Energy Security and the Leadership Challenge

David J. O'Reilly

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

Keynote Address

Houston, Texas, February 13, 2007

I'm delighted to be here tonight, and Chevron is proud to once again be the Global Energy Partner at CERA Week.

Two years ago at this conference, I spoke about the energy challenges facing the world — the challenges of demand growth relative to new supply, declining production in OECD countries, frontiers like the ultradeep water and geopolitical instability in energy-producing regions of the world.

All of these circumstances together, I suggested, had created a new energy equation. I discussed the need for policies that acknowledge our global energy interdependence.

And I spoke about the need to be strategic, to align U.S. energy policy with other policies central to our national interests such as environmental, economic and foreign policies. I said that we needed to make the necessary policy trade-offs clear.

Two years later, these challenges — and opportunities — loom even larger. I'm encouraged that since then, energy has become recognized for the strategic issue that it is. It is clearly at the top of the political agenda. The President outlined an ambitious set of energy proposals last month, and Congress is engaged on energy issues.

American businesses also recognize that how we develop and use energy is critical to our competitiveness and profitability. That's a good thing. Any discussion about the future of energy in this country needs the full engagement of the U.S. business community.

Despite this growing awareness of energy issues, we still haven't made many of the changes in energy strategy, and energy policy, that are required for the 21st century. Today's energy debate, to a great extent, continues to be informed by narrow and outdated perspectives, unrealistic expectations, and short-term thinking.

As an industry, we bear some responsibility for this. We haven't done all that we should to put the energy debate in the proper framework. We haven't talked directly enough with the American public about our business and the value we provide. As a result, our industry has lost some credibility.

It's time to reverse that trend. It's time to move the discussion about energy security forward on a pragmatic, realistic path. It's time to respect the fact that a majority of Americans are demanding bipartisan solutions to the most critical issues facing the country. And, clearly, energy is on that list.

With the right kind of centrist thinking, I'm confident that we can lay the foundation for true energy security — the development of reliable and affordable energy through the 21st century.

I'd like to begin by addressing the response I believe this moment requires.

Let's start with the projection that the world will use 50 percent more energy in the next 25 years. Given this, we will need all the energy we can develop, in every potential form. To help meet that demand, we need to think of energy as a broad portfolio of sources and make investment and policy decisions accordingly.

Just as there are fundamentals to managing an investment portfolio, there are fundamentals to managing the energy portfolio. We need to begin with a savings plan.

Energy efficiency remains the cheapest and most plentiful form of new energy we have. Energy saved is, quite literally, energy found. We've made progress. The U.S. economy has doubled since the 1970s, while energy use has risen only 25 percent. But we still have a lot of open runway. A 6 percent reduction in energy use could effectively reduce U.S. crude oil imports by a third.

A commitment to energy savings means demanding more of ourselves as businesses, and demanding more of the products we sell to customers — from fuel and vehicles, to appliances and building materials.

Businesses are addressing energy efficiency in innovative and effective ways. But there is clearly more to do.

A second principle to managing the energy portfolio is to enhance our core investments in oil, natural gas, coal and nuclear. Or, in financial terms, protect our principal.

Hydrocarbons are the most plentiful and economic forms of energy that we have. Even if the use of renewables doubles or triples over the next 25 years, we will still use fossil fuels for more than 80 percent of global energy demand.

Today, new technologies are helping us locate and recover resources that were once considered too difficult to develop. For example, Chevron recently tested a well called "Jack" in the deepwater Gulf of Mexico. It's located in 7,000 feet of water and more than 20,000 feet below the seabed — the deepest well ever tested in the Gulf.

Not so long ago, the Gulf was referred to as the "Dead Sea" regarding its potential for new oil and gas supplies. But, to paraphrase Mark Twain, reports of its death have been greatly exaggerated. The work at Jack was a great example of what can be accomplished when companies are given the opportunity to invest and innovate.

A recent report by the U.S. Department of the Interior estimates that technically recoverable oil on the Outer Continental Shelf (OCS) could run as high as 115 billion barrels — a point I'll come back to in a minute.

I believe that any plan to enhance our energy security must include an open discussion of ways to increase access to domestic supplies. We have to find a way to set aside outdated attitudes about energy development that have been used to deny access.

Instead, let's have a discussion that recognizes the advances we've made in technology over the past 20 years — advances that allow energy production and environmental protection to coexist.

A third principle of managing the energy portfolio is investing in the next generation of energy.

Hockey legend Wayne Gretzky used to say he was successful because he skated to where the puck is going — not to where it was. In the same way, managing the energy portfolio requires investment in emerging energy sources. We can't lose sight of the primary role that hydrocarbons will play for decades to come.

But renewables and advanced technologies have the potential to alter the energy portfolio over the long term. They can create new feedstocks for fuel, new sources for power and new benefits for the environment.

We're seeing a tremendous flow of investment capital into alternatives. Globally, it's estimated that more than $7 billion in private equity was invested in renewable energy and clean energy technology in 2006 — more than doubling that of 2005.

When resources of this scale are directed at developing new technology, solutions that can be applied at commercial scale cannot be far behind.

These fundamentals of managing the energy portfolio — efficiency; protecting core investments; investing in alternatives — form the pragmatic, realistic building-blocks of a responsible energy policy.

President Lyndon Johnson — a true pragmatist — once said, "Knowing what's right isn't the problem. It's doing what's right." I think that's where we are today with energy policy. We know that to ensure energy security, we need to use energy more efficiently. We know we need to responsibly develop the core energy resources this continent holds. And we know we need to incorporate more alternatives into the supply mix as they are developed.

