationship they have in a lot of different places.  After the March 7 elections in Iraq, you know, a number of the Iraqi leaders and politicians went off, almost surreptitiously, to consult with the Iranians.  But then they got invited down to Riyadh and they all – oh, yes, I’m invited down.  And they went down with great fanfare and came back and reported on their conversations and everything like that.  They were happy to do that. 

 

And Prime Minister Maliki, who the Saudis don’t particularly like – he’s sitting there, complaining, no one invited me.  Same ways in Afghanistan.  You get the Karzai government and the Taliban – both want to be in the good graces of the Saudis.  The Saudis don’t really understand what their conflicts are all about, but they certainly want to be there. 

 

The same thing with Karzai.  He was describing that he was in Saudi Arabia, making the minor pilgrimage.  He got a call from the king, said come to Riyadh.  The king met him at the airport, drove him in the king’s car to his castle, Karzai says – (chuckles) – and gave me warmth and love and all the rest.  You know, he’s – (inaudible). 

 

Those are a few examples of some of the soft power.  And I think it’s a useful element – with the U.S. in partnership.  When we move to U.S. business interest in Saudi Arabia, I think it’s sort of the reverse.  U.S. business brings a great deal of soft power these days.  What’s a business like Google based on but soft power?  And this applies also to the oil industry. 

 

It used to be the oil companies would come in with capital, access to markets and expertise.  Well, all these countries have plenty of capital.  They can buy the expertise and market access, no problem.  The areas where U.S. companies and others have done so exceedingly well is in bringing different and new technologies. 

 

Think ExxonMobil in Qatar – played a singular role in building the LNG industry there.  You’ve got Chevron up in the neutral zone operating a concession.  And what it’s doing there is using the expertise it developed in Indonesia in steam flooding, getting oil that’s otherwise very hard to get out of the ground to market. 

 

Occidental portrays itself as being in the business of recovering – not discovering – oil.  And it’s got projects in Oman and Yemen and Bahrain where basically defunct oil fields are now producing more than a hundred – (inaudible, background noise) – barrel.  You get petrochemicals – there’s an ongoing deep feasibility study between Dow Chemical and Saudi Aramco for building a very sophisticated and large chemical plant. 

 

And I think the key thing there is they aim to have several thousand products – most petrochemical plants turn out two or three commodity chemicals that ship off.  They’re going to be producing specialty coatings, engineer plastics for cars, you name it.  So – and I think that’s where you bring the increased sophistication.

 

And I think that makes a rather interesting sort of marriage between the political benefits we have in joining the soft and hard power and the business interests.  I think if, as President Obama noted, we’re stuck in the Middle East whether we like it not, at least what’s happening with the U.S.-Saudi relationship is, we’re concentrating in a bunch of different fields to see how we can help each other.  And I think it’s working.  Thank you.

 

MR. MATTAIR:  Thank you.  Thank you.  Well, I got a note saying that a technician would work on the mike between speakers and that we could go to the podium, but I didn’t see that happen.  So Fareed, would you like to speak?

 

FAREED MOHAMEDI:  Well, as Nat has spoken today about how the Gulf is yet again becoming the center of the world’s oil industry and the world’s supply, it certainly became that after World War II and became central to U.S. plans to rebuild Europe and Japan.  And now, the Gulf is becoming very much integral to the growth of Asia and what we call at PFC the growth of the pan-Asian grid.

 

Basically, draw a line on the supply side from the Persian-Arab Gulf to – all the way up to Russia and you have all the players in Gulf, in Iran, in Central Asia and in Russia that are now quickly facing East and supplying and planning to supply the big industrial machines of the East Asians in China, India, Southeast Asia.

 

And that sort of system is becoming a big trading system of oil.  While the old trading system under the sort of American tutelage postwar was run by the IOCs – the international oil companies with ExxonMobil and Chevron and Texaco and BP, et cetera – the new players, interesting enough, are the national oil companies.

 

And this is one of the big phenomena that we’re seeing, that this pan-Asian grid is now becoming the domain of the national oil companies.  Saudi Arabia is very much – as Nat told you earlier – integral to this.  And in fact, Saudi Aramco’s plans are increasingly facing east in the sense that they are building capacity in the oil sector to service that huge colossus in the East.

 

They’re also, in many ways, politically and economically turning east to face – not only – and Jean-Francois will tell you this later – not only in terms of crude oil, but in terms of petrochemicals and other industrial output.  So in a sense, Asia is becoming very much integrated as one big whole of suppliers in the West Asia feeding into the industrial growth centers of East Asia.

 

In many ways, this is – from our point of view – very exciting phenomenon because you’re getting the center of economic growth that is taking place from, in a sense, the Arab Gulf all the way to the South China Sea, almost unprecedented level.  And the Gulf is finding itself, in a sense, back, in a sense, as part of the Asian continent, which I think is very good for long-term economic growth for the region.

 

The other element of this is – that we’re finding is that OPEC is very much important to his phenomenon of the pan-Asian grid.  And at the center of OPEC and at the center of this system is Saudi Arabia.  Saudi Arabia is very much in charge of the – not only OPEC as a global phenomenon, but of that regional phenomenon.  And mainly because it has invested – Saudi Arabia has invested in excess capacity, which it will be using to manage the oil markets over – the physical oil markets over the next several decades. 

 

The other element of this in terms of building capacity and providing the world with sufficient oil resources – the other aspect of this is that the economies of the region – the Gulf region – have been managed extremely well over the last decade.  And you’ve got a sense of economic stability which is unprecedented. 

 

And that is very important in the sense for consumers to know that the oil that they’re getting – where it’s coming from is coming from fairly stable and resilient economies.  And I’ve argued here and in other places that actually there’s almost an economic revolution that’s taking place in the Gulf. 

 

And so undergirding this oil supply system is a fairly stable economic system that is leading to – especially Saudi Arabia being a very responsible part of the global economy.  And you’ve seen the Saudis act this way, for example, in 2008 when they felt the oil price went up too much to 150 (dollars per barrel) when King Abdullah invited consumers and producers from all over the world to come to Riyadh – to Jeddah I think it was to Jeddah, yeah – to discuss the oil issue and in fact, order the Aramco to increase production by a million barrels a day and contributed to the decline in oil prices at that time. 

 

So at the heart of – so the new economic system in the world, you’ve got also a producer that’s interested in keeping oil prices stable and affordable for its customers, not only in the West but also in the East.  So I think that’s another aspect of this that I am finding that it’s quite positive looking forward.

 

Now, to this system of the pan-Asian grid, robust consumers, able producers, you’ve got a new phenomenon that’s happening and that is the rise of Iraq.  And the prospect of new Iraqi oil coming on.  It’s been shrouded in uncertainty because of the politics of Iraq, but I think now we are starting to see the beginnings of foreign oil company interest.  And now, of course, they have contracted with the Iraqi government to invest billions of dollars to develop this sector. 

 

It’s very difficult to predict what the production will be.  Will it be another 6 million barrels a day – which is phenomenal, which is huge?  Will it be 3 million barrels a day?  It’s difficult to say.  But it’s quite clear that we’re going to start to see a lot of production coming out of Iraq in the next five to 10 years. 

 

And in that sense, it could be quite destabilizing to the oil markets because on top of the excess capacity that has been built up in Saudi Arabia, you will start to see a lot more capacity coming out of Iraq and a lot more production coming out of Iraq.  So future OPEC negotiations, interestingly enough, will not be a one-city issue – Riyadh – but a two-city issue, which is Riyadh and Baghdad. 

 

And some of us who remember some of the interesting negotiations of the 1980s between Baghdad and the rest of the Gulf and all the intra-OPEC dynamics that went on, I think we could revisit that in the future as this capacity comes on.  Nonetheless, I do think that most oil producers – and some of you may chuckle at this – have realized that the shenanigans of the 1980s were not particularly productive – (laughter) – and so they remember that and may not want to go back to that sort of relationship. 

 

I’m not implying that we’re going to have another invasion of a neighbor like we did in the ’80s and the ’90s, but I am saying – over oil – but I am saying that I think that OPEC negotiations and OPEC haggling will become interesting in the future.  So that’s how we see the world of oil.  We see the world of oil as shifting to Asia – Saudi Arabia and the East Asian countries very much at the center of this.  And then the growth of Iraq.

 

But one other area that in many ways has been neglected in terms of energy and oil and gas – and this conference is about oil and gas – has been the whole issue of natural gas.  And Nat alluded to the rise of Qatar as a major LNG producer and it is going to continue to be a major LNG producer.  And so the Gulf has become very important to not only oil supplies but to gas supplies. 

 

The other aspect of the Gulf that’s very important to see in terms of global energy is that it’s not only become a big supplier but also a big consumer.  And this is tied into that whole issue that I talked about in terms of the Gulf being a viable, long-term, stable growing economy.  It also is now needing its oil and gas supplies for itself.  And in fact, ironically in terms of natural gas, it is a net importer of gas.  Even Iran, which is the second largest – has the second largest reserves in the world– is a net importer of gas. 

