speech

Partnership: The Ultimate Renewable Resource

By George L. Kirkland, Managing Director
Chevron Nigeria Limited

Sixth International Energy Forum

Lagos, Nigeria, May 12, 1998

As the millennium approaches, who can help but look to the future? It's hard not to think of the year 2000 as a major milestone.

It's not just the unfolding of a new age that catches our attention. It's the unfolding of new ideas in the oil and gas industry that ignites interest and that, I believe, will make this period a true turning point.

Our industry has been going through tremendous change. That can be both exhilarating and unsettling. A torrent of global events has radically altered the political and economic landscape: the breakup of the Soviet Union, the end of apartheid in South Africa, the growing interdependence of financial markets, the shrinking of the world through telecommunications, the globalization of the world's economies, and — for the oil industry — the opening of opportunities in nearly every spot on the globe.

At the same time, the industry is experiencing a renaissance in technology, new products and markets, and innovative business practices.

This is all intensely interesting. Certainly, such change gives rise to more competition. But it also makes for a fountain of creativity.

I would like to discuss with you the nature of partnerships: how they can provide a strategic advantage in a relentlessly competitive world and how they can best create value in a global economy. I will cover some worldwide trends and explain, as I see it, what this means for Nigeria.

The main idea I want to leave with you is this: A solid partnership, built on trust, commitment and shared goals, is the ultimate renewable resource.

Such an alliance provides stability and allows innovation. It can be renewed and tailored to partners' needs. And it can be responsive to economic winds that strike forcefully like the first rain after Harmattan.

A partnership's foundation determines its success. An African proverb says, "If you want to know the end, look at the beginning." Taking a lesson from that, I'd say, "If you want to attain your goals, know your partner."

My company's history in Nigeria goes back to 1961. We're a part of this country. After 37 years, it's fair to say our partnerships with the Nigerian National Petroleum Corp. must be doing something right.

We made our first offshore discovery, the Okan Field, on Christmas Eve 1963. Following that first find — "okan" means "one" in the language of the Itsekiri people — were many more successes. Today, we produce more than 400,000 barrels of oil a day and, together, expect to increase that rate to more than 600,000 by the year 2001.

But none of us can afford to rest on past accomplishments. Nor can we get too comfortable with rhetoric about the future. The forces of change force us to examine how we do our work and compel us to reinvent partnerships for the new millennium so that words translate into work, and rhetoric into reality.

What are these forces of change? They are the move — I could say stampede — to free-market economies, the increasingly global nature of business, the growing number of important players in oil and gas, and advanced technologies that open up tremendous new opportunities.

Lately, we have witnessed mergers and buyouts on a manic scale, both in the downstream and upstream, to a point where it's difficult to remember who has teamed up with whom. Between 1992 and 1996, the number of energy alliances increased more than 40 percent a year.

Let me give a few examples. Texaco, Shell and Saudi Refining have formed a downstream venture in the United States. British Petroleum and Mobil are merging their downstream operations in Europe. Chevron and Texaco plan a marine fuels-and-lubricants joint venture that would operate in 100 countries. Amoco and Shell created a production company in West Texas. Mobil and Shell did the same in California.

More and more, competitors come together to share the high costs of research and development. The DeepStar Project, for example, focuses on deep-water issues and involves 20 major oil companies, along with nearly 40 service and manufacturing firms.

Also making a mark in this new energy era are independents, such as Apache and Union Pacific Resources — "Who?" you might ask — which are taking bigger roles in offshore and international exploration and drilling.

Countries once closed to outside investment have unlatched their doors, while many government oil companies, including Nigeria's, move toward privatization.

China's recent ventures into Venezuela, Kazakhstan, Sudan and Iraq remind us how truly global and interdependent our industry has become. Russia's LUKoil has lined up projects in Azerbaijan, Belarus, Kazakhstan, Algeria and Libya.

After two decades of insularity, Venezuela has been aggressively seeking investors, and firms from around the world have responded. With a new high-profile image, Azerbaijan has become a magnet for deal-makers.

