Securing California's Energy Future

David J. O'Reilly

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

Town Hall Los Angeles

Los Angeles, California, October 25, 2007

I spent part of my career at our refinery in El Segundo. So I always appreciate the opportunity to return to Los Angeles, and I'm pleased to be a guest of Town Hall for the first time.

Chevron has close corporate and personal ties in southern California. When I flew in yesterday and got a firsthand look from the air, I had a much greater sense of just how devastating the wildfires have been. Our hearts go out to all the victims and their families and to those who've lost their homes. The firefighters and first responders who are risking their lives have our special gratitude.

It strikes me that the entertainment and energy industries have much more in common than you might think. For one thing, we're both always looking for new discoveries. Chevron had a "near" discovery in Los Angeles some years back.

When I started my career at Chevron near San Francisco, one of my colleagues had a son named Bob. Bob had actually worked at our El Segundo Refinery for a while. And for all we knew, he may have been on the cusp of a promising career in the oil business, just like his dad. One day, his father invited us to see a new movie that his son was in. We all came back impressed. The movie was "Butch Cassidy and the Sundance Kid." And Chuck Redford's son Bob had one of the leading roles. So, Robert Redford is one discovery that got away. But our loss was Hollywood's gain.

Before I go any further, I want to congratulate Town Hall on celebrating its 70th year.

Chevron surpasses even that venerable age at nearly 130. In fact, just about 30 miles from here, in the Santa Susana Mountains, we can trace our early operations to California's beginning as an oil-producing state. There in Pico Canyon sits a truly big discovery – the first oil well in California to yield commercial quantities of oil, beginning in 1877. Pico No. 4 produced until 1990 – over 113 years later. And that's what folks in Hollywood would call a good long run.

Pico No. 4 is just part of the larger Chevron story. I suspect most of you know Chevron through our service stations. But, Chevron's business, in fact, goes far beyond our retail network. Today, we are one of the world's largest energy companies. We operate in 180 countries, and employ a diverse, multicultural workforce of 58,000 people, two-thirds of whom live outside the United States.

We operate across the entire energy spectrum. We produce oil and natural gas. We refine and sell petroleum products. We're the world's largest producer of geothermal energy, and we're pursuing next generation biofuels and other alternatives. About two-thirds of our business is outside the United States. And, by far, our biggest business is the exploration for and production of oil and natural gas.

To give you an idea of the scale of our operations, consider this comparison. Our revenues last year were approximately $200 billion and our profit was approximately $17 billion, which equals about an 8.5 percent return on sales. We produce a lot and we have to sell a lot to make money.

In 2006, Americans spent close to $10 billion at the movies. That's about half of the $20 billion that Chevron plans to spend this year to bring new energy supplies to market.

We go to those lengths because the world needs every molecule of energy we can find, in every potential form. The world's population is growing. So is its economy. We are in one of the longest sustained economic expansions in history – an expansion that is creating millions and millions of jobs around the globe and lifting tens of millions of people from poverty.

Energy is at the very center of this expansion – in many ways, energy is the true currency of the global economy. Energy enables economic growth by providing light, heat, power and mobility. How we provide that energy, in ways that sustain and protect economic growth and human progress, is one of the greatest challenges of our time. So I appreciate the opportunity to offer some thoughts on this issue and how we can meet that challenge and help build a secure energy future.

Let me start by providing some context, drawing from an important new study by the National Petroleum Council [NPC]. The study is the most comprehensive of its kind – it had input from more than 1,000 experts from business, universities, think tanks and environmental groups, as well as the energy industry. And its findings are sobering. In fact, its title is revealing: "Facing the Hard Truths About Energy."

First, the report concludes that the demand for energy will continue to grow. It projects that the world will use up to 60 percent more energy in the next 25 years, driven primarily by growth in the developing world, while warning that we face "accumulating risks" in meeting that demand.

Among the risks are rising resource nationalism, higher development costs, challenging new resource areas such as the ultradeep water and the Arctic, and the need to manage carbon emissions. These factors have created what is, in effect, a new energy equation – one that will require new responses to create lasting solutions.

The first and most important response is to become more energy efficient. And the study recommends a range of efficiency improvements in residential, commercial and industrial sectors and in fuel economy standards. But, the study recognizes that even with efficiency, the world will still need new supplies of energy.

It recommends expanding production of oil and natural gas in the United States, as well as diversifying our energy supplies with clean coal, nuclear, biomass, and other renewables.

Finally, the study recommends that we develop a global framework for managing carbon emissions.

The NPC study provides a thoughtful, pragmatic framework for the development of energy policy in the United States. But it also has implications for our own state – because California, to paraphrase Wallace Stegner, it is like America, only more so. California's rising demand for energy poses an increasing challenge to deliver affordable, reliable supplies.

It wasn't always this way. In the late 1800s, as I mentioned earlier, California helped create the modern oil industry. By 1910, California supplied almost 25 percent of the world's oil production.

Think about what's happened subsequently. By 1985, California was still providing more than 60 percent of the oil that Californians consumed, with the rest coming from Alaska. But now it's quite different. California produces less than 40 percent of the oil it needs. Alaska supplies only 20 percent and foreign imports have grown to 40 percent.

Production of natural gas, which supplies about one third of California's electricity, has also shifted dramatically. In 1985, California produced about one-third of the natural gas it needed, with the rest coming from the Southwest and Canada. Today, California imports almost 90 percent of its natural gas. And those sources are expected to decline in the future.

The trend is clear. A steady decrease in energy production and a corresponding rise in imports are putting California at the end of the energy pipeline. And demand continues to rise.

