speech

Managing the Energy Portfolio

David J. O'Reilly

By David J. O'Reilly, Chairman and CEO
Chevron Corporation

The Annual Meeting of The Executives' Club of Chicago

Chicago, Illinois, May 8, 2007

I'm delighted to be with you this afternoon as part of your annual meeting. Chicago is one of America's great cities. And it's a city that knows something about energy, which is what I want to talk about today.

There's a group based in Chicago called the Midwest Energy Efficiency Alliance. Its Web site calls energy the single most important issue of our time. I could not agree more. Energy affects nearly every aspect of modern life, from light and heat, to mobility, manufacturing, economic prosperity, and national security.

Our company is investing a lot of effort to help policy-makers and business leaders understand energy markets. At each of your seats today is a book called 5 Facts About Energy Security. It illustrates the drivers of today's energy markets, some of which I'll be addressing today.

But first, let me say one thing up front: businesses such as yours play a vital role in the energy marketplace. Businesses may vary in size and purpose, but all have one thing in common – the need for reliable, affordable energy. That's why any discussion about the future of energy needs the full engagement of the business community.

I'm encouraged that energy has moved front and center – not only in the nation's executive suites, but also in our nation's capital. Yet despite a growing awareness of energy issues, today's debate, to a great extent, continues to be informed by narrow and outdated perspectives, unrealistic expectations, and short-term thinking.

It's time to move the discussion about energy forward on a pragmatic, realistic path. It's time to recognize the fact that America's business community, and American citizens, deserve realistic solutions to ensure the development of reliable and affordable energy.

I'd like to share some ideas about how to make those solutions a reality and strengthen America's energy security in the 21st century.

Before I do, let me set the context with some facts and figures. Let's start with demand. The global economy has experienced a decade of broad-based growth. As a result, energy demand has increased.

Oil continues to be the world's leading source of energy. We currently consume about 85 million barrels per day – up over 10 million barrels from a decade ago. Current oil production capacity is less than 90 million barrels per day, leaving global markets with very little flexibility in the event of a disruption.

The World Bank expects the global economy to double between 2005 and 2030, from about $35 trillion to $70 trillion. That economic growth is expected to increase global energy demand by 50 percent in the same time period.

Some of that demand growth will come from the United States, which accounts for roughly 20 percent of global energy consumption. But most will come from the developing world as its economies continue to expand. A massive amount of investment will be needed to meet this growing demand for energy.

Chevron is doing its part. This year, we will invest nearly $20 billion to find, produce and deliver more energy. We are currently building 30 new oil and gas production projects each representing a Chevron investment of $1 billion or more.

But the global challenge is clear. To sustain economic growth – which has raised the quality of life for millions of people around the world – we need to develop reliable, affordable supplies of energy in every potential form.

To paraphrase Winston Churchill, security in energy lies in variety and variety alone.

We need to think of energy as a portfolio of sources and make policy and investment decisions accordingly. Just as there are fundamentals to managing an investment portfolio, there are fundamentals to managing the energy portfolio.

We need to begin with a savings plan.

Energy efficiency is the cheapest and most plentiful form of new energy we have. Energy saved is quite literally energy found. We've made progress. The U.S. economy has more than doubled since the 1970s, while energy use has risen only 25 percent.

But we still have a lot of opportunity. A relatively small reduction of 5 percent in U.S. oil consumption would reduce imports of crude oil by 10 percent – or almost completely eliminate the need for gasoline imports.

In developing countries, the opportunities for efficiency are even greater. If China could become as efficient as the United States was in 1970, it would save the equivalent of 16 million barrels of oil a day, or almost 20 percent of the world's daily consumption of oil.

A commitment to energy savings means demanding more of ourselves as businesses and demanding more of the products we sell to customers – from fuel and vehicles to appliances and building materials.

A second principle in managing the energy portfolio is to enhance our core investments in oil, natural gas, coal and nuclear, the so-called "blue chips" of the energy portfolio – or, in financial terms, protect our principal. Hydrocarbons are the most plentiful and economic forms of energy we have. Even if the use of renewable energy doubles over the next 25 years, we will still use hydrocarbons to satisfy 80 percent of global energy consumption.

Fortunately, new technologies are helping us locate and recover oil and natural gas resources that were once considered too difficult to develop.

For example, Chevron recently tested a well called "Jack" in the deepwater Gulf of Mexico. It's located in 7,000 feet of water and more than 20,000 feet below the seabed – the deepest well ever tested in the Gulf. The next time you fly across the country, take a look out the window. That's about how deep we drilled the Jack well.

Not so long ago, the Gulf was referred to as the "Dead Sea" regarding its potential, or lack of potential, for new oil and gas supplies. But as Mark Twain once said, reports of its death have been greatly exaggerated.

The application of new seismic technology now allows us to see further and deeper into the Gulf of Mexico than we ever have before. The results are a discovery like Jack, which leads us to believe there may be 3 billion to 15 billion barrels of oil and natural gas in that part of the Gulf. The high end of that range would be equivalent to 50 percent of our nation's current reserves. All told, the Department of the Interior estimates that technically recoverable oil on the Outer Continental Shelf of the United States could run as high as 115 billion barrels.

Yet the federal government has placed 85 percent of the Outer Continental Shelf off-limits to exploration and production. It defies logic and common sense to call for energy independence in America while denying access to American resources.

I believe that any plan to enhance energy security must include an open discussion of ways to increase access to domestic supplies of oil and natural gas. We have to find a way to set aside outdated attitudes about energy development that have been used to deny access for decades.

