T. Boone Pickens Calls for Energy Plan at Stansberry Society Event

Known for his saying that "the first billion is the hardest," oil billionaire T. Boone Pickens addressed the Stansberry Society Conference in Dallas at the end of May with a plea for a national energy plan that takes advantage of the billions of barrels of oil being produced each day in the U.S. for domestic use. First addressing the audience, and then in conversation with event host Porter Stansberry, followed by an all-star energy investing panel, the Pickens Plan advocate was optimistic about the prospects for growing the country and individual investment portfolios through smart use of natural resources.

On making (and losing money): I moved to Dallas from West Texas in 1989 worth about $25 million ($25M). I ran that $25M up to $4 billion ($4B) in 2007. 2008 and 2009 were a disaster. I lost $2B. I've given away over $1B and have $1B left.

On leveraging the oil and gas renaissance in the U.S.: I launched the Pickens Plan in 2008 because I felt that I was running out of time, and this country desperately needs an energy plan. We're the only country in the world without one. We use more oil than any other country, 18 million barrels a day (18 MMbpd) with China's 10 MMbpd a distant second, and we import about half of what we use.

Five years ago, we discovered the biggest gas field in the world, the Marcellus Shale in Pennsylvania. We are now the world's largest natural gas producer; we have more reserves of natural gas than any other country in the world. That is huge for this country. It's huge for the world. It is going to change the dynamics of the oil and gas industry. It's a renaissance that started in the U.S.

We have the cheapest fuel of any country in the world. Our oil here is 10% cheaper. Our natural gas is 75% cheaper. Our gasoline is 50% cheaper. We're now moving businesses back to the U.S because of cheap energy.

On the challenges to energy independence: The only problem is that this administration hates the oil and gas industry. It doesn't want to use fossil fuels. Hedge fund manager and environmentalist Thomas Fahr Steyer recently told me he is going to spend $100M to block the Keystone Pipeline and he wants to get rid of all fossil fuels. His plan to replace all that transportation fuel is to ask the government to find an alternative. We'll see what happens with that.

Some politicians say that we need to export more oil, we should go to Europe and fix the Russian dominance of natural gas, but it's not doable. We will not have one liquefied natural gas (LNG) export facility until late 2015, over a year from now.

On use of the reserve: Go back to the Arab oil embargo in 1973. We were cut off from the Mideast's oil and it scared the devil out of everybody. In 1974, we passed a law requiring a 750 million barrel (750 MMbbl) Strategic Petroleum Reserve (SPR) in the salt caverns in Louisiana and Mississippi just in case we had another Arab embargo. In the last 40 years, the most we have ever taken out at any one time is 28 MMbbl. So we have over 700 MMbbl in storage, and the greatest amount we've taken out at one time is 28 MMbbl. Do we really need that much storage?

It would take 10 years to remove even 400 MMbbl without disrupting the market. Selling that oil would result in a profit, because it was purchased at $28/barrel ($28/bbl) and today oil is $103/bbl. That is a big profit, one of the few big profits I've ever seen the government have.

Profits from the reserve could be used to develop energy in America by switching all the heavy-duty trucks to natural gas. A $30,000 tax credit would roughly cover the incremental cost for converting from diesel, which is twice as expensive, to natural gas engines.

The government should use the cheapest fuel for our federal vehicles. That is its fiduciary responsibility. By making sure we use the cheapest fuel—which also happens to be 30% cleaner—we could reduce our imports by 3 MMbpd. That would put a dent in the 4–4.5 MMbpd we import from OPEC.

On funding both sides of the war: Eliminating Middle East imports is important because some portion of the money for oil purchased from OPEC inevitably goes to the Taliban. That's not really because the Saudis are trying to hurt us; they're just paying ransom so the Taliban will leave them alone. That means by using Mideast oil, we're paying for both sides of the war: the Fifth Fleet to protect the world oil transport through the Straits of Hormuz while funding the terrorists that attack those transport ships. And we only get 10% of the oil we are protecting. It makes no sense. That is why I am working so hard for an energy plan.

Porter Stansberry: You have been so successful. Your commodity fund is up 24% this year and your equity fund is up 19%. You are 86 and clearly enjoying life and newly married. Why are you still in the game?