 

So it’s interesting that it is – that from a gas point of view, the Gulf itself is a very big consumer.  The prospect of Qatar being such a large – the reality of Qatar being such a large LNG producer was that in a sense, LNG from the Gulf would almost unite – the belief was that LNG from the Gulf would almost unite the different separated markets in the world – the gas markets of the world.  Oil markets are united in the sense that you can – and fungible.  Oil flows all over the world.  Gas markets are still regional.  And LNG was thought to be the sort of glue that would bring together world gas markets. 

 

A strange thing has happened in the last two years and this is the phenomenon of the growth of unconventional gas in the United States – shale gas or whatever you want to call it.  And this massive increase of domestic gas has now created a situation where the U.S. is, yet again, self-sufficient in natural gas.  And it’s actually backing out LNG from the Gulf and maybe pushing it off to Asia and making it much cheaper in the world.

 

So that is an interesting thing where the Gulf is faced with the threat of U.S. supplies and possibly this phenomenon of unconventional gas spreading around the world and where gas is found in other parts.  And the Gulf becomes – the world becomes less dependent on LNG from the – sorry, the world becomes less dependent on gas from the Gulf.

 

The other phenomenon that is threatening Qatar’s primacy in LNG is the phenomenon of Australian gas.  And Australia could become as big a gas producer as Qatar – possibly over 70, 80 million tons a year of LNG.  So Asia in a sense, could become much more dependent on countries in its own backyard, which is very interesting for global dynamics. 

 

Anyway, I will end there and I sort of explained these sort of big systems that are being formed in the world of oil and gas.  The Gulf remains extremely important, although there are some interesting dynamics that will take place in the next decade.

 

MR. MATTAIR:  Thank you, Fareed.  Thank you.  We had someone who – can we take one or two minutes now just to see if we can take care of the mike at the podium?

 

(Pause.)

 

MR. MATTAIR:  Okay, we can resume.

 

MR. KERN:  Yeah, we’re ready to go.

 

LOU PUGLIARESI:  As the chairman said, I’m a substitute for Herman Franssen – who turns out is a trustee on our organization – the Energy Policy Research Foundation.  As you said, we used to be out of New York.  This is a little unusual audience for me.  I’m usually with the geeky oil and gas market guys and – but I would like to try to put this in a little context. 

 

You know, when we changed our name – (chuckles) – from the Petroleum Industry Research Foundation to the Energy Policy Research Foundation – people said well, you know, petroleum issues are kind of gone.  You know, we need to have a broader outlook.  And so we got to – so our trustees and the staff got together about five years ago and said, well, you know, why don’t we see if we can identify what we think the big issues are in terms of energy policy or oil and gas markets that – where the conventional wisdom just might be wrong.  We came up with five areas worth during research on:

 

They were unconventional gas, which at the time was not – I’m not sure we have any particular insight, but we knew that that was something that could radically alter our outlook.  That was pending collapse in world refining.  I mean, it was just world refining capacity was coming in too fast.  Another area is Latin America.  Latin America is probably the most under-explored region in the world.  I mean, it’s just an area that needs – and it’s borne out a little bit by Brazil, but a lot more can happen there.  And you think about it, these are all kind of game-changing things that are out there. 

 

The next one is demand in the developing world.  The traditional view is in the West is that when OECD – when oil prices get 6, 7 percent of GNP, you just can’t drive them any higher.  You know, economies retract, demand just craters.  And in the developing world, the view is, well, that’s not the case.  We’re not so sure.  And we have a project to look at how demand actually – sort of uncovering demand growth in the developing world and what happens is the subsidies start to disappear. 

 

And the fourth one, of course, is Iraq.  And Iraq is, by any standards, a huge game-changer.  And I want to leave you with two interesting statistics.  When they held the auctions in December, it was the largest transfer of assets – productive reserves – into the production stream from the non-production stream – on a single day essentially – in the history of the petroleum era – 60 billion barrels.  This is a phenomenal event.  It’s interesting that, you know, outside our little community, at least in the oil and gas market analysts and the sort of PFC guys, you don’t really – you don’t read a lot about this. 

 

And I’ll give you one other interesting statistic about it.  If as a result of everything that’s happening in Iraq, the price of oil is $20 less than it would be in whatever your business-as-usual case is, the net present value – real money to the U.S. economy – is a trillion dollars.  The joke around town is, well, we could have paid for the war for this.  (Laughter.) 

 

So I think you can no longer dismiss – and if there are any – I doubt there are any peak oil – please don’t send me any mail if you’re a peak oil person.  We get plenty of mail on that.  And so we can go from a period – we can no longer dismiss out of hand that we could have a supply shock. 

 

We’re used to price shocks, but we could have a supply shock.  And managing that supply shock – there’s a lot of stuff in the ads spoken about PFC – but that’s something that’s out there.  All the guys that used to do the OPEC modeling – they’re going to have new jobs now because we now have a new way to think about OPEC behavior. 

 

Now, what’s interesting about this is that the – and I know a little about – my first job in the government was working on an offshore leasing program in the U.S.  So I know a little and I can tell you that this was a very sophisticated auction.  The Iraqis understood – you know, the midlevel folks in the ministry – the oil and gas guys there – are very, very sophisticated.  They’re very well-trained.  They know what they’re doing. 

 

And one of the ideas when you have an auction is to get as much information out there among all the parties and get all the parties to reveal what they think is out there.  And the Iraqis did a very interesting thing.  They said, okay, in order to qualify to bid in this round, you have to make an estimate of the reserves.  And when we get that estimate of the reserves, we’re going to share it with all the bidders. 

 

And you ask, why would they do something like that?  Well, the reason they did that is they want – they don’t want any gaming in the auction process.  And if you have to make an estimate and then share it with everybody, you sort of think about – the only thing you can do is give your best guess.  You give your best estimate because any other strategy is a loser for you because everybody else is doing it. 

 

The other thing is that they’ve really broken the mold.  Although these are technical service contracts, they are bid in a way where even the companies can book the reserves because they have a contractual right to a percentage of this production.  It’s a very small percentage because the revenues that the Iraqis receive are going to be close to 95 percent.  And from private communications we’ve had with the firms that the rate of return on this are still acceptable, close to 15 percent internal rate of return. 

 

Now, clearly the companies are hoping – I always like to point out:  We don’t view this as a loss leader, but we do think that companies are going to look for opportunities to provide more production at lower depths, perhaps extend the reserves.  There’s going to be lots of opportunities out there.  And I’ll get into a – and there is of course a long list and we’ll get into all the things that can go wrong. 

 

And by the way, this – I’m taking this presentation from an article that’s going to appear in World Oil at the beginning of May, but it’s on our website now – the complete report.  And it’s part of a longer-term effort we have to sort of look at the milestones, when this production might come along because it is a huge, huge event in the world oil market.

 

So what we looked first is – and we actually played with the numbers a bit.  We delayed how much production could the Iraqis produce within a relatively short period of time.  And if you look at what was going on in Iraq without the auction, we estimated that the Iraqis could move from around 2.5 million barrels a day to close to 4 million by 2020. 

 

But if we took the contracted value of the volumes as specified in the contracts, that number could go to as high as 14 million barrels a day.  That’s what’s in the contract.  We even be delayed some of that by 75 – a more realistic but still quite, quite ambitious strategy is contracted values to move Iraqi production from around 2.5 million barrels a day today to close to maybe 10.5, 11, 11.5 million barrels a day.  These are large numbers.  We are not saying they are going to happen.  We need to look at the infrastructure, the milestones. 

 

But if you – yesterday Weatherford held a conference call – and you probably don’t know who Weatherford is.  (Chuckles.)  Weatherford does a lot of downhole services on well sites.  They said they could only describe the initial bids that were coming into them as astounding.  They had never seen anything like this.  Schlumberger is in the process now of building a massive camp in the south. 

 

This is a – you know, there’s lots of things that can go wrong, we say this, but as we say, you can no longer dismiss it.  It is a very serious process.  Whether the Iraqis increase production to five, six, 7 million barrels a day or they actually get as high as 10, 11 or 12 – that is something that remains to be seen.  I think the higher numbers are very problematic. 

 

In no time in the history of the modern petroleum era do we have a period of time when this much increase in production occurred.  We just don’t have – we can go back to the Russia in the mid-2000s – Saudi Arabia in the ’70s probably put six to 7 million barrels a day increment onto the market – it moved by that fast.  But there is no – but I think everyone would agree, the Iraqis do have the reserve base to support this.

 

The other interesting thing about this is that after – they had two rounds.  The first round failed miserably.  In fact, all the bids were rejected.  Folks had a lot of problems with the tax regime.  But the Iraqis made some adjustments in the first round and by the second round they got really phenomenal bids. 

 

And one of the interesting things to remember – the under – though it’s not quite law yet – but under the provisions of the contracts or the working assumption is that the revenues will be shared on a per capita basis.  So this means that even Kurdistan will receive about 17 percent of the revenues – which, by the way, is more than they’re getting from their – (chuckles) – development projects locally. 