Instead, let's recognize the advances we've made in technology over the past 20 years – advances that allow energy production and environmental protection to fully coexist. Let's also talk about coal and nuclear – and consider how we can enhance energy security by making them safer, more efficient and more environmentally benign.

The Midwest uses coal for more than 70 percent of its power generation, so this is an important issue. U.S. energy policy should focus on accelerating the development of clean-coal technology – including breakthrough solutions like carbon sequestration – so we can take advantage of a resource that exists in vast quantities in this country.

Nuclear power provides about 20 percent of the nation's electricity – roughly the same as here in the Midwest. It's critical that we invest in a new generation of nuclear power as current facilities age and are taken offline.

A third principle of managing the energy portfolio is investing in the next generation of energy.

Wayne Gretzky used to say he was successful because he skated to where the puck is going not to where it was. I know I'm in Blackhawks country today, so I use this reference with great care.

But successful management of the energy portfolio over the long term will require significant and strategic investments in alternative forms of energy, including noncarbon sources.

We can't lose sight of the primary role that hydrocarbons will play for decades to come. But renewables and advanced technologies clearly have the potential to reshape the energy portfolio over the long term. They can create new feedstocks for fuel, new sources for power and new benefits for the environment.

This isn't news here in the Midwest, which is responsible for almost all of the country's ethanol production.

There is a rightful place for corn-based ethanol in the nation's portfolio of transportation fuels. Chevron has proposed a national goal of E–10 – or 10 percent ethanol – on average, per gallon of gasoline. This could effectively triple the volume of ethanol that was used in transportation fuel last year.

There are several benefits to this approach.

  • E-10 can be accommodated with the existing vehicle fleet and the existing distribution system.
  • E-10 is likely to be economically achievable, while allowing time for the next generation of technologies to be developed.
  • And E–10 could cut U.S. gasoline imports by more than 80 percent.

Getting to E-10, however, will be a challenge. Already, about 20 percent of the U.S. corn crop is dedicated to ethanol production. This has contributed to a significant increase in corn prices, which has affected the cost of food ranging from cereal to beef and poultry.

In the long-term, the real promise for biofuels is the development of technology that will allow non-food sources such as switchgrass or agricultural waste to be used for ethanol production.

This will liberate us from the food vs. fuel debate.

Chevron has several major research partnerships under way to ramp up this technology. We recently struck an alliance with Weyerhaeuser, the forest products company, to research and develop biofuels in the United States from wood fiber and other cellulose-based sources.

The market is witnessing a tremendous flow of capital into alternatives. Globally, it's estimated that over $70 billion was invested in renewable energy and clean energy technology in 2006 – an increase of more than 40 percent over the previous year.

When resources of this scale are directed at developing new technology, breakthrough solutions that can be applied at commercial scale cannot be far behind.

There's one other element of energy policy that I'd like to address today and that is the subject of climate change. There are few issues where the need for policy alignment is greater.

This is a huge challenge for all of us. But as a starting point, the private sector, policymakers and the scientific community should work together to create a national framework for carbon management that is rational and cost-effective.

Otherwise, we run the risk that state and local actions – no matter how well-intentioned – will create a patchwork of regulations that impose high societal costs with limited benefits.

Reaching consensus on the components of a national framework should be guided by several principles.

First, we should acknowledge the critical need for global engagement. Reduction of greenhouse gas emissions must involve all of the major emitting nations in the world. Anything less could put America's economy at a tremendous global disadvantage.

Second, there should be broad and equitable treatment of all sectors of the economy to ensure that no single sector is unfairly burdened.

And third, there should be open communication about the costs, risks and trade-offs associated with climate change policies.

The world has reached a point where integrated carbon management is needed. Now we need to exercise the leadership that is required to create policies that are balanced, practical and flexible.

These fundamentals of managing the energy portfolio – efficiency, protecting core investments, investing in alternatives, and environmental stewardship – are the building blocks of responsible energy policy.

But knowing the right thing to do is one thing. Getting it done is another.

I think that's where we are today with energy policy. We know that to ensure energy security, we need to use energy more efficiently. We know we need to responsibly develop the existing energy resources this country holds. And we know we need to accelerate the development of the next generation of energy.

There is a growing consensus regarding what we need to do. But finding the political will to get it done presents a tremendous challenge.

For too long, energy policy in this country has defaulted into predictable positions – Republicans against Democrats, business against environmentalists, hydrocarbons vs. renewables.

We need to bridge these divides. We need to shift our perspective from special interests to the common good – from the tyranny of the "or" to the genius of the "and."

The American business community and the American people deserve a forward-looking, centrist strategy that relies on common sense and, most of all, action.

None of what I have outlined today will be possible without the active engagement of America's business community. The business community needs to take an active leadership role – your voice on energy is truly the voice of reason, the voice of pragmatic solutions.

It may seem, at times, like an overwhelming challenge. But Carl Sandburg once called Chicago the "city of big shoulders." I believe the business leaders of Chicago, the Midwest and America are up to this challenge.

If we seize the opportunity, and demand the political leadership necessary for a successful energy policy, I believe that several years from now, we will look back on this time as a turning point – a time when the United States finally approached energy issues strategically and pragmatically. A time when we realized that the solutions were right in front of us.

And a time when we acted on those solutions, when we summoned the courage to make the tough trade-offs required for an effective energy policy and stayed committed to those policies over the long term. Our shared future demands nothing less.

Thank you.

Updated: May 2007