Resurgence In The Gulf: The New Energy Economics

By Peter J. Robertson, President
Chevron U.S.A. Production Company

Tulane University Business Forum

New Orleans, Louisiana, Nov. 5, 1997

Also see a press release regarding this speech.

Good morning and thanks for inviting me to participate in this forum. It's a pleasure to be here.

New Orleans is one of Chevron's major employee population centers. And it's one of those places that I love returning to. It seems there's always a reason to celebrate here. Maybe those of us in the business community could learn something from that.

The petroleum industry . . . at long last . . . can afford to do some celebrating of its own -- cautious celebrating, to be sure. After a pretty tough decade, no one's in the mood for overstatement.

One reason to celebrate is that this month marks the 50th anniversary of the offshore oil and gas industry in Louisiana. In November 1947, the first oil well not visible from of land was brought in by Kerr-McGee . . . about 45 miles south of Morgan City.

Of course, the petroleum industry in Louisiana goes back much further than that . . . to 1901 when the first commercial oil discovery was made . . . on land, not far from Jennings.

For most of the century, petroleum has been a very important element in the local economy. Directly and indirectly, the oil and gas industry currently supports some $65 billion in sales, $8 billion in household earnings and 30,000 jobs in Louisiana. It also pays more than $800 million in taxes, fees and royalties to the state. That accounts for 14 percent of all state revenue.

And these figures are likely to increase. Having weathered the oil price collapse of 1986 and having learned a few hard lessons along the way, the oil and gas industry is experiencing a dramatic resurgence in the Gulf of Mexico. That's good news for everyone in this region . . . whether you make platforms or po-boys.

Not all of you are in the oil and gas business, but I'd bet that every one of you has a family member or neighbor who is. We are all linked in one way or another; we are all affected by energy economics. Likewise, we were all touched by the lean times of the late 1980s and early 1990s. Clearly, that period was difficult for many in the New Orleans area . . . and traumatic for more than a few.

But things have changed. Energy economics aren't what they used to be.

Driving through Morgan City these days is like being caught in rush hour on I-10. It was only a few years ago that you could sail through town and barely put your foot on the brake. As a result of the downturn in the oil business, work had dried up there and roughnecks went off to be truck drivers. But now Morgan City's fabrication yards . . . that service the offshore industry . . . have a backlog of orders, and the place is humming. And this story is being played out in many other Gulf communities . . . small and large.

Lafayette, too, was hit hard when oil prices took a dive. The state university there helped identify ways to bolster the town's economy - expanding into various service, retail and distribution businesses. The residents of Lafayette have picked themselves up, diversified and yet are open to new oil and gas opportunities.

And there are plenty of opportunities.

No doubt, you're aware of an increased level of activity in the Gulf of Mexico. You've probably heard about a new oil "boom." I'd like to tell you . . . from my point of view . . . what's going on. But I'm not going to use the word "boom." It's not that we're superstitious in my business; but one of the things we've learned from recent history . . . is moderation. Besides, the word "boom" is too often followed by the word "bust." I'll go more into lessons learned later.

If the industry isn't exactly booming, it is healthy . . . very healthy . . . and not just because of oil and gas prices. This new-found health can be explained in two words: deep water. There are other factors, but deep water is the main one that's redefining energy economics.

We always assumed that drilling in deep water was prohibitively expensive. And, for the most part, we were correct. But recent advances in technology . . . and new insights into the characteristics of some deep reservoirs . . . have altered the picture. And have made deep water both appealing and practical.

I didn't say inexpensive: deep-water projects will be costly. It used to be hard to spend $50,000 a day on an offshore project; now $250,000 a day is realistic. But, for the first time, deep-water projects are economically justifiable.

Not only has new technology reduced the cost of getting at these deep reserves, but the reservoirs themselves - the regions that hold oil and gas - look much better . . . of much higher quality . . . than we had imagined. The costs are great, but so, we believe, are the returns.

Let's look at technology first.

A number of technologies that have been around for a decade or so have gotten much more sophisticated recently. They've changed the way we look for oil, the way we drill for it and the way we produce it.

