Geopolitical Trends And Implications For Middle East Oil
J. Dennis Bonney, Vice Chairman of the Board
Middle East Petroleum & Gas Conference
I'd like to share with you today some thoughts and observations on the forces driving our industry in the 1990s.
These are times that call for each of us to predict the unpredictable and think the unthinkable.
Every oil entity is changing rapidly in its own operation. But even as we continue to change from within, we are being strongly affected from the outside by a number of geopolitical trends as well.
This afternoon I would like to touch briefly on four geopolitical trends.
Firstly, the break up of the Soviet Union and its aftermath.
Second, the burgeoning economic growth in the Pacific area, particularly China.
Third, the worldwide trend towards market-oriented economic policies and privatization.
And, fourth, some aspects of the heightened environmental awareness being encountered around the world.
The challenge of geopolitical change is well exemplified by the sudden end to the super-power rivalry that shaped the Cold War -- and there is no more dramatic manifestation of this than the fragmentation of the Soviet Union into 15 new independent states.
It was, for many of us, unimaginable.
Yet it happened, and many of us in the oil industry have tried to predict how it would affect us.
This experience has turned out to be a lesson in humility. Crude production in the former Soviet Union declined some 15 percent in the past two years, and about one-third since 1989. It might have seemed logical that oil exports from the former Soviet Union (FSU) would continue to fall along with its oil output. But internal demand has dropped even more, and thus after a sharp drop in 1991 exports have in fact continued steady at a little over two million barrels per day of crude and products.
The continued weakness in the local economy, together with the pressing need for convertible currency, suggest that FSU exports are likely to continue at least at the present levels in the near term, and perhaps moderately increase as efforts to raise production begin to yield results.
Many foreign firms are involved in these efforts. A word about Chevron's activities in Kazakhstan may be in order.
Chevron is engaged in a major joint venture with the Kazakh government oil company to develop the very large Tengiz oil field, together with other smaller deposits nearby.
When we began negotiating for this project, we were dealing with Soviet officials in Moscow.
With the breakup of the Soviet Union, almost overnight we found ourselves dealing directly with the new independent republic of Kazakhstan.
The historic transformation proved to be the catalyst that brought our negotiations to a successful conclusion, as the new nation quickly set in motion policies to promote investment growth, particularly in the oil and gas sector.
Currently produced crude oil is being delivered into Russian pipelines in exchange for deliveries of Russian crude at export terminals.
We continue to work on options for direct export of the Tengiz crude itself. One of a number of alternatives that has been proposed is an export system tying in with existing facilities here in the Gulf.
It wasn't that long ago that merely to propose such an idea would have been unimaginable.
Many of the other former Soviet Republics have new ideas and plans for expanding oil and gas production and exports as well.
Petroleum exports from the former Soviet Union averaged 2 million barrels daily last year. For the year 2000, the estimates range from 1.3 million barrels a day at the lower end to about 4 million barrels a day at the upper end. Further out to the year 2005, the export estimates tend to cluster around 2 million barrels a day, accounting for the expected oil industry recovery, new field developments and a return to more favorable economic conditions.
Thus to the north, major geopolitical changes have added a new element of long-term competition and uncertainty for Middle East producers.
Assessing the possibilities will continue to occupy planners in producing nations for years to come.
Meanwhile, to the east, another nation appears to be on the threshold of becoming an important market for Middle East oil.
This of course is China. While China's burgeoning economy is just one of several in Asia, this awakening giant is particularly important. Because of its size and unrealized potential, China's growth is almost a geopolitical trend in itself.
We've seen the dramatic development in progress in the booming areas of Shanghai and the Shenzhen Free Economic Zone as well as in Beijing and other major cities. Entrepreneurs, investors, workers and consumers are responding to opportunities opening up in the market. Energy demand is expanding with the economy.
China's oil production today is about 3 million barrels a day. This number is expected to increase only slightly over the next five years. By contrast, oil demand is growing at six to eight percent per year and could approach 5 million barrels a day by 1999. We expect China to become a net oil importer this year. Though projections vary based on different scenarios, by the year 2000, this emerging giant economy may be importing as much as 2 million barrels per day.
