Challenge 2001: Proving the Value of Energy

By David J. O'Reilly, Chairman and Chief Executive Officer
Chevron Corporation

21st Oil & Money Conference

London, England

This has been quite a week: OPEC meeting in Vienna, Climate Change meeting in the Hague, and, of course the recount in Palm Beach, Florida!

On the occasion of this 21st Oil & Money conference, I'm reminded of the writings of Charles Dickens. "It was the best of times, and the worst of times."

Three straight quarters of record profits among the top players in our industry, and all we get back from the market is a yawn. The high-tech stocks stole the show early in the year. But it didn't last. And while technology still has a lot to offer, the bloom is off the dot-com rose.

Through it all -- even as tight supplies and strong prices drove us to new heights -- the performance of integrated-energy stocks remained anemic. There I was still enjoying the afterglow from our third-quarter earnings and the positive response to the Chevron-Texaco merger announcement when I saw the headline in Energy Intelligence Briefing: "OIL EQUITIES FLOP AGAIN IN OCTOBER"

And while the market ignored our value on one side, customers and governments hammered away at each other.

Recently, we've seen dramatic fuel protests in Europe. Politicians and pundits raised old fears and conspiracy theories and demanded new energy policies. And it wasn't just OPEC and oil in the news! U.S. natural gas prices doubled and electric power ran short. During summer, the big manufacturers in Silicon Valley had to scramble for backup power supplies. And then Business Week came out with a big story about oil prices with the best and worst headline of the year: "REVENGE OF THE OLD ECONOMY,"describing the energy sector as "reaching out from the grave."

It was one of several stories quoting various experts, including Federal Reserve Chairman Greenspan, saying high oil prices could hurt global prosperity and maybe even drag down the stock market!

In this environment, there are four points that I would like to make today.

The first is the new economy needs energy to grow, surprisingly so!

The second is that the internet will change the way we do business but not the fundamentals of the energy business itself.

Third is that our role is to provide energy -- safely and efficiently -- is now more critical than ever.

Finally, we need to fulfill that role well to regain the confidence of our customers and stockholders.

Clearly, both the new and old economies -- and especially the developing economies -- need energy to grow.

Despite this we're being cast as the dinosaur industry from the last century trampling on the new one.

In fact, the world remains seated squarely on our shoulders. Information technology is a great "enabler." But energy is still the greatest enabler. Not just heat, light and mobility, but computers, communications and distribution. You can't have B2B without BTUs.

There's a new on-line grocery company in California called WebVan. You just click through your order and they deliver it. But delivery, for most things, can never be digitized. Somebody's got to fuel the "van" in WebVan, and put the "express" in Federal Express.

In the U.S. alone, the electricity consumed by the engines of the new economy has grown from 4 percent of the total 10 years ago to about 14 percent today. According to the Digital Power Report, there were 20,000 servers in use five years ago. Now there are six million tied to 200 million PCs, and most of the power they require comes from power plants running on fossil fuels.

So let's tell the truth here: Energy is the new economy's best friend.

In Northern California -- the hub of the new economy -- where I live, people need more power, more mobility, more services and, therefore, more energy.

The good news is the world today gets more GDP from every kilowatt-hour and gallon of fuel. Oil prices can't hurt the economy the way they did 20 years ago. This welcome development validates the march toward energy efficiency. But make no mistake. Although our world is more energy efficient, and less energy intensive, we're no less energy dependent.

Yes, the new economy needs energy to grow, surprisingly so!

Let me turn now to the Internet.

I think the first point here is that while the Internet is changing the way we do business. It will not change the fundamental nature of the energy business itself. Greater connectivity is creating more-efficient markets, better-managed supply chains and leaner cost structures.

A number of trading and supplier exchanges are already up and running and making good on the promise of e-business: The Petroleum Electronic Pricing Exchange, TradeCapture, PetroCosm, Wellbid, HoustonStreet Exchange, and so on.

Energy Intelligence Group has counted almost 200 energy related e-business companies.

As for Chevron, we've had the good fortune to be located near Silicon Valley and we've learned a lot from watching our high-tech neighbors.

