Cop hopkins touch on cspan2. Next from politics and prose bookstore in washington, d. C. Thane gustafson looks how russias unstability systems could impact the oil supply. He explores what it mean for the global economy. Its a little under an hour. Its a pleasure to see you here tonight. As we know, happiness is relative thing. I began the day this morning in the dentists chair having a crown put in, and here by tonight im at politics and prose. Im a happy man. Having gone from one extreme to another. Its a special pleasure to welcome you here tonight. And standing room only. This is marvelous. I thought i would begin by telling you a few stories about what the book is about, and skipping the big structure and simply tell you some stories about some of the people in the book. In the end its very much about real people. So what kind of book is this . Its big, its heavy, its, you know, you may open it with a certain trip dedication. What it is is a memoir, first of all. Its a little bit of a memoir of my travels in russia. Its a memoir of the number of the people in the weak. We have gone through twenty years together. Its a memoir of the last twenty years since the soviet union fell apart. Its a history of the oil industry and but in par par parallel to history the initial collapse of the 1990s and gradual recovery. The decade after so we end up with at russia we see today after this long cycle with the Russian Oil Industry has gone through the same cycling. Its a biography, its a multiple biography of a number of people but in particular of the clan that emerged in the 1990s from the city of saint saint peters berg and came with putin in the year 2000. You can sum up the last twenty years by saying its the revenge of saint peters berg over moscow as they take over and are very largely without much exaggeration are in command. This is very much a saint peter berg crowd. It its a history of the emergence of the crowd. Its the latest chapter in the 300year rivalry between the two capitals. Its the tale of two cities. Its a murder mystery that i cant give you the names of the guilty ones in every case. You can draw your own conclusions. There are some marvelous unsolved mysteries that may be unralphed someday. It used to be said in russia in 1990 you could fell the business was profitable from the trail of bodies that lead to the front door. If there were no bodies it wasnt worth paying attention to. It wasnt profitable. Ill leave it to your imagination where the International Red cross was highly profitable by that measure in the 1990s in russia. The subsidies you could get for the import of tax free tobacco and alcohol to benefit good causes such as the red cross. Even the Science Fiction story. What were dealing here really when you come down it the oil industry in familiar grew up in almost completely isolation and this is virtually a unique case. We have other places where oil industry have gone grown up and run by national Oil Companies. Almost in every case, in fact in every case, the industries were first founded by foreigners and then were taken over. Not so in the case of russia where from the 19 20s rate on the oil industry was home grown and developed the own culture and civilization even as the soviet union did with the own language and culture. I sometimes like to tell my classes that the story of russia in the 20th century is very much that have a people who decided that capitalism didnt work. So its though they are piled in to a space capsule and took off and landed on the planet mars and started a different civilization which the market was thrown out in prices and private ownership and built that civilization and made it run for nearly six or seven decades, not well, but it ran. Then they decided it wasnt working with particularly well. They piled back to the space capsule and came back to earth. Which is remarkable. Its something russians do every so often. They conduct the massive social science experiments on themselves. This isnt the first time they have done it. Here they are back on earth again and the oil industry suddenly faced the world. How they came to terms with one another. The past twenty years have been a time of revolution in the global oil industry. And suddenly you land on earth and you suddenly find yourself at least in the oil industry, faced with a race thats a story. The book has tragic heroes and tragic antiheroes. One of whom in jail. The man who was briefly the richest man in russia who ran the most successful private oil company in russia at the time of his arrest in 2003 and the man has been in jail now for nearly ten years, and october 2013, he will have been in jail for 2014 in jail for ten years and this very much is the result of a blood match with his nemesis, valid my putin. One of the Big Questions is when will he get out . No one knows. But the other question is what exactly did he do . And there has been a great deal of coverage of him. And i didnt want to add to that whole literature, but what i have tried to do is to go in to his company and ive had interviews with a number of players in that company to try to find out what was unique about that company that he built. What was unique about it that enabled it to Double Oil Production within four short years . How is that done . Youll find the chapter on that side of the story. Then lastly, i have to say that this is a story of guilty love. Which ill come back to if you ask me. Whats the book really about . All right. Let me give you the main points here. Ill keep it brief because the basic structure the skelton of the book is quickly told. Its a analysis. It cull man nates in a prediction. This industry, which is now at this moment, the Worlds Largest oil producer because the saudis have tholgds back. They play tag with one another. They alternate and for who is the Worlds Largest oil producer. Russias at the moment are a hit. They moved up very slightly to very nearly the soviet level of production. Meanwhile the saudis have battles back in order to moderate the as a matter of fact why are they like that . We