Asia's New Energy Bridge: A Constructive Challenge

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

State of the Industry Address

Kuala Lumpur, Malaysia, June 14, 2004

Selamat pagi and selamat datang! Good morning and welcome! Thank you for that kind introduction.

Members of the energy industry and distinguished guests:

It's my honor and privilege to address this ninth annual Asia Oil and Gas Conference, especially here in Malaysia.

Let me also offer a special thanks to the chairman of Petronas Malaysia, Tan Sri Azizan, and to Tan Sri Hassan Marican, president and chief executive of Petronas. They are wonderful hosts.

I am sure all of us here appreciate the role of Petronas, our host for this important event. Yesterday I had a wonderful tour of their Twin Towers, 88 floors high and overlooking the Kuala Lumpur City Centre, which is one of the largest integrated real estate developments in the world. Both the views and architecture were spectacular. I hope you've all done that.

My company is deeply proud of its long history in Asia. Our kerosene signs first appeared along Shanghai's Great White Way almost a century ago. Junks, camels and even Manchurian carts drawn by Mongolian ponies delivered our products. Beginning in the 1930s, our Caltex colors flew in Indonesia, Thailand, the Philippines, Singapore, India and Cambodia, and of course, here in Malaysia.

Those early efforts at reaching out to build business relationships underscore a crucial point I'd like to make this morning. Not just for those of us in the oil and gas industry, but for all industries: Throughout history, the more open and connected Asia and the West are, the more we have mutually benefited.

Many thousands of years ago, a land bridge across the Bering Strait linked North America and Asia and opened a new world to early humans. Later, the Silk Road formed a trading bridge for commerce between Asia and the West.

Today, a new bridge - an energy bridge - unites Asia with the rest of the world.

And I believe this bridge can open the way to an era of unprecedented opportunity for our global energy industry,for other industries and for the millions of people in the Asia-Pacific region and around the globe that can benefit from it.

However, I also believe that significant barriers threaten our progress. And I am convinced that removing those barriers - successfully completing our bridge - will largely depend on actions by Asia. Companies like mine can help, partnering governments and multilateral organizations can prod and push, but Asia must lead the way by continuing its evolution toward freer and more open economies. I'll come back to that point later, but right now, speaking of bridges, did you know that the most famous bridge in California, the Golden Gate Bridge, was at one time called "the bridge that couldn't be built"?

But Joseph Strauss, the bridge's chief engineer, was resolute. He overcame the obstacles with a unique suspension design that used the two largest bridge cables ever made - they contain enough wire to circle Earth three times. The bridge was completed in 1937, on time and for $2 million less than its $35 million budget. I wish we could have projects run like that today.

It was a triumph of discipline and determination over disbelief and doubt.

Today, Asia, too, is reaping the rewards of discipline and determination - and defeating the doubts of those who thought the region might never recover from its past difficulties. The Asia-Pacific is leading the world with what some are calling the greatest industrial revolution in history.

China is surging with an annual growth rate of 9 percent. Its economy is projected to be double Germany's in just six years and to overtake Japan's, the world's second-largest economy, by 2020. And in 2003, China attracted $52 billion in foreign direct investment, surpassing the United States as the world's largest recipient.

Rapid growth is a regionwide phenomenon. In East and South Asia and in the Pacific, the gross domestic product is expected to climb by almost 7 percent this year, says the Asia Development Bank. Japan, too, is recovering after years of stagnation.

This growth can change - and is changing - people's lives. Millions of Asians are crossing the U.S.$5,000-per-year income mark that signals liftoff for consumer economies. Demand for televisions, refrigerators and personal cars has soared. Across the region - as economies boom - tax coffers swell and countries such as Thailand and Indonesia are balancing their budgets and cutting debt.

Best of all, Asia's broad-based, market-driven economic growth is lifting millions of mostly rural citizens out of extreme poverty. Poverty should be of deep concern to all of us. I believe the issues of poverty and meeting basic human needs to be the defining challenges of the 21st century. So I was very heartened by recent World Bank data showing that in 2003, the number of East Asians living on less than $1 a day fell to below 200 million people for the first time. And those living on less than $2 a day fell by 50 million.

Economic growth is still the world's best antipoverty medicine. And its most active ingredient is energy.

