People, Resources And Technology - Managing The Future Challenge

By Richard H. Matzke, President
Chevron Overseas Petroleum

11th Annual Middle East Oil Show and Conference

Manama, Bahrain

Also see a press release regarding this speech.

I always feel a sense of welcome when I visit Bahrain – but this year, I feel a special and perhaps ironic sense of returning.

The great adventure of Middle East oil began here, more than 70 years ago. Explorationists had long known that the Gulf contained enormous petroleum resources. Even then, technology existed to produce the oil. But the real key to unlocking this region's treasures was found in the interplay between people. For had Bahrain's leaders not been open to foreign oil exploration, my company's first well here, Well No. 1 at Jebel Dukhan, never would have been drilled. And its success persuaded others in the region to open their countries.

Since then, our industry has taken many turns. Many countries nationalized their resources, national oil companies emerged, and the price of crude rose and fell. But I'm convinced that today, just as on June 1, 1932, we again stand at a turning point. And again, success will be determined less by resources or technology, and more by how well we work together as people.

Our industry today faces difficult times. Adjusted for inflation, the price of oil is virtually the same as it was when we brought in the Jebel Dukhan well.

I may be an optimist, but history has shown that oil prices will recover. Those who properly position themselves will again prosper. But our business will never be the same. Its fundamentals are being reshaped. And all of us – international oil companies, national oil companies and host governments – must change.

Like it or not, our industry's central reality today is the declining significance of equity ownership. Our ability to recognize and collectively respond to that change will define our futures. It will determine how well we manage and utilize our people, resources and technology.

Let me be blunt here: there's no point in talking about technology, people, and resources if we continue to work in isolation. Isolationism resulted in loss of market share for the Middle East and a declining standard of living. Seventeen years ago, according to the Washington Institute for Near East Policy, the average yearly per capita income for Gulf region residents was $28,000 in 1997 dollars. Today it is just $12,000.

The ability to achieve change is handicapped by certain paradigms in the Middle East that are shifting, but not fast enough. The fact that a country attracts private foreign investment does not show lack of ability or undermine sovereignty. It demonstrates smart business. Countries like the United States, the UK, Australia, and Norway encourage foreign investment in all economic sectors. The Middle East has large private investments in both Europe and the United States.

Direct foreign investment brings needed hard currency income that can strengthen local economies, expand job opportunities and bolster political stability. What's more, the kinds of partnership arrangements that can secure that capital are becoming more flexible. They range from equity ownership to operating and technical-service agreements and points in between. These days nobody is saying, "it's all-or-nothing."

The good news is that this new world may offer special opportunities for those nimble enough to seize them – what I call "right-fit" partners.

There was a time when companies insisted on moving their crude in their own ships to their own refineries. The name of the game was resource control.

Wall Street still thinks this way. But in our business, the performance spotlight in our business is unmistakably shifting from control of assets to return on assets; from commodity ownership, to profits per barrel.

Consider our experience in the former Soviet Union, Venezuela, and the Middle East.

It's been seven years since the collapse of the FSU, an area of great promise and risk. My company was in the midst of negotiating a traditional, 3-year tax and royalty agreement – when the communist government fell. Now, after a bumpy journey, Kazakhstan and Azerbaijan have struck deals with several companies that balance equity, profit and cost recovery.

In Venezuela, where pride in the country's national resources runs high and foreign ownership of reserves is legally barred, a different kind of relationship was fashioned – essentially a fee based on operating results. Here in the Middle East, relationships are still evolving. The region's historic openness to foreign investment appears to be returning, driven by the desire to regain market share. We've recently signed exploration and production sharing agreements with Bahrain and Qatar, and are pursuing opportunities in Kuwait and Saudi Arabia, among others.

The point is that in each instance, regardless of the specific location or parties involved, relationships are being tailored to satisfy local considerations and stakeholders. And that means people, resources and technology are being used in effective ways.

Countries, of course, benefit from the prosperity created by these partnerships through jobs, training, health and education programs; through community investments and a stronger overall economy.

By allowing foreign investment, Venezuela literally pumped new life into Boscan, a 50-year-old field. With 3 million barrels a day to worry about, PDVSA relied on partnerships to rejuvenate Boscan. The project created hundreds of jobs, and the nation got low-cost production it otherwise would not have had – not to mention $2 billion in capital.

Technology played a part too, but perhaps not in the way you'd think. We didn't go out and look for the fanciest, highest-tech solutions. More and more the trick is to find the right technology – the most cost-efficient technology – for a given application. Through partnerships, Venezuela squeezed every inefficiency they could out of operations. They shaved average drilling time from 35 to 15 days. They used off-the-shelf drilling mud rather than name brands. They improved gravel-packing tools and completion fluids. They formed contractor alliances. And they boosted output, despite lower-than-predicted new-well productivity.

Increasingly, the technologies that make such gains reflect a collaborative effort. In fact, I don't believe there are many pure technology plays left in our business, mainly because we've all gotten so good at it.

The ownership of ideas is growing as elusive as ownership of barrels of crude and units of gas. Connectivity, sharing and transfer – these are technology's new watchwords. To a great extent, they depend on organizational, management and even cultural skills. That's why at my company, we drive decision-making, including technology decision-making, down to levels as close to the well head as we can. At Boscan, nobody phoned San Francisco for permission to choose a different drilling mud. In my company, we believe technology should be fit-for-purpose, shaped by local managers to meet local needs and concerns.

Earlier I hinted there could be a surprise in today's globalizing oil business: that less-than-super-size companies could turn out to have some competitive advantages.

You might recall that everybody predicted a great future for our industry's Ultra Large Crude Carriers when they were introduced in 1975.

But today less than a dozen ULCCs still actively trade, none are being built and many have been scrapped. Why? Essentially, they were too big for their own good. Their need for vast shoreline tankage and docking facilities barred them from many ports. And industry's requirements changed too, in ways that favored smaller, more flexible tankers.

Now I'm not going to tell you that every ship on the sea should be a runabout, or that the only good company is a small company. To compete internationally, a firm must possess a critical mass of capital and talent. But the time may be ripe for host governments and national oil companies to forge partnerships with companies that are big enough, but not too big.

The underlying forces I cited earlier aren't going away. And, so long as they offer efficient, low-cost ways of doing business, "right-fit" partnerships will play an important role.

I believe a "right-fit" partner should:

  • Big enough to possess sufficient resources, but small enough to have an entrepreneurial work force and a hunger to excel;
  • Big enough to boast a depth of international experience and expertise, but small enough to desire partnerships that respect all sides;
  • Big enough to endure ups and downs, but small enough to prize cost-efficiency and responsiveness to change;
  • Big enough to be corporate citizens of the world, but small enough to care about business ethics – down the lowest level employee.

For now and for the future, partnerships will be vital to people, resources and technology.

For people, partnerships can help preserve jobs and core competencies, and facilitate the sharing of knowledge and cultures;

For resources, partnerships can provide flexible vehicles to deploy capital and maximize margins, while accommodating different views of equity;

For technology, partnerships can provide a platform for exchange, for improving and applying our best ideas at the lowest-cost.

Eight decades ago, Sheiks Isa and Hamad – two of the greatest visionaries of their time – opened Bahrain's borders to outsiders, launching the Middle East on a new path. I believe we again stand at such a decisive moment. Once again, it will be people – and the ways we find to work with one another – that will determine our success. I urge that we go forward together to share what can and will be a bountiful future.

Updated: February 1999