request come back to that. So anyway, there we have the russians who are the Number One Oil producers. But they have essentially been coasting on the asset inherited from the soviet union from another time and another place. And such was the wealthy of what was discovered such was the wealth of what is Still Producing 60 of russian Oil Production today comes from fields that were already in production at the time of the collapse in the soviet union. Virtually all of russian oil today comes from fields already known. Or have been very New Discovery ies that are producing today. The drama of the situation is that the inheritance is starting to run down. And the place to look is west siberia, which has been the producing core of the soviet oil industry since the 1960s, has been the locomotive of the industry for the half of century. Its now in decline. That doesnt mean that the russians are running out of oil. There are phenomena reserves, and of course, im not talking about natural gas which is a different story. The future of russia will be natural gas not oil. Lets stick with oil for the moment. Theres plenty of oil left, but as you move out of that inherited comfort zone, you move to areas that are deeper, that are colder, that are sourer, that are more complex, that are more distant, that are offshore, in a word, you move to oil that is more costly, if only because now you have to invest in it instead of just inheriting it. And the result of that is that its going to be less profitable. Now the reason that matters is that the oil industry has a very important customer. Thats the russian state. And the russian state for the past two decades and going back to soviet times but particularly in the last twenty years, russian state has become extremely dependent on the revenues from oil, and indeed the [inaudible] the pure from the soviet legacy the past twenty years. To a greater extent that in the soviet state ever dependented on oil. And that dependence is growing. And you can show that on the graphs, you can show that on the slides that i occasionally use in presentations. You can show that percentage of the russian budget that comes from oil and gas revenues. Its going up and up, and round numbers in 2012 it passed the 52 mark. Thats oil and gas revenues together. Its very largely oil. And to put that in perspective, you have to add that the russian budget itself is growing very rapidly. To support the some of the same obligations we find others a Pension System and the like. In addition to that the budget has to support the growing ambitions of the putin leadership to increase funding for defense, funding for infrastructure, for the renewable of industry, and indeed shall we say for the support of many clans that provide the basis of support for the regime. This sets the stage. These two trends the increasing dependency of the russian state on oil and gas revenue to feed an expanding budget and the impending increase in cost of declining profit from oil and gas, this sets up a visualize it in your minds two contrary curves that are going to intersect somewhere. And result in crisis. The Russian Oil Industry in the next generation is simply not going to be able to support the growing level of expenditure that is basic to the russian system to the russian state system that we see today. And thats the core argument of it. The russian state cant help itself. It is effectively addicted. But the Russian Oil Industry cant help its because it has in effect had twenty years without having had to compete to innovate. It is not ready at this moment to compete in the same way that the World Oil Industry is now competing for new sources of oil for new technology, and indeed its causing a new revolution in oil around the world. The Russian Oil Industry is not yet ready to do this. It will be, the question is how fast. It will be, the question is what incentive will the russians state provide . What point will this intersection take place . So ill stop there. That is the core of the book, and why dont we open the floor for questions and answers and take the discussion whenever it goes. Good. Theres another microphone. Good. Im sitting near the microphone so ill grab my chance here while i can first in line. Your last the last idea that you just presented is the central idea that the regime now faces the problem of coming up with the technology and the where with all to expand to sort of invest in the industry and develop the industry more than they have in the recent past. Is the do they have a, you know, i think of russia as being fairly technology logically competent. Do you see any great dependence theyre likely to have for any number of years in developing their own technological exaipabilities capability through the Educational Foundation of it or just any other aspect of oil and Gas Technology so forth that they cant produce come up with their on own reasonably inexpensively or at least in comparison to what they have to sort of come up with if they have to deal with the rest of the world . And in particular, of course, whether theyll be forced to look to the u. S. Or to the sort of traditional western opposition for that . Well, thank you are in thank you for that question. That is indeed the central question. That is the question that needs to be raised next. Let me say, first of all, to put things in perspective, when i say that the Russian Oil Industry is not ready and im going take a few minutes to answer this question, so i hope i wont keep you standing too long. Were talking about extremely clever people. Were talking about people who are not [inaudible] so the right way to think of it is moving fronts. The World Oil Industry has been moving so fast that what were talking about is a russian industry that although it has been moving forward, has not been moving forward at the same rate at the same pace. So there is that gap an indeed perhaps a widening gap. Now in some instances that gap is quickly overcome. Let me give you an example, the same as fracking that were hearing so much about. The russians, first of