Energy Security, Development and Leadership

By Peter J. Robertson, Vice Chairman
Chevron Corporation

Washington, D.C., Mar. 6, 2006

I wish to commend Paul Wolfowitz and the World Bank Group - and in particular, Kathy Sierra, Jamal Saghir and Kyran O'Sullivan - for focusing on the issues of energy security and development during this Energy Week. After all, energy security - reliable, affordable supplies of energy for future growth and well-being - is one of the most fundamental issues facing the world today. And it is just as important to the developing nations as it is to the more developed countries: if anything, affordable power and fuels are even more crucial to the poorest amongst us.

Our own energy portfolio gives Chevron a special vantage point on the subject before us today. After our acquisition of Unocal, we are the largest international oil company in Asia, the Pacific and the Caspian regions; we are major investors in Africa and Latin America - and we are also one of the world's largest renewable energy companies. Chevron's exploration success story, combined with its long queue of projects, will enable us to grow our production by 3 percent a year, compared to a 1.9 percent annual growth in world demand - a figure few of our competitors can match.

As oil prices cross successive thresholds of $50 and then $60 per barrel, it's more and more clear that a new energy equation is emerging which will reshape the growth and development agenda. In all our economic and development strategies, we must put at stage center initiatives which will increase future energy supply and use energy more wisely and efficiently. And by "we," I mean all oil consumers and producers - at the government, industry and international levels including all those gathered here today.

Oil and Gas Are the Starting Point

We must be realistic about our starting point. Oil and gas demand are high and growing, so much so that the world consumes twice as much oil as is found today. Countries like China and India have ever growing energy needs, the world does and will continue to depend primarily on oil and gas for our energy requirements now and into the foreseeable future - and well over half of that will come from the Middle East for a simple geologic reason: that is where most of the resource is. No amount of rhetoric will change this reality, but this is the beginning not the end of the discussion.

We should acknowledge, first, that for the past quarter century the Middle East has provided a reliable supply of oil and gas to global markets. Saudi Arabia has steadily provided over 9 million barrels of oil per day - in fact, the Kingdom produced over 10 million barrels per day during supply disruptions in recent years - and its policy of maintaining about 1.5 million barrels of excess capacity has established it firmly as the "central banker" of oil. Now the Kingdom is undertaking a major investment program to increase that supply to 12.5 million bpd, with additional expansions likely to 14 or even 15 million bpd. The importance of Saudi supply - and its sensitivity - is underlined by the Kingdom's recent success in foiling a terrorist attack against the world's largest oil processing center at Abqaiq, which nonetheless triggered a temporary jump of over $2 in oil futures.

Qatar is a major gas supplier to the world - exporting over 20 million tons per year and expected to export over 50 million tons annually by the end of the decade. Chevron is deeply engaged in oil, gas and petrochemical investments in these two countries - and we are actively pursuing similar opportunities in Russia, which holds one third of the world's gas reserves.

But we should acknowledge, also, that there continue to be threats to oil and gas supplies around the world. In fact, supply disruptions have been a constant feature of energy markets in recent years, and a tight demand/supply market is particularly vulnerable to political confrontation and conflicts. The growing tendency of some countries to use energy for coercive purposes is cause for particular concern and danger. Moreover, as we saw with the 2004 Tsunami and with Hurricanes Katrina and Rita in 2005, natural disasters can have devastating impact not only on the energy industry, but also on the social and economic development of the communities in which we operate - including the poorest amongst us.

This tight energy market underlines the importance of expanded oil and gas development around the world - as we at Chevron are undertaking, for example, in Kazakh and Azeri oil from the Caspian region and Gorgon gas from offshore Australia. We are also committed to bringing vast new, non-conventional resources online - notably the oil sands of Canada and Venezuela and, we hope, Russian gas from the Arctic basin - and to creating new energy pipelines, from joining with the World Bank and other countries and companies in the West African Gas Pipeline to expanding the CPC pipeline from Kazakhstan across Russia to the Black Sea.

You are also leading important policy initiatives at the World Bank, including the extractive industries review, the global gas flaring initiative, and new environmental and social standards for project finance. We at Chevron welcome and are active partners in all these initiatives, and are firm believers in industry partnership with the World Bank. Through your lending and technical assistance, and through our providing clean and affordable energy, we can seek to alleviate poverty through sustainable development worldwide.

In addition to production and transportation, we must also do much more to increase refinery capacity, which is almost entirely taken by growing demand worldwide. Here again, Saudi Arabia deserves credit for its refinery investment initiatives, as do China and India - and we in the United States should thin out the regulatory thicket which has prevented a single new refinery from being built at home for the last 30 years.

Despite the obstacles, industry is moving to expand the capacity of existing refineries in the United States, and will be able to do more if government can make a shift in its own priorities. Major energy companies do not need subsidies or other incentives - what we need is a moratorium on the disincentives to increased capacity and production, including access limitations, new source reviews and calls for adopting LIFO accounting and repealing foreign tax credits. Allowing market signals to prevail will do more than a raft of well-intended but counterproductive regulations getting in the way of developing energy resources.

All these resources, old and new, are more achievable thanks to management, technology and the new price environment. And they all give fresh meaning to Winston Churchill's statement, in 1913, that "Safety and certainty in oil lie in variety and variety alone." More than 90 years later, that variety is found by both national oil companies (NOCs) and international oil companies (IOCs) in ever increasing locations, both onshore and offshore, in shallow as well as extremely deep waters.

New Energy Resources

As we maximize the current generation of energy resources, we also must do much more to develop the next generation: from clean coal to wind, from ethanol to hydrogen - all big commitments for our company and, increasingly, for industry and governments around the world.

Chevron is working with our home state of California to generate ethanol-based fuels; and we have launched with the U.S. Department of Energy a national demonstration project for hydrogen-based vehicles.