 

I think in both the first and the second bid rounds, the bidding companies far exceeded the target volumes proposed.  One of the ways the process worked was because you got a recovery – you got a fee one to two dollars a barrel which you bid at, you could get an advantage by bidding a higher volume.  But once again, I’d like to point out, these are contracted volumes.  The companies could not just willy-nilly bid these higher volumes.  They’re not going to get their cost recovered if they miss the targets. 

 

I think that one of the – you know, some of the outstanding problems that will remain is the infrastructure, although we think that none of these are insurmountable.  But they are huge problems, particularly at the ports and the export capacity.  And a lot of work needs to be done there.  But I think one issue to keep in mind is that the auction represents the first significant break from the prevailing oil industry structure in the last 40 years.  Since the wide-scale nationalization in the ’70s, the companies have limited ability to exploit and develop the reserves in these countries with the national oil companies. 

 

And I think it’s very interesting if you look at Total, which I thought should have gotten a project there.  They did not.  And I think we’ve seen them go back now, thinking that, well, maybe we did make a mistake.  You know, maybe these terms aren’t too onerous.  We should have.  And so I think some of the companies that didn’t get in there are now looking back at it again. 

 

Now, you know, much of the – and so where does this sort of leave us?  Much of the debate over the last few years over peak oil we think has moved from a discussion of these below-ground issues – geology, which you can’t do much about – to above-ground concerns – politics and resource nationalism.  And while the – (chuckles) – geology is sort of difficult to change, we can move – the above-ground issues can move quickly.  I think that that’s what the Iraqi story is.  You know, we went to a period where expectations were quite limited and pessimistic to quite positive.  Now, whether they play out is something to be seen. 

 

If you go – there’s an interesting thing on our website.  We did a piece that appeared in the Oil & Gas Journal on why oil prices went so high when they went to – and we have a completely different view.  But I always explain to my trustees that the most downloaded document on our website is a primer on gasoline blending.  (Laughter.)  It’s not these more arcane issues.  And we’ve done a lot of stuff on whether the Hubbard method is a good way of forecasting. 

 

So we say, while the Iraqis are moving the right direction, there’s a large portfolio of risk.  And I think that’s where – you know, given the stakes for the United States, for the world economy – that’s where the attention ought to go:  these portfolio risks.  And they go from a whole range:  There is a critical – there’s a contract risk regarding cost recovery.  You could get to the point down the road where the cost recovery – where the Iraqis are writing relatively large checks amount.  They’re getting large revenue with the cost recovery.  But so far the ministry folks seem to be going through it in a very systematic way. 

 

Struggle for political leadership, of course.  We’ve heard a little bit about this already.  The Arab-Kurdish conflict remains outstanding.  And then there’s these outstanding debts.  And some companies chose not to bid, not to participate.  And the Iraqis still owe money to Kuwait, Saudi Arabia and they even – we haven’t resolved the U.N. debt.  And this all needs to be worked out. 

 

There’s the stability of the tax regime.  You know, I think some of the companies are nervous about that, some of those that didn’t bid.  The carried interest that the Iraqis had was 25 percent in some cases.  The infrastructure remains formidable.  We’ve got a lot of rigs to move in there, a lot of things that still has to happen.  But as we say – but none of these uncertainties really are insurmountable.  That’s the thing to keep in mind. 

 

And I know – I spent yesterday with Raja Sidawi; he owns the Energy Intelligence Group.  And I gave him our, like, 25 reasons this could not happen – you know, oh, that might prevent – and he gave me 50 more.  And so there is a huge range of obstacles out there.  But I think our pitch now is look, you can no longer dismiss this out of hand. 

 

And the interesting thing is when you look at how valuable this is to the U.S. and the world economy, it sort of raises a question about what, you know, what is the administration doing?  They’re out here working on, you know, biofuels and solar, which has – largely eats money for the economy, particularly in an era of fiscal fatigue.  And here we have an event taking place halfway across the world which can sort of generate enormous benefits for the U.S. that kind of underlies the stakes we have and why it’s so important for us.

 

MR. MATTAIR:  Thank you.  Professor Seznec?

 

JEAN-FRANCOIS SEZNEC:  Thank you and good morning, ladies and gentlemen.  I’m Jean-Francois Seznec.  I’m at the Center for Contemporary Arab Studies at Georgetown Universities, where we work on politics and energy issues, focusing mostly on the Gulf because ultimately, that’s the only part of the world I know.  Also, I just got back from Saudi Arabia last night, so you might see sand dropping out of my ears.  (Laughter.) 

 

But it was actually a very exciting trip.  I had not been back for a little while, so I got to go.  Really, what I’m going to say is in no way, in opposition, nor in disagreement, with anything I’ve heard so far.  Perhaps it’s just going to clarify some of the points, or put them more in my own perspective, I guess.  Being a good academic, I fit the facts to fit my theories, you know? 

 

But in essence, what I really want to say is that what we are witnessing in the Gulf right now is really very exciting because, truly, there’s a major industrial revolution taking place.  And this is really based on the will and vision by the leaderships of Saudi Arabia, of the UAE in particular, of Qatar, to a certain extent, to move away from being one commodity producers to developing economies based on knowledge and so on. 

 

The way I put it sometimes to my students is that one could compare – with some optimism – that one could compare the development of Saudi Arabia today to that of Germany in the 20^th century, in the sense of moving away from just being a coal-producer in Germany, to being the largest chemical producer in the world.  Saudi Arabia will be the larger producer of chemicals within five years.  And therefore, it will have as much influence on the markets in chemicals, which are very important, than it does today on the markets for oil. 

 

The concept of the Gulf is that they don’t want to rely on oil for the long term, because it’s a non-renewable commodity.  They want to be able to cut down production and take much less oil, but make it make a lot more money.  A barrel of oil, today, okay, will sell for $70 to $80, $85 a barrel.  But if you make it into various products, like chemicals or metals, or whatever is very energy intensive, you can end up making $300 to $1,000 a barrel.  And that’s really what they want to do. 

 

So ultimately, that means that you can count on the Gulf exporting less oil.  And by the Gulf, I mean Saudi Arabia, Qatar – and mostly Saudi Arabia and the UAE.  The Saudis today are exporting a little over 7 million barrels per day.  And I think within a few years you will see that these exports will be cut to 5 million, probably below 5 million barrels a day. 

 

So in a sense, I’m very interested to hear about Iraq and I follow this, of course, very closely because ultimately, one of the major issues here is that Saudi Arabia is not opposed to having Iraq as a competitor in oil.  Because ultimately, they don’t want to be under pressure, by the U.S. in particular, to be the supplier of last resort, as they have been thought of by the Department of Energy here.  The Saudis want to keep that oil and, as I said, move into knowledge-based, value-added production.  So seeing Iraq coming in as a producer of one commodity is really good for them, in the sense that it doesn’t put them under pressure to use their nonrenewable resources. 

 

Fareed has mentioned that the Saudis have increased capacity to 12 million barrels a day and, at this point, only produce 8.2 million barrels.  But this is interesting.  If we see the development of the economy, the electricity, particularly desalination, we find that the Saudis really are going to use another hub to increase their usage of their own oil, from 1.5 million barrels a day to about 4 million barrels a day. 

 

So as their usage of their oil for their own good is coming, it’s going to put a lot less barrels on the market, hence why they might not be so unhappy about Iraq.  Why are they doing that?  I mean, yes, of course, there’s the whole issue of keeping the barrels in the ground because otherwise, they will be gone forever, but they’re under a great deal of pressure to maximize it.  These countries, all of these countries, have a local population that is growing extremely rapidly and they need to create industry because that’s where the jobs are. 

 

So they are also trying to force – and that’s the leadership in Saudi Arabia and by leadership, I mean moving away from the royal family.  I’m one who does not believe that the royal family is that important in Saudi Arabia, although the State Department doesn’t agree with me.  I think the leadership of the Kingdom of Saudi Arabia is with the king, yes, but also, mostly with the civil servants, like Ali al-Naimi, the minister of oil, and people of this nature.  These people want to throw the Kingdom of Saudi Arabia into the 21^st century, kicking and screaming if necessary, but they are in the process of doing it. 

 

And when you travel there extensively, as I have done for the least two weeks, it’s absolutely amazing to see the difference.  Now, I used to live there in the ’70s and to see the difference between now and what it is today is just absolutely staggering.  But they want to do this more to develop their own nation and their own people, but why do they want to do that?  Well, they want to do this because they view themselves as, really, a world power.  Now, that may be a bit arrogant on their part and on the part of the UAE as well, but in fact, by increasing their presence and their footprint in value-added production out of energy, they can really become a world power. 

 

And Fareed, you mentioned very well what’s happening in Asia.  And I think we see the importance of Saudi Arabia and China and India.  It’s moving up very quickly.  Prince Salman was just in India for five days this week and, you know, made some really interesting contacts there.  So they want to be as dominant in all these industries as they are in oil. 

 

That’s a very tall order, needless to say.  They still have a long way to go, but they are really trying hard.  They still have enormous problems with education.  But they are attacking it.  I was just attending – at Georgetown we just had a conference on education, a sort of private workshop with the leaders in the educational field in Saudi Arabia, this week. 

