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Moderator:  Good afternoon and welcome to this week’s edition of Halftime Talk.  We’re honored to be joined today by our distinguished guest from Washington, DC which is very much in the news this week, and one might say it’s in the news every week, Frank Fannon, Assistant Secretary, Bureau of Energy Resources at the Department of State.  Thank you, Frank, for joining us. 

Assistant Secretary Fannon:  I’m delighted to be here.  Thanks, Sean. 

Moderator:  Frank, I want to kick off with one of the sort of subjects that I’m hoping to go through with you at this sort of your kind of exit interview, if you like, from the point of view of the Energy, the State Department.  But what are the most significant moments, one might say, last year was the role, how America got involved with Saudi Arabia and Russia and the whole OPEC initiative to kind of salvage the energy markets in March and April and find stability and then a roadway back to recovery?  It seems a very  unusual step for the U.S. to get involved with that and I’m just wondering how that came together and what does it look like now in the rear view mirror as we kick off a new year?  

Fannon:  Thank you.  Again, I’m delighted to speak with you. 

That was a consequential time for the United States, a consequential time for the world, for the global economy really.  

During the spring we saw an acute impact on the world market with COVID and it happened also to coincide at the same time with some ongoing discussions within the OPEC-Plus construct with respect to supply. 

The U.S. in the last few years became of course a consequential player in the global energy market alongside some of the incumbent dominant producers around the world.    

Moderator:  You became the largest oil producer in the world.  

Fannon:  We did indeed.  January a year ago we were producing upwards of 13 million barrels per day.  It was a dramatic feat.   

What we all saw was the increased instability in the oil markets in this time of a 100 year demand shock crisis which we never saw in our lifetimes for sure, and the impact that was having across the global economy in the face of this remarkable headwind of the COVID pandemic.  

So we thought first what we ought to do is identify the areas which were within our control that we can arrest the devolution of the global economy and called on the G20 in effect, and at the time of course the Crown Prince of Saudi Arabia served as the President of the G20.  The G20, of course, is an organization of the 20 largest economies, focused on global economic stability.  And here we had this chaotic event in the world, in the global economy, and having one of the world’s largest energy producers foundational to the economic growth and recovery.  Saudi Arabia also serving as the head of the G20. 

So in March Secretary of State Pompeo called the Crown Prince, had a discussion with him and encouraged him to use not only his position as the historic head of the global energy market but also his role as the leader of the G20 to arrest this trend and use his leadership to exercise great control over those markets.  We were very pleased to see the Crown Prince do just that.  Called for an extraordinary Energy Ministers meeting to speak to some of these issues.  At the same time the OPEC-Plus members were having their discussions.  And we were, together, able to impose some meaningful changes to the market. 

I think another thing that was pretty transformative of that is how we used traditional structures.  Of course OPEC-Plus had theirs in terms of the focus on the supply.  But we in the United States helped lead the International Energy Agency which was an organization formed in the aftermath of the oil crisis of the 1970s by then Secretary of State Henry Kissinger.  We used that construct to have a demand response as well and called on IEA members to take this opportunity, at the same time the G20, and the OPEC-Plus was curtailing supply, we called on the members of the IEA to use this opportunity and time to fulfill their historic, their requirements, their commitments as IEA members, to fill their [strategic] oil reserves, so it’s creating a demand. 

Moderator:  It was a huge part of the recovery last year was also China doing that and certainly others. 

One of the things to note about that period which sort of brings us to today is pre-COVID becoming the major crisis that it was and the collapse in demand was the fallout between Saudi Arabia and Russia over the strategy going forward for OPEC-Plus in early March 2020, and it became a bit of a disagreement about strategy and market share and everybody sort of first port of call was pump as much as you can, and then obviously finally all of these pieces came together as you articulated.  But this week just finished, the OPEC-Plus met again for their meeting and outlook for the first quarter and interestingly, Saudi Arabia agreed to cut a million barrels a day while giving Russia and others the opportunity to continue to increase their supply.  How do you explain that?  What did you think is the thinking behind such a position now as compared to nine months ago when it was basically blow up everybody’s houses in a way?