Three-dimensional seismic technology is a good example. This technology allows us to look below ground: sound waves bounced off subsurface structures create a computer image that we can interpret and, virtually, wander through.

In the past, 3-D seismic has been good for spotting large deposits of oil or gas. Now it's a key tool in detecting smaller deposits. This fine-tuning is beneficial, particularly to producers operating on the shelf - that area of the Gulf of Mexico that's shallower and closer to shore and where most production has come from.

Advances in 3-D technology are helping us understand the geology of the gulf's deep water. Sformations overlay much of that area, and we are rapidly getting to the point where we can infer what lies beneath . . . to "see" below the salt.

Another technology of great importance is directional drilling. It's been around for a while too. But we're doing things now we couldn't have done just three years ago. Let me give you an example.

Say you have a reservoir 100 feet deep and 1,000 feet wide. In traditional, straight-down drilling, a single well taps into 100 feet of this zone. But if you can drill straight down . . . next to the reservoir . . . and then turn 90 degrees and go into it horizontally, you're tapping into a zone of 1,000 feet . . . with just one well. And we can do that!

The industry has made other giant strides in drilling. In the past, drilling and logging downhole data were two separate tasks: You'd drill . . . stop . . . insert an electric line with sensors . . . record data . . . stop . . . drill again. Now, sensors are integrated into the drilling process itself, and they instantaneously send back information on such things as temperature, resistance and porosity. There's no need to stop the drilling.

This technique has been in use for a decade or so, but it, too, has improved tremendously. The equipment has gotten smaller, stronger and able to run deeper.

Even the drill bits themselves have improved greatly. They last longer, drill faster and - in combination with new drilling fluids that are environmentally "friendly" - they can cut drilling time in half.

The oil industry also is borrowing technology from other disciplines and applying it in new ways.

One exciting example is magnetic resonance imaging or MRI technology used in the field of medicine. Doctors use MRI to scan the human body. The oil industry now is using it to learn more about rock formations. What had been a two-step process - learning first about porosity and then what those holes in the rock contained . . . water, gas or oil - can be done in one step with MRI.

As you can see, there's a lot going on in the area of technology. And the rate of change is accelerating.

Take platform design. It's one of the things that make deep-water drilling practical.

In the Gulf of Mexico, Chevron is developing the Genesis Field in 2,600 feet of water. Instead of sitting on the bottom of the Gulf, the Genesis Platform will float like a giant buoy that's tethered to the sea floor. It's been designed to adjust to ocean rhythms and to ride out hurricanes. It's a remarkable feat, really, and we'll be seeing many more innovations in platform design. In fact, as subsea and downhole work get more sophisticated, the need for platforms might disappear altogether.

Production from Genesis - which is about 150 miles south of New Orleans - is expected by the end of next year. For Chevron, this is a true milestone. Genesis represents our first deep-water production anywhere.

I mentioned earlier that advanced technology was one key to making deep-water drilling a viable option. The quality of the reservoirs is another key.

In the early 1990s, we thought deep-water wells would produce - at best - 3,000 barrels of oil a day. But some of the early drilling showed production rates of more than 10,000 barrels per day. The reservoirs are bigger than we imagined and often are composed of loose sand. Without getting too technical, let me just say that this type of formation makes production relatively easy.

In the case of Genesis, we believe we can reach peak production by drilling 12 to 17 wells instead of 40 as originally planned. You can understand how that changes the economics of a project.

You can appreciate, too, that I'm not the only one to have noticed this. Many more players than ever before have a stake in the Gulf of Mexico, and independents are competing with majors offshore. In the spring 1996 offshore lease sale, Zilkha - a small independent - bid on the largest number of leases. And in March 1997, Zilkha was third in total number of blocks bid on.

Now I can't say I'm keen on having more competition in an already competitive business. It makes my job that much tougher. But the fact that there are more players now is probably good for the overall economy. This resurgence has created a much broader base of participation.

It also indicates just how attractive these new opportunities are.

The bidding for deep-water leases has sparked an enormous amount of interest and activity. Chevron, for example, had 16 deep-water leases at the beginning of the decade. By 1995, we had acquired 91 such leases. In 1997 . . . just two years later . . . that number has grown to 362. And Chevron is not unique in this respect.

