Fuels Of The Future
Kenneth T. Derr, Chairman of the Board and Chief Executive Officer
San Francisco, California
My main purpose in coming here today is to talk a little bit about the future of the petroleum industry.
Perhaps it might surprise some of you to learn that I believe the petroleum industry has a future -- and a long and bright one at that.
You may have a different impression, and if so, I can't blame you, because periodically I open the paper and find out that some analyst or futurist has once again written our obituary.
In these stories, petroleum is portrayed as a sunset industry, standing on the verge of extinction.
We're supposed to be going out of business, for two reasons:
One, because the world is surely running out of oil. And therefore consumers will have to make a rapid transition to new fuels, new energy sources, before the whole mechanism of industrial civilization just grinds to a halt.
And two, that transition needs to be urged along, regardless of how much oil there is left, because the pollution associated with consuming petroleum and other fossil fuels is doing irreparable harm to the environment.
Well, in response to the first concern, I want to borrow a line from Mark Twain and assure you that the reports of our demise have been greatly exaggerated.
The world is not running out of oil. As a matter of fact total world reserves now stand at the highest level most of us in the industry have ever seen.
In 1950, world crude reserves were about 76 billion barrels -- roughly a 20-year supply at the rate of consumption of that era. Since then, the world has consumed 600 billion barrels, yet now has about 1 trillion barrels in proved reserves -- a 50-year supply at today's rate of consumption. Unfortunately, it should be noted that two-thirds of these reserves are located in the Middle East.
Continued exploration and development and the evolution of new technologies will almost certainly extend the world's reserves for an additional 50 years -- certainly far beyond any meaningful planning horizon.
By that calculation, petroleum is not an industry looking at its sunset. It's standing in the noonday sun.
In fact, the opportunities for a company like ours have never been greater. All over the world, nations that were formerly closed to us are opening up and welcoming the U.S. petroleum industry. We're seeing it in Kuwait in China and Vietnam, throughout Latin America and, most significantly, in the new nations of the former Soviet Union.
U.S. companies in particular are sought after, in part, because we are the acknowledged leader in all phases of petroleum technology -- as we have been throughout this century. But also because we have a tremendous record for assisting in the general development of our host nations -- helping build schools, roads and hospitals, drilling water wells, and on and on. And finally, they are obviously attracted to our financial resources.
It's ironic that just about the only place where we seem to be unwelcome is right here in the U.S. The latest thumb in the eye for us is that the State of California -- the biggest petroleum consumer market in the world -- recently legislated all offshore lands under its jurisdiction to be closed forever to petroleum exploration and development.
The combination of these factors is resulting in our company now spending 75 percent of our exploration and production budget internationally, and only 25 percent here in the U.S. Ten years ago, it was 60 percent U.S., 40 percent international.
As for the other issue -- the issue of whether we need to find new, cleaner fuels to replace petroleum -- well, that's more complicated. Responding to that issue is my main purpose today.
First, as background, it's very important to understand that U.S. industry has been making tremendous progress in reducing air pollution.
Across the nation, air emissions have declined dramatically from 1970 to 1990: Particulates dropped 59 percent . . . volatile organic compounds, 29 percent . . . sulfur dioxide, 25 percent . . . and carbon monoxide has declined 41 percent.
Yet, in the same period, Gross Domestic Product grew 69 percent.
The rate of progress is intensifying. In 1990, 98 areas failed to meet new Clean Air Act standards for ozone -- the main component in what we usually call smog. By the end of 1992, 46 of them met the standard for clean air.
It's worth asking how this was achieved. The cities that still have unacceptable ozone levels can learn something from the cities that managed to attain the clean air standards.
One real success story is right here in the Bay Area, where we are now meeting Clean Air standards and have applied for re-designation.
Back in 1969, all nine counties of the greater Bay Area had a serious ozone problem. Except for a narrow band right on the coastline, the entire area failed to meet the clean air standard for ozone.
By 1992, the ozone problem had virtually disappeared. In 20 years, the Bay Area has gone from 50 days a year of non-attainment throughout the region to one or two days a year in very small parts of the Bay Area.
And how did the Bay Area achieve this? First of all, the region minimized conflicting bureaucracies and streamlined the regulatory process under one agency.
Second, the Bay Area Air District wisely resisted the temptation to apply any and all measures to clean up the air. Instead, the regulators tried hard to utilize a cost-benefit approach in selecting remedies. The most economical solutions were tried first and the least economical weren't tried at all.
However, one of the few tasks the Bay Area District performed that fell short of their goals was the task of communicating their success to the rest of us.
Last year, the San Francisco Chronicle published a fascinating chart that compared improvements in air quality with public perception of air quality. Every year, as the air got cleaner and cleaner, the public believed it was getting worse and worse.
How can we make good public policy with such a misinformed public?
Nonetheless, in spite of this progress, we still have some distance to go in really putting our air quality problems behind us. And that's what the issue of alternate fuels is all about.
