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Accessing Reserves and Investing in Infrastructure

John Watson

By John Watson, Executive Vice President, Strategy & Planning
Chevron Corporation

CEO Plenary, 2008 World Petroleum Congress

Madrid, Spain, July 3, 2008

Good morning. I would like to congratulate the World Petroleum Congress and the Spanish Organizing Committee for an outstanding conference, and I want to thank Secretary Srinivasan for moderating this panel. I am particularly honored to be here with Sergio Gabrielli of Petrobras.

Chevron and Petrobras are partners in several major projects, including Frade and Papa-Terra in Brazil and Agbami in Nigeria. Our partnerships with Petrobras are important to us and demonstrate an important fact in today's global energy environment. And that is, by combining the unique strengths and capabilities of an international oil company and a national oil company, we can deliver value for all stakeholders and help meet the world's energy needs.

We've been asked to speak on the topic, "Accessing Reserves and Investing in Infrastructure." Clearly, the world needs the former and host governments require the latter.

In Chevron's view, most of the price increases we are seeing are related to fundamental concerns about the outlook for physical supplies in the long term.

I'm going to discuss why partnerships based on cooperation and trust are imperative for helping to meet the supply challenges we face and for the economic and social progress that we deliver when we get it right.

But first, let me put today's business environment in context.

The backdrop to this World Petroleum Congress has been rising oil prices. They have doubled in the past year, driven by global issues affecting supply and demand. The world is consuming oil at an increasing rate, and this demand growth is projected to continue. There are more than a billion people who enjoy a high standard of living in developed countries. There are billions more in developing countries who are striving for that same high standard of living.

The current global energy system is straining to meet all our needs. Spare capacity is limited, and there is no room for error. This environment makes it more important than ever that we find and develop new supplies of energy, invest in infrastructure to produce it economically, and get it to consumers quickly.

And all stakeholders must do their part. The challenges we face are too large for go-it-alone strategies or for any stakeholder, including the United States, to simply sit back, consume resources and let someone else solve the problem of supply.

Finding and accessing new reserves to meet demand is hard enough as we continue to push the limits of our abilities in increasingly challenging environments. But we also have to bring these resources to market in a socially and environmentally responsible manner.

This is where investing in infrastructure plays a vital role. Sustainable growth requires large investments, and we are making them. New investment by the five major international oil companies alone surpassed $100 billion in 2007. That's nearly 10 percent more than in 2006.

This year, we are seeing even larger increases across the entire industry. For example, Chevron's $22.9 billion capital and exploratory spending program for 2008 is a 15 percent increase from our 2007 outlays — and triple what it was just four years ago. These investments are being made along the entire energy value chain: from exploration and production; to refining and transportation; to geothermal, solar, cellulosic biofuels and other emerging technologies.

Our industry's investments are a tremendous platform to stimulate broader economic growth wherever we do business. But it is partnerships — based on cooperation and trust — that create the stable operating environments required to make those investments viable and beneficial to all stakeholders. Building strong, sustainable partnerships — between international oil companies, national oil companies, local governments and communities — allow us to meet growing demand while producing social and economic value in the countries where we operate.

Historically, partnerships have helped our industry mitigate risk. Today, the power of partnerships is found in cooperation. No single entity has all the components needed to go it alone on major energy projects. All of the success factors for projects — access to resources, technology, capital and knowledge of local operating environments — require cooperation and alignment among multiple partners.

For an international oil company like Chevron, partnerships begin with a simple question: Where can we add value? We need to make an assessment of what is needed for a specific opportunity in a specific country. In our view, partnerships that add the most value address five basic attributes.

Let me briefly touch on each one.

The first attribute is technology. Increasingly, the success of hydrocarbon exploration and production with multiple partners rests on the smart application of the right technology for the project. This is especially true at a time when limited availability of resources require us to develop all the resources we have available to us. Whether it is heavy oil, the deep water, oil sands or molecular transformation in the refining system, technology is a driving force in the success of our partnerships.