Fannon:  I really can’t speak to that.  The Kingdom looks at things through a longer term than the short.  I’ve gotten to know some of the officials there and the leadership of Saudi Aramco.  They’re very strategic thinkers, remarkable capacity in terms of the operations of the Saudi Aramco.  But I can’t speak to the specific motivation.  I would just suggest that they’re looking at the longer term, they’re looking at the recovery and the expectation of global —  

Moderator:  It would sort of indicate, well, to a certain extent it indicates the opposite, doesn’t it?  Because if Saudi Arabia thinks they have to cut a million barrels a day they must be of the view that outlook for demand recovery in ’21 is actually not that positive.  I’m wondering does the State Department, does your department share that view for demand recovery in ’21? 

Fannon:  We don’t look at it in terms of price projections and what one’s expectation of what the appropriate price is completely different in our —  

Moderator:  But demand.  I mean nonetheless, demand is critical and very important for U.S. production.  As you said, you started the year at 13 million down to now about 11 so you’ve got some recovery to do as well. 

Fannon:  Without a question and one of the great virtues of our system is the responsibility of the private sector to react based on market conditions.  And I think that’s one of the real stories here about the short cycle system of U.S. shale.  I mean we’re going into these discussions with SOEs who, wherein the government controls the output, and countries are jockeying to make a relative commitment on whatever in terms of what their output’s going to be.   

It’s not the way the U.S. system works.  It will never work that way.  But we do have the greatest degree of confidence and we’ve reiterated that through the time period and it’s borne out to be true, is when market conditions react price makes it uneconomic for certain producers to produce.  They don’t.

Moderator:  But we did have the Texas railroad and others getting vocal — 

Fannon:  That was a bit of noise, wasn’t it?  Yeah.  That was — 

Moderator:  Well, I don’t know.  I mean ultimately these are strange and new times.  The issue I suppose ultimately is what does the outlook for recovery look like from your perspective?  The 13 million barrels a day achievement pre-COVID came with the sort of nostalgic and fairly well used perspective of U.S. energy independence which is something that has become a mid of a mantra for U.S. policy.  And I’m wondering does that still remain, do you think?  Obviously as you come out of office, the next administration comes into office, what’s your outlook for U.S. energy independence? 

Fannon:  I think you’re exactly right, that that concept of U.S. energy independence, I mean it is something that was born in the Nixon era and has continued throughout.  So it is a mainstay of American politics.  It is because every consumer sees what prices are and consumers are voters and so there’s going to be a strong domestic political resonance to the issue of price.  But we focus on the concept of energy security and that speaks to — which is a different thing.  We view energy security as founded upon having diverse energy types, supplies, types of energy, routes, premised on transparent, efficient markets.  We’re not tied to one type of energy versus another type of energy, and this goes to the broader concepts of energy transition as well as, of course you talk a lot about oil, but gas and the role that gas plays in securing that energy resilience, not just for ourselves, friends and allies around the world, but for the markets as well. 

In the oil story we talked about hitting 13 million.  On the gas side, in 2016 the U.S. was the 15th largest gas exporter in the world.  Fifteenth.  That was the year we started exporting LNG.   

Last year, or in 2019, we were third.  Our gas is going to more than 40 countries around the world. 

So this is a story about efficient, transparent markets, for having the appropriate private sector motivations to get after it and find opportunities, and for other countries around the world to develop their own infrastructure and have the capacity to import.  

This is a remarkable story.  I think it’s both in the context of the oil sector as well in the gas sector.  The rest of the world is still catching up to U.S. energy markets, and the responsivity the U.S. private sector has all around the world.  And it’s transformative. 