The Chinese government has opened some new areas for international exploration, both offshore areas and onshore in the Tarim Basin. Numerous companies have responded. But this won't increase output in the near-term.
China is not the only producing nation that has turned to outside partners and privatization in the hope of revitalizing its production industry.
Geopolitical and economic changes are leading to many areas that were formerly inaccessible being opened up for exploration and development by international companies.
Internal and external competition for capital makes it more difficult for many countries to marshal the resources for energy development. Some are finding they must offer creative and more attractive terms, not only to motivate involvement in new exploration but also to maintain the full pace of production in existing fields.
Venezuela, for example, has arranged for the revitalization of several marginal fields by offering incentives to foreign companies based on their success in achieving incremental production. Indonesia is offering attractive terms to encourage enhanced oil recovery, and exploration in some of its remote areas.
India, also, is offering attractive and creative terms for E-O-R projects. Vietnam continues its aggressive push to bring in more investment and technology for its petroleum industry, particularly for offshore exploration. And the dramatic moves toward oil sector privatization by Argentina and Peru may inspire others to follow.
Clearly, more and more nations believe outside technology, management skills and capital can stimulate oil production and protect oil-export income.
As the opportunities have become more numerous, however, the multinationals themselves are also stretched by the increasing cost of addressing them.
The costs and challenges of developing new reserves, often in remote locations, compete internally with the ongoing capital requirements of established areas, which require intensive reservoir management and massive E-O-R projects.
And the opportunities are not limited to oil.
Natural gas has become a strong performer in world energy markets.
World gas consumption is approaching 60 percent of the level of world crude consumption, compared to 40 percent 10 years ago. And one projection suggests worldwide natural gas demand could well overtake crude oil demand within 15 years.
Widely held concerns regarding environmental quality represent another geopolitical trend that is likely to have an enduring impact on Middle East oil. These concerns are showing themselves in a new campaign to try to divert society significantly away from reliance on oil for long-term energy needs.
The U.S. government and the automobile industry have recently launched an ambitious program to develop a super-efficient automobile -- one that can deliver up to 80 miles per gallon. This program is designed to reduce automotive emissions and also to moderate the growth in petroleum imports.
But perhaps a more ominous trend for the future of petroleum demand is exemplified by the U.S. Energy Policy Act of 1992.
This act sets a goal for alternatives -- such as electricity, alcohol fuels, compressed natural gas and LPG -- to replace at least 10 percent of the projected U.S. gasoline and diesel consumption by the year 2000.
If that can be achieved, alternatives would displace close to 1 million barrels of crude per day in the U.S. market.
By the year 2010, the goal is for alternatives to replace 30 percent of gasoline and diesel, or over 2 million barrels per day. The impact would fall primarily on Middle East exporters.
This intense interest in alternative fuels may signal worldwide trends to come. And the potential effect on oil demand should concern all producers.
Certainly there are valid concerns about air quality in the world's major cities, and the potential long-term effects of carbon-dioxide release.
But, the best scientific data indicate that air quality in major cities in the U.S. and Europe has in fact been steadily improving. One reason is improved automobile design. In fact, today's new cars -- burning today's cleaner gasolines -- have achieved over 90 percent reduction in tailpipe emissions compared to cars of 30 years ago.
Recent studies indicate that just 10 percent of cars cause 50 percent of all vehicle pollution.
Certainly, the most cost effective way to improve air quality is to accelerate the replacement of older vehicles with today's lower-polluting models.
And when reformulated gasoline is adopted in major cities over the next three years, automotive emissions are projected to decrease another 15 to 25 percent from today's levels.
Yet despite this progress and the promise of more to come, the movement which has come to be known as "Get Off Oil" continues to gain popular support. This "petro-phobia" is based on the widespread misperception that air quality is getting worse, not better.
One survey last year showed 71 percent of Americans believe the U.S. should reduce its oil consumption. And 25 percent of those people want oil consumption reduced sharply. Only 27 percent favored using the same or greater quantities as today.
Neither oil producing countries nor oil companies can afford to ignore this trend.
It is important that we together give priority to helping consumers and governments everywhere see that oil and environmental responsibility can co-exist.
I believe we must work together to demonstrate the legitimacy of petroleum as the best fuel for the long-range future.
Updated: January 1994