The U.S. Clean Air Act Amendments of 1990 will require the sale of a reformulated gasoline -- RFG for short -- in nine U.S. cities, including Los Angeles and San Diego, starting in 1995.
The new formula is a special gasoline blend that results in less emissions of hydrocarbons and other pollutants.
As usual, our state has gone the federal government one better. California will require an even more stringent reformulated gasoline for the entire state, starting in 1996.
Finally, new laws requiring auto manufacturers to reduce tailpipe emissions will force gradual changes in the cars we see on the road here in California. The specific fuel formulas and some alternative fuel vehicles are all mandated by legislation or regulation.
Other states -- primarily the urban areas of the Northeast -- are also considering adopting some or all of these born-in-California requirements.
The public debate about alternative fuels has been heavy on emotion . . . but often very lean on facts.
Let me take you through some of the key facts.
Back in the 60s, a typical car, driving 10 thousand miles a year, generated 324 pounds per year of the stuff that forms smog -- ozone precursors as they're called.
Today, according to the California Air Resources Board, the yearly average per car is only about 59 pounds -- an 80 percent reduction.
That average, however, is made up of all the cars on the road today. But the worst 10 percent . . . the old or poorly maintained cars . . . generate over 200 pounds of ozone precursors per year.
But a new 1994 car produces just 21 pounds per year -- a reduction of 94 percent from 1960.
By 1998, when state mandates for low emission vehicles are well underway, a new car burning California reformulated gasoline will generate only 12 pounds of ozone precursors per year -- a 96 percent improvement compared to cars of the 60s.
Getting there is neither cheap nor easy but it is feasible. We know how to make the fuel and Detroit knows how to make the cars.
The biggest impact most people will notice is that gasoline will cost more. The federal RFG that will appear in January will add something like five cents a gallon to the cost of making gasoline. The California Air Resources Board has estimated that California RFG -- the kind that the whole state will get in 1996 -- will add 12 to 17 cents to the cost.
In the context of an ozone problem as severe as the one in Southern California, these costs may be reasonable. However, requiring the California RFG for our entire state is somewhat questionable.
Now, let's compare reformulated gasoline to some of the other candidates for "fuel of the future."
One that's been getting more and more attention lately is compressed natural gas -- CNG for short.
A CNG vehicle can be slightly cleaner than its gasoline counterpart. A l998-style Ultra Low Emissions Vehicle running on CNG would emit only 8 pounds of ozone precursors in a year -- compared with 12 pounds for the new cars burning the gasolines required that year.
But the necessary vehicle and refueling system modifications make CNG both less economical and far less convenient for the average motorist. The U.S. Department of Energy estimates that new CNG vehicles will cost $2,500 to $5,000 more than a conventional car. In addition expensive new fueling facilities are required.
CNG's application appears to be in a special niche -- large vehicle fleets, where the longer time of refueling can be accommodated at night, and the high cost of the special compressors can be minimized through a central facility.
Methanol is another alternative you hear mentioned. In fact, several years ago, it was the favorite of the alternate fuel proponents. However, after quite a bit of scientific study, it turned out that methanol really doesn't offer any environmental benefits over reformulated gasoline. In fact, the toxic effects can be quite a bit more serious if ingested or inhaled.
And using methanol is considerably more expensive than reformulated gasoline -- 30 to 50 percent more.
Thus I think even methanol's most avid supporters of several years ago are now looking elsewhere.
Now the latest celebrity alternative seems to be electricity. Everywhere you look, you read claims and counter-claims about the viability of battery-powered cars.
We'll begin seeing these cars on the road in California as soon as 1998, because that's when state regulations mandating their introduction will take effect.
Let me focus on that mandate for a moment, because it's really quite an unusual bit of legislation. The law requires the major auto makers to produce and offer for sale what it calls "Zero Emissions Vehicles," equal to 2 percent of their total sales in the state. So far, the only thing that qualifies as a ZEV is electric.
The percentage ratchets up over time, reaching 5 percent in 2001, and 10 percent in 2003. Off hand, I can't think of another instance of a law that requires a manufacturer to make a specified percentage of any product.
How will they do it? In part, by supplying vehicles to fleet owners, who are required by other laws to purchase a certain percentage of alternative fuel vehicles as they replace older vehicles.
But I have to assume the primary mechanism will be by lowering the price of the electric cars . . . even far below the actual cost . . . until they finally appeal to some buyers.
Of course, that means they will have to raise the prices on all the other cars they sell.
Just a couple of weeks ago, Robert Eaton -- the chairman of Chrysler -- was quoted as saying that he expects his company will have to sell their electric minivans for less than $18,000 . . . even though they actually cost up to $45,000 to build.
And he said that he'd make up the loss by charging an extra $2000 for every other car and truck sold in California.
Why are the costs so high? Because the technology is still so primitive. In order to get even barely acceptable miles per charge-up -- say, 40 to 50 miles -- you need lots of batteries . . . arrays of batteries that can weigh a thousand pounds or more.
