Conference on U.S.-Saudi Energy and Economic Relations in Global Perspective

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

Council on Foreign Relations Conference

Washington, D.C., April 22, 2002

I welcome the opportunity to participate in this conference on U.S.-Saudi relations. This relationship is an important one for all of us, and it is an honor to share the podium with so many prominent representatives from each country.

As the CEO of an American company that has been involved in the Kingdom for almost 70 years, I suppose I could be seen as biased. Perhaps I am. But I do have a perspective on the relationship from business, commercial and personal points of view. I would like to share them with you today.

ChevronTexaco's involvement in Saudi Arabia goes back to the very beginning of the Saudi oil industry. In February 1933, Lloyd Hamilton of our predecessor company Standard Oil of California arrived in Jeddah to negotiate an oil concession with the Kingdom. Within four months, an agreement was signed and exploration began in the Eastern Province.

It took almost five years and a half-dozen dry holes before history was made with the Dammam No. 7 Well – marking the birth of the greatest oil province found anywhere in the world.

ChevronTexaco's involvement in Saudi Arabia goes back to the very beginning of the Saudi oil industry.

In these early days, Texaco joined Standard Oil of California in a partnership that was to become Aramco. And, as we now know, Saudi Aramco has become – by far – the largest oil company in the world.

Our roots in Saudi Arabia extend beyond Aramco, however.

In 1949, Pacific Western Oil, another predecessor company, acquired a concession onshore in the Partitioned Neutral Zone (PNZ) between Saudi Arabia and Kuwait. Pacific Western became Getty Oil, which subsequently was acquired by Texaco. And, of course, Chevron and Texaco completed a merger last October.

I recite this history as a lead-in to make some points about doing business in the Kingdom.

That concession in the PNZ is operating very successfully today. We now produce over 150,000 barrels of crude oil per day through a subsidiary company called Saudi Arabian Texaco. The complete rebuilding of the infrastructure following the Gulf War and steady improvement in production is testament to the quality of the organization we have built – over 90 percent of whom are Saudi citizens, including almost all of its senior management.

Our involvement goes beyond the PNZ. In a partnership with Saudi investors, two years ago we started up the first completely privately financed petrochemical plant in the Kingdom. Today, that plant is providing important products to the Saudi and export markets. And, together with our Saudi partners, we recently announced a $1 billion expansion plan.

The singular focus on performance and excellence that our Saudi colleagues bring to these endeavors is a dramatic illustration of the new Saudi Arabia that Crown Prince Abdullah is building. It stands in sharp contrast to criticism that the Kingdom does not have the depth of technical and managerial talent to successfully boost economic growth.

These projects and businesses provide high-level employment opportunities, technology transfer and professional training, particularly for the new generations of engineers and scientists.

Our long relationship in Saudi Arabia has been a successful one. And I like to think it is a relationship that has been equally rewarding for our Saudi partners and all the other stakeholders involved.

Moving now to the role of the Kingdom in the world energy market: Worldwide crude oil demand today is approximately 77 million barrels per day (mbd). This demand is expected to reach 90 mbd by 2010 and may be substantially higher in the following decade.

On the supply side, global production capacity currently is 81 mbd. OPEC accounts for almost all of the surplus capacity, with Gulf producers contributing 90 percent of the total.

Recently, there has been much debate about the impact of increased production from non-OPEC sources such as Russia, the Caspian and West Africa. Some commentators suggest that these sources will lessen our dependency on OPEC oil. Some claim that the Middle East will decline in importance as a result.

This is flawed thinking and a shortsighted view of the world's oil supply and demand balance.

... it is no surprise that a recent article by Robin West of Petroleum Finance Co. referred to Saudi Arabia as 'the global central bank of oil.'

It is true that increasing non-OPEC production in the near term is displacing OPEC oil. However, under any reasonable economic growth scenario, these sources cannot possibly satisfy the expected long-term demand. Saudi Arabia, with 260 billion barrels of oil reserves, possesses almost one quarter of the world's oil reserves and one-eighth of the world's oil production capacity. So it is no surprise that a recent article by Robin West of Petroleum Finance Co. referred to Saudi Arabia as "the global central bank of oil."

With its enormous reserves and excess capacity, Saudi Arabia has long played the role of a balancing producer. Its excess capacity has recently had a moderating impact in times of volatile market such as in the weeks following September 11 and, more recently, when Iraq announced that it would withhold oil exports for a month.

Of course, no one would argue that diversity of oil supply is important for every country that relies on oil imports. Multiple sources of oil are important for consuming countries, including the United States. Diversity of supply means security of supply. Nevertheless, the numbers speak for themselves – the world needs and will continue to need Saudi oil for a long time to come.

Because of its oil reserves, much of the discussion on economic development in the Kingdom centers on energy and energy-related businesses. I think that it is important to discuss the need for diversifying the economy and attracting investments in other industries and businesses from both Saudi and non-Saudi investors.

... the world needs and will continue to need Saudi oil for a long time to come.

Saudi Arabia has a well-documented high birthrate and a rapidly growing young population entering the work force. Economic diversification is and will be critical for the long-term growth of the economy. Saudi Arabia will need more labor-intensive, knowledge-intensive and service-business growth. In recent years, the Kingdom has taken some positive steps to improve the business climate.

Continuing these reforms is an essential dimension to the economic health of the Kingdom, and they should provide U.S. companies outside the energy sector with new investment opportunities not available in the past.

On the subject of investment, we should not forget that three years ago Crown Prince Abdullah launched an energy investment initiative for the Kingdom. He invited foreign oil companies to submit proposals for upstream gas projects and associated downstream projects. Negotiations on opportunities of this size and scope are by their very nature complicated and time-consuming. Not only must the terms make sense for Saudi Arabia, they must also make good business sense for the companies involved.

Although my company is not participating in these particular opportunities, the Crown Prince's vision for major foreign investment in the Kingdom's hydrocarbon and industrial sectors sends a strong signal about the direction of Saudi Arabia's economic policy to open its economy more and more to outside investment and to serve as a full-fledged player in the global economy.

Having spent my time so far on the business perspective, I would like to close by sharing some personal thoughts about the situation in the Middle East, because it has the potential to be very destabilizing and already has introduced volatility into the oil markets.

I applaud the action taken by Crown Prince Abdullah, when he introduced his vision for peace, and the vigor with which he has pursued gaining support for it from the rest of the Arab world.

Reflect for a moment on the vigor with which Ibn Saud completed his conquest of the Saudi Arabian peninsula in 1925. He spent the next decade building the early foundation of the modern Saudi Arabia. One step was the oil concession with Standard Oil Company of California.

It is easy to look backward and conclude that the personalities involved at the time could see clearly what they were creating. But as Joseph P. Ellis said in his recent book about the founding fathers of the United States, "No one present at the start knew how it would turn out in the end."

Saudi Arabia is where it is today because of the vision of its first modern day leader, and I hope that Crown Prince Abdullah's vision for peace will have an equally successful outcome.

I know that many of us here today look forward to a strengthening of the economic, commercial, cultural and political bonds that are of mutual benefit to the United States and Saudi Arabia. And I am personally hopeful for a continued strong and lasting friendship with our Saudi partners.

Thank you.

Updated: April 2002