all, will tell you they inconveniented fracking. Over. I looked in to this quite a bit, it turns out that its not quite true. The first fracks were done in the United States in the gas industry, i believe in missouri in 1947. If i remember correctly. And fracking, by the way, is used in the gas industry on a massive scale ever since. So suddenly we become aware of fracking. Its been going on before our eyes but many notice all along. The people who brought it back, hour, were the canadian who brought it to russia in 1988, then big time after the soviet union fell apart. And fracking started to be applied on a massive scale in starting in about 1998. Now the point of the story is this, even though it was new to the russians, practicedically speaking in stwaight. It become a russian big they were doing fracking on a larger scale. It gives you one measure of the lag and the lag quickly overcome. At the opposite extreme, however, there are techniques that are completely out in russians and that require a whole different aura of capability because they are more difficult. And the prime example of arctic offshore. Now there are two examples in the world of countries that have gone from zero to sixty in developing world leading capability for arctic offshore. Norway and now brazil. Those two are really the touch donees. They are the benchmarks. And those two examples tell you it takes about twenty years. If you do it right, and you develop your own home grand canyon grown industries for arctic offshore and you start doing it and take it and make your mistakes and start logging your achievement. It takes you twenty years from zero to the forefront. Where the russians are at this moment are effectively zero. They didnt have to. They had no need go off to the arctic offshore. And so the starting gun is now. And it will be very interesting to see whether they do as well as the nor wee nor wee again and the brazilians from scratch a home grown city that can perform at the top of the world standard. You can about they have enlisted the western company as the nor wee we are seeing the beginning of the fascinating chapter too in which the question of the hour and the question of the decade, question of the next two candidates is going to be how well can the russians work in partnership and learn what they need learn from the likes of exxonmobil, et. Cetera. And so thats what is at stake right now. Hi, thane. Thanks. You said that. How nice to see you. Nice to see you. You said in part this book is about guilty love. We ask you to tell us about that. So id like you to tell us about that. [laughter] true confession, the guilty love is mine. And although it is unfashionable too confess love for the oil industry, i must say that in the process of researching and writing and living this book, i have become captivated by the extraordinary ambition of a wager that the oil industry makes every day, which is the incredible bet against nature that consistencies of walking up to what to all the appearances looks like an empty baron piece of real estate and figuring out that anywhere between 1,000 and 5,000feet down, theres rock. By the way, i dont know if you have ever actually seen the rocks that oil comes from. Its amazing. You you would walk by on the street and never look twice. Gray rock. Its very dense. It looks about as hard and dry as anything as you can imagine. And yet inside the microscopic pore im not talking about shale now. Im talking about regular sand stone. The shale is even tougher and tighter. Inside there unbelievable belie there are these microscopic pores that happen to be filled with oil. And so there you are making this bed bet against nature spending, you know, you can spend the sky is the limit on what you have to spend to drill a well particularly if youre drilling arctic offshore. Youre going wager this . Over half of the Oil Production from the United States in the lower half from the over 48 in the United States comes from mom and pop companies, wildcatters, that effectively taking that bet every day. I must say the more i got in to this, the more i find, good lord, its amazing. But i left the best part out. Here is where guilty love turns in to passion. Im going to talk about [inaudible] because tight oil is the latest adventure in this amazing story. It begins, of course, back in the 1920. This is what we remember from say daniels book the prize which is this marvelous history of the oil industry. We remember in 1920s your classic wildcatter who then would drill wells and with no science and knowledge. Fast forward a hundred years. Where are we now . I have actually witnessed this myself sitting on a platform in the north sea watching as a guy ocean or drilling engineer sits in front of a computer screen and watching a picture. A picture in full and living color which is being updated every few minutes that shows the structure that a drill bit is going through which the engineer is guiding as he goes. The drill bit is 5,000 feet down and ten miles away. And moving through going through a oil bearing rock in three or four meters being sent back in real time from the drill bit as it moves forward, that column straight through the [inaudible] five or ten miles out and is getting astounding production. Not only that, but even so often along the path of the horizontal well hes doing the frack job. You have multistage fracks along the horizontal frack. Frack, frack. The result of all of that has been the most extraordinary surprise in the history of the oil industry and possibly in the economic history of the United States in this century. From being dependent on imported oil, we are now on the verge by 2020 of producing some 5 Million Barrels a day. 5 Million Barrels a day. Thats half of saudi production. That oil did not exist except in those stones as recently as five years ago. That is amazing. Is this not a love story . [laughter] of course, where it gets extremely interested that the russians are watching. The russians are watching because theres no reason in principle why the same magic cannot be applied