Moderator:  How do you see that specifically going forward?  Obviously it’s a bit like one of the old chestnuts in the energy media is the obituary of OPEC.  The other one now is increasingly the obituary of shale.  These do become very recurring and shale has proven to be incredibly resilient as has OPEC, obviously 60 years old now.  Bus shale is similarly quite resilient over the last decade despite the cycles. 

What’s your own outlook do you think for shale recovery?  We’ve now seen oil prices move above $50 on WTI.  The outlook is positive.  What can shale expect this year at those kind of prices? 

Fannon:  I think what we’ve seen, and this isn’t the first time there has been a severe downturn – the shale patch has gone through this twice before in terms of price – it forces a degree of discipline in the market.  I was in the private sector working in the industry when one of the downturns happened and the level of scrutiny, of operations, cost savings and improving efficiency down to the most minute detail is taken quite seriously, especially in these times.  And we see that continuing on. 

We’re also seeing a degree of discipline in terms of financing shale projects.  The concept of going after value over volume is now a Bible verse in the shale patch.  And you also see the expansion of some of the larger companies buying in and have bought into shale. 

What is an economic price point is the question we get asked often by friends around the world, and it varies depending on what flag, what company — 

Moderator:  What I think you can say, as you’ve just articulated indirectly is that every year that passes and every crisis that passes, that price point seems to go lower, the ability to be profitable . . .

Fannon:  Exactly.  And what the rest of the world has come to see is just that.  And secondly, that they will continue to produce once prices suggest that they can.  Back to the short cycle point, we can turn on or off within a matter of months and that’s a unique degree of market responsivity that the U.S. shale producer has that no where in the world has.  And I see that continuing on. 

Moderator:  Let’s just switch gears a little bit and talk about the energy transition.  We saw through COVID in essence the acceleration of the energy transition around the world and on company levels, you know, especially the European oil majors, very publicly transitioning and restructuring towards lower carbon fuel mix, et cetera.  

I’m wondering what obviously the U.S. over the term of the Trump administration now coming to a close, but nonetheless, stepped out of the Paris agreement.  That now looks like it will probably be reversed with the new administration.  But ultimately where is the energy transition in America today, January 2021?  And where do you think it’s likely to go in the coming year or coming four years? 

Fannon:  First I think it’s important to recognize the energy transition is not a monolithic thing.  It’s varied based on locations around the world.  As such, we ought not to simply see it from a perspective from Brussels or from the United States.  We have to be specific about it. 

But what I see, again, I have a global [remit], very much see that the call for cleaner forms of energy is global and it’s a direct reflection of the demographic shifts that are occurring at scale where people are entering the middle class.  You know, Brookings did a study and within the next 20 years there will be an additional two billion people living in the middle class.  That’s a good thing.  And when people enter the middle class they have agency and they demand their governments respond to their needs which includes a cleaner environment. 

So this call for cleaner forms of energy is happening. 

Where I think in the U.S. —

Moderator:  Look at the valuation of Tesla.  We just today, Elon Musk became the wealthiest man in the world.  

Fannon:  And we have stacks of new electric vehicles happening weekly in the United States. 

I think it’s important to distinguish the high level statements, which are one thing, versus the actual performance which is a whole other thing.  And in the United States the performance and the transition in the United States alone is world leading, as well as our technology is world leading. 

Now the rhetoric, that may be a different matter and you spoke to the issue of the Paris Accord.  But I would look to the actual environmental outcomes versus political speech. 

Moderator:  But we saw that at Kyoto where the U.S. didn’t ratify Kyoto but yet became the first country to actually keep the requirements of Kyoto because of your incredible ability to innovate and to drive things forward from a green economy point of view. 

Fannon:  And look at China.  China came out with yet another statement that they’re moving their targets further in the future, but according to a variety of third party analysis, China’s domestic coal investments plus their coal investments that they’ve made through their Belt and Road and developing nations represents nearly 50 percent of global greenhouse gas emissions.  

Now again, I would focus on outcomes and performance, execution of policy versus political speech. 

