Energy Realities: Navigating the Future
By Jay R. Pryor, Vice President, Corporate Business Development
World National Oil Companies Congress
London, June 22, 2010
We’re gathering against the backdrop of continued uncertainty. Everything is affected: energy producers, energy consumers and the markets. Our industry’s challenge is maintaining a focus amid the turbulence. We need to respect the energy fundamentals, the pillars that will support global growth and development for coming decades.
We have all recently seen how great volatility can influence energy markets over the near term. Consumption is driven down. Investors sit on the sidelines. Demand for just about everything slows – and sometimes even shrinks – until confidence returns.
The short-term tides vary, but it is the gravity of a rising global population that drives global energy demand. That’s why our industry must tune out the “noise” of short-term market volatility. We must stay focused on long-term trends and the energy needed to meet future demands.
The mission of our industry is to help the greatest number of the world’s citizens realize the promise of energy: health, mobility, comfort and security.
Our products will remain fundamental to sustaining the global economy’s momentum for many decades. They are essential in the workshops of the world. They are the means that bring global consumers into contact with the world’s goods and services.
Simply put, without hydrocarbons very little moves.
Of course, some of the uncertainty around energy goes beyond the health of global markets. Some question the state of our industry.
Although we have always focused on safety and reliability, the tragedy in the Gulf of Mexico has pushed industry safety to the top of the agenda around the world.
The tragedy in the Gulf of Mexico is most keenly felt on a human level. The offshore community is a close-knit family. We share the loss and can only imagine the suffering of those 11 families.
There are extraordinary environmental challenges to meet and local communities to rebuild. These issues reinforce the serious responsibilities we must uphold when producing hydrocarbons worldwide. The challenge is magnified in remote and challenging environments.
This has been a humbling experience for our industry – and one from which we must learn.
Looking to the future, the industry must fully and rigorously analyze the Gulf tragedy. We all need to confront the implications with candor and humility yet with strong resolve.
And from the lessons learned, we must develop and universally apply solutions that will preserve our license to operate. We welcome new standards, safeguards and oversight that will help to help prevent future accidents. But as those lessons are learned and applied, leaders and policymakers need to consider carefully the potential for unintended consequences.
Our industry can always improve and that must be our commitment – a culture of continuous, positive improvement in safety and reliability. It is in everyone’s interest to ensure that every company’s operating standards are up to the same high level.
Policymakers, while rightfully focused on this tragedy, should analyze it in context: as an isolated, and likely preventable, event. They should keep in mind that overall, the industry has a good record for safety and environmental protection.
Shutting down or scaling back deepwater development in the Gulf would constrain supplies for the world’s energy consumers. It would also be a step backward for energy security.
This is why the right investments need to take place. They must be made in an orderly fashion to meet expected demand growth while offsetting field declines. Getting things wrong will ultimately be a net loss to global energy security. I am confident that the will exists to get it right.
Protecting the environment, and with it the license to operate, is very much in the mutual interest of both the energy industry and our host governments. For our part, Chevron will do everything that we can contribute.
Whether we operate in the Gulf of Mexico or elsewhere, we have one common goal. Our industry must build global energy security to support long-term economic prosperity. This is where the interests of energy producers and energy consumers meet.
An effective energy strategy begins with recognition of the importance of scale. The world’s current energy system was built over more than a hundred years. Changes to that system always require extremely long lead times. Energy transitions take place over decades – as experience teaches us, over multiple decades.
Consider the sheer volume of present needs. Every day the world consumes roughly 86 million barrels of oil. The majority of that oil is used for transportation.
Even if you assume relatively flat demand growth, the world will still need an additional 30 million barrels per day within the next decade, simply to offset declines. That’s the rough equivalent of tripling Saudi Arabia’s production.
However, demand won’t stay flat; it is expected to grow dramatically over the medium term. The International Energy Agency estimates that global demand will be roughly 40 percent higher by 2030.
Just as today, conventional sources will supply most needs through the middle of this century. Although renewables are poised for impressive growth, they begin at a very low baseline. They will not significantly displace traditional sources for many years.
Even under the most aggressive scenarios, hydrocarbons will supply about 70 percent of global demand by the year 2030.
Our challenge is clear – produce more energy safely, reliably, with less carbon and at a price that supports global economic growth. Billions of people and their aspirations for higher living standards are in the balance.
Chevron sees the clear implication: the world needs it all. This means all the energy from every available source and a reality-based strategy to get there.
The best path to energy security is a portfolio approach.
Our position is aligned with the U.S. National Petroleum Council’s (NPC) recommendations in its Hard Truths report. The NPC made a number of critical points. We need to:
Expand and diversify supplies.
Strengthen global energy security.
Reinforce capabilities in technology and human talent.
The NPC focused on the United States, but the balanced approach it recommended will work around the world. Policymakers everywhere can concentrate on a few key steps to develop a portfolio of sources and strengthen energy security.
Moderating demand through greater efficiency shows enormous promise. Our experience suggests that enormous potential savings are available across the United States and around the world.
A 4 percent global reduction of energy across all sources could save the equivalent of 10 million barrels a day. By a reduction of just 20 percent across all sources, the United States could save the same amount.