We really began the transformation four years ago with our Global Information Link project, standardizing our desktops and connecting all employees worldwide to each other and to the Internet. This new level of connectivity within our decentralized company is helping groups and business units of all sizes share knowledge and lessons-learned across the company. And that has helped all of us make better decisions faster.

Meanwhile, we became an incubator for Silicon Valley ideas that might have applications in our company, and that led to the creation of Chevron eBusiness Development Company. These incubator experiences led to in the co-founding of PetroCosm, an e-procurement exchange linking oil and gas companies to suppliers.

They also led to the formation of Retailers Market Xchange (RMX) with Oracle and McLane and now Phillip-Morris is on board. RMX is bringing the power of the Internet to service station and convenience store operators by linking them to branded marketers and suppliersand to each other.

Also during this period, we founded Silicon Valley Oil Company, an exchange linking fuel-and-lubes-jobbers and distributors to customers.

So it's been quite a year for the e-business story. I think we probably got more news coverage during 2000 for our B2B activities than for our record earnings!

But we also learned how hard it is to make these new-economy businesses work because we've had to pursue the un-familiar at an unusually fast pace against tough -- and sometimes unknown -- competition.

We intend to get our share of the forecasted billions in industry-wide cost savings and revenue growth from participation in e-business activities.

During 2000, we identified about 150 prospects for putting the net to work.

I think our culture helped to give us a head start in all of this.

The same decentralized, empowered structure that helps our business units move faster and execute better, also helped position us to seize the Internet opportunity, which has already changed the way we do business.

Despite all this change, however, we're still an energy company and this is still the energy industry.

I think Goldman-Sachs got it right when they said: "The Internet will help oil companies meet the world's energy needs by ushering in the next wave of cost cutting and productivity improvement."

Again, the Internet is changing the way we do business but not the fundamental nature of our business.

Now let me turn to our industry's primary role: supplying affordable energy to customers in the developed and the developing world, and throughout the economy.

In recent years our industry has collectively shaken the confidence of customers and investors by implying a lack of commitment to growing the business, by creating uncertainty as to its future, and by losing sight of the importance of communicating the value proposition that reliable supplies of energy bring to society.

When oil prices hit bottom two years ago -- during one of the inevitable low points in the oil-price cycle -- a lot of people predicted doomsday for our business. Even The Economist had a headline predicting $5 oil. Industry leaders forecasted a long period of low prices and talked about ways to keep our business viable in world of $10 oil.

Now, I'm not arguing that $30 oil is sustainable either but it takes a long-term view of the business to ensure that we can generate adequate supplies for the world's growing energy appetite. Successful players must be committed to investing in capital, technology, and people, to stay on our trajectory of finding and producing energy more efficiently and with less environmental impact than the past. And we must be prepared to take our challenge to new frontiers such as the deepwater and countries closed to outside investment.

No one can deny that we achieved a great deal during the last decade, but now we have to do all the parts of our job even better than in the past. It's going to require development and application of new and better technology managed by even-more-skilled people.

We've made enormous progress in advancing technology in seismic, drilling, and producing operations as well as processing and product quality.

It is impressive to stand on a drillship in the Gulf of Mexico in 8000-feet of water as the bit penetrates the objective 25,000-feet below, even if it's a dry hole.

It is impressive to stand on the deck of the FPSO Kuito on Block 14 and witness the first deepwater oil production in Angola.

It is impressive as well to visit Escravos, in Nigeria, and witness the first phase of a multi-phase project which will put out flares and incorporate a world-scale gas-to-liquids plant.

All of these are driven by new technology, skilled people, capital and commitment.

It will also take forging effective partnerships that open new frontiers to our business.

Building relationships with host governments so that they benefit not just from taxes and royalties but also from technology transfer from a skilled workforce and modern infrastructure.

Look now at our operations in Kazakhstan just seven years after our commitment began. Billions of dollars of investment in facilities, and the years of investment in building the skills of the people there, are paying big dividends for us as investors. But even more important, the project is benefiting the people of Kazakhstan -- and with the construction of the Caspian Pipeline -- it is benefiting Russia as well.

Tengiz production up five-fold . . .world-class safety and reliability . . . increasing capital investment . . . taxes and royalties flowing . . . local businesses growing . . . these are the indicators of a win-win partnership!