TBP: I love the game. I'm not going to do something I don't like to do. As long as I can play the game, I'm going to bluff my way through.

PS: I think a lot of people are stuck doing jobs that they don't love. I tell people all the time, if you don't love what you do, if you wouldn't do it for free, then you have no chance at being the best at it.

PS: Let's talk commodities. Would you invest in coal or uranium? These are two energy commodities that have seen their prices plummet.

TBP: Over 40% of the power generation in the U.S. comes from coal. We're going to have to use coal. A congressman once said to me that he was going to get rid of all coal-fired plants. I responded that if you shut down all the coal-fired plants, you could multiply the price of electric fuel by 10.

TBP: At the same time France put a moratorium on fracking wells. Then they complain about relying on Russia.

TBP: We have had three failures over the years. Another report on the viability of nuclear is on the way. I can tell you what the executive summary will say. Do not build a nuclear plant on the coast. Do not build it on seismic faults. That's it. You can put it in stable areas and it works.

TBP: Not today, but I would, yes. There will be a time to come into both of those. I am not just an oil and gas guy. I'm a guy who wants the best, cleanest energy for America.

PS: Berkshire Hathaway Vice-Chairman Charlie Munger has said that as long as the world agrees to exchange worthless paper for oil, we should let them. To me, it sounds foolish because if you do that long enough, your paper is going to be worthless, and that's going to cause much bigger problems. I think his argument is nonsensical, but I wondered what you thought about it.

TBP: I haven't talked to Charlie face-to-face in probably five years, but I can't agree with Charlie on that.

The Energy Report via Porter Stansberry: Does OPEC have the influence it used to have? Does the Middle East matter anymore?

TBP: It does because OPEC sets the price for oil. Of the 92 MMbbl produced every day in the world, OPEC is producing a third of it. It is big enough, and it is organized and credible. It is a cartel. 30% of oil can set the price by adjusting on spot. Saudi Arabia has made it very clear that it has to have $100/bbl for oil to meet its social commitments. Over half the people don't work in Saudi Arabia. Theirs is not an economy that provides jobs, so Saudi Arabia has to pay its people.

Now the Iranians are a little bit squirrelly. Credibility is not that important to them. They'll tell you they have to have about $23/bbl. But they have increased production, and China is cooperating with them. China has an energy plan and imports half its oil. China uses 10 MMbpd and imports 5 MMbpd through deals with Venezuela, Brazil and Iran. China loans them money and gets oil in payment at a discount.

PS: What do you think the chances are, in the next couple years, of finding a really huge shale oil field that can produce a 100 MMbpd well either through technology or luck?

TBP: Slim to none. East Texas was discovered in 1931. It is a huge field. It's out of the Woodbine sand, but it comes from source rock—the shale reservoirs—that was heated, pressured and squeezed into the trap. The East Texas field is a conventional trap for oil. Even then, we knew the oil was in the shale, but not until George Mitchell, the father of fracking, did we think we could get more than 5% of the gas out of the Barnett Shale. Lo and behold, now we're going to get 40%. We may get 80% before it's over.

Audience Question: How long do you think it will take to get natural gas infrastructure in place in the U.S. so that conversions to natural gas engines are viable to the public?

TBP: Actually, it's there now. I've got a natural gas car. I could plug it in in my garage and my fuel costs would be $1/gallon through the gas line that powers my stove. There are plenty of fueling stations in California.

PS: One last question. What's your favorite way to profit from energy in the stock market today?

TBP: I'd get into the commodities. We've done a great job. Why do you think the economy has recovered in the U.S.? It's all due to energy.

But let me make one request. I've got 2.5M people signed up with me in PickensPlan.com. Please join us.

(Editor's note: We followed the T. Boone Pickens discussion and a panel discussion on the shale boom with some questions of our own for Porter Stansberry and his associate, Matt Badiali.)

TER: Porter, I would like to ask you to answer the question you asked T. Boone. Based on the new technologies like zipper fracking and the challenge of a lack of infrastructure, how do you suggest gaining exposure to the energy market?

PS: There are a lot of opportunities in the energy sector because as the cost of dry holes disappears and as production methods become more efficient, the cost of production will decline. Eventually that should lead to lower oil prices, which sounds bad at first. But, as long as margins remain reasonably robust, lower total energy prices will actually increase demand substantially. . .and that will power the industry forward for decades, not merely for a period of temporary high prices.