Since the United States is the world’s largest energy consumer, savings on that scale would move the needle for global energy markets.
Other energy sources have a role – wind, geothermal, solar, hydro, advanced biofuels – all will be needed. The world must move aggressively to develop and bring new energy sources to commercial scale. They will be important segments of the portfolio in the future.
Today, Chevron is the world’s leading producer of geothermal energy. We currently supply electricity to millions of households in Indonesia and the Philippines.
Other renewable sources are poised for dramatic growth.
Progress on that front should not, however, confuse the necessity of developing traditional sources. Coal, oil and natural gas will be central to meeting the world’s future needs well into the middle of this century. And, of course, nuclear power will be a source as well.
There is no doubt that we’ll need it all. But that won’t happen without the right framework. Sound policies and partnerships will do that. We need comprehensive, integrated policies for a stable, long-term investment climate and to drive innovation.
Developing the infrastructure and producing the energy for the world’s future needs will be a vast undertaking. The sums alone are staggering.
The International Energy Agency (IEA) estimates that $26 trillion in investment will be needed by 2030 – $26 trillion.
Let’s bring the scale of that investment into focus. The Apollo Program, which took men to the moon, cost about $90 billion, in today’s dollars. So, according to the IEA’s estimate, the world will need 285 Apollo Programs, 14 per year for the next 20 years. This gives a little idea of what we are talking about.
At stake is affordable and reliable energy for countries at all stages of development.
Two years ago, a historic degree of volatility shook global markets. To avoid similar volatility in energy prices and potential shortages, we must act now. Building the right investment conditions must start today. Action now will ensure that energy is available when needed.
Now, what steps should be taken?
From the perspective of an international energy company, here are the things we need to see for a positive framework for investment:
Sound policies to promote stable fiscal and regulatory regimes.
Open markets characterized by transparency and access.
Respect for the rule of law.
Focused application of new technologies.
Putting these pieces in place creates the foundation for successful partnerships. They bring together resource-holding countries and companies that have advanced capabilities and cutting-edge technology.
The global economic downturn has taken a toll on investment. Hopefully, it’s temporary. Global exploration and production investment shrank by 15 to 20 percent from 2008 to 2009.
However, Chevron maintained its long-term view. We kept capital spending at roughly the same level for 2008/2009.
Companies investing in energy development can benefit from two advantages: a disciplined investment strategy and a strong balance sheet. We all share a binding interest in those energy investments being made.
The world doesn’t want to get caught again on the wrong side of the investment cycle when demand returns and the needed energy supplies are years from being developed.
And our industry will always get the blame.
The Gorgon Liquefied Natural Gas Project offshore northwest Australia shows all the elements of successful 21st-century energy development at work. The initial investment for Gorgon is US$37 billion. This project required innovation across all the elements in the value chain – from the upstream development to market delivery.
It's one of the biggest natural gas projects in the world.
How big? Gorgon can supply enough natural gas to produce electricity for a city like New York for the next 100 years. Natural gas from Gorgon will help significantly expand and diversify the Asia-Pacific region's energy supplies.
It also offers several advantages on carbon management. It's the largest, most advanced carbon dioxide injection and sequestration project in the world. It will sequester 3.5 million metric tons per year of CO2.
In addition, Gorgon will create thousands of jobs – more than 10 thousand direct and indirect jobs at the peak of construction. Over its lifetime, the project is expected to spend $33 billion on Australian goods and services. It will be a pillar of the Western Australia economy.
Gorgon represents the future of an integrated energy development. It demonstrates that, with proper planning, economic, environmental and social considerations can all be aligned into a successful project.
This brings us back to the need for strong partnerships. Government and energy companies must work closely on massive, complex projects with major environmental dimensions, like Gorgon.
With cleaner-burning fuel for fast-growing Asian markets, significant value for the home government and innovative environmental protections, Gorgon showcases the value that international energy companies can create on behalf of their partners. We bring capital, technology, people and know-how to unlock the full value of a country’s resources.
Another example of productive partnership exists within the Partitioned Zone of Saudi Arabia and Kuwait. There, heavy oil is trapped in the Wafra reservoir. In a large-scale pilot project, Chevron is applying our steamflood technology for the first time in a heavy oil carbonate reservoir.
In the process, we’re leveraging a century’s worth of heavy oil experience.
Our experience stretches from Bakersfield, California, down to Hamaca in Venezuela, and across the Pacific to Duri, Indonesia. Pioneering work like that being performed through our partnership shows the value that partners in energy development can create when the right conditions are in place.
Chevron has been able to work in Saudi Arabia, Venezuela and Australia and in many other countries for decades because we built a strong foundation.
To solve today’s energy equation, governments, companies, consumers and resource holders must do the same thing. They must use a pragmatic, cooperative approach. We must find the common ground and the path to partnerships that benefit all.
Future generations depend on the insight and resolve of current energy stakeholders. We must make the right choices today to avoid compromising future energy security.
By making disciplined, responsible decisions, the world can put the sound policies in place that will prevent energy shocks and disruptive shortages. Fortunately, we as an industry have the vision and the will to avoid that scenario.
So let’s go out there and do it and make the far-sighted decisions that will keep the global economy growing, moving and developing.
Updated: June 2010