Oil In The 21st Century: The Competitive Challenges

By Kenneth T. Derr, Chairman of the Board and Chief Executive Officer
Chevron Corporation

45th Annual Convention

San Francisco, California

I'm very proud to be speaking to you today. Throughout my career, I've found Desk and Derrick members to be a great source of knowledge on oil and energy industry trends and issues. And the reason for this is clear.

Your association has been dedicated to promoting personal education, professional development and continuous learning since 1949. Your motto, "Greater Knowledge - Greater Service," really does describe the outlook of all the Desk and Derrick members I've known.

More important, it's a philosophy that will serve you as individuals - and the companies you work for - well into the next century.

In fact, your goals are a perfect fit with a subject that's captured my interest and attention in recent years, and they are at the heart of what I want to talk about today. And that is the need for the people in my company - and in any company, for that matter - to be a part of a learning organization.

The key competitive challenge for any corporation headed into the 21st century is to have people eager to absorb knowledge, master new skills and apply those abilities in a fast-changing global economy. Flexibility and an enterprising spirit are essential, not only for business success but for a company's very survival.

So, we have a mutual interest at stake. Because in times of change, it is the learners who will inherit the organization. And those who refuse to learn will find themselves well-equipped for an organization that no longer exists.

This sure is true of the U.S. energy industry. The companies we joined in years past may still be in the same fundamental business today. But the ways we now do our work bears little resemblance to how we once operated. The organizations have changed, and in many respects, it's been a radical change.

Please bear with me if I overstate the obvious. I know that you're all aware of what's been happening within many American corporations. We've gone through major restructurings that have included downsizing and a shift toward emphasizing international operations. I know that in the energy industry, these trends have created apprehension among Desk and Derrick members, because you so clearly care about the future of our business.

Well, our business certainly has a future. And it's one that is far more bright than we ever imagined ten years ago.

From the 1950s through the early 1980s, post-war economic growth erased an awful lot of business mistakes. With the encouragement of government officials, corporate managers consciously expanded employment and enhanced job security, which contributed to large and cumbersome corporate bureaucracies. Along with all this came the idea that responsible companies promised, implicitly or explicitly, lifetime jobs.

I think we all realize that conditions have changed. Frankly, during this long period of general prosperity, American companies grew flabby. Meanwhile, the Japanese, most notably, began making numerous products of much higher quality than did their U.S. competitors.

Economic growth then began to slow. Trade barriers began to fall. And we found ourselves competing in a truly global economy, against manufacturers with modern factories and lower labor costs. Relatively few American-based companies were prepared to compete on the international stage.

It was apparent that if we were to succeed, we had to become globally competitive. That meant we had to make some basic changes in the way we were organized, where we focused our efforts and how we did our business.

Since the early 1980s, employment in U.S. petroleum businesses has been reduced by more than 400,000 jobs, which is nearly 26 percent of the work force. This is a mind-boggling figure, especially when you consider that we are producing and delivering more products and energy than we did 15 years ago.

The reductions have been industrywide. In 1984, when Gulf and Chevron merged, we had a combined work force of about 80,000. Today, Chevron directly employs less than 37,000 people throughout the world. That's down about 15,000 in just the past four years.

Part of the employment contraction in the U.S. is due to government policy, which prevents us from finding and developing significant new sources of American oil and natural gas. There are good prospects remaining. Unfortunately, most of these are beyond our reach.

But an even greater factor was the need for oil companies to cut their operating cost structures. Since 1991, Chevron has reduced its operating costs by $1.5 billion a year. When you compare that to our 1995 operating income, which was $2 billion, it's easy to see the importance of cutting those costs.

Like many other petroleum companies, we have also sold many of what we call "noncore" businesses. In Chevron's case, these have included our Ortho Consumer Products line, Chevron Land and Development Co., and our fertilizer and agricultural chemicals units.

We also sold our interests in more than 3,100 U.S. oil and gas fields, most of which were marginal producers. We kept less than 400, but these were fields that yielded over 95 percent of our U.S. upstream profits.

Taken together, we've sold roughly $5 billion in assets since 1990.

That $5 billion in capital has been useful, to say the least. But these sales weren't only about money.

More important is that the process enabled us to focus on our core business. What we do best is to find and produce oil and natural gas, and refine and sell petroleum products and chemicals. And while focusing on these core businesses, we've learned to run them with fewer people.

Most of the staff reductions have come through normal attrition, voluntary early retirements and asset sales, with many employees going to work for the acquiring companies. But about 20 percent of those employees left involuntarily - the most painful part of the process.

Providing generous severance packages and job-finding assistance didn't erase the pain, either for them or us. We know these people. We're aware of the impact on their families. And the steps were not taken lightly.

When people discuss the transformation of American business, the difficulties of downsizing - and doing more work with fewer people - gets most of the attention. But for all the turmoil, the process has had some benefits that you don't often hear about.