The best way over the next few years to profit from these trends is to gain the arbitrage between the low domestic price of oil and gas and the higher international price. That's why there's been an explosion in propane exports. These "refined" products and all of the infrastructure associated with them will do very well over the next three to five years. Firms that are able to vertically integrate from wellhead to export markets will do best. "Capture the arb" will be the strategy that wins in the medium term.

The best way over the longer term to participate in these trends is to focus on buying the most attractive energy resources at the lowest possible price. That's why we see companies making material changes to their asset base, selling off marginal assets and focusing their production and exploration activities in the highest quality shales close to centers of distribution.

TER: Matt, same question: How will new technologies open new investing opportunities and what companies are well positioned to take advantage of those opportunities?

Matt Badiali: The economics of shale wells are improving every single day. Sometimes it's due to new techniques like zipper fracking, sometimes it's due to simply longer horizontal legs and more sand in the fracks.

The US could make a lot of money selling all the asserts in the army, navy and air force.
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true but it wouldn’t be a wise thing to do. But the military does sell off assets all the time that are out of date. Sometimes they turn whole battleships into scrap iron for sale.

Maybe we should sell that along with the SPR; it makes as much sense.
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explain why you do not think that given the current oil related technological revolution — the SPR has not outlived its usefulness. It was after all developed as a response to the first OPEC oil strike of 1973. The USA is in the early years of exactly reversing that oil strike.

How long do you think it will take to get natural gas infrastructure in place in the U.S. so that conversions to natural gas engines are viable to the public?
TBP: Actually, it's there now. I've got a natural gas car. I could plug it in in my garage and my fuel costs would be $1/gallon through the gas line that powers my stove. There are plenty of fueling stations in California.

Pickens is selling government snake-oil. Home natural gas compressors cost over $5,000. A CNG system for a car costs $3,000 and takes up half the trunk. Range is 40 to 80 miles. There are only 600 fueling stations in the U.S., largely because a ~$5 million step-down facility is required outside major urban areas. Forget about intercity travel unless you switch back to good old gasoline. Having consumers handling natural gas compression is an invitation to explosions and fires. It's like a dangerous alternative to electric vehicles, as if they are not bad enough.

The balance of Pickens' ideas are nanny-state intrusions in our lives and businesses, between tax credits and burning the Strategic Reserve.

Just leave well enough alone. The boom in unconventional production has resulted from private initiative despite the heavy hand of government.

Go away Boone.

Pickens is selling government snake-oil.
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Natural gas cars are not in the cards.

Typically vehicles suitable for natural gas are short haul trucks and buses with defined routes. That’s what’s available now. I see natural gas buses in my neighborhood all the time.

Beyond that in the northeast there is a switch over from #6 & #4 —even #2 fuel oil to natural gas for heating big buildings.

As well, the initial tests are underway to convert diesel trains to natural gas.
http://online.wsj.com/news/articles/SB10001424127887324539404578342540494619344

T Boone Pickens is talking about converting long haul trucks and buses. That’s doable. The fracking revolution makes the strategic reverse obsolete. Whereas natural gas is locally priced and plentiful in the USA -— oil is globally priced. If the USA cut 3 million barrels@ day out of demand —the extra oil would simply go elsewhere in the world.

Right now I’m optimistic that the USA can enjoy oil increases beyond the end of 2015. They won’t be 1 million barrels@ day annual oil production increases that are expected by the EIA through the end of 2015. Rather current estimates are for over 500k annual oil increases from 2016-2020.

But then that’s it for USA oil increases.

But worldwide demand for oil is going to keep rising as more millions enter the middle class and people’s demand for energy rises.

So just to keep pace with world wide demand the USA is going to need to cut down on oil consumption. The pickens plan takes place over a decade or more.

It does nobody any good to see these huge run ups in oil prices that in turn choke economies world wide and then lead to an economic contraction that kills the demand and therefor the price of oil.

These wild price swings are not helpful to anybody.

to keep pace with world wide demand the USA is going to need to cut down on oil consumption

The market says that gasoline is the fuel of choice for passenger vehicles, and most commercial vehicles, by a wide margin. The government should not attempt to alter our preferences through regulation or the tax code. Distortions like that never work and always lead to misery.

