Petroleum Industry in the 21st Century: Technology, Business and Frontiers
Ali Moshiri, Managing Director
ChevronTexaco Latin America
It is my pleasure to be here with you today to share my thoughts on the challenges facing the petroleum industry. This year marks the 125th anniversary of ChevronTexaco, and around the globe ChevronTexaco people are celebrating. For me, having first-hand experience with the company during more than a quarter of its illustrious history, this is an opportunity to reflect on the evolution of our industry and consider what may lie ahead.
Consider the cycles that the industry has experienced. We can clearly see the nature of the energy business: Long periods of price stability are punctuated by supply or demand peaks leading to temporary price spikes. Supply, as we all know, is driven by resource availability; and demand is driven by economic growth.
It is a relatively simple supply-and-demand system that has many risks and uncertainties. Supply uncertainty is affected by the all-too-familiar geologic risk and by uncertain access to key resource areas.
As we study key events that have affected the price curve, we see the impact of major amounts of new supply coming into the system, such as Russian production in the 1880s, Texas production in the early 1900s and Venezuelan production in the 1920s. More recently, we see the impact of events causing supply disruptions, such as the Middle East oil embargo in the 1970s, the Iranian revolution in 1979 and Iraq's invasion of Kuwait in 1990, as well as the current situation in Iraq creating supply uncertainty.
The earlier era was dominated by supply, making the downstream refining and distribution businesses so attractive for many years. Once we reached the 1970s, with the influence of OPEC, profitability shifted more to the upstream, and resource access and control combined with political unrest became key drivers.
I think it is worthwhile to remember that only six years ago, West Texas Intermediate crude oil was selling for $12 per barrel, and it has now risen to more than $50 per barrel. We are in an era of explosive population growth driven by the developing regions of the world. As these areas develop economically, energy demand will increase significantly, as has been the case in China.
The outlook for energy demand is one of steady growth. Population and economic expansion will increase the planet's energy requirements. Natural gas will play an increasingly important role, given the volume already discovered, but a different business model will be required to get the gas to market. And despite the progress made in the gas sector, oil will continue to be the most important energy source. With ongoing turmoil in several key supply areas of the world, the industry's challenge will be to provide the needed energy.
Closing the supply gap will be difficult in the near term, much like it was in the founding days of our industry. Although the competitive landscape for resources has changed, those early days taught some valuable lessons still applicable today.
In the late 1800s, it was the discovery of a resource base that formed the foundation of new oil companies. With the first oil field found in California, ChevronTexaco's earliest pioneers formed the Pacific Coast Oil Co.
The competition has been and will continue to be for access to resources. This was not lost on the pioneering geologists of Standard Oil Co. of California, such as Bert Miller and chief geologist Max Steineke. Steineke discovered oil at Dammam Dome in 1938, which launched Saudi Arabia on the path to become the world's largest oil-producing nation.
The romantic days of oil company geologists and engineers gaining easy access to concessions in exotic parts of the world in exchange for their expertise are now long gone. Competition is tough, and access to resources for companies is limited. In the 1970s, our industry absorbed the shock of the oil embargo and, for the first time, truly recognized how sensitive supply can be. Politics came to the forefront, followed rapidly by widespread nationalization.
This ushered in what I like to call the New Era, in which national oil companies control about 70 percent of the resource base. This has forced a dramatic shift in the competitive environment. It has driven companies like ChevronTexaco to plan for the long term and develop advanced technologies and financial systems to raise capital to compete effectively for resources outside the nationalized arena.
The New Era initially demanded a focus on exploration, reservoir management and the strong organizational capabilities of skilled personnel. This worked until OPEC discipline broke down in the mid-1980s, when it became apparent that the oil business also required effective management of the political situation, periods of over supply, financial market performance expectations and higher capital efficiency. This led to the era of mergers and acquisitions, bringing a focus on value creation and increasing the resource base using all options: exploration, enhanced recovery and field redevelopment, asset purchases and company mergers.
No longer is it acceptable to be superior in one dimension of the business. Even our earliest predecessors realized that capital efficiency, market access and an integrated approach were needed for long-term success, and our history is filled with partnerships and growth. Today, the mergers continue, and to excel one needs to be the best in all elements of the business or risk falling behind and being absorbed by a more efficient competitor. ChevronTexaco has lived this evolution for the past 125 years and, in doing so, created one of the largest integrated energy companies. And it started with one discovery in California.
Our industry has explored for decades and needs to continue to do so, from the Caspian Sea to offshore Venezuela, from Siberia to Argentina, and from western Africa to the Gulf of Mexico. Today, however, we face not only the technical challenges of finding hydrocarbons, but we face the challenges of operating in deep and now ultradeep water, shrinking resources, existing mature assets, more complex contract terms, and key areas remaining in the control of national oil companies.
Now, more than before, a greater talent pool in a broader array of disciplines is required to overcome these challenges. The capability to maintain value, focus on safety while maintaining capital discipline, and appreciate the importance of managing relationships with the host governments and national oil companies, form the basis for success.
The good news is that industry has always been on the edge of technology and business capability. In the past, we have solved equally challenging problems as we do now, and we will do so again. In Eurasia, oil and gas now flow to market from the Tengiz and Karachaganak fields across two countries and thousands of miles. A huge, complex partnership between companies and governments solved many of the issues, and the investment was realized.
Similarly, we expect gas to flow through four countries in West Africa, delivering needed energy for power generation while reducing flaring in Nigeria. Regulations and legal structures were and are being created to make this happen.
Closer to home, a liquefied natural gas project is taking shape in Venezuela. It will require the construction of new infrastructure in a remote area of the country. Cross-border treaties and unitization agreements between Trinidad and Tobago and Venezuela will need to be formed to unlock the gas resources that straddle the maritime boundary.
And, in the long term, we see the possibility of regional gas pipelines interconnecting Venezuela and Colombia with energy-hungry Central America. Much like the West African Gas Pipeline project, this effort will require the cooperation of multiple governments, state enterprises and corporate investors.
Complex? Yes. Doable? Absolutely. I am confident that industry can rise to the challenge. Why ? Just consider all the progress we have made so far in exploration, drilling, reservoir imaging and management, shipping and transportation, refining, and marketing.
It is people who will solve these problems. As our forebears did in the past, so will we in the future. The petroleum industry was founded by individuals with vision, creativity, determination and resilience. Nothing has changed. We are a "can do" industry that excels at problem solving. We always have, and we always will.
Updated: October 2004