Yes, restructuring generated anxieties and uncertainties, but it also forced all of us to jump on a very steep learning curve - and climb it faster than we once thought possible. In the oil business, we embraced the Quality Revolution and adopted its principles to change how we operate. Because of the uncertainty, the industry was charged with a sense of urgency, which in turn expedited those changes.

We've organized much of our work force into teams, while reducing layers of management and flattening the bureaucracy. This gives greater decision-making authority to those who are at the front lines of the business.

We've adopted information technologies that enable individuals to do more and better work - and instituted policies such as family leave, flexible hours, part-time work and alternative schedules - so that employees can better balance their home lives with what we realize are demanding jobs.

Work and family programs have been absolutely critical to our company's people and represent a major shift in corporate culture. Since we ask so much of employees, it's only right that our policies account for overlaps between an employee's home life and work life. We recognize that unless those two areas are balanced, no one can be at their best.

The oil business has also changed how we work with partners, by forming novel and entrepreneurial alliances that in the past would have seemed unthinkable in what's been a very conservative industry.

For instance, we're delighted by our new alliance with McDonald's. We plan to build hundreds of shared locations - with Chevron stations and McDonald's restaurants - throughout the Sun Belt and the West. Given the price of land in prime locations, the dual use of the sites will serve mutual customers and reduce costs for both companies.

The recent agreement between Mobil and British Petroleum - to merge their refining and marketing operations in Europe - is another example of oil companies adapting to fast-changing business conditions.

Along with the urgency and innovation, we've also developed new technologies. These include three-dimensional seismic studies and horizontal drilling techniques, which together help us find and produce oil and natural gas in a more cost-effective way.

We've made great strides in our environmental performance and in how we work with the nations and communities where we operate. For U.S.-based petroleum corporations, this is a significant distinction in the international marketplace.

As a result, I believe that American oil companies, along with many other manufacturers, are now stronger and better prepared for the challenges of global competition than corporations in any other nation.

As a CEO, I'd love to say that four years ago, when we started serious cost-cutting and downsizing, I knew exactly how things would turn out. I'd like to claim that I made a forecast, that I knew all the uncertainties would inevitably lead to innovations and radically different ways of doing work.

In truth, credit for the transformation rests mainly with our employees, who made a commitment to learn, discover and apply their knowledge to help the company grow. Thanks to their efforts in restructuring the industry, I believe we are poised for real financial growth, although in a vastly different world.

At Chevron, we are trying to increase our earnings by 10 percent a year. Although it won't be easy, I'm convinced this is possible.

For one thing, the age of oil is nowhere near its twilight. When I started my career, the U.S. had about 12 years worth of proved domestic reserves at 1960 consumption rates. Thirty-six years later, we still have nearly a decade of proved reserves, despite greater consumption. Worldwide, there is about 45 years' worth of reserves. And more oil will be found.

For another thing, although we keep a prudent watch on emerging technologies, I can't envision anything replacing fossil fuels in the foreseeable future. The demand for oil and natural gas will continue.

In its 1996 International Energy Outlook, the U.S. Department of Energy estimates that worldwide demand for oil will grow at nearly 2 percent per year for the next 15 to 20 years. That's an annual increase of about one-and-a-half million barrels per day. And in developing countries - especially the rapidly growing economies in Asia - growth in oil consumption is forecast at a rate of roughly 5 percent per year.

Now, you're probably wondering how I can talk about Chevron's goals for 10 percent growth when we live in a 2 percent world. But that brings me right back to the strengths, skills and innovative ideas that American companies developed during our restructuring - and the reason that much of our growth will come from international ventures.

Of the $3 billion we've budgeted for exploration and production worldwide, about 65 percent is earmarked for international projects. This is where we can reap the largest rewards, if we do our work better and smarter than our competitors.

Before I talk about international projects, let me assure you that we haven't abandoned the United States. I've mentioned the limitations imposed by government. Nevertheless, we're increasing our U.S. exploration and production spending by 20 percent to more than $1 billion in 1996.

I'm also pleased to report that there's now a mini-boom in the Gulf of Mexico. We're finding new sources of oil and natural gas, and squeezing more production from mature fields - in part thanks to three-dimensional seismic studies, horizontal drilling and better, low-cost operating practices.

We're moving into deeper water in search of oil. With its Mars and Auger fields, Shell has been the leader of the industry. And as others follow, the oil services industry in the gulf will continue to enjoy a resurgence. An estimated 95 percent of all available deep-water drilling rigs are now operating, and securing contracts to use their services is getting tougher everyday.

We've found that innovation is critical to other areas of our U.S. operations - and again, this stems from what we learned while restructuring. For instance, we are just about to conclude a merger of our natural gas and gas liquids marketing business with NGC Corp., a Houston-based firm. The new company will become the nation's largest marketer of these fuels and feedstocks.