Opportunities that are technologically practical for the first time, such as "deep water," also inspire partnerships. These prospects are as expensive as they are enticing. Partnerships let you spread the costs, leverage knowledge and technology, and share both risks and rewards.

There's another reason for the swell of activity. There's been a shift of thinking within the industry. "Going it alone" used to be a source of pride, a sign of strength. Accomplishing a task was a goal in itself. Today, the focus is on adding value. So we ask: Can you create more value by combining someone else's skills with your own? And does that task add value?

The "explorationist" of old had a simple objective: Find oil. Today, it's more complicated. We ask that same person to find oil that can be economically produced and readily marketed — and, by the way, it sure would be nice if you could reduce the cycle time on that and cut your operating costs.

My refining colleagues talk, quite seriously, about maximizing the value of every molecule. With advances in process control, information technology and "smart" materials, that is not a far-fetched notion. Those refiners are finding opportunities in places they never looked before. Many in the upstream are doing the same.

How we think about competitors also has shifted. Rivalries aren't going to suddenly disappear. But we are more likely to see other companies as collaborators rather than adversaries.

Oil companies, in general, are pretty good at that dance — cooperating in one arena and competing in another. Perhaps the healthier view is that we are competing more against geologic odds than against each other.

Using Chevron ventures as examples, I'd like to demonstrate how "geo-petro-politics" — if I may coin a word — have radically changed in recent years and how adaptable our industry has been in response.

Chevron's joint venture with the Republic of Kazakhstan — called Tengizchevroil — was a pioneering effort. The agreement, concluded in 1993, not long after Kazakhstan gained independence, instantly increased Chevron's oil reserves by a third and secured capital and technology for the Kazakh government. Mobil, LUKoil and ARCO have since joined in.

Shell and Chevron are looking for joint opportunities in the Caspian region in the areas of exploration, production and transportation and in selling crude oil, gas liquids and natural gas.

In 1996, Chevron began operating Venezuela's Boscan Field — a bold move for Venezuela and a homecoming for us since we discovered the field in 1946. Under the agreement, we neither own nor market the oil but receive an operating fee, a capital cost-recovery fee and an incentive fee.

Also in Venezuela, Chevron is operator of an international consortium — Phillips, ARCO and Norway's Statoil are members — that is boosting oil production from a Lake Maracaibo field. The consortium comes up with capital funding and pays operating costs, and in turn, Petroleos de Venezuela, S.A. (PDVSA) reimburses the partners on a regular, predetermined basis.

Working with the Chinese government, Agip and Texaco, we produced China's first offshore oil and continue to be very active in the South China Sea. Each partner loans employees to the project, and in an unusual arrangement, the operators' management roles rotate. You might be surprised — this arrangement actually works.

Going against the grain of corporate culture, Chevron two years ago merged its North American natural gas business into Houston-based NGC Corp. This firm is a leading marketer of energy, including electric power. Through the alliance, we participate in the growing de-regulated energy service sector.

The traditional boundaries between oil, natural gas and electric power companies are blurring. In fact, some industry watchers predict that tomorrow's petroleum company will range from the wellhead to the light switch. But that's a topic for another time.

These examples illustrate how industry is breaking new ground and finding new ways to succeed. These breakthroughs — it's fair to call them that — rest on partnerships, often of an unexpected kind. They rest, too, on the idea that the whole is greater than the sum of the parts, that a partnership embodies strength none of the parties alone possesses.

A decade ago, few could have foreseen the inroads Chevron has made in Kazakhstan and Venezuela. Even five years ago, our deal with NGC Corp. might have failed; it simply didn't fit the traditional business model.

The lesson we've learned — and Chevron's not alone in this — is that there are many ways to achieve a goal, and "business as usual" is not always best. Ultimately, we all want a reasonable return on investment and an acceptable share of income; how you arrive at that point can vary widely.

Like technology, a partnership can be updated, improved and refined. But it has a very important human element, and that, too, must be considered. What is a contract without trust?