 

And it’s really amazing that they know they have a problem and they’re trying to tackle it, just like they knew they had a problem with industrialization and they have been tackling it.  So that’s actually very interesting to see, that they know that they don’t know.  And I think that’s probably their biggest quality, really. 

 

The consequence of all this, really, is that I think the Gulf cannot be counted as being the producer of last resort.  I mentioned that earlier, just now.  And I think that’s where Iraq and, perhaps, later on, Iran, with making crude could come in.  Iran is, of course, a major issue for them.  But as I have mentioned and it was referred to by Tom, I have – and I still agree with myself, in that sense, if you want that position – I think the GCC’s extremely, extremely, underlined and capitalized, opposed to a Western military strike or Israeli strike on Iran. 

 

What I think is very interesting is that people tell me yes, but in private, they tell me that – in fact, in private, most of the people I talked to in private – I was talking to a couple of senior princes who have their own agenda and who don’t necessarily represent the views of the king or the views of the civil service as a whole.  But let me go into this just a little bit.  If there is a U.S. or an Israeli – for them it’s the same thing – military strike on Israel – on Iran, I’m sorry – it will bring this economic miracle I just mentioned to a screeching halt. 

 

The investments will stop immediately.  A lot of the foreign staff who are, you still, still manning – especially in the UAE – who are manning most of the factories will leave.  There will be internal strife, pushed in the Gulf by Iran, obviously, and as we know they are very high – they’re a very strong Shia community. 

 

Now, they may be Arabs versus Iranians and there’s very little lost love between the two, but nevertheless, the Iranians could create havoc in places like Bahrain, even the east coast of Saudi Arabia.  Kuwait, in particular, is very sensitive – could be very sensitive to these issues.  Even in Qatar, or in the UAE, where you have relatively small but strong Shia communities, that could really bring a complete halt to the development of the region. 

 

They know that if the development of the region stops, then it means that they will not be successful in marginalizing the conservative religious establishment in Saudi Arabia.  The people will be not able to find jobs and they could create a lot of pressure on this government.  So I think the priority – yes, they’re worried about Iran, but the priority is to continue growing so that, in fact, in the long term, they can marginalize Iran. 

 

And as remaining because of the sanctions – and I’m a big proponent of the sanctions – by using the sanctions to keep Iran very week, you emphasize the transfers of money from Iran to Dubai – about $10 billion a year, the elites of Iran are sending the money to Dubai – and that is really weakening Iran’s stature.  And that’s really what they’re pushing for. 

 

Now, they’re worried about the nuclear issues, but they have all now just decided to go nuclear.  Just three days ago, the king of Saudi Arabia announced that they would – that they would build a nuclear electrical facility.  So we’re moving along in that direction.  But they do not want a military strike.  I cannot emphasize this strongly enough. 

 

So one thing I’d like to finish on, really, is the issue that has been mentioned of natural gas.  It’s not directly related, but the fact that the price of gas has been decoupled from the price of oil is of great importance to the Gulf.  One of the reasons the Saudi miracle, in terms of industry, has happened, or is happening, is because they have refused to export natural gas.  The Saudis never – in the ’70s, late ’70s, the minister and the king, at that time, decided not to export gas.  They’re gathering the gas and they’re using it solely for their own internal consumption. 

 

The only ones who have actually taken their natural gas and exported it are the UAE and Qatar, as we just mentioned.  But this decoupling of the price of gas is very interesting.  I was giving a speech at Saudi Aramco the day before yesterday on these matters.  And I made a little computation on the back of the envelope, but if you take the price of gas today in the U.S. – $4.50 a barrel, even $5 per millions, or million BTUs – between $4.50 and $5.00 per million BTU – this corresponds to $30 oil. 

 

So what’s the interest of the producers, of users, to move to other – like, nuclear and whatever?  It’s very, very low.  So there will be more demand for this gas.  Now, the contracts for gas in Qatar – and they’re producing 46 million tons per year today.  They will be producing 72 million tons per year by the end of this year, with a new Exxon Mobil plant.  Those were originally built, really, to provide energy to the U.S.  And all of a sudden, the U.S., as has been mentioned, is now – is breaking even into its need of gas.  So these tankers full of LNG are going to float around the world looking for an expedition. 

 

And the contracts are very interesting.  The contracts between Qatar, the large companies and China and Korea, and so on, are based on the price of gas being at parity with the price of oil.  So that today, you can see that North Korea is probably – and I say probably because I have not seen the contract – but it’s probably paying something like $10, $11 a million BTU for liquid natural gas.  And all of the sudden, the Korean electricity company gets a call saying:  Oh, we have an LNG tanker for you, you know, $6 a million BTU.  Are you interested?  Well, you bet your boots they will be interested. 

 

And I think what we will witness, to the great dismay of Qatar and, perhaps, Exxon Mobil and people like that, is that the price of gas in the Far East, from LNG, is going to decline very rapidly.  This is very interesting because I can see that Qatar, with all its big – you know, everybody’s been saying Qatar’s making so much money.  The average GNP per person is over $100,000 and so on.  We are going to witness, I think, a very major decline in income in Qatar, in particular. 

 

It’s going to hurt Russia just as well because these gas prices are not international.  They are sort of segmented.  But LNG is now what makes it not segmented anymore.  And as Qatar becomes – and it already is the major supplier – as the rumor from Australia is that in a few years it’ll be even supplanting Qatar in the Asian market, the price of gas will remain totally decoupled from oil. 

 

Now, that will have some very interesting consequences, in terms of politics.  Iran is the largest, has the second-largest reserves of gas in the world, even though they are so badly managed, at this point, and there’s so little capital that they still are a net importer from Turkmenistan.  That will impact them greatly.  It really will impoverish people like Iran.  So I will live it at that because I’m sure people will have questions.  But thank you very much. 

 

MR. MATTAIR:  Thank you, Professor Seznec.  I think we might just take Q&A here at the table.  Well, actually, let me, as the moderator, ask the first two questions.  Just for the record, Fareed, can you talk a little bit about the domestic economic reasons for the producers to be concentrating on gas? 

 

Why is it that they want the gas?  What is it about their domestic economic development and their environmental concerns that leads them to that?  And secondly, I notice that there are more and more stories about how these producers are spending more on offshore oil and gas fields.  So could you comment about that?

 

MR. MOHAMEDI:  The technology for a lot of this gas that’s being found in the United States has been around for a while.  But what was not around was the price.  And suddenly, the price went up and a lot of the smaller players just rushed into this, looking for a good business venture.  And this has led to enormous growth in gas because of these small players drilling many wells.  And it’s coming out of the ground. 

 

Now, it’s attracted the attention of the bigger players, as you saw in the Exxon Mobil – Exxon Mobil bought up a fairly sizeable small company and it’s sort of attracted the attention of the big players coming into the United States.  And then there’s the whole phenomenon of learning about how to do this and taking it overseas and seeing if you can, you know, find this gas in different places around the world. 

 

The other reason, I think, has been access.  As oil prices went up, national oil companies became much more powerful in their own countries and it became more difficult for the big players and the small players to get access to the reserves around the world.  75 percent of the reserves of crude oil and gas, to a certain extent, are really owned by national oil companies, by governments.  So access has been a very big issue. 

 

That’s why Iraq was such a big news item because one of the biggest provinces in the world was opened up to the international oil companies.  But the significant news there was that it was the national oil companies that really came in, in a big way, even in Iraq, which was opened up.  You know, many people thought that this was going to be the province of the private companies.  It also became the province of the national oil companies from consuming countries. 

 

Why is offshore become a phenomenon?  Technology, again.  The national oil companies of some of the provinces, especially in the Atlantic Basin and especially on the Africa side of the Atlantic Basin, found it technologically difficult to access the offshore.  It’s more complicated. 

 

The interesting thing, on the South American side – Petrobras, namely – has the offshore technology and is going to be ruling that province and going to be exploiting it to the point where Brazil’s oil output goes from something like 2 million barrels a day to 5 million barrels a day.  But mainly, the international oil companies have found offshore a good business prospect because they could get access to it and they have the technology. 

 

MR. MATTAIR:  Okay, but with respect to the first one, would you agree that they see gas as a more efficient fuel for producing power, for producing electricity, for diversifying their economy and that they would want to preserve oil and use gas instead?  Is that an explanation?

 

MR. MOHAMEDI:  Well, I think that from a macro-policy point of view, from an environmental point of view, gas is seen as more efficient, environmentally sound, et cetera.  But from a commercial point of view, it’s become commercial because the oil companies couldn’t get access to oil.  So they got more access to gas around the world and they developed it because of that, and then created markets all around the world.

 

MR. MATTAIR:  Okay.  Well, my second question and then we’ll go to the audience would be for Lou:  How do you assess the prospects for Iraq meeting its targets, given the fact that they really haven’t achieved some of the most important political compromises they need to achieve?  And there are problems forming the government and problems with the oil law.  There are predictions that Iraq could, conceivably, descend into serious civil violence again.