Moderator:  What do you think it means for the Middle East energy industry, Middle East oil producers, NOCs?  We’re seeing the IOCs transform, particularly the European ones.  I would expect the U.S., American companies to follow in that transition.  But what does it all mean do you think for the Middle East energy companies, the Middle East classic national oil companies as they look at this change?  How should they adopt do you think? 

Fannon:  First, looking at the region, I would say – I think no region’s future is necessarily bound by its past.  I see these countries as some of the real leaders in energy transition adoption, energy transition related technology investments, and really with a very forward-looking view.  Whether it’s some of the investments they’re making in electric vehicles.  Of course the most celebrated NEOM Project.  There’s a variety of activities that the Emiratis are doing.  Oman is doing just this amazing concentrated solar to enhance oil recovery with Occidental Petroleum.  It’s really a transformative kind of application of technology, looking at what’s comparative advantages and the natural endowment that they have in adopting best in class new technology and helping innovate that. 

Moderator:  Now they’re getting into hydrogen as well. 

Fannon:  That’s right.  So I think the region is very forward looking and they’re using some of the considerable wealth that they’ve accumulated by supplying the world with oil and gas to redirect some of that  capital, to look to help diversify their economy both in the energy space as well as in technology. 

But I would also say they’re not just doing it there.  They’re also investing in places like the United States.  And whether that’s in electric vehicles or it’s in U.S. LNG exports.  I think that is a remarkable development.  I think it’s something we ought to celebrate more and we should speak more about. 

Moderator:  In terms of the specific oil play, if you take the different things we’ve talked about, U.S. energy independence as we talked, a construct from the Nixon time and it’s always been there, probably will always remain in some sort of romantic way.  But ultimately as we live in the current and the future with the rise of the low carbon economy, the lack of CapEx that has been invested in new hydrocarbon supply in Europe and in the U.S., it strikes me that the Gulf, the Middle East will rise again in its importance in terms of, obviously its major importance as an oil supplier to the world, but its percentage of the market may become greater.  So consequently the concept of U.S. withdrawal from the Gulf or from the Middle East which is another construct that we’re dealing with over the recent years in terms of diplomatic terms which is obviously the State Department’s space, that actually the world might be drawn back into the Gulf because with the reduction in investment and oil supply coming out of the majors that the NOCs in the Gulf will become much more important as a source of the increased supply.  I would just ask you to speak to that. 

Fannon:  First I have to quibble with your assertion that the U.S. is disengaging from the Gulf. 

Moderator:  It is a perception in the region for the last ten years.  I’m sure it’s a narrative you’ve heard before. 

Fannon:  I have heard it.  My goodness, the Abraham Accords I think are pretty transformative, and just by a quick point, again, move beyond political speech and outcomes. 

But your point with respect to the markets, look, COVID I think, IEA looked at this and saw that there’s been some 30-35 percent reduction in oil and gas spending globally as a result of COVID.  That’s tremendous. And — 

Moderator:  And the impacts we haven’t even started to feel yet. 

Fannon:  No, not at all, because people aren’t using.  There’s probably going to be, volatility will take place another year. 

But at the same time we’ve seen an increase year on year of renewables and clean energy investments of some 6-8 percent. 

So I think where the money flows, you’re spot on.  If the West retreats from investing in oil and gas, it increases the prominence of the existing suppliers given we’re going to need this for a very long time.  And I think that the world’s still reconciling with some of these questions.  

I would also say that the relative economics and the payout, the returns on investment, is something that friends in the finance community, they’re still reconciling with.  Because prior to, again, pre-COVID, we were talking about some trends that existed pre-COVID.  But effectively COVID has accelerated them.  

One of those trends was poor returns in oil and gas spending.  That preceded COVID.  Now COVID has really underscored that and it created, it elevated some of the other opportunities for ESG-related activism and investment trends.  We’ve seen a proliferation of impact funds, and that is as it should be, given where we are in the world and we’re facing a global pandemic.  