Sometimes government is needed to supply the massive speculative capital required by transformational technologies. Pickens should be promoting thorium reactor research rather than advocating government meddling in the petroleum industry.

But the military does sell off assets all the time that are out of date. Sometimes they turn whole battleships into scrap iron for sale.

Only when they have found something "better" to take its place first.

Maybe we should sell that along with the SPR; it makes as much sense.

Because our need has changed and we have something to take its place? Decribe that to me.

In 1973, when we decided we needed the SPR, we used 6.7 MMBPD of gasoline and 4 decades later we us 8.8 MMBPD.

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MGFUPUS2&f=A

Our crude oil imports in the same time have climbed greatly in the same time, 3.3 MMBPD to over 7.

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRIMUS2&f=A

In 1973 we imported 2.1 MMBPD from OPEC, now over 3.

Most of our releases from the SPR todate has been to replace oil deliveries disrupted by weather, offshore platforms, oil ports, etc. Do you think that has gone away? Do you think our oil production/delivery is not vulnerable to accidental or intentional disruptions? The SPR is the only oil source protected by the military; Sept 11, 2001 shows we are not immune to attack within our borders as well as supply disruptions from without.

Natural Gas and electric may become significant means of providing transportation in our future economy. But today, they are rather insignificant compared to oil.

T.Boone Pickens owns the largest Natural Gas Transportation Fuel distribution system in the US. While I want to see NG fuel grow, it has been my observation over the decades when T.Boone talks, we should first tighten our grip on our own wallet.

The SPR provides more damping to price swings than anything else in the world. The ability to put 4.4 MMBPD additional oil so quickly into the largest consumption market is unmatched.
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Can you recall a time when it was actually used to great effect?

For example, the last big run up was 2008. The price of oil briefly touched 150. The economy subsequently crashed. was the strategic reserve used? No. Here’s a list of times that there has been small draw downs on the SPR. They’re all minor. http://energy.gov/fe/services/petroleum-reserves/strategic-petroleum-reserve/spr-quick-facts-and-faqs

The Saudis have a greater reserve capacity that they can bring to market faster than SPR. Historically they have used their reserve capacity better than the USA. For example, in 1985, Reagan convinced the Saudis to pour their extra oil reserves on to the world market to crush the price of oil. They did. The price of oil collapsed. Then as now the Russians were dependent on oil prices to pay their government officials at all levels. When the oil revenues collapsed, the Soviet government couldn’t pay much of their bureaucracy. When they couldn’t pay their people -they couldn’t command them. Since the old soviet union was a command economy/polity— when there was no command and control the country fell apart. That’s how reagan won the cold war.

Even today the Saudis use their reserves to American advantage. If they wanted to they could pour an extra two million barrels @ day onto the world markets and drop oil prices down to $70@ barrel. But they need about 90 for their patronage system to work smoothly. Further its likelier that extra Saudi reserve capacity will be used to sop up lost Iraqi supply—should that happen- than that American SPR will be used.

The problem is that for years to come supply and demand will be too tightly balanced. There is little reserve capacity in the USA. The solution for the USA is first to raise production but then also to drop consumption—in roughly that order.

The Saudis actually get this. There is a concerted effort now in Saudi Arabia to wean that country off of oil—so that they can use their oil production for exports. They plan to spend about 109 billion on solar power over the next 15 years.
http://www.fool.com/investing/general/2014/05/25/interest-in-solar-energy-rises-even-in-saudi-arabi.aspx

I am not in favor of suddenly dropping US demand by 3 million barrels@ day. Rather what I think prudent would be to follow the interests of American frackers. They will be able to raise supply through about 2020. (And recall that I’m making the optimistic case for rising production.) But that’s really about it. In the mean time —every year they will be slashing their costs. After 2020 there won’t be any boosts in supply. After 2020 the most important thing for the USA to do is to be slashing demand annually. Why? because demand world wide is still going to be going up substantially. The USA will need to be slashing demand substantially just to keep markets balanced.

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The Next Billion (Barrels of Oil): T. Boone Pickens Calls for Energy Plan at Stansberry Society Event