 

MR. PUGLIARESI:  I mean, look, you can’t discount any of that.  This is all legitimate risk.  I mean, there’s a huge risk profile.  It’s interesting that companies did not bid – there was a lot of granularity in the bidding.  They did not bid on West Baghdad and they didn’t bid on certain areas.  They bid on the south – largely Sunni, where they have a lot of confidence in the stability.  They have a lot of confidence that the technocratic side, within the ministry, is kind of – you know, it has enough influence, no matter who’s in power, to take this through. 

 

But if you’re saying, is there risk, sure.  There’s a lot of risk.  And what’s interesting is, you know, I would say traditionally that a lot of the players, a lot of NOCs are there.  Here’s the interesting thing:  Who’s there?  Well, the Europeans, the Americans, the Chinese and the Russians.  It’s kind of an interesting group.  We all have a stake in this area remaining stable and, you know, continuing forward. 

 

And even if you were Iran, you’d probably have second thoughts before causing a lot of problems in that part of the world.  It’s not as if it’s just the U.S., so yeah.  I think that for us the next stage is to really peel back some of the political risk analysis and get a better handle on things.  But we see this as, from the research point of view, in the longer term.  But clearly, the companies have bid, you know, with their feet, in a sense.  They’ve showed up, put their money up and they’ve found the risk acceptable.

 

MR. MATTAIR:  And not only that, but actually, to go back to Professor Seznec’s point, I mean, with China and Russia in Iraq, as well as in Iran and in Saudi Arabia, they also have a stake in the outcome of this situation with Iran because military strikes harm their economic interest as seriously as they do Saudi Arabia’s interest. 

 

MR. PUGLIARESI:  You know, we had in the ’70s something called the Working Group on Persian Gulf Security, which was just us, the Europeans and the Japanese.  Maybe we need a new group on Persian Gulf security that includes the Russians and the Chinese.  (Chuckles.)  I don’t know, but I mean, it’s interesting how this is playing out. 

 

MR. SEZNEC:  Just a little point to emphasize what you’re saying, really, is I think the amount of money is so large in the production in Iraq.  And there’s so much hope from the Iraqis to, actually, for the first time in a long time, actually make some money and get their country going again, that in my view it doesn’t really matter which government is in place. 

 

Whether, even if it’s an Iranian, sort of, controlled government or not, they still – I think the majority of Iraqis are really nationalistic.  They believe in Iraq.  They do not really believe in being Sunni, or Shia, or whatever.  They really believe in being Iraqis and they need the money, so whatever the government in place is, if they know they can go up to 6 or 8 million barrels a day, I think it will happen.  So I’m relatively optimistic. 

 

MR. PUGLIARESI:  Yeah, right.  I think, you know, this is a good deal for the Iraqis.  This is in the Iraqi press.  They saw how the first auction went.  So the sequence of the failed first auction, followed by the second auction, with these high revenue takes – I mean, even if, you know, Muqtada al-Sadr takes over and says, okay, let’s nationalize these guys, someone’s going to say, well, you’re going to lose a lot of money.  And so I think occasionally, rationality does emerge.  (Laughter.)  And we hope that it sustains itself. 

 

MR. MATTAIR:  Well, yes.  Can we take questions from the audience now?  I saw one in the back.  I think you might have been the first, you.  I do want to take your question soon because I saw you first, but why don’t you –

 

Q:  My name is Christopher Blanche (sp).  I’m analyst with the Congressional Research Service.  To revisit the question of Iraq’s production increase and its implication for OPEC, I was in Algiers in February and posed this question to the Sonatrach officials.  And they sort of chuckled and shrugged their shoulders and said, oh, we can work it out.  And that seems to be what folks are saying, that they’re not the rivaling type.  But it seems to me that there are real fiscal implications and a lot of these countries have been on a roller coaster. 

 

And if you look at the Gulf – Saudi and UAE in particular, they have very full hands with a lot of the infrastructure programs that they have going down the pipe.  So can the panel take us inside and unpack this a little more?  What are those negotiations going to look like?  Can they work it out?  What lessons can be drawn from the ’80s and ’90s, or more recently, about OPEC relations, particularly among the Arab states?  You know, how realistic is it and who stands to win, who stands to lose inside OPEC?

 

MR. PUGLIARESI:  That’s for you, Nat.

 

MR. KERN:  I think one of the big factors to look for is who’s going to be the next prime minister in Iraq?  If it’s Maliki, again, the Saudis and other Gulf states can’t stand him.  If it’s Allawi or someone like that for the next four years, I think there’s a reasonable prospect of them working out an arrangement where, essentially, Saudi doesn’t go up as much as it would otherwise like to, leaving room for Iraq.  They did it after the Iran-Iraq war.  They did it after Kuwait came back.  It’s been done.

 

MR. PUGLIARESI:  You know, what the kind of mid-level guys at the ministry are telling us is, you know, we sort of want to be put – don’t even phone us till we get to 4 to 5 million barrels a day.  I mean, look, we are way below quota.  If you’ve got a problem, you work it out, but we’re on this track.  When they get above that, I think you get into the whole question of OPEC dynamics.  It could probably keep CRS busy for at least a couple years.  I mean, it’s going to be an interesting area to look at.

 

MR. KERN:  But that’s why you have your $20 lower price because there’s a little more competition.

 

MR. MATTAIR:  Yes, please.

 

MR. MOHAMEDI:  OPEC countries, now, have varying – what we call threshold prices, what price that they need to balance their external account.  The king has said that a fair price for both consumers and for producers is about $75.  And they, essentially, in the last year, achieved that.  And that’s because Saudi Arabia has been able to swing production in OPEC and it’s gotten, to a certain extent, especially after 2008, some cooperation from all the OPEC states. 

 

OPEC, in general, is aligned around that price.  There is no real disagreement on that.  Having said that, there are some countries that need $75 more than other countries.  The Saudis need about $50.  Venezuela, Iran needs a little bit higher, at about $75 plus.  But in general, they’ve been able to manage it at that level. 

 

You’re absolutely right that the coming of Iraqi oil will pressure the system.  It will because right now, most excess capacity, which is how the Saudis manage production, is in Saudi Arabia – and how OPEC manages the supply issue – is in Saudi Arabia.  So the Saudis cut back and they can do it almost by e-mail, manage this market.  But, you know, in the future it’s going to take a lot more negotiations between the Iraqis and the Saudis. 

 

Now, as Nat said, the Iraqis have said:  Forget about the 1980s, when you used to always say that our quota will be on parity with the Iranians.  No more.  We’re now talking about parity with the Saudis.  And so that’s the new, that’s the new sort of buzz.  But the thing is that I think that Iraq has also said that if we get about 6 million barrels a day, then that will be pretty much satisfactory. 

 

So I think that’s what we’re headed towards.  But the rise from two (million barrels a day) to six and the ability to manage that by OPEC will be a complicated affair.  And it’ll give us OPEC-watchers another lease on life.  (Laughter.)

 

MR. MATTAIR:  Peter?

 

Q:  Pete Broscos (sp), with ITPA.  I’d like to focus my question also on Iraq.  A lot’s been said about the massive production potential and the portfolio of risks, but in reality, I’m curious, where are the oil companies?  What are they doing?  Are they on the ground?  Are they experiencing any problems, particularly with regard to the security situation?  Thank you.

 

MR. PUGLIARESI:  Yeah, if you look at the – you can actually go to the, you know, either track the conference calls or look at some of the specific – BP, in the Ramallah field, they have shared quite a bit of information.  They’re on the ground.  Let me just tell you, they’re on the ground.  The contracting for the – the seismic crews were already there, before the options were even finished.  You know, the down-home services are being contracted for, you know, the water – I think Nat was telling me that Exxon had just reported that they have concluded a deal on the water for some of the enhanced oil recovery. 

 

The service companies are there in a very big way.  As I said, Schlumberger’s building a very large camp.  Halliburton is there.  So there’s no, there’s no evidence that this is – you know, we always like to say that we never trust any of these deals that you hear about until you see someone breaking ground.  Well, let me tell you, they are breaking ground.  There are very serious efforts underway right now. 

 

MR. MATTAIR:  And they’ve been on the ground for a while.

 

MR. PUGLIARESI:  They’ve been on the ground.

 

MR. MATTAIR:  And not because they’ve been providing services even before the auctions.

 

MR. PUGLIARESI:  Absolutely.

 

Q:  Good morning.  Hossein – (inaudible).  Let me thank you all for the wonderful presentations and start off with stating my disappointment on two things.  One is, of course, the name of the, the title of the talk today.  The name of the body of water between the Arabian Peninsula and Iran is actually the Persian Gulf, not the Gulf – not, you know, the Arabian Gulf, if I may say to the speakers. 

 

But the second one is that it’s interesting that Iran, you know, the first producer in the region and still the second-largest producer and owner of reserves – there was no substantive discussion of Iran’s ability to produce and potential.  But I do have one question for each of the speakers, if you don’t mind. 

 

Nat started sugar-coating, you know, the opportunities for U.S. companies in Saudi Arabia, or the region as a whole, but the reality is that since the Arab oil embargo of the ’70s, the entire region has been closed, at least to the upstream, particularly oil, to outsiders.  So we can talk about these things, but what he said reminded me of what I remember in the early ’70s, you know, in Iran. 

