Petroleum in an Interdependent World

By David J. O'Reilly, Chairman and CEO
Chevron Corporation

Panel Discussion

September 17, 2004

Excellencies, Ladies and Gentleman: thank you for the invitation to speak. It is an honor.

I believe our industry could be at a strategic inflection point. Consumers are concerned about our collective ability to be a reliable supplier. I'll come back to this in a moment.

Let me begin by reviewing some history. Until the early 1970's, the industry was dominated by the International Oil Companies. The demand for oil was largely in the OECD countries and was satisfied by private enterprise, and many would argue, without sufficient sharing of the benefits with the owners of the oil.

In the second phase of the industry, beginning in 1973, the oil producing countries came into prominence requiring a larger share of the economic rent. The resulting price escalation changed consumer behavior and demand, and led to a prolonged period of significant surplus OPEC capacity. This was amplified by successful the International Oil Companies' exploration and development in new areas, for example in the deepwater.

We could now be in yet another phase, in which there is no longer plentiful supply capacity relative to demand—resulting in price volatility and reliability concerns.

What are the implications of these circumstances which last occurred about 25 years ago? Based on what we experienced then, the possible reactions include:

  • less confidence in the industry on the part of consuming governments and consumers themselves
  • consideration of onerous policy changes by governments, such as alternative fuel mandates, and
  • permanent changes in consumer behavior.

So what can be done? We all have a stake in seeing that our product (oil) is viewed positively and not negatively.

Consumers around the world are interested in reliable, affordable oil which promotes improved quality of life and generates economic growth.

This is consistent with the long-term desire of oil producing countries who want to secure predictable, reliable markets for their oil. It is in the interest of oil producers to see that oil production and prices are optimized in a manner that extends the productive life of their resources, while ensuring that oil retains its appropriate share of the energy mix in a growing world.

What are the barriers to making this simple equation work? The fact is more than three-quarters of the world's known oil resources are in the hands of oil producing governments. Massive investment is needed to bring these reserves to market. At the same time many oil producing countries are facing significant demands for social expenditures in areas such as health care, education, and infrastructure, with additional investment requirements to diversify their economic bases.

These are important priorities when compared to the cost of investing in increased capacity. The data shown yesterday at the conference suggests that investment by the National Oil Companies may well be lower than required to meet future needs. One solution to this challenge is for oil producers to give greater access to the International Oil Companies. The International Oil Companies can help oil producing countries to realize their sovereign interests by investing, providing state of the art technology and creating jobs.

Done well, International Oil Companies can be a positive force and help overcome concerns about reliability of supply. This will require a new era of collaboration between the International Oil Companies and the National Oil Companies in this interdependent world.

If we do not change the current course, we run the collective risk of being seen as unreliable. A lack of confidence in oil's reliability and predictability could once again have significant implications for the global economy.

This is a lesson from history. We should not have to re-learn that lesson!

Harnessing the resources of the International Oil Companies with the reserves of the OPEC nations and the talents of the National Oil Companies, without compromising sovereignty, is a means by which all of us can meet our responsibilities.

Thank you

Updated: September 2004