This summer, Thomas A. Petrie celebrates 40 years in the oil and gas industry, first as an oil securities analyst and subsequently as an M&A advisor and investment banker. He has been vice chairman of Bank of America Merrill Lynch since Petrie Parkman Co., the Denver-and Houston-based energy investment banking firm that he co-founded, merged with Merrill Lynch in December 2006. Formerly he was managing director and senior oil analyst with First Boston Corp.

Petrie was a keynote speaker at the Hart Energy Developing Unconventional Oil (DUO) Conference in Denver in late May, after which he spoke one-on-one with a Hart Energy editor.

You have said that the development of unconventional oil in the US has come at an especially fortuitous time, given geopolitical events and your belief in peak oil.

Yes. I see development of unconventional oil in the Bakken shale and the Three Forks formation in North Dakota and Montana as a world-class, 21st-century opportunity. It’s a function of people-driven innovation and significant technological advances.

The timing of these unconventional opportunities and a host of others that are candidates to become sources of new liquids in the US couldn’t be more propitious. When you look at what’s going on geopolitically, with unrest ranging up to civil war throughout the Middle East and North Africa and the post-Macondo implications for offshore drilling and US supply, to have such a new set of opportunities unfold at this time is remarkable.

Thomas A. Petrie, vice chairman, Bank of America Merrill Lynch, recently spoke at the Hart Energy DUO Conference in Denver in late May. The development of unconventional oil, he noted, is a function of people-driven innovation and significant technological advances.

The North American upstream oil and liquids sector is morphing into a new era and a new ballgame. Further, the opportunities to develop associated midstream infrastructure to fully exploit these resources are enormous.

What are current macro supply-and-demand fundamentals?

In terms of demand, some one-half trillion bbl of oil have been consumed since 1945. The peak oil argument would say there’s another 1.2 trillion or so remaining; a more optimistic viewpoint would add about 30% to 50% to that figure.

Regardless, prodigious consumption is the order of the day. It’s important to keep that in mind despite crosscurrents of political unrest and concerns about a slowdown in US and worldwide energy demand from the weak economy.

Another big driver in the supply-demand picture is that since 1970, miles driven in the US have declined. But population growth worldwide continues. In 1950, there were 2.5 billion people on the planet. Today, there are just under 7 billion, and through 2030, it’s expected we’ll add another 1 billion; from 2030 to 2050, another 1.5 billion.

So, from now until 2050, we’ll add as many new people to the planet as were present in 1950. And much of that population growth is occurring in emerging markets where per-capita consumption rates are rising quite rapidly. The developed world is expected to stay fairly flat in population growth and actually to shrink somewhat in terms of absolute oil consumption.

How will we accommodate that growth?

We’ll need to increase consumption efficiencies and the incentives for adopting them as the price of energy moves out of the traditional US $60 to $80 range into the new zone we’re still defining. There will be plenty of price incentives for efficiencies.

Still, according to the International Energy Agency, the Brookings Institution, and other sources, the internal combustion engine, even as improved and advanced as it is, remains the predominant source of individual optionality and commercial transportation. Only after 2030 do hybrid and electric vehicle options take a greater market share.

The Obama administration seems to think these new vehicle options will take a greater market share well before 2020, but I don’t see that happening without some serious work. Something has to give to meet global patterns of demand.

How will the supply puzzle come together?

The 11 companies with active contracts in Iraq believe they have some prospect of developing 11 million daily bbl; more realistically, it might be 6 to 8 million. The Saudis could add another 3 million from shut-in production. Beyond that, price rationing will play a role, and that’s why you hear Goldman Sachs recently projecting $130 oil later in 2011.

That’s how we get to 2015 in terms of supply. I refer to it as the looming reality of practical peak oil. We’re there. Sadly, Matt Simmons didn’t live to see it, but practical peak oil will be upon us in 2015, 2016.

And this is where you see the unique role for unconventionals.

The current demand declines of 3 to 5 MMbbl/d of oil in the developed world will only partially offset what’s needed to accommodate growth in China, the Middle East, and Asia. In that context, the ability of the US to capitalize on unconventional oil and gas opportunities at home has critical major implications for developing new supply. This is a better opportunity than at any time since I’ve been an analyst.

How could domestic supply evolve?

In addition to the Bakken, there are compelling opportunities offered by another eight to 10 candidates for liquids development in the US. And what’s happening in the US and Canada has real potential for other parts of the world given the joint ventures announced in the past year. These involved six major liquids projects, all but one with a foreign player bringing a large amount of capital. The amounts committed represent a tenfold magnitude of additional capital committed to fully exploit these opportunities.