Many of the new blocks Chevron will explore are in the Alaminos Canyon area in water depths of up to 8,000 feet. Exploratory drilling will begin in this area in about two years. Our long-term goal is to add more than 2 billion barrels of new Gulf of Mexico reserves over the next 10 to 20 years.

The Gulf of Mexico's deep water is now considered one of the world's great frontiers and is luring companies from around the globe. I read recently that Statoil of Norway has interests in 87 deep-water tracts in the gulf.

For many years, those of us concentrating on U.S. petroleum projects took a back seat to the supposedly more glamorous international projects. Our role was to provide cash to those growth areas. Now we are on more of an equal footing. And that feels good.

But in the United States we face a persistent dilemma: the Gulf of Mexico is one of the few promising areas . . . with truly global-scale prospects . . . where we are allowed to drill . . . despite the fact that our nation imports more than half the oil it consumes.

Chevron is gradually exiting offshore California. After a period of intense political battles and severe regulatory restrictions, the reservoirs we developed have not performed as well as expected. We're prevented from drilling in the most promising areas of Alaska that could help the country achieve greater energy self-sufficiency.

And in the yet-to-be-developed eastern Gulf of Mexico - a frontier in its own right - the process of getting permits to drill has grown extremely complicated.

The Norphlet Trend is an extremely prolific offshore gas region that extends from Louisiana to Florida. It's already in production off the coasts of Pascagoula and Mobile, providing an essential energy source . . . a clean-burning fuel that's more and more in demand by American consumers.

The United States is nearly self-sufficient in natural gas - unlike oil - but it's likely we'll be importing more gas from Canada over the coming years. New pipelines that cross the border already are being planned.

In 1996, the Gulf of Mexico provided 27 percent of our domestic natural gas. By 2000, thanks to current deep-water discoveries, the domestic supply of gas from the Gulf will increase by 25 percent . . . from 13.8 billion cubic feet a day to 17.2 billion cubic feet.

At the eastern end of the Norphlet Trend is a gas prospect called Destin Dome that we are trying to develop. We filed development plans with the Minerals Management Service - or MMS - in November and received word in August that the filing was complete. And we expect it could take two more years before we get an approval to proceed . . . as the MMS, the Environmental Protection Agency and the state of Florida all review the plans.

Any project of this scope demands intense scrutiny and the highest environmental standards. On that, we are in agreement. What is dismaying, however, is how complicated and time-consuming the permitting process has become. This is one factor that casts a shadow on the new energy economics: Regulatory delays are expensive . . . for everyone.

I am confident that, in the end, the citizens of Florida . . . when they have reviewed our exemplary environmental record in the Gulf and understand the relatively low risk of producing natural gas . . . will see the desirability of moving ahead with this project . . . both for their state and for the nation.

In 1996, of some 44 million barrels of oil Chevron produced in the Gulf of Mexico, only 107 barrels were spilled. That's just 0.00024 percent. And our goal is zero.

We've been honored with many environmental awards. We recently won the "National Health of the Land Environmental Award," presented by the Bureau of Land Management for the eastern United States. This recognizes Chevron's outstanding environmental practices during an almost 50-year partnership with the Bureau of Land Management and the U.S. Fish and Wildlife Service.

Aside from my concerns about the permitting process, there are other regulatory issues that affect virtually all businesses represented here. The move to impose even stricter air quality standards . . . just when industry has shown remarkable progress complying with already stringent rules . . . deserves to be questioned. We all want clean air and environmental vigilance, but we also should demand that laws be based on science and reason and not on emotion or political expediency.

I'd like to bring up another issue that you might have been hearing about.

There is some pressure to include petroleum exploration and production wastes under federal laws that govern hazardous waste disposal. While currently exempted, these petroleum wastes still are heavily regulated by the states. In addition, we adhere to guidelines established by the American Petroleum Institute. These guidelines encourage waste reduction, recycling and . . . only when necessary . . . disposal at a carefully controlled site. Only 0.1 percent of these wastes are disposed of at commercial facilities.