Some common attributes underlie successful partnerships: commitment, communication, cooperation and continuity. Due to increasing global competition, these are more important than ever.

Commitment implies a long-term investment to achieve shared, mutually beneficial goals.

Communication demands that goals, strategies and processes be well defined, that laws be clearly understood and not changed arbitrarily, and that partners maintain an ongoing dialogue.

Cooperation comes from integrated teams capitalizing on their combined capabilities.

Continuity depends on uninterrupted operations, reliable funding and a supportive business environment, particularly in the areas of taxes and royalties. The government's role here is critical.

What does this mean for those of us in Nigeria? It means, broadly, that we should be innovative in adding value and increasing efficiency in our operations. To do this, we must ensure that:

petroleum operations are supported by reliable funding;

leases and other agreements are renewed in a timely fashion;

opportunities for cooperation among competitors are explored — for example, sharing infrastructure or eliminating redundant efforts through joint projects;

new partnership structures, which benefit all stakeholders, are evaluated;

each partner's skills are used to maximum benefit.

I'm confident we'll find ways to make today's operations — which I'm very proud of — even better for tomorrow. There are many positive signs.

Look at the future of gas in Nigeria. Due to government incentives, the future in some ways has already arrived. The Escravos gas plant, a pioneering effort that began operating a year ago, is capturing gas that had been flared, thus ensuring a cleaner, safer environment. It has broadened the country's revenue base and created jobs for Nigerians.

The West African Gas Pipeline promises to benefit not only Nigeria, but Benin, Togo and Ghana. This project will develop a regional transportation grid to supply a clean, low-cost and plentiful energy source that, in turn, will stimulate economic growth.

For the longer term, breakthroughs in transforming gas into liquids hold further promise. Just last month, Chevron and Sasol, a South African petroleum company, announced plans to design a 20,000-barrel-a-day gas-to-liquids plant, based on cutting-edge technology from the two companies. This facility, to be located near the Escravos plant, will turn natural gas into synthetic hydrocarbons and, ultimately, into high-quality diesel and naphtha products.

As I look ahead, I'm optimistic about the Nigerian government's move to privatize the electricity, telecommunication and refining sectors — essential steps for greater participation in the growing global economy.

I'm optimistic, too, about the government's vision to transform the economy by the year 2010 and the private sector's chance to share in these exciting changes. On a personal level, I'm grateful to have participated in a number of the Vision 2010 subcommittees that helped set a course of increased prosperity for all Nigerians.

Another African proverb advises that "Strategy is better than strength." The task then is not to take our individual strengths and stack them up like building blocks that can topple. Instead, let's view each contribution as a thread that can be woven together into a rich and durable fabric.

Together we can reinvent partnerships for a new age. Our industry is reinventing itself. It has changed from a commodity to a high-tech business. Where it once valued independence, it now sees strength in interdependence. A narrow focus on resources has broadened to include work processes and strategic alignment.

Many challenges, no doubt, lie ahead. But everyone here knows the tremendous potential of Nigeria and the richness, not only of its natural resources, but, more important, of its human resources.

At Chevron, we believe business partnerships extend to the communities where we operate. That means respecting the local culture; learning from our neighbors; supporting environmental, health and education initiatives; and creating an infrastructure that improves the quality of life. And it also means continuing to share technology and provide professional development opportunities to Chevron Nigeria employees.

Nigerian author Chinua Achebe, wrote: "Africa is not only a geographical expression, it is also a metaphysical landscape — it is, in fact, a view of the world and of the whole cosmos perceived from a particular position."

As a relative newcomer to this country — I have been in Nigeria only six years — perhaps I can't expect to fully understand this metaphysical landscape. But, in my sphere of activity, I do know this: When a partnership weaves together commitment, trust and skill, it can accomplish great things.

And great things accomplished in the petroleum industry can radiate throughout the nation, propelling the economy forward and opening up new opportunities for all Nigerian citizens. We at Chevron look forward to playing a role in that effort.

Updated: May 1998