 

The situation in Saudi Arabia, in particular, is very particular to what we saw in Iran in the ’70s.  But my question is, don’t you think the Saudis are actually contributing more to the instability rather than the stability of the region, at least in the last few years?  King Abdullah, when he was – before he became king, he was really more an effective leader than he is now.  He tried to resolve the issues with, you know, neighboring countries.  And now it’s exactly the opposite.  There are the problems with the United Arab Emirates, with Yemen, with Iran and so on.  So it’s exactly the opposite direction. 

 

For Fareed, it’s interesting, you know, you talked about Qatar, but there were two other things.  First of all, Qatar really didn’t have much choice.  They had to go with the liquification route because they really didn’t have an outlet.  They didn’t have, you know, domestic consumption needs.  They didn’t have a regional need for gas.  So their options were limited.  But the problem is the security of, you know, of the export.  If there’s anything – if anything happens to the Strait of Hormuz, pure shock.  Oil-producing countries, they may have other options, but for Qatar, it’s not. 

 

The other thing is the environmental issue.  And Qatar is probably the most polluted place anywhere in the region and yet they’re producing gas, so there is a tremendous environmental impact there.  But my question for you is on the excess capacity you mentioned the Saudis have developed in the last few years that’s supposed to last for a long time or decades – whatever you call it. 

 

How do you explain that?  If the optimism of Iraq doesn’t materialize, do you really think – I understand they have to pay an insurance premium just to make sure that the market is stable and so on, but I hope that you talk about that a little bit.  For you, I just wanted to mention that Iraq wasn’t really the first country that opened up.  It was Iran in the ’90s with the buyback of the communities that came up and I honestly think that buyback offers a much better return.  You mention that the maximum –

 

MR. PUGLIARESI:  You can’t really say that by the number of concluded deals, though, which is really the evidence of where the buybacks work.

 

Q:  Well, the thing is that I’m not sure if the companies realize the risk and all the political risk and stuff and if you’re counting on the rate of return of 15 percent max, that’s the minimum that Iran guarantees.  This one is not guaranteed.  Mr. Shahristani, not long ago –

 

MR. PUGLIARESI:  No, we don’t know what the rate of return is on these deals.  We know what the companies have told us they think they got.  We don’t know what they are yet.

 

Q:  Assuming that everyone produces the volumes that they said they will and Mr. Shahristani, not long ago, said that what we are agreeing to is creating a capacity for incurring profit.  I mean, investors have to be crazy to make huge investment for Mr. Shahristani and develop capacities so I hope that you talk a little bit about that.

 

For Jean-Francois, there are – you talk about Iran’s threat – external threat from Iran in the region, but don’t you think that the internal threats, the real hardliners in Saudi Arabia really introduce more threat to the authorities in Saudi Arabia than Iran or any outside threat?  Thank you.

 

MR. MATTAIR:  Okay.  (Chuckles.)  That’s a question for each one of you.

 

MR. PUGLIARESI:  Let me just quickly respond on the buyback.  I’m familiar with two companies that engaged in very intense negotiations, one from Japan and one from a Scandinavian country which will remain unnamed.  In both cases, they could not get to the point where they felt – and it was really the Iranian bureaucracy that sort of chewed them up – to get to the point where they felt the deal was workable. 

 

I’ll quote a colleague of mine, Fereidun Fesharaki.  He says the Iranians do a much better job of imposing sanctions than the federal government and it’s really the kind of – the process in Iran which prevents these – I don’t think these companies were necessarily worried about U.S. sanctions. 

 

They couldn’t get the deal to work and partly because, I think, a lot of the talent that used to be in the oil ministry has been purged with the Revolutionary Guard political appointments and stuff where they don’t have the kind of expertise where people could get comfortable with these deals.

 

Q:  They did that deal with Total that you mentioned and it was very effective.  So –

 

MR. PUGLIARESI:  But I’m just saying, this is a completely different scale.  You just need to see what’s happening in Iraq.  It’s got these other problems but on the contracting terms, it’s a completely different scale.  But I take your point – that certainly it has been done before.

 

MR. KERN:  Again, you’re correct:  We’ve neglected Iran or belittled it.  That’s the fashion these days in this town.  (Laughter.)  I can’t apologize for –

 

MR. SEZNEC:  The whole issue of the internal threat is very interesting because in fact, that’s a little bit what I was arguing, is one of the causes of the leadership pushing so much the country to move forward is to bypass the religious establishment and to totally marginalize them.  To a great extent, they have succeeded so we’ll see how that continues. 

 

One thing I want to point on:  the negotiations with an international oil company which is – I can talk about these talks I’ve had with various international oil companies on these matters.  I totally agree with Lou.  They tell me it’s impossible to negotiate in Iran.  You negotiate a deal and as soon as you have a negotiation, it starts again and again and again so it has never been finalized.

 

Now, on top of it you have all the political pressure.  Total had a deal; Total left the North Dome – why?  Because the French government told them to do so.  But to quote one of my Saudi friends a couple days ago, was telling me, negotiating with the Iranians is, what’s mine is mine and what’s yours is negotiable.  It’s very, very difficult. 

 

So I find that every company, including that Scandinavian company you mentioned, just finds it very, very difficult to finalize anything.  That Scandinavian company did finalize a contract; they are actually finishing it this year in the North Dome.  But they don’t want to do any more – they just felt there had been an issue.

 

Quick issue that’s dear to my heart on the Persian Gulf.  Algeria, where I come from, in terms of knowledge of the Gulf, is really from the Arab World.  That’s where I was for so many years.  Of course, if I mention “Persian Gulf,” I’d be thrown out and I may well not arrive so for them, it’s the Arabian Gulf.  So I’ve made a compromise:  In everything I write, I write about the “Arab-Persian Gulf,” so I’m sure everybody hates me.  (Laughter.)

 

MR. MOHAMEDI:  On excess capacity, the Saudis, in a sense, had a big debate in the early part of the 2000s on whether they should spend the money on increasing their capacity.  Ali Naimi, the oil minister, used to say, you have insecurity of supply, we have insecurity of demand and we’re going to put in billions of dollars and then suddenly the demand is going to disappear.  He was borne out because in 2008, demand did collapse because of the global financial and economic crisis. 

 

But I think they felt that they needed to put the investment in to maintain Saudi Arabia’s strategic position in the world and especially now with this emerging pan-Asian group, as they became more and more important to Asia.  So they’ve decided, well, they’re going to hold it.  When Iraq returns, it’s going to definitely stress the system and we’re going to go back to this sort of Baghdad-Riyadh negotiations over price and that’s where the price, at least in the physical markets, is going to be found.

 

MR. MATTAIR:  Would you mind waiting just one second so I can say something about Iran, because you’re saying that we’ve neglected it and to come back to Jean-Francois’ point, there are a lot of contract disputes.  The Turks have a deal to take gas from Iran and they go to court because they’re not getting the volume they were promised; there are disputes over the price of the gas that Iran has contracted to send to Pakistan.  It is the reputation that they are very, very difficult to negotiate with and deal with.

 

But on top of that obviously there are really no opportunities for American firms in Iran because it’s against the law to do business in Iran.  Although the opportunities are theoretically rich because they’re so rich in oil and gas, it’s just a closed market to us.  Other people have entered the arena, depriving us of business – the Chinese, Russians and Europeans – but even that is starting to contract because the sanctions that are contemplated by the Congress and the sanctions that are already in place in the executive orders that go back to President Bush’s first years after 9/11, they prohibit dealings with the banks.

 

So let’s say a European company needing to get financing for a project is running into a problem.  Banks are being fined by the United States government for dealings with Iran; banks are being blacklisted.  The whole possibility of financing these deals is very, very difficult, even for European firms now. 

 

So you see firms leaving Iran.  You see firms that have contracts to develop offshore gas fields, like Total, leaving, and others as well.  There are still some there because of these contracts were signed a long time ago and the work is already ongoing, so ENI is still in offshore, it’s still offshore; so is Total.

 

But in terms of new contracts, they are against the law and it’s really stymieing European opportunities there as well.  Of course, that leaves the Chinese and the Russians and that’s why they’re going to impose sanctions – really tough, tough sanctions – in the Security Council and that’s why they’re going to even impose the kinds of tough sanctions that Obama would orchestrate with a coalition of the willing.  So we didn’t really plan to exclude Iran but the panelists are concentrating on other things and we can go into it more in the Q&A.

 

Q:  Well, you were saying there are more reasons why we should include Iran, why you should – we should have a detailed discussion on either Iran’s ability or inability of producing what Iran needs for its own and for export.  So there are more reasons.

 

MR. MATTAIR:  I agree and you know, we have covered it in other conferences.  I think you’ve been to one where we focused exclusively on Iran.  But I take your point.

 

Q:  Fareed talked about the Persian Gulf region so Iran should have been included in that as well.

 

MR. MATTAIR:  Well, we can talk – we still have time to talk about it.  (Laughter.)  We still have half an hour to talk about it.