But when the world comes back to moving forward and our economies start roaring again which they certainly will, what happens to the lag in the current investment and how will that be made up and by whom?  

I think you’ve got two responses to that primarily. You’ve got the largescale conventional producers which are in your region; and you’ve got the short cycle market responsive U.S. private sector shale producer here.  I think those will be the two levers that will be able to charge forward. 

As the inaugural Assistant Secretary of State in the Bureau of Energy Resources, I want more U.S. companies going globally.  But I’ve found in my time here, more investment was retreating back to the U.S. pre-COVID.  Why?  Because it’s safe.  Capital flows where it’s encouraged and it was encouraged in the United States.  I see that continuing.  But when all of this plays out, how it plays out, that has yet to be seen. 

Moderator:  Maybe, Frank, we could just wrap up where we started, and this is the final month of the Trump administration, final weeks, in essence.  What do you think is the energy legacy of this administration?  What do you think will be the most significant change potentially that the new administration brings to U.S. energy policy? 

Fannon:  That’s a question I get asked and I probably can’t answer too directly because I won’t be a part of that administration.  But I think I would reflect first about before.  I worked in the industry during the Obama/Biden administration.  There I worked on a variety of projects around the world and I worked with the State Department.  I worked with the Bureau that I’m so fortunate to have led this period.  And I saw a degree of pragmatism when it came to issues of energy diplomacy.  Because the United States State Department, Democrat or Republican, recognizes how U.S. companies show up around the world.  U.S. firms are an extension of our soft diplomacy.  They’re effectively tools in the diplomatic toolbox.  We want to see, as diplomats, we want to see more U.S. firms operating globally. 

So I expect that there will be a continuity of that going forward.  And I’ll do everything I can to help support whoever eventually is fortunate enough to take my place. 

Moderator:  Do you think — just to interrupt on that point, because it’s current.  The rapprochement between the GCC states, Qatar being brought back into the fold, do you think that has any bearing on energy policy?  Any bearing on energy flow? 

Fannon:  I do.  Back to your earlier question about legacy,  I think one of the other lessons here, is we’ve seen – and you talked about energy independence, and we can speak about these, the shale era – we’ve got all these epochs of energy.  

I kind of started thinking about coining a new one which is one of energy partnerships.  And something that I’ve seen, which I’m very proud to have been a part in, is catalyzing some energy partnerships across regions.  The GCC and the rapprochement relative to the rift is a critically important one. 

Look at the developments in the Eastern Mediterranean region.  This is transformative.  We have halo effects that will spill in and has spilled into other areas.  The Abraham Accords is an exemplar of that.  Where we have trading relationships, we have discoveries of energy in one location — Israel — where domestic market is insufficient to justify economic investment.  So you find other markets.  And you have partnerships with other regional players.  You see this then blossoming into other relationships.  The Eastern Mediterranean Gas Forum that Cairo hosts.  I mean this goes on and on and on. 

And I see these kinds of examples occurring in other places.  Greece into the Balkans, for example.  You know, in the MENA region it makes so much sense to do more and I think we’ve really laid a strong foundation that can be built upon.  And when we see these energy trading relationships happen it forces a degree of comity, it forces a degree of cooperation that everyone benefits from and it has us all thinking twice and working more in a spirit of cooperation which will I think help foster peace in other areas. 

I was in Beirut sometime ago and again, the opportunity set is right there.  I see that’s another area, a bit of unfinished business, and I’m really hopeful that we can bring that into the fold as well as other projects such as Gas for Gaza. 

Moderator:  Frank, we could talk all night inevitably, or all morning in your case.  But thank you, Frank Fannon, Assistant Secretary, Bureau of Energy Resources at the U.S. State Department.  It’s a pleasure to have you on this week’s Halftime Talk. 

Fannon:  Thank you, Sean.  Wonderful to be with you.

U.S. Department of State

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