NGC is an aggressive, entrepreneurial organization, the kind of company that will thrive in the increasingly deregulated energy supply business. Chevron will own 28 percent of the new company and will be one of its major suppliers. We will enhance each other's strengths.

And since the U.S. is the world's largest energy consuming nation, we're certainly here to stay.

Still, most of that 10 percent growth that Chevron is after will come from international projects. These are places where American companies have an advantage, thanks to the technologies we've developed and the skills of our people. But it's not like we're the new kid on the block.

Chevron has had international operations for more than 60 years. Thanks to our reputation for excellent technical skills, business ethics and environmental practices, we're now being invited back as partners into countries that nationalized our assets in the 1970s.

A good example is Venezuela, where Chevron discovered the huge Boscan Field about 50 years ago and operated it until 1975. By the early 1990s, however, Venezuela started looking for cash and the expertise to improve recovery from Boscan, which was in decline.

Chevron has had a lot of experience in producing the kind of heavy oil found there. So we're now back at the Boscan Field as operator, where we think we can increase production by 43 percent over the next three years. And there are other U.S. oil companies helping to revive the Venezuelan industry.

Again, it is the technical and environmental skills, and a solid track record of seeding social and economic benefits in surrounding communities, that have made American oil companies welcome partners in places as diverse as Papua New Guinea, West Africa and the Republic of Kazakhstan.

Which brings me to our Tengiz venture in that former Soviet republic. This has been one of the greatest challenges Chevron has ever faced, and if you've read about some of the problems we've encountered, you may wonder why we bothered taking such a risk.

Well, risk is the one thing that will never change in the oil industry. But the rewards can be tremendous. When we signed the agreement to develop the 6 billion-to-9 billion-barrel Tengiz field, our half instantly doubled Chevron's worldwide crude oil reserves.

These types of opportunities don't occur very often. And despite some growing pains, the project is starting to come together.

We boosted production in Kazakhstan to 95,000 barrels per day in 1995 and hope to expand it to 130,000 by the end of this year. We're also growing close to reaching a final agreement on a new pipeline system to move Tengiz oil directly to export markets.

This has taken five long and difficult years. But it is an achievement of which I am personally very proud.

CEOs get a tremendous amount of criticism these days for focusing on quarterly results just to please securities analysts - actually, we get criticized for a lot of things - but we're most often accused of downsizing to produce short-term financial results and upward spikes in the price of our stock, moves taken at the expense of the future.

Well, when you consider Tengiz, our operations in Papua New Guinea, Angola, and our new North Sea ventures such as the Britannia gas field and many more, you'll see that we took some of the proceeds from downsizing and poured them back into projects that will keep our employees busy for decades to come. These investments - and they are big ones - will yield income for Chevron's stockholders long after I have retired.

Allow me to deal with two questions that I hear repeatedly, and which I'm trying my best to answer.

First: How can a company generate loyalty when that so-called implied contract of lifetime employment no longer exists?

And second: How can you motivate people when flattened hierarchies reduce the opportunities for promotions?

These are tough ones, because they're at the core of what people have long assumed a career at a large corporation was all about. We know the times have changed. But only now is our thinking starting to catch up with the realities of restructuring.

Ironically, instead of company loyalty, I'm starting to detect an even more powerful attitude in our work force. It's a commitment to a profession, work group or project.

While loyalty is an admirable trait, it also suggests a somewhat passive mentality. The loyal employee does as he or she is told. But the committed employee brings creativity, discretionary effort and even passion to the workplace. Moreover, a committed employee not only has the skills needed for a current job, but is ready to adapt to whatever new demands arise. And this can include opportunities inside or outside of the corporation.

This emerging attitude has flourished thanks to our Quality Revolution, and it's been aided by pushing down lines of authority, reducing layers of supervision and encouraging employees to take risks - without enduring nit-picking and criticism for minor mistakes.

Though there may be fewer opportunities for conventional promotions, these team environments - where employees have a strong feeling of ownership over their tasks and output - are much more interesting places in which to work. People today have much broader job responsibilities than ever before.

This brings me to the final key of meeting the competitive challenges of the 21st century. And that is the willingness to seek continuing education that will enable us to adapt to the next round of change, which is inevitable.

Greater knowledge is the key to greater service. And it is people like you who will inherit our future organizations.

The oil industry has gone through some tough times. The cost-cutting, downsizing and restructuring was difficult, yet necessary for short term survival.

But the urgency that came with that process helped prepare us for the long term. We learned new ways of working, and we know that we must keep learning as we move into the 21st century.

Our industry has a solid and bright future. And it's because of people like you, who have made American oil companies the strongest competitors in the world. For that I can only offer my most sincere thanks.

Updated: September 1996