In 1988, the EPA concluded that "when managed in accordance with state and federal requirements, exempt oil and gas wastes rarely pose significant threats to human health and the environment." We firmly believe this to be true and that state regulations, which consider site-specific and geographic factors, can best ensure safe practices.

If the industry loses this exemption, some wastes that currently go to non-hazardous waste sites at a cost of, say, $6 a barrel, would have to go to hazardous waste sites at a cost of some $60 a barrel . . . a tenfold cost increase.

We ask simply that opinions be formed . . . not by fear . . . but by rational dialogue. And we insist it's not the number of regulations that will ensure safety . . . but, rather, how well those regulations are thought out.

I've touched on many of the positive aspects of what I call "the new energy economics." I'd be remiss if I didn't also add some cautionary notes. The opportunities are tremendous, but there are more than a few challenges.

The resurgence of activity has led to a scarcity of support services and equipment. And when supply doesn't meet demand, producers' costs go up.

In addition, there's a scarcity of skilled employees. Last decade's economic downturn discouraged many students from entering petroleum-related fields and prompted many longtime oil workers to look for different careers. Furthermore, deep-water technology is new to everyone; a work force skilled in deep-water technology has to be developed. Within Chevron, we have a high-level team looking at strategic staffing in the upstream and detailing the precise skills required for the coming years.

I think we clearly communicated our post-1986 troubles; we haven't done as good a job at communicating the new opportunities that lie before us.

I believe there has never been a more exciting period to work in the petroleum industry. And it's a wonderful time to be working in the gulf region. We're not going to return to the high employment level of 1981 - when people were expecting crude oil prices to surpass the $100 mark - but we can offer exciting challenges to professionals who are flexible, innovative and interested in multidimensional careers.

To understand the oil industry today, it's helpful to know what we've learned from the recent past. First, we learned we couldn't operate the way we always had. We found it necessary to cut costs, reorganize our work, innovate . . . and plan around flat oil prices . . . something around $18 a barrel.

We also learned the value of collaboration . . . with industry peers, with academia and with the community. The oil industry has increasingly seen the value of partnerships . . . of all types. For example, major oil companies are looking to form alliances with those who provide support services. Partnerships help minimize risk and ensure access to the materials . . . and support personnel . . . you need.

The importance of partnerships represents a cultural change in many ways. We share information now that we never would have divulged in an earlier era. We don't always have to be the operator of a project; sometimes it makes more economic sense not to be.

We learned that everyone . . . regardless of his or her discipline . . . is responsible for the bottom line. At Chevron, each of us is an entrepreneur working toward a common goal. Sharing a broad view is better than trying to consolidate a whole array of narrow views.

I'd like to pay tribute to the many research organizations - our partners in R&D - that are helping us reach our goals.

  • The University of New Orleans helped create a 3-D simulation of our new Genesis Platform. Using this tool, we could see where the stress points were and what adjustments had to be made.
  • Louisiana State University shares with us its expertise in soils and foundations. This is particularly important in designing platforms that stand in weak offshore soils.
  • The University of Southwestern Louisiana in Lafayette is a partner in safety training. We run emergency drills there on how to evacuate an offshore platform using specially designed escape capsules.

There are many more examples. And I owe a special thanks to Tulane University. Your M.B.A. program is highly regarded at Chevron and quite a few of our employees have returned to school to get their master's from Tulane.

In conclusion, I am very optimistic as I look to the future. But I believe in "managed optimism." That is, you continue to question your assumptions and reassess your risks. And you remind yourself that, in the past, the words "boom" and "bust" too often went together.

That said, I believe that the Gulf of Mexico is the very heart of deep-water technology . . . technology that will be used in many ways and in many places around the world. For 20 years, annual production from the Gulf of Mexico shelf has ranged from 1 to 1.25 billion barrels. Within the next decade, deep-water production will likely increase that figure 42 percent to 1.7 billion barrels.

With projections like that, I can affirm that the Gulf of Mexico is . . . once again . . . where it belongs . . . at the forefront of a global industry.

Thank you very much.

Updated: November 1997