So, I believe "knowing what's right" is the easy part. It's "doing what's right" that is our greatest challenge. The fact is that managing a portfolio — whether it's comprised of financial assets or energy assets — requires trade-offs and compromise.

For too long, energy policy in this country has defaulted into predictable positions: Republicans against Democrats; business against environmentalists; hydrocarbons versus renewables; federal preferences versus states' rights.

We need to bridge these divides. We need to shift our perspective from special interests to the common good — from the tyranny of the "or" to the genius of the "and."

To achieve this, all of the stakeholders in the future of energy need to have the courage to embrace the lost art of compromise. The American people want and deserve a forward-looking, centrist strategy that relies on common sense, and, most of all, action.

After all, leadership is ultimately about getting things done.

What would policies of the pragmatic center look like in practice?

We all need to be part of the solution — government, business, the energy industry, investors and consumers. Let me give you some examples.

Here's one for government — the issue of access.

When we consider the development of domestic oil and gas resources in the OCS, we've created a kind of Gordian knot in the policy arena. We've become paralyzed in a debate confined by fixed positions and fuzzy data.

The fact is that much of the data we have about potential resources in prospective OCS areas is very limited — the equivalent of a few snapshots the size of postage stamps — because it's based on technology that is more than 25 years old.

Twenty-five years ago, we didn't know — we couldn't know — that the area of the Gulf where we drilled Jack held the volume of resources that we've now discovered. It took innovative new technology to do that.

It's time for the U.S. government to conduct a modern inventory of key areas in the OCS, as authorized in the Energy Policy Act of 2005. We believe an effective, targeted 2D seismic survey of selected areas in the Pacific, Atlantic and Gulf regions could be completed for well under $500 million. That appears to be a rational investment given the $4 billion or more in new revenue that increased royalty rates will generate.

If the results indicate the potential is really there, the U.S. government should consider a leasing program that evaluates the potential once and for all. That would form the basis of an informed and fact-based discussion about energy.

Another area for compromise lies within our own industry regarding transportation fuel.

The President's State of the Union address offered a target of increasing the use of renewable and alternative fuels to 35 billion gallons a year in the next decade. That's a laudable goal. But it cannot be met with corn-based ethanol alone. It will require major advances in technologies that are still very much in the development stage.

A more pragmatic approach suggests setting a goal of E-10, or 10 percent ethanol, on average, per gallon of gasoline. This would effectively triple the volume of ethanol that was used in transportation fuel in 2006.

There are several benefits to this approach:

  • E-10 can be accommodated with the existing vehicle fleet and the existing distribution system.
  • E-10 is likely to be economically and technically achievable, while allowing enough time for the next generation of technologies to be developed.
  • And E-10 could lower imports of petroleum products in the United States more than 25 percent.

A third suggestion for compromise lies between the oil industry and venture capitalists.

Last year, we were faced with a ballot initiative in our home state that would have imposed a discriminatory tax on California oil production. The revenues would have gone toward a range of unspecified alternative energy projects.

California voters, who clearly support alternatives, recognized the initiative as poor public policy and defeated it by a decisive margin.

The California energy industry reached out to the proponents of the initiative with ideas to collaborate on a range of alternative energy projects. Those ideas were rejected, and the initiative turned out to be one of the most expensive campaigns in the state's history.

Let me suggest another approach.

We should step across traditional boundaries and create stronger alignment in research by the energy industry, venture capitalists, universities and national labs. By combining our resources, we will enhance our chances of developing the technologies that can alter the energy landscape.

Finally, a discussion of energy policy today would not be complete without recognizing the issue of climate change. There are few issues where the need for policy alignment is greater.

This is a huge challenge for all of us. But as a starting point, the private sector, policymakers and the scientific community should work together to create a national framework for carbon management that is rational and cost-effective. Otherwise, we run the risk that state actions — no matter how well-intentioned — will create a patchwork of regulations that impose high societal costs with limited impacts.

Reaching consensus on the components of a national framework should be guided by several principles.

First, we should acknowledge the critical need for global engagement. Reduction of greenhouse gas emissions must involve all of the major emitting nations in the world.

Second, there should be broad and equitable treatment of all sectors of the economy to ensure that no single sector is disproportionately burdened.

And third, there should be open communication about the costs, risks and trade-offs associated with climate change policies.

The world has reached a point where integrated carbon management is needed. Now we need to exercise the leadership that is required to create policies that are balanced, practical and flexible.

Let me conclude with a few thoughts.

Two years ago I spoke about a new energy equation that is reshaping energy markets and demanding new solutions. I spoke of the interdependence of energy markets around the world and the need for integrated U.S. policies regarding energy, the environment, economic growth and foreign relations.

A consensus has clearly emerged about the need for such solutions.

I am now calling for increased interdependence — and collaboration — in how we create these solutions among government, the business community, the energy industry, researchers and investors.

Tonight, I would like to ask all of us to accept the ultimate leadership challenge — getting results. If we do that, I believe several years from now, we will look back on this time as a turning point.

A time when the United States finally approached energy issues strategically and pragmatically.

A time when we realized that the solutions were right in front of us.

And a time when we acted on those solutions, when we summoned the courage to make the tough trade-offs required for an effective energy policy and stayed committed to those policies over the long term.

Harry Truman, a man of common sense, once said, "Progress occurs when courageous, skillful leaders seize the opportunity to change things for the better."

I challenge all of us to seize that opportunity. Our shared future demands nothing less.

Thank you.

Published: February 2007