That is why I think energy is Asia's bridge to opportunity. And that's why I'm concerned that unless Asia acts, lack of sufficient and affordable energy will cause a traffic jam on that bridge. This year alone, the International Energy Agency (IEA) projects that world oil demand will grow by 1.65 million barrels per day. Two-thirds of the demand will come from Asia, and half of that, from China. The IEA also forecasts that Asia will soak up 40 percent of the growth in world oil demand between now and 2025.

How to meet that demand is the challenge facing our industry and the entire Asia-Pacific region. Let me talk about some ways I believe Asia can meet that demand.

First of all, there is the enormous resource Asia already has at hand, its existing base of proved oil reserves. We all know that Asia is and will continue to be a net importer. But sometimes we forget about the oil that the region does have. Three Asian nations - China, Indonesia and Malaysia - rank among the world's top 25 oil producers. Together with Australia and Brunei, they account for more than 36 billion barrels in proved reserves.

Those of you here can appreciate the value of this known resource. Because we don't have to find it, it's the most cost-effective energy we can produce. At my company, we consider producing and developing known reserves so important that we call it our Base Business, and we've made maximizing that Base Business a key upstream strategy. Yes, Asia should keep up the hunt for new oil. But Asia should also make the most of what it already has.

As Deputy Prime Minister Dato' Seri Mohd Najib Tun Razak said this morning, Asia is increasingly becoming dependent on crude oil imports to satisfy its energy needs, and that's projected to grow.

In contrast, the Asia Pacific holds a much stronger position when it comes to natural gas. In fact, the most exciting new span in Asia's energy bridge is, of course, natural gas, especially liquefied natural gas (LNG). Unlike oil, Asian natural gas is more of a connectivity issue than a dependency issue.

By 2020, China plans to build 31,000 miles (50,000 km) of gas pipelines and LNG infrastructure as part of a strategy to increase by fivefold natural gas's contribution to energy consumption. India, Indonesia, Malaysia, Thailand and Singapore are all considering or pursuing major natural gas projects.

Natural gas, in short, is redefining Asia's energy business. It's even redefining our companies.

At ChevronTexaco, for example, we're changing the way we do business. We've unified all the components of the natural gas value chain - liquefaction, shipping, pipeline, power generation, marketing and business development - in a single organization called ChevronTexaco Global Gas. And over the next decade, we're looking at investing billions to build a high-impact, world-class gas business. Natural gas is clearly becoming a global commodity.

To see this, one only has to look at the proposals to bring Asia-Pacific gas to the North American West Coast. Each proposal will add to the competition for energy resources, and each proposal will expand Asia's worldwide energy marketplace. Natural gas also encourages regional cooperation. As far off as they may seem at times, proposals such as the Trans-Asian Gas Pipeline and an "Asian gas grid" reflect the utter logic of linking natural gas production centers with neighboring countries' markets.

When a marching band crosses a bridge, it is often ordered to "break step," to deliberately fall out of cadence, because the perfect rhythm could cause collapse. In much the same way, Asia's soaring growth is straining the energy bridge. By early 2004, according to the Cambridge Energy Research Associates, 24 Chinese provinces were reporting electricity shortages. Blackouts were increasingly common, diesel fuels and coal were in short supply, and the price for metallurgical coke used in manufacturing steel rose by a factor of three. Before recent loan restrictions, 100,000 new cars were hitting the streets of Beijing, where price controls kept fuel below U.S.$2 per gallon every 100 days.

Around the globe, experts worried that Asia's soaring tiger could come in for a hard landing because of energy supply concerns.

How can Asia ensure that energy - the great enabler of its progress - does not become its biggest bottleneck? Earlier I said that Asia must act to keep the energy bridge open by continuing its evolution toward freer economies. What I propose is meant as a constructive challenge from a business friend and partner for many years.

Much progress has been made - the recent signing of the United States-Malaysia Trade and Investment Framework Agreement, for example. But much remains to be done. And I am not alone in feeling these concerns. In a recent report, the Asian Development Bank urged that the region "move away from restrictive investment regimes to establish the right mix of institutions, incentives and infrastructure to create [an] enabling business and investment climate."

I think of the building of the energy bridge as the creation of a strong framework for investment, much as towers, piers and trusses make up the framework that supports a bridge. In Asia especially, it's important that this framework be capable of nourishing a full, drill-bit-to-light-bulb value chain.

I believe such a framework requires four conditions: open markets, leadership by national oil companies, adequate infrastructure and sanctity of contracts. Let me speak about each one briefly.