Chevron's expertise in sour gas, heavy-oil production and refining, subsalt imaging, and deepwater drilling not only adds great value to our partners' projects, our technology expertise also adds tremendous long-term value to workers in the countries where we operate. The technical skills that our national work forces learn and skills in safety, project management and other areas benefit our host countries and partners well beyond a specific project for years to come.

The second attribute of sustainable partnerships is building a local work force. We need to leverage our business investments into trained and skilled local workers. This is essential at a time of critical labor shortages in our industry. Leveraging our investments to create jobs in local markets has a powerful multiplier effect throughout the local economy, as well as providing companies with a committed and capable work force.

Creating local jobs is a top priority for Chevron in every one of our major projects around the world. In Africa, for example, Chevron's work force includes 9,000 national employees. More than 80 percent of our managers and supervisors are from our host countries.

Increasingly, those employees are being tapped by Chevron for jobs outside Africa, preparing them for possible higher-level positions in their home countries later on — or anywhere else in our global operations.

The third attribute is enabling local supply chains. Investment by international oil companies can stimulate the development of small companies and services, which expands job opportunities and boosts the local economy.

A good example is our Agbami Field offshore Nigeria, which I mentioned earlier and where our partners include Petrobras. This deepwater project has generated the construction of 10,000 tons of offshore components in local shipyards, and nearly 3 million work hours for Nigerians.

The fourth attribute of sustained partnerships is community development. Our industry can make important contributions through the application of technology, building local supply chains and creating jobs. But we also have the opportunity to build human capacity — that is, make investments to strengthen the basic building blocks of a prosperous society. Education and training, job creation and health care — all of these things contribute to a healthy society and a healthy business environment.

You can see a number of excellent examples of this kind of capacity building at the Social Responsibility Global Village right here at the World Petroleum Congress. Those examples include Petrobras's Carnauba Viva initiative in Brazil. Some 400 craftswomen in the state of Rio Grande do Norte supply mats, braids and crates made of tough, weather-resistant carnauba palm to replace aluminum wrappings around Petrobras's steam pipelines in the region.

Another example comes from my own company. The Angola Partnership Initiative is the kind of community involvement that Chevron seeks — investments that produce a broad, positive and lasting impact for a lot of people. Launched in 2002, Chevron leveraged an initial $25 million investment with $31 million in matching funds and partnerships such as the United Nations and the U.S. Agency for International Development.

Angola Partnership Initiative projects range from providing small-scale farmers with tools and technical aid to micro loans for small businesses. This investment has had a tremendous multiplier effect and has contributed to significant and sustainable improvements in the lives of thousands of Angolans.

All of these attributes together — technology, local jobs, supply chains and community development — are fundamental components of partnerships that produce the most value for the most people over time.

However, for these partnerships to begin and be sustained we need a very important fifth component: the right set of policies — stable and predictable tax and regulatory regimes, sanctity of contracts, and the rule of law. These policies attract investment in energy projects and provide a strong foundation for broader investment across the full economic and social spectrum.

One of the toughest policy challenges we face today is the temptation to retreat into nationalism — closing borders, blocking investment and maximizing short-term returns at the expense of long-term economic growth. My own country is yielding to this temptation by first, rallying around unrealistic calls for energy independence. And then, threatening punitive taxes on the oil and gas industry, which only inhibits investment in critically needed new supplies.

Other countries are yielding to the same sort of simplistic temptations, encouraged by an environment where, some believe, the price of oil can only go up. I am confident that we can see through the temptations presented by high prices and produce realistic and sound energy policies that balance economic, environmental and social objectives over the long term.

Going forward, the leaders in our industry — the partners of choice — will be those who master the smart application of technology, build local work forces, enable local supply chains, foster community development and enact the right set of policies.

Strong partnerships, based on cooperation and trust, will enable us to continue to access resources and invest in infrastructure. They will help assure the long-term health of our industry and, in doing so, promote economic growth and human progress for the generations who will follow us.

Thank you for the opportunity to address this plenary today.

Updated: July 2008