It was satisfying in September to stand in Tengiz surrounded by hundreds of employees celebrating 10 million hours of safe work. It's a story of world class performance in a country that opened itself to investment and partnership. And the good news is that we're still very early in this development cycle.

Another example is Venezuela. They're going through some tough times but all countries go through good and bad times -- so it takes commitment and partnership and skill to stay the course during the ups and downs.

It's been gratifying to see performance improve so dramatically at Boscan, near Lake Maracaibo, and the credit for that goes to the high level of commitment of our Venezuelan employees. They're increasing supplies, applying technology, but most importantly, putting in place the organization, talents, and skills to make the growth sustainable.

So as an industry the key to our mission of growing supplies is to renew our commitment to resources -- capital, technology and people -- to fulfill our primary mission of energy supply.

Lastly, while we know we can increase supplies by doing all the right things and performing as superior partners, we also know we have to gain the confidence of investors at the same time. After all, without equity capital, we cannot achieve our energy supply mission.

So let's turn now to the 64,000-Euro question: What is it going to take for companies to reward stockholders?

Recently, one of the top technology analysts was asked why the market today seems to discount the old-economy stocks of companies that make the things everybody needs. Things like washing machines and energy.

And he responded: "It's true we need all those things. The question is whether they are good investments."

We can't control the moods of the market, but we can certainly influence them by projecting confidence -- and we do that through our commitment to the business, but much more importantly through our performance.

It is my belief that companies need superior performance in the following areas to be successful:

First is Operational Excellence -- Safe, reliable, efficient operations -- and environmental performance -- all are the essential starting points. These are the nuts and bolts of the business and essential from the reservoir to the refinery.

And in terms of our reputation, operational excellence is even more critical.

Next is Capital Stewardship -- We're talking about good decisions well executed.

A new study from Deutsch Bank reported that the 14 largest commercial oil and gas companies invested $68 billion during 2000, and this will be up to $78 billion five years from now. But those who spend their capital the same way five years from now as they do today will not be as successful. We will have to leverage capital better to get significantly more output of all kinds for our invested dollars. Quality decisions, technology that improves value, and project execution will be key.

And managing the portfolio to migrate from the mature assets to those earlier in their life cycle will be critical.

Another fundamental success factor is Profitable Growth:

  • by making existing assets more profitable.
  • by building new assets in established lines of business in Kazakhstan, Venezuela, Angola, Thailand, and achieve the size and scale so important to maximizing returns.
  • and through pursuing new lines of business -- such as our investment in Dynegy, our new energy services group, our gas-to-liquids joint venture with Sasol and Chevron eBusiness Development Company.

And think there is no better example of our commitment to profitable growth than our planned merger with Texaco.

This is a combination that we believe will give us an ideal scale to achieve both superior growth and superior returns in all the right places.

Upstream, we'll have greater scale in West Africa, Latin America and the Gulf of Mexico.

  • We'll reinforce our premier position in The Caspian.
  • We'll be better positioned downstream worldwide.
  • We'll have more options in the gas-and-power sector.

Over time, however, I believe the true differentiator in our industry is Organizational Capability.

Those organizations with the best capacity to manage change and to execute well, will be the ones who fulfill the supply mission with superior returns.

This is where we can learn from the successes of the new economy.

Organizations of people who are empowered within decentralized structures will be best at seeking and capturing new opportunities; best at rapidly and effectively deploying new technology; and best at building relationships at local levels, which is so important and necessary in today's complex, fast changing world.

Commitment, confidence, successful execution, and superior skills will differentiate the companies that will satisfy both the energy-supply and investor-return missions.

As you can tell, I'm bullish on energy and I'm bullish on Chevron because the world needs energy to grow -- and new economy even more so; because we have the new power of the Internet to help us change and improve the way we work to perform our critical mission of providing energy for the future; and because we have great opportunities to keep improving technology and take our skills to new frontiers.

The market will reward those who are committed and who have the organizations that demonstrate a track record of sustained performance.

I'm confident Chevron is, and will continue to be, one of those.

And as this extraordinary year draws to a close, here on the occasion of this 21st Oil and Money Conference it is my hope that in the future, society will see that there is much more to us than just oil and money, and understand our vital role in economic well-being. It is my hope that we will be fully valued for what we do and how well we do it.

Updated: November 2000