If these batteries are of the lead/acid type -- the kind we all use to start our conventional cars -- they wear out and need replacing in a couple of years at a cost of something like $2000. If they are a more advanced, longer lasting type, they cost a great deal more.
There's no question that electric vehicles can offer emissions benefits. But they are most certainly not -- as they're sometimes called -- "zero emissions vehicles."
You should take into account emissions released by generating the electricity. They may not come out of the tailpipe, but they do go into the air someplace.
A power plant burning natural gas inside the LA Basin will, by the year 2001, be extremely clean. An electric car using power from this source would account for less than nine-tenths of a pound per year.
But, if the power comes from a gas-fired generator outside the L.A. basin, the ozone components rise to about 7 to 12 pounds per year -- in the same ballpark as the low emission cars which will run on RFG.
And if the electricity comes from a coal-fired plant . . . and coal currently supplies 30 percent of Southern California's electric power . . . the associated emissions per car would work out to 30 to 42 pounds per year. That's three times what the gasoline Low Emissions Vehicles produce.
Since those emissions are out of the area, maybe that level of emissions won't bother the folks in L.A. But I have a hunch the people in Arizona and Utah might have a few things to say about it.
And certainly, if you study the side-effects of electric vehicles in the Northeast -- where fifty percent of the power is generated by coal or oil fired plants -- it's clear that what might look like a solution to, say, Pittsburgh, would look like added pollution to Philadelphia.
The main point to keep in mind in all the fuss over electric vehicles is that, feasible or not, affordable or not, they simply aren't going to make that much of a difference.
The L.A. area, for example, will get essentially the same reduction in emissions by the year 2010 -- whether electric cars or gasoline cars are part of the solution.
The South Coast Air Quality Management District estimates that in the year 2010, total emissions of ozone precursors from all man-made sources will be 2000 tons per day. That scenario includes about 1 million electric vehicles on the road -- and it does not include any power plant emissions outside the L.A. area.
But if each of those electric vehicles were replaced by the cleanest running gasoline car, the increase in total emissions would be less than one percent of all emissions.
The bottom line is this: without major technological breakthroughs, which don't appear on the horizon, electric vehicles are not a viable solution.
In fact, the single biggest factor in future air quality improvements in California will be simple fleet turnover -- the continuing replacement of older gasoline cars with new gasoline cars that produce only 12 pounds, or less.
The best thing the state or local authorities could do to get further reductions sooner would be to take steps to speed up the buying of new cars. Because a better car burning cleaner gasoline truly makes a big difference.
Earlier, I told you that the worst 10 percent of the cars on the road . . . the old or poorly maintained cars . . . each generate over 200 pounds of ozone precursors per year.
Scrapping or repairing those cars should be the focus of any extra effort . . . and any use of public funds . . . to reduce automobile emissions.
Industry has been making this point for years. And yet, so far, the only people who've acted on it have been private industry. Unocal started a program a few years ago to buy and scrap old cars in the L.A. region. And Chevron has a similar program going right now in that area. But, so far as I know, no government agency has done more than agree it's a good idea.
It's a lot more than a good idea. Replacing one clunker with any newer well-maintained car gives ten times the benefit of adding one more electric vehicle to the road. And it can be done at a fraction of the cost.
By the same logic, doing whatever can be done to keep low-emissions gasoline vehicles affordable would be sound policy. After all, these are the new vehicles that most of us will actually be buying in the future.
In summing up, let me just reemphasize the three main points I have tried to convey today:
One . . . that the United States has made great progress in improving air quality over the past 20 years. We still have a distance to go in some of our largest cities -- but we have already come a long, long way toward clean air.
Two . . . that alternatives to gasoline, while they may have some very limited niche applications, have too few environmental advantages and too many economic disadvantages to really justify the high expectations that some regulators have put upon them.
Three . . . that the clearest and best alternative to today's gasoline for improving our air quality . . . the only alternative likely to be widely available for the foreseeable future . . . is a cleaner reformulated gasoline, running in a cleaner car.
I know this is an unpopular conclusion in some quarters, but fossil fuels are likely to remain the world's primary energy source for a long time to come.
All over the world, in many nations, there are hundreds of millions of people striving to modernize, to learn the secret of economic growth, to enter fully into the promise of the 21st century.
Their hopes depend on acquiring -- as rapidly as possible -- the amazing and still evolving technology of the industrialized nations. Petroleum is still the driving force in that technology.
And, ladies and gentlemen, until our policy makers come to terms with that conclusion, we can't have a meaningful discussion about our energy future.
Those discussions are going on in many venues.
As I participate in what's now my third high-level commission on national and international environmental issues, I can tell you there is a growing realization among all participants -- industry, government and environmental advocates -- that economic growth is a pre-requisite for environmental improvement.
At the same time, I see a strong new philosophy on the part of industry. At the center of it is a firm commitment to conduct operations and continually improve technology, so as to provide real . . . and realistic . . . solutions to the environmental impact of development and growth.
That is the path of true progress. That is the road to a sustainable future.
And I am hopeful that is the path we will take.
Updated: October 1994