 

Q:  Thank you, gentlemen, for a great panel and happy Earth Day.  I’m wondering also a little bit about Iran, about the politicization of Total and even – and also Venezuela’s oil companies have been going through and been mismanaged by the governments and they – the governments, respectively, spent the funds on their own needs and I was wondering, with the rise of Iraqi oil, if they meet their quota over the next two years, could that diminish the political influence that these countries exert through their crude on the market with Russia and China? 

 

The second point on that:  How has Venezuela and Russia worked with Iran to develop this energy triangle of Russia selling weapons to Venezuela and that ties into Iran and – I’m wondering about the politics of the oil reserves of these two countries and how do you think that the rise of Iraqi will affect it.

 

MR. MOHAMEDI:  This concept of politicization of oil by the OPEC countries of Venezuela or – is a bit of a joke because the United States overthrew governments because of oil.  I think that politics and oil have always gone together.  The economic power and the political – geopolitical power of many of these governments is greatly exaggerated.  I think that it’s good, sensational stuff but it’s really not what happens in reality in the markets. 

 

Chavez sound – he makes good copy and he’s glamorous or sensational.  But really, it doesn’t really matter to the oil market.  In fact, the mismanagement by some of these countries is actually helping other oil producers that are at times helping even diversify – the oil market diversify away from some of these guys. 

 

In fact, the problem of Iran is that it has excluded itself by its mismanagement of its oil sector from the world oil markets and it’s becoming increasingly irrelevant.  And so that’s why – the policies of these countries are actually hurting themselves rather than enhancing their political power.

 

MR. PUGLIARESI:  Yeah, let me – I think another thing – I mean, I agree, it’s really sort of pricing.  We gave a presentation about a year ago to one of those agencies with the funny three-letter name and it was on Gazprom and we said, look, we think you have it all wrong.  We think Gazprom does not have all this power and dominates – no.  In fact, the pricing leverage is moving against them.  This is a market issue having to do – because of the Shell gas revolution, the – and that this is going to break the kind of delinking.

 

They literally threw us out of the room:  “You can’t be serious, Lou.”  And so like a month ago, they called us back up, said, well, can we go ahead and go over that briefing again?  And I said, you know – and so, what happens – the way to think about Iraq is it has to do with the price.  Political leverage is going to drop if the price drops.  It has happened – again, the breakup, the de-linking of gas is more than just a de-linking.  It means that the assets, and far away from the markets that the Russians sit on, the Central Asians sit on, have declined dramatically in value.  Now they’re in a position where they have to change their whole strategy.  That’s where the political risk comes.

 

MR. SEZNEC: A quick point, if I may, on the Chinese contracts in Iran.  Everybody says that the Chinese are dealing a lot with Iran and so on.  There’s a lot of truth to that.  The fact is, however, I think there are 21 or 22 oil contracts signed between Iraq and China but not a single one has produced a drop of oil yet.  It’s always “next week, we will start producing.”  It’s the same, a little bit, with the Russians. 

 

I think the Chinese are playing it very smartly in the sense that they want to be the friends of Iran because they’re the only ones dealing and signing with Iran, but they’re making sure not to produce anything, not to annoy the Saudis who are by far their largest supplier of oil and a very large market for their own goods.  So I just wanted to bring this as sort of a factoid.

 

MR. KERN:  Yeah.  China’s biggest contract with Iran is for LNG.  Iran doesn’t make LNG.

 

MR. SEZNEC:  That’s right.  Exactly.  That’s exactly true.  There is no LNG in Iran and there won’t be any anytime soon because it costs so much money to start.

 

Q:  Yeah, I’m Carl – (inaudible, off mike).  Professor Seznec, I was struck by what you said about the GCCC countries opposing military strikes on Iran but supporting the Chinese and as I’m sure you’re well aware, there’s a growing drumbeat for strikes in certain circles in the U.S. and from Britain for military strikes after a tightening – further tightening of sanctions.  How do the GCCC countries view this drumbeat?  Do they think it can be – that military strikes can be put off?  Do they think the sanctions can be maintained indefinitely or what?  How do they view this?

 

MR. SEZNEC:  Well, as some people said, those who know don’t tell and those who tell don’t know so I will tell.  (Laughter.)  I think basically the scenario at work in my head, very simply, is that if we do decide to make a military strike on Iran – and I think there’s been effort by the administration to convince the users of oil that Saudi Arabia will make up for the 2.3 million, 2.4 million barrels that are exported by Iran – Iran produces 3.8.

 

I think if there is a military strike, the Saudis have been very, very strong in telling the U.S. government that they’re opposed to it.  If they don’t – if we bypass their opinion and still bomb, I think they will not produce the extra 2.4 million.  They will produce and they’ll just happen that the price of oil will go to $200 a barrel and they’ll be sorry all the way to the bank.  (Laughter.)  I think that’s what’s going to happen.  But I really think they are so afraid that it will stop the evolution of their society at this point that they will take that kind of action.  What else can they do?

 

MR. MATTAIR:  Fareed Mohamedi has to catch a train, so I’d like to say thank you before he leaves.  Yes?

 

Q:  Thank you, gentlemen.  My name is – (inaudible).  I have two small questions, or short questions, one of which is that, if Iran becomes a nuclear power, what will the impact of that in the business environment, within the media and would that stop the local and international investment in the region and that would create some other problems? 

 

And the second is that some people say that by mid-21^st century, there would be another energy crisis in the world and due to the increased demand and consumption, particularly in the growing economies, and decrease supplies.  Would you believe in that?

 

MR. KERN:  It’s hard to know exactly what Iran would do if it was a nuclear power, a year or so out.  Certainly, if I were producing gas and got it from a reservoir that is shared with Iran that Iran is not able to exploit, I would expect to get a call from the Iranians saying, we want you to share up a little of these revenues you’re getting from our joint field.  I’m sure what the Qataris would respond.  But I think there’d be a number of areas where the Iranian government would assert what it considers to be its legitimate rights. 

 

MR. PUGLIARESI:  Yeah, I’d like to give you an alternative framework to think about this transition to fields of the future.  You’re thinking about petroleum.  What happens with the peak oil stuff or all this running out of stuff is that you have to prove a negative.  It’s sort of hard to prove a negative. 

 

There’s been about 5 million holes drilled in the world, 4 million in North America.  Almost all of those have been two basins:  the San Joaquin and the Permian Basin.  We did a study where we went back and we said, how good is the Hubbard mechanism – which is standard of what we were looking for – how good is it at forecasting peak oil from these two basins? 

 

I won’t go into the whole – it’s a very interesting report, if you look at the website – and we updated it for every 12-year period, a 15-year period.  It turns out, in the final period, the year 2000, where we had updated it from the ’60s and re-forecasted, it missed us by an order of magnitude.  So there’s a lot of uncertainly on how much oil and gas is out there. 

 

But there’s probably a backstop price of oil.  There’s probably a price for oil where you can’t drive it any higher because conservation is so prevalent at that price or alternative fuels are so prevalent and so the question is, how are we going to approach that backstop and what are the alternative technologies going to be?  You really don’t know. 

 

I’m not convinced DOE can pick the winners and losers.  And I think that shale gas is a great story – took place largely on private land, people had an idea, could move it from one area to the next.  And actually, if the gas reserves are much higher than we think, gas-to-liquids may turn out to be the backstop price way before we start running out of petroleum.  I guess if you put the array of all the problems you have to worry about in the world, for us, that’s not one of them.

 

MR. KERN:  Yeah, I mean, there’s some arguments that we hit the backstop price in ’08.  We got peak demand.

 

MR. MATTAIR:  Yes?

 

Q:  Hi, Julius Grime (ph), in charge of capital.  I was wondering if any of you might have any insight on what might take place for those firms operating in Kurdistan, that have made it through the mess of the KRG, or prior to and outside the Baghdad process.  Simply put, what sort of settlement might you expect between Erbil and Baghdad?

 

MR. KERN:  I think if the Iraqi government ever is more transparent about the terms that they reach with the big oil companies in the main parts of Iraq, the KRD has already published the terms of its contracts and you would want to see whether the Kurds got as good a deal as the Iraqi government did. 

 

I think it’s probably going to be on a par, in which case the Iraqi government is sitting there – Baghdad is sitting, preventing exports from which it deprives 83 percent of the revenue because of the revenue-sharing.  The first year, if they wanted to meet the terms of those contracts, they’d have to turn over about 50 percent for cost recovery but, you know, that’s life.  I think Iraq would benefit from them opening up export outlets for Kurdish oil.

 

MR. PUGLIARESI:  I do think – it’s really hard – that the recent, particularly this provision where there’s really no legal basis, that the revenues will be distributed provincially on a per-capita basis, as seems to be softening the Kurdish position, a little bit. 

 

The interesting thing is that there’s a famous contracting analyst, let’s call him, or contracting expert, by the name of Pedro van Meers (ph) and he takes a look at these contracts and says, well, you know, this provision is going to cost too much; acceleration of cost recovery; this one’s corrupting.  He reviewed both the Kurdish and the Iraqi central government contracts and as far as we can tell, most of his suggestions were taken in both cases. 