The common denominator here is transportation, which is key to future demand. In the face of high gasoline prices, consumers are pressing for higher fuel efficiency, and industry is responding through hybrid cars and cleaner, more efficient fuels, not just in the United States and Europe, but in China. We must widen the spectrum of energy efficiency to include buildings, industrial facilities and other large energy users.

We have been able to do this to great effect, not only in our own company but in a Chevron subsidiary, Chevron Energy Solutions, dedicated to providing energy efficiency solutions to other industrial users - as a separate, profitable business. Just recently CES helped the San Francisco post office reduce its electricity needs by 46 percent - adopting zero and near-zero emission technology, installing solar and natural gas-powered fuel cells, and saving 10 million kilowatts per year.

Global Action for Energy Security

These are realistic and consequential steps, in both supply and demand, that we can take starting today. But consider how much more could be accomplished through truly global action for energy security.

One powerful forum for achieving this is right here at the World Bank. You understand that energy security is just as important to the developing as to the developed world, and that price fluctuations as well as misuse of energy revenues can rob the promise of development. You promote transparency - as Chevron does through our support for your initiatives and for EITI, in Nigeria and elsewhere - and indeed knowledge of the cash flows is the first essential step to ensuring that they are used wisely.

You have established models for petroleum reserve collection, management, utilization and sharing. Bad leadership can make oil wealth a curse, but good leadership can make it a boon for future growth and development: you are showing the way to the boon. Petroleum funds from Alaska to Norway demonstrate that such models are achievable - and extremely important. But these efforts are also very challenging - and we should all support the World Bank as it seeks to ensure the continued fair implementation of the Chad-Cameroon pipeline agreement.

Another forum for global energy security is the Group of Eight industrial countries who have invited the world's two fastest growing energy consumers, China and India, as well as Brazil and South Africa, to join them when they meet this July in St. Petersburg. This year's G-8 chairman, Russia, is making energy security a top priority. As President Putin wrote just last week, "Our common future in the area of energy means common responsibilities, risks and benefits." By focusing on such priorities as energy capacity, efficiency, transit, a positive investment environment and - not least - success stories from new energy projects, the G-8 can do much to support increased energy security worldwide.

As we pursue global energy security in these and other forums, I believe the key must be energy interdependence - not energy independence.

Today's energy markets are complex and highly interconnected. Today energy consumers and producers, government and industry, NOCs and IOCs, should work together in partnership to achieve the energy security goal I proposed at the beginning: reliable, affordable supplies for future growth and well-being.

For the United States to do otherwise would be a retreat into a 21st century version of Fortress America which served us so poorly before the great wars of the 20th century.

To advance these goals of energy security and interdependence, I believe we should adopt a new producer-consumer framework - in which producers agree to increase capacity through shared investment from consuming nations, and consumers increase efficiency of energy use.

This framework should be a top priority of our energy diplomacy, offering a realistic alternative to the dead ends of producer-consumer confrontation and the current spiral of increasing prices and consumption. It ought to be defined through five fundamentals.

First, open markets. We should promote transparency and the free flow of energy trade and investment on a level playing field. By removing market barriers, we could increase production significantly and moderate the price volatility we face today. Transparency - from reserves and supply/demand data and forecasts to cash flows - will promote market-based development.

Second, sound policies to promote stable and predictable fiscal and regulatory regimes, contract sanctity and the rule of law. The better established these are, the greater the investment, development, and security of energy for all countries.

Third, robust technology to conserve and optimize the resources we have now, to develop a full range of new energy sources, and to continue mitigating environmental impacts - all embedded in an effective energy security action plan. In the public sector, this entails replacing an approach driven by special interests with one propelled by the most cost-effective opportunities identified in the marketplace.

Fourth, broader energy efficiency - in effect, the biggest and cheapest form of new energy we have at our disposal. Efficiency deserves a concerted drive by all of us - starting with recognition that transportation is key to future demand. Consumers are pressing for higher fuel efficiency, industry is responding, and government should recognize and reinforce these signals from the marketplace.

Fifth - and this gets to the core mission of the World Bank - is responsible development. We should see energy - both its production and its use - as a platform for broader economic growth and social well-being in developing, transitional and developed countries. We need to ensure that the economic benefits of energy flow to all stakeholders - including the poor and the vulnerable - and this can only be achieved through proactive national and international leadership fully supported by industry.

This new producer-consumer framework would entail, then, energy security based on interdependence. Its key provisions would be open markets; sound fiscal and regulatory policies and the rule of law; robust technology; energy efficiency; and responsible development. It would recognize that this is the time not for small, incremental steps - but for far-reaching actions and political tradeoffs.

I for one believe that a new framework - leading to a new plan of action for energy security - is not only possible, but vital. At Chevron, we believe industry must demonstrate accountable leadership - but we must also expect it of policy-makers and society.

Leadership for energy security must be rooted in realism and action, not just politically attractive - yet ultimately empty - catchphrases. We need to work hard to move the energy market from volatility to a positive equilibrium based on growth and development. And leadership should be rooted in partnership, not nationalism or isolation.

As the world's trade leaders work feverishly to strengthen the global trading system to advance trade and development more broadly, it is both appropriate and necessary that the energy debate be seen in such terms. Narrow, parochial conceptions of energy security have failed us in the last 30 years, and it is now time to shift the level of the debate.

This audience understands, far better than most, that the benefits of globalization are still just a promise for billions of people on this planet. To be sure, globalization has stimulated the use of energy. But true energy security is essential if the benefits of globalization are to be shared by all - which is why it is at the very center of the growth and development agenda.

To enable us to realize the full benefits of energy and development, all here today must take on the mantle of leadership in meeting this challenge.

Thank you.

Published: March 2006