For the first time in my career, we’re looking at a sustainable prospect for an incline in US production. If you add to the oil potential the natural gas liquids potential associated with unconventional gas from the other half-dozen or so resource plays, then we could have at least 7 MMbbl of production and a meaningful improvement in the US import position.

If, on top of this, we get an improvement in offshore development, where the remaining potential rivals what’s already been produced, coupled with Canadian oil sands and unconventional oil potential, then the US position becomes pretty intriguing.

This is the best opportunity in over half a century for a decade-plus period of year-on-year growth in US output.

What are your thoughts on Saudi Arabia’s break with OPEC’s line at the most recent meeting?

There’s a real split within OPEC. The Saudis feel there is a need to raise production to meet world needs, and the Iranians and their counterparts want to hold steady to keep oil prices higher. The supply/demand picture argues for the Saudi position. There’s also a confrontation/power struggle developing between Saudi Arabia and Iran, and I think what happened was a warning shot across the bow to let Iran know that the Saudis are looking to take definitive action. There’s only so much the Saudis can do to increase output over the course of the year, however, until more refinery capacity opens up that can handle their oil. At the end of this year, new capacity will come on in Port Arthur (Texas), and in the near term, about 1 MMbbl/d will come on elsewhere in the world to allow them to push crude to India, China, and other parts of Asia.

OPEC’s president has signaled there may be an emergency meeting before the fall meeting. The situation will turn on what happens to oil prices if the Saudis make good on their threat to push more oil to market.

What about the stability of Saudi Arabia?

According to Petrie, “something has to give to meet global patterns of demand.” (Source: ExxonMobil’s 2010 Energy Outlook)

Saudi Arabia is the linchpin for security of supply out of the Persian Gulf. During my recent trip there, I was struck by how much King Abdullah is on top of the situation. It isn’t a totally clear case that Saudi Arabia remains stable, but the issue is at least largely deferred because of some very proactive actions he has taken and because of the good will he enjoys thanks to his anti-corruption programs of the past decade.

I think the issue is succession. Now may be the time for Saudi Arabia to break out of the rough resemblance it has had to China in the 1970s and Russia in the 1980s, when octogenarians ruled. It’s time for leadership to pass to at least the next generation, and maybe ultimately two.

The concept that a monarch in the Middle East is an absolute power – nothing could be further from the truth. Effectively it is a consensus-building position, more so than our own US presidential role is, at least in current times.

In the region as a whole, this is just the beginning of the first chapter of change in the Middle East. It will take decades to work out.

What’s your view on the recent decision to release oil from the Strategic Petroleum Reserve?

This was a coordinated effort with 27 other nations, with the US supplying half of the 60 MMbbl/d total over the 30 days, at 30 MMbbl or 1 MMbbl/d. It gets criticized by some as price management, but really it is supply management, given the loss of Libyan oil, which is tough on Europe. Putting oil on the market helps to loosen up the ability of the world supply system to adjust, with some supply from Nigeria and Algeria that would have gone to the US being redirected to Europe.

It also applies some pressure to prices, which the Saudis are probably willing to accept. It contributes to pressure on Iran, which wants to maintain levels of output and keep prices higher. The bottom line is we were flirting with significant demand destruction at oil prices above $100/bbl.

If you had the Obama administration’s ear, what would you recommend?

We need to figure out how to accelerate the use of more natural gas to substitute for oil imports and how to convert optimal development of unconventional oil into the system. These two actions would create jobs and enhance energy security.

“I refer to it as the looming reality of practical peak oil. We’re there.” – Thomas A. Petrie

If we can intelligently use more gas to displace coal in power generation and in more portions of our transportation network – a variation on T. Boone Pickens’ plan involving 18-wheelers – we can, on the margin, make a difference, with lower emissions, cleaner air, and reduced import dependence. This is alongside the benefits from 1.2 MMbbl/d coming out of the Bakken in the next decade, 800,000 bbl from the Eagle Ford in the same time frame, and something additional from the Niobrara and Monterey shales.

That’s what’s so wonderful about the petroleum sector – the ability of producers to adapt down the food chain, figuring out how to capture exposure and move it on to the next party that can prosecute it. The development of the unconventionals is bottoms-up and technology-driven, with astute people figuring out what to do next.