Delivering Globally Competitive Gas Projects
John D. Gass, President
ChevronTexaco Global Gas
Gastech 2005 Conference and Exhibition
I am delighted to be here at Gastech because, I think you'll agree, these are very exciting times for our industry. I can't think of many other business sectors poised for the kind of growth we are. And there are few industries more critical to the future of global economic growth than the energy industry.
I'd like to offer some ideas on how we can accelerate the growth of our industry. But first, let me provide some context.
The fact is that the global energy industry is approaching a unique point in its history. We are witnessing the creation of what is fundamentally a new energy equation, driven by the convergence of several factors:
- the growing global demand for energy, particularly in China and India;
- challenging, new resource locations such as the deep water, the Arctic and oil sands;
- a need for greater diversity of energy supplies;
- an increasingly complex geopolitical environment;
- and a shifting competitive landscape.
Solving this new energy equation will require the successful development of all the energy we can obtain to help fuel economic development and human progress around the world. Clearly, a key element of that solution is natural gas. If the 20th century was the Age of Oil, then the 21st century certainly will be the Age of Natural Gas.
We're fortunate to be in our industry at this point in time as we build the infrastructure needed to meet the world's growing demand for energy. Like all great changes, it offers both opportunities and challenges. And all of us in this room have a responsibility to ensure the success of this transformation.
So I'd like to talk about how we must manage the challenges and maximize the opportunities as we build the global gas industry. The potential is enormous - and the responsibility great.
The successful development of the world's natural gas supplies through the liquefied-natural-gas (LNG), gas-to-liquids (GTL) 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 partner countries' economies, for local communities, for consumers, for the environment and for our companies.
Just as the LNG industry has matured - spurred by the dramatic reduction of costs and the opening of new markets, such as North America - we are now witnessing the birth of a new business that will dramatically impact the Age of Natural Gas - the gas-to-liquids industry.
We at ChevronTexaco have high expectations for GTL and its ability to meet the global need for clean transportation fuels. We're very proud of our leading position in GTL through Sasol Chevron, our joint venture with Sasol. Sasol Chevron is leveraging technology to develop major GTL opportunities around the world.
With scale and new technology driving down costs, we believe the GTL sector is poised for dramatic growth. Clearly, natural gas will be a key determining factor in addressing the new energy equation.
So the question we face today is, How quickly and efficiently can we reach the full potential of this resource?
The theme of Gastech 2005 is "Making Projects Happen - From Start to Finish." I believe there are three fundamental things we must get right to make projects happen and realize the full potential of natural gas. I call them the "Three C's": cost competitiveness, cycle time and complexity.
Let's talk about each of them briefly.
First, cost. Given the level of investment required in natural gas projects and the long development timeline, it is absolutely imperative that costs be managed aggressively.
According to the recent Goldman Sachs' report "One Hundred Projects to Change the World," two-thirds of the top 100 energy projects under way today represent multibillion-dollar investments. And over the next 20 years, ChevronTexaco estimates that the energy industry will have to invest more than 2 trillion dollars in new oil and gas infrastructure to meet global demand.
Because of the scale of projects today, even small overruns can be significant in absolute dollars - 5 percent of $5 billion is not exactly a rounding error. While costs must be managed at the project level, we also need to create the right environment for assurance of stable returns over the long term.
Investments of this magnitude must be made in an environment of transparency, predictability and discipline. Investors need to have confidence in the rules of the game.
Taxes, fiscal regimes, protection of intellectual property, sound regulatory structures, sanctity of contracts - all these things have to be in place and fit together. Otherwise, investors cannot make the big decisions and commitments needed to move ahead at a competitive pace.
The second "C" is cycle time - more specifically, reducing cycle time to bring projects online sooner.
For example, the Gorgon Field offshore Western Australia was discovered in 1981. And Gorgon is only now on the verge of realizing its potential. To some extent, the long cycle time to date is understandable. Building a new industry requires a dynamic balance between markets, technology, investments, policies and partners - a whole range of factors.
It took time to get that balance right. But even if the history of natural gas is one of going slowly, we cannot let the past define the future. Going forward, the successful gas projects will be those that manage cycle times - the time from discovery to market - as aggressively as they manage costs.
The third "C" is complexity - how to manage the inherent complexity of large natural gas projects in ways that add value instead of adding to costs and cycle times.
Today's projects involve complex commercial arrangements and multiple interfaces covering many different markets, and often involve institutions such as the World Bank and the International Monetary Fund.
For example, Sonangol's and ChevronTexaco's Angola LNG project has multiple joint ventures supplying gas to a liquefaction facility that has five partners. The level of complexity of this project has required a tremendous amount of 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.
The result? The Angola government recently passed a resolution establishing the necessary regulatory framework to move the project forward, enabling the partners to reach key agreements that resulted in the recent announcement to commence front-end engineering and design.
Going forward, successful projects will require new levels of collaboration and strong partner alignment. There's just no way around it. I think we can all agree that the challenge is laid out before us.
To make projects happen, there are fundamental competencies we have to master: controlling costs, reducing cycle time and managing complexity. And the catalyst to making all of that happen is building effective partnerships.
Today's gas projects involve multiple stakeholders. Building strong partnerships among those stakeholders allows us to more effectively pool resources, share risk appropriately, link multiple markets, and leverage technology and best practices.
Going forward, the leaders in our industry, the partners of choice, will be those who master the three C's - costs, cycle time and complexity - and demonstrate the ability to collaborate, innovate and solve problems.
In closing, I would just like to add how fitting I think it is to hold this conference in Bilbao.
Many of us in the room today will visit the Guggenheim Museum while we are here, and I can't think of a better symbol for our industry at this point in time.
When Frank Gehry designed the Guggenheim, he created something that made Bilbao a destination point: something that stimulated local economic growth and something that many people say has redefined architecture in the 21st century.
I believe the global gas business we are building today will redefine the energy industry in the 21st century. We will be delivering a clean, reliable source of energy to fuel global economic development while, at the same time, fueling our industry's continued growth.
Together, we have an enormous responsibility as part of the generation that will make that happen. And, we will be building a strong bridge to a new generation of energy sources that will ultimately redefine our industry in the next century, if not before.
Updated: March 2005