Delivering the Promise of Natural Gas in the 21st Century

By John D. Gass, President
Chevron Global Gas

Plenary 4 Keynote Speech

Johannesburg, South Africa, September 28, 2005

Thank you, your Excellency, for that kind introduction.

Chevron is delighted to be a major sponsor of this year's World Petroleum Congress.

This is an important event for our industry, so it's unfortunate that our meeting this year is being held against the backdrop of Hurricane Katrina and Hurricane Rita, which have devastated the U.S. Gulf Coast.

Chevron, like most of the U.S., is very focused right now on recovering from the tragic and destructive aftermath of these hurricanes.

The energy industry was at a critical point even before these disasters, with soaring demand driving more volatile and higher prices, and leaving very little spare capacity. Now, those factors have become exacerbated.

Thankfully for Chevron, all of our employees in the areas affected by the hurricanes are safe and secure, though many have lost their homes.

But all of us with operations in the Gulf Coast join the communities there in facing tough challenges to recover from the damage. We will remain focused on helping our employees and the communities where we operate, and in restoring our production and refining capabilities.

I must say that I am very proud of our industry and its response to the devastation.

Meanwhile, the disruptions caused by these hurricanes emphasize in very stark terms why diversifying the energy supply is critically important. Natural gas is a major component in diversifying the world's energy mix, and I'm going to address how we can accelerate that process.

First, let me say how good it is to be back in Africa.

Prior to my current assignment I worked for three years in Africa, based in Angola. Africa is a special place with special friends, and I always look forward to returning here.

Last year, Dave O'Reilly, Chevron's chairman, explained why our company believes that the decades ahead can - and must - become The African Century. Africa's possibilities, he said, are too vast for it not to reach its full potential.

Clearly, Africa has momentum. There's a powerful sense of positive energy in many countries on the continent.

The G8 acknowledged the importance of Africa in world affairs by making African poverty and debt relief one of two major issues it addressed during its summit in July.

Africa's momentum also is building through encouraging signs of growth, democracy and economic reform. And, importantly, many countries in Africa are playing a greater role in global energy activities.

Currently, for example, the U.S. imports more oil from Africa than it does from Saudi Arabia. About 17 percent (2.2 million barrels per day - MMB/D) of U.S. oil imports come from Africa, as compared with 12 percent (1.6 MMB/D) from Saudi Arabia.

On the gas front, Africa is now a leader in the liquefied natural gas (LNG) business through projects in countries like Nigeria, Egypt, Algeria, Libya and, soon, Angola.

Looking ahead, roughly 75 percent of the world's future gas demand will be concentrated in Asia and the developed world. However, nearly 80 percent of the production growth over the next 25 years will originate here in Africa, as well as the former Soviet Union and the Middle East.

Africa also is demonstrating the potential of resource-based economies to promote economic growth.

The world's thirst for energy is opening the taps on a huge flow of cash into Africa, and many of the companies represented here today are making major investments in Africa. Chevron, for example, plans to invest more than $15 billion in Africa energy projects over the next five years, or more than $8 million a day.

These kinds of investments can help bring opportunity and progress to Africa.

It can mean more jobs for Africans, greater opportunities for African businesses, new markets for local goods and services and investments in infrastructure that will benefit communities across the continent.

So I commend the World Petroleum Council for recognizing the importance and the potential of Africa by scheduling this year's WPC in Johannesburg.

I'd like to spend my time today talking about the future of the energy industry - a future that can be summed up in two words: natural gas.

It's clear that oil will continue to be the predominant energy source for some time to come. Renewables and alternative energies will play an increasing role in the energy mix, but not on the scale of petroleum products. However, the role of natural gas in meeting global energy demand is forecast to grow strongly.

Chevron is committed to this future. Although we have been in the gas business for more than 100 years, we created a global gas organization in 2003 to better manage our assets across the entire natural gas value chain.

And our recent acquisition of Unocal adds significantly to our natural gas business.

This is an exciting time for all of us in our industry because I think you'll agree natural gas has very much come of age. What was in the past viewed as a second prize, and sometimes even an unwanted byproduct, is now a valuable commodity in its own right.

While global demand for energy is expected to increase by nearly 50 percent over the next 20 years, the real growth in demand is for natural gas. It's projected to increase nearly 70 percent over the next 20 years.

With this kind of projected growth in demand, we are at a tipping point in the evolution of the natural gas industry.

We are making a transition from an industry based almost solely on dedicated projects and long-term contracts, to a global commodity market - one in which gas can be more effectively developed, transported and marketed, and its economic value fully realized.

To successfully accomplish that, we must build an infrastructure that delivers natural gas safely efficiently and cost-effectively anywhere in the world.

The successful development of the world's natural gas supplies through the LNG and long-distance pipeline projects that are now under way globally will help diversify the world's energy portfolio.

They will deliver the full promise of gas - for our host countries, for local communities, for consumers, for the environment as well as for our companies.

But to successfully develop projects of this scope and scale isn't easy. It will require an unrelenting focus on what I believe are three fundamental challenges common to all gas projects.

I call them the "Three C's." They are cost competitiveness, cycle time and complexity.

Let's take a brief look at each one of them.

First, cost competitiveness. The IEA estimates that in order to meet the projected rate of gas demand growth, roughly $2.7 trillion of investment - or $100 billion per year - is required across the entire gas value chain by the year 2030.

Given this level of investment, and the long development timeline inherent in gas projects, it is absolutely critical that costs be managed aggressively from start to finish.

Because of the scale of projects today, even small overruns can be huge in absolute dollars.

This is particularly true in the environment we're in right now.