Open markets: Reduced trade barriers, price deregulation, market-driven public investing - all are requisites of a transparent business environment. When it joins the World Trade Organization (WTO), for example, a nation joins an open and rule-bound global trading system. But entry is just the first step. Living up to WTO agreements is critical to long-term economic progress, even though the short-term price may be temporary internal strains. Open markets also mean competing globally. ChevronTexaco, for example, is proposing regasification terminals that would bring Asia-Pacific LNG to the North American West Coast. The United States would have to compete for such supplies and producers would have to compete for customers, but that's what open markets are all about.

Leadership by national oil companies: Asia's national oil companies (NOCs) are key pillars of economic growth. Asian NOCs are stepping out internationally, operating more like private companies, especially because an increasing portion of Asia's energy needs must be met by imports. But as they stride confidently across our new global energy bridge, NOCs must recognize that they are no longer accountable solely to local or national interests. Like international oil companies, they have become citizens of the world. And as such, they must recognize and accept the social, ethical, legal and environmental responsibilities that go with that global citizenship. In Indonesia and Malaysia, this - the cooperation and shared responsibility of all members of a group - is gotong royong. And I'm happy that PETRONAS, ChevronTexaco's partner in a number of projects around the world, is a model of best-practice gotong royong.

Adequate infrastructure: A strong framework for business simply cannot exist without adequate infrastructure, portrayed by the drill-bit-to-light-bulb value chain needed especially for electricity. China plans to install plants this year capable of generating a combined total of 42 gigawatts, roughly equal to the United Kingdom's entire installed capacity. Yet some international investors shy away from Asian power development projects. Could that be because "take or pay" contracts were not honored or is there a misguided view of having electricity as a "right"? Electricity may be a fundamental necessity, most certainly to economic progress, but having it is not a right. Governments need to unwind the spools of red tape, regulations and antiquated policies that have choked off power development to hundreds of millions of their citizens.

Sanctity of contracts: Someone once observed that it takes two to speak the truth - one to say it and another to hear it. So it is with contracts. Both parties must be confident that they are sharing the same truth and that as it is written or said, so will it be performed. Contracts are the keystones that hold Asia's energy bridge together. And the sanctity of contracts is especially important to Asia's newest energy business, LNG. The large investments that are required - U.S.$1 billion or more for a single terminal - depend upon long-term, ironclad contracts that all parties can trust and perform under, such as the already-established LNG contracts with Japan.

Open markets, leadership by national oil companies, adequate infrastructure and sanctity of contracts: Each strengthens our bridge by adding the critical element of predictability - predictability of trading terms, predictability of supply and delivery, predictability of responsible behavior, and predictability of trust. This will help overcome the concerns of unpredictability raised by others in this conference.

Today, in our 125th anniversary year, ChevronTexaco is active in 27 Asia-Pacific nations. One in every five ChevronTexaco employees works in the region, 10,200 in all. The Asia-Pacific accounts for more than 20 percent of our global oil and gas production. We have more than 7,000 Caltex-branded and affiliate service stations, including more than 300 here in Malaysia. We hold refining, chemical and power generation interests in seven Asia-Pacific nations. Our regional gas prospects rank among the most promising in the world.

We at ChevronTexaco are proud of our presence in Asia and especially proud of the legacy of social progress that is part of it. In the end, this may be our bridge's strongest span of all.

In Indonesia, ChevronTexaco has helped train small farmers, build health clinics and housing, and educate nearly 40,000 young people. In the Philippines, through our Caltex affiliate, we've sponsored shelter, schooling and job training for Manila's homeless street children. At Barrow Island, offshore Western Australia, our environmental practices have been recognized as an industry model for all island oil operations.

Some of these efforts have won international recognition. They were the right things to do. But they were also the smart things to do - because ultimately, the success of our energy bridge will be judged by its value to nations, communities and people.

Like the ocean waters that flow under the Golden Gate Bridge and through the Strait of Malacca, Asia's energy benefits must also flow - to its people as well as to the rest of the globe.

This morning, I have tried to offer a constructive challenge to help make sure that happens, to urge Asia to develop a framework that will allow its progress toward open markets to continue and accelerate. Only then can we be assured that Asia will fulfill its economic destiny. Only then can energy serve as Asia's bridge from a world of what is to a world of what can be.

Again, I'd like to thank you for the opportunity to address this great conference. Thank you. Terima kasih.

Updated: June 2004