 

MR. KERN:  Yeah, at some point where he reviewed it, the Kurdish were getting a better deal but the Iraqis changed it.

 

MR. PUGLIARESI:  Yeah.  I tend to agree with Nat on this one.

 

MR. SEZNEC:  I think it will be interesting to see what happens with the political negotiations between the Kurds and the various parties because I’m sure that’s an issue that we’ll try to negotiate.  The Kurds would like to keep complete control of their oil and of course I’m sure the ministry of oil in Iraq wants to somehow, sooner or later, get hold of those contracts.

 

MR. KERN:  It’s complete control but they are willing to give 83 percent of the revenues after cost recovery.

 

MR. SEZNEC:  That’s right; that is true.  So I think these issues – it’s a very complex issue, I think and the Kurds are trying to show that they are – they attended the meeting in London a couple of – three, four weeks ago where they were discussing these issues – Kurds were discussing these issues.  As you mentioned, they softened their position quite substantially in the past few weeks to sort of get back into the game. 

 

I think they felt that the negotiations by Shahristani were really very good for the whole nation and probably better than they themselves could obtain with the various companies and they’re probably being pushed by the companies, Sinopec in particular, to get back into good graces with the Iraqis so that Sinopec ends up working in Iraq itself as well.  So I think altogether, we will see sort of a – probably the two sides getting back together and sooner or later get their little companies like DNO and Sinopec and so on getting back into the good graces of Iraq.  It’s going to take a little while to heal but –

 

Q:  I’m Charles Stewart; I work for Rep. Watson who’s on the Foreign Affairs Committee.  I’m just a little curious – I hear different ideas about the political implications:  On the one hand, you hear that the dynasties are the least of our – basically technocratic capitalists now so it doesn’t matter who rules or how that happens. 

 

On the other hand, you hear King Abdullah became king by a fluke, it was supposed to be his uncle, he got in; Sultan Qaboos is gay, has no heirs; Saudi Arabia’s got all these princes – yet we seem to act as though there is a stability that’s not driven by the dynastic nature of the ruling powers of families.  Just want to hear some comments on that.

 

MR. MATTAIR:  On a technical point, leadership in Saudi Arabia passes from brother to brother right now so it would not have been an uncle who would have been in line.  Jordan – Jordan.  Sorry.

 

MR. SEZNEC:  Well, Jordan is not an oil supplier so we’re not really discussing this.  (Laughter.)  I think there is a – it’s very interesting and I’d like to reiterate what I said earlier, is we tend to see the whole decisions and the elites in the Gulf in particular as being driven by the royal families.  I strongly disagree with that.  Maybe in Dubai it is but frankly – and in Abu Dhabi it is also – but in Saudi Arabia, the state is run by the civil service in Saudi Arabia. 

 

The princes do matter an enormous amount – they make final decisions and the civil service cannot work without approval from certain princes – but the royal family, especially King Abdullah in Saudi Arabia, is really the decision of last resort.  Every decision is made by consensus at that level, not only between the 10, 15 senior princes and the 10, 15 senior civil servants.  But I think it’s time we realized that yes, the technocratic nature of the state and what they want to achieve is really primary to the future of the region, I think.

 

Q:  And that even in the case of when there are succession issues, in other words, when the king dies, that doesn’t create power vacuums that you would –

 

MR. SEZNEC:  There is no – I mean, yes, then definitely you could say that.  But certainly in Saudi Arabia there is no succession issue.  The succession is actually very well-organized at this time and the new Bay’ah Committee that’s there, which was really built – and I’m making a very long story very short – was built by Abdullah to sort of remove sultan from power eventually and to go to a more technocratic prince, whether it’s Salman or Khalid al-Faisal, I think we’ll see in the very near future, unfortunately. 

 

But I think it is very well-defined.  All the senior members of the royal family have a say in these matters.  But it is an extremely stable system, at this point.  I can’t say that about the other countries of the Gulf, by the way.  I would not say that about Qatar; I would not say that about the UAE.

 

MR. MATTAIR:  I’m not sure we’ll have a succession issue in Saudi Arabia as soon as you think. 

 

MR. SEZNEC:  Eighty-seven.  (Chuckles.)

 

MR. MATTAIR:  But healthy. 

 

Q:  Hi, my name is Victoria Pushka (ph).  I was wondering if I could get your interpretation of the Iraqi government’s decision to shift the soft loans into single, non-reversible contracting fees for the 250 deals it just did.

 

MR. PUGLIARESI:  Yeah, I’ll have to – Stan Harbison (ph), who’s the lead – worked on that issue and I’m not familiar but I do know that the loan issue is something that still – it’s something that gives a lot of people heartburn because they’re not sure how all of this is going to get worked out.  But I don’t have the answer to that.  I’ll have to get back to you.

 

MR. KERN:  There was a legal issue with the cuts.  Parliament should have approved it if it was a loan but it doesn’t matter if it’s just a payment.

 

MR. MATTAIR:  Oh, okay, Professor Seznec has to leave so I thank him for joining us.

 

MR. KERN:  We’re out of questions anyway.

 

MR. MATTAIR:  Well, I have one – at least I have a topic.  (Laughter.)  I have a topic.  To what extent are the decisions of these producers strictly economic and how much would their dissatisfaction with American foreign policy influence any of these decisions or their decisions about how to invest the revenue?

 

MR. KERN:  Oh, well, you know, I talked about how for 13 years, it was a political decision that the Saudi government ordered Saudi Aramco to be the number-one or number-two supplier to the United States.  It missed that, I think, in one year. 

 

But that was – that’s difficult.  They’re far away, they’re competing against Canada with no other place.  It was a purely political decision and the kings’ and the crown princes’ decisions – remember ’03?  It was political to stop favoring the United States.  Very straightforward.

 

MR. MATTAIR:  Are there any other questions?  Yes.

 

Q:  Can I make a comment please?  On Qatar gas, as talked about, the situation is really not as you said it.

 

MR. KERN:  Please enlighten me.

 

Q:  The joined fields – North Dome field, or the old North Field, as they call it now, was discovered in the early ’70s by Shell.  In fact, the first project in, in my guess, 1974, was an evaluation of a scrapped project.  Iran had no idea that the field would extend into the Iran territory; Iranian oil. 

 

It was after the Iran-Iraq wars that Iran actually made the discovery or, you know, found out that the field is extended into the Iranian oil.  Now, the size of the field:  It’s only one-third on the Iranian side and two-thirds on the Qatari side.  Iran has 10 phases of 28 phases of the project actually developed.

 

MR. KERN:  So are they producing one-third of the gas here?  (Chuckles.)

 

Q:  It’s actually producing considerably from that field and the ratio is very close to what it’s supposed to be, hopefully, area-wise.

 

MR. KERN:  One-third, two-thirds?

 

Q:  And then China, that you talked about, actually Chinese involvement in Saudi Arabia – and there is no involvement anyways in the oil – but on the gas, there were some major contracts several years ago for exploration in the Rub’al Khali area – the Empty Quarter.  China was one of the four major operators there and they didn’t find anything. 

 

MR. KERN:  They’re very marginal areas.

 

Q:  Well, you know, Shell had a huge discovery there.  So it’s not that the area is really empty as far as hydrocarbon is concerned.  The potential is great and Shell proved that to be the case.  These things take time.  China’s involvement in Iran is real and they are really involved in oil sectors of the economy, in the hydrocarbon – they’re really involved in the refining and pipelines and so many other areas.  They may not have production for oil but the commitment is there and they’re making a major statement.

 

MR. KERN:  Building the – (inaudible).  Yes.  They’re very active.  No question about that.  Yeah.

 

I think the U.S. often gets in a high fever pitch about Chinese contracts with Iran and then it would look at the $25 billion contract for LNG over the years.  Well, okay, countries sign these kind of things and it’s kind of futuristic – they’re like things Goldman Sachs sells:  They don’t really exist.  But no – there’s substantial Chinese presence; there’s no question about that.  Those are strong ties.

 

Q:  These contracts, they –

 

MR. KERN:  Some are window-dressing; some are real.  Yeah.

 

Q:  In Qatar, it’s the same thing:   They’ve been investing for years and now they’re –

 

MR. KERN:  Yeah.  But I’m reassured that the Iranians don’t have a valid reason to ask Qatar to pay for stealing their gas.

 

Q:  In fact, they’re working very closely with – (inaudible) – and not just economic issues, but on security issues.  It’s kind of interesting.

 

MR. MATTAIR:  Are there any other questions?  Yes?

 

Q:  I’m just curious if anybody knows how much it costs Saudi Arabia to maintain all that spare capacity.

 

MR. PUGLIARESI:  That number’s around.  It’s expensive but affordable.  I can say it’s a big number and we may have it.  I think we do have it.  We did it once and looked at it.

 

MR. MATTAIR:  Well, if that’s it, we can adjourn a little bit early and I’d like to thank everyone for coming and I encourage you to visit our Web site which is www.mepc.org to see the transcript in two or three days and to look at all the other programs that we are doing.  Thank you very much.  Thank you to the panelists.  (Applause.)

 

(END)