The unprecedented number of projects on the drawing board - and the demands this is placing on contractors and suppliers - is causing costs to rise and putting project schedules under pressure.

That brings me to the second "C" - cycle time, or, more specifically, reducing cycle time so that projects come online sooner.

Historically, long cycle times have been inherent in gas projects. Building a new industry requires a dynamic balance between markets, technology, commercial arrangements, investments, policies and partners - a whole range of factors.

But even if the history of natural gas projects is one of going slowly, we cannot let the past define the future. Reducing cycle time is necessary if we are to keep up with global demand for natural gas.

Some words of caution here, however. Managing cycle times aggressively does not mean abdicating prudent decision making and capital stewardship. Those are imperative, especially in today's hyperactive gas project environment.

The third "C" is complexity. How do we manage the inherent complexity of projects in ways that add value but do not add to costs and cycle times?

Almost all gas projects today involve complicated commercial arrangements and multiple interfaces involving many different stakeholders.

For example, the Angola LNG project, co-led by Sonangol and Chevron, has multiple joint ventures supplying gas to a liquefaction facility that has five partners.

The level of complexity of this project is enormous, and managing it has required a lot of hard work.

But we've developed a shared vision of success, we've identified and rallied around common needs, and we've approached conflict resolution creatively and with respect.

This approach to managing complexity has proved successful. Earlier this year, the Angola government passed a resolution establishing the necessary regulatory framework to move the project forward.

It enabled the partners to reach key agreements that started front-end engineering and design work.

Successfully meeting the challenge of the Three C's, however, cannot happen without an investment environment that ensures stable, long-term returns.

Transparency, predictability and discipline must guide the investment environment for a successful gas project. We cannot succeed unless investors have confidence in the rules of the game.

Taxes, fiscal regimes, protection of intellectual property, sound regulatory structures, sanctity of contracts - all these have to be in place and fit together so investors can make the big decisions and commitments needed to move ahead.

Let me point to Qatar, for example. It's a country with enormous gas reserves and has attracted a scale of investment unprecedented in our industry.

Qatar's transparency and robust business frameworks - together with its ability to develop long-term plans and implement them effectively - has enabled Qatar to attract that level of investment.

I have looked at how controlling costs, reducing cycle times and managing complexity are crucial elements of successful management of gas projects. And I have emphasized my strong belief that transparency, predictability and discipline are essential to create the investment climate necessary for gas projects.

Now I'd like to focus for a minute on the catalyst that really brings the Three C's to life: and that is effective partnerships.

You'll note that I said effective partnerships.

Let me tell you about an effective partnership that I am very familiar with and quite proud of.

It's our leading position in gas-to-liquids (GTL) through SasolChevron, our 50-50 joint venture with Sasol.

It combines Sasol's gas-to-liquids technology with Chevron's downstream technology and global reach. Our joint venture has high hopes for GTL. We believe it will dramatically impact the natural gas industry and its ability to meet the global need for clean transportation fuels.

But, as is often the case in new partnerships, our startup five years ago was not without its challenges.

Sasol and Chevron have very different corporate origins and cultures, and the challenge from day one was to get aligned and remain aligned.

But we've made our partnership work by focusing not on differences, but on what we share.

We share an ambition for Sasol Chevron to be the leading company in GTL. We share a heritage of making challenging energy projects work. And we share the desire to create a partnership of complementary strengths.

Today, SasolChevron is a model of what can be accomplished by building strong partnerships among stakeholders: the kind of partnerships that allow us to more effectively pool resources, share risk appropriately, link multiple markets, and leverage technology and best practices.

And as we continue to build the global gas industry, new levels of collaboration and partner alignment will be required.

I think we can all agree that the challenge is set out before us.

In closing, I would like to say that managing the Three C's - cost competitiveness, cycle time and complexity - is critically important for bringing successful gas projects to life.

But I believe that there is a higher purpose in building the global gas industry of the 21st century.

Those of us in the energy industry are all custodians of the world's natural gas resources. And we have a responsibility to develop gas projects not only for the benefit of our companies and our investors, but also for the benefit of millions of people worldwide.

This higher purpose I am talking about can be found in China, where LNG will provide energy for a power plant that delivers electricity to homes and businesses in Zhejiang Province.

That higher purpose can be found in Venezuela, where recently discovered natural gas will eventually help ease gas shortages in the western part of the country and provide energy to hospitals, schools and homes.

And that higher purpose can be found right here in Africa in the kitchen of a mother who used to cook her children's food using wood or coal, but now heats it over the steady blue flame of natural gas.

There are two words that you hear a lot around Chevron these days. Those two words are "human energy."

"Human energy" speaks to a commitment to provide energy to power plants in China; to hospitals, schools and homes in South America; to a mother's kitchen here in Africa and everywhere else in the world where energy is needed to help make a better life for all.

"Human energy" also describes the partnerships between the diverse constituencies that are necessary to provide that energy - in Africa and around the rest of the world.

And "human energy" includes the energy of people worldwide committed to finding and producing energy to fuel economic growth and human progress now and in the future.

Nowhere is the potential of "human energy" greater than in the global gas business that we are building today. It will redefine the energy industry in the 21st century.

By mastering natural gas projects and partnerships, the global energy industry can continue to grow and prosper.

And by mastering gas projects and partnerships, we will deliver the energy needed to fuel global economic development and a better way of life for millions.

Clearly, the opportunities are enormous and the responsibility great.

But I am confident that together, we can seize those opportunities and meet the responsibility we all share for delivering the promise of natural gas.

Thank you

Updated: September 2005