Today, California has 36 million people. By 2025, the state's population is projected to reach some 45 million.

Our state's economy – which is among the top 10 in the world – will continue to grow. And to sustain that growth, we'll need energy. To get it, we must increase and diversify our energy resources and use those resources more efficiently, which is the fundamental approach outlined in the NPC report.

So, first, let's take a look at efficiency. Chevron takes the challenge of energy efficiency very seriously. As a company, we've become 27 percent more energy efficient since 1992. We also market energy efficiency to other businesses and institutions through Chevron Energy Solutions, whose current projects in California are projected to give customers more than $250 million dollars in energy savings.

California itself is a recognized energy efficiency leader – in fact, state initiatives promoting energy efficiency for appliances and new buildings have set a standard for the rest of the country.

Today, utilities invest in efficiency as the "resource of first resort" and it's estimated that every dollar utilities invest in efficiency generates more than two dollars in savings for its customers. All of us in California – utilities, businesses, policy makers and consumers – must keep finding more efficiency gains because it is important if we are going to meet energy demand in the long term.

But efficiency alone can't meet all of the state's energy needs. The fundamental truth is that oil, natural gas, coal and nuclear will remain indispensable to meeting the energy needs of California – or those of any other modern economy.

Fortunately, despite some predictions that the world is running out of oil, we will continue to discover new resources – and to get more out of the resources we've already discovered.

Chevron's oil fields near Bakersfield, just over 100 miles from here, are a good example of just how we're doing that. Oil was discovered there in 1899. Today, operations there are a model of technical innovation. For instance, by injecting steam underground to enhance oil recovery, we've more than doubled the typical recovery rate. We're powering some of our fields in the San Joaquin Valley with solar energy. And we're managing those fields with a sophisticated system of digital technology that increases reliability, safety and efficiency.

Technology not only transformed a 100-year-old oilfield in California, but is also expanding the frontier of energy in areas like the deepwater Gulf of Mexico. Chevron recently set several industry records when we drilled a well five miles deep in the Gulf. We drilled to depths that at one time were thought to be impossible, and we did so without a single safety or environmental incident.

We estimate there may be 3 billion to 15 billion barrels of oil and natural gas in that part of the Gulf. The high end of that range would be the equivalent of 50 percent of America's current oil reserves.

Looking beyond the Gulf of Mexico, potential oil and natural gas resources contained in the other U.S. coastal regions are estimated to be the equivalent of nearly 75 billion barrels. Yet the federal government has placed 85 percent of the U.S. Outer Continental Shelf off-limits to exploration, including potential major oil and gas resources off the Pacific coast.

It defies common sense to call for energy security and energy independence in our country while denying access to American resources, especially when technology allows energy production and environmental stewardship to safely coexist.

A sensible energy policy in this country – and in this state – should consider providing broader access to the resources we have, so they can be developed safely and responsibly and efficiently as we've been doing in the San Joaquin Valley for over a century.

U.S. energy policy should also promote the development of clean-coal technology. This is very important for California, which gets more than half of its imported electricity from coal. The big hurdle, of course, is how to deal with the carbon that coal produces.

In Australia, Chevron is applying technology to sequester carbon underground as part of a big project called Gorgon. It will be one of the world's largest sequestration projects, and it will allow us to deliver decades of clean-burning natural gas with a minimal carbon footprint. As we develop that technology, it has the potential to be applied to coal and significantly reduce carbon emissions there also.

Technology has also improved the economics and safety of nuclear power, which currently provides about 13 percent of California's electricity and about 20 percent of the nation's power. It is critical that we invest in a new generation of nuclear power plants as current facilities age and are taken off-line.

We need to continue to expand the use of renewables – such as hydropower, wind and solar – which already provide almost 30 percent of California's electricity needs.

California's energy security will require a third ingredient: strategic investments in next generation energy technology, including renewables such as biofuels.

Biofuels have a potentially important role in the future of transportation. Currently, we're blending nearly 6 percent ethanol into our California gasoline, and this percentage will likely rise in the next few years. But it's critical to understand the practical limitations of corn-based ethanol – most importantly, its impact on food supplies and food prices.

The National Academy of Sciences just published a study describing one of ethanol's environmental impacts. The study concluded that increased ethanol production from conventional corn could harm water supplies – by significantly increasing the quantity of water used for irrigation and decreasing the quality of water supplies due to the runoff from fertilizer and soil erosion.

These limitations are spurring us to find the next generation of biofuels, where the promise – and the challenge – is to be able to convert non-food sources, such as wood pulp and agricultural wastes, into what's called cellulosic ethanol. Developing this technology, if we are successful as a country and an industry, will liberate us from the food-versus-fuel dilemma. It will address potential environmental issues, and it will help us develop a low-carbon source of fuel at commercial scale.

We're making significant investments in the race to develop these second-generation biofuels. We have research partnerships with academic institutions, including UC Davis and the federal government, to pursue these technologies.

We're optimistic about the long-term potential of biofuels and other alternatives. But we are also realistic. Developing alternative fuels at commercial scale will require hard work, massive investments and a lot of time.

We believe it will be a decade or more before these new biofuels can make a meaningful contribution as a fuel, if we are successful on the technology front.

There has never been a more urgent need to be realistic. Because of the thin margin between supply and demand, we're at a time when the price of oil has reached record highs, at nearly $90 a barrel. As prices rise, we will feel the effects at the gas pump and in our monthly utility bills, of course. But, we'll also see the effects at the supermarket and at the airport.

Consumers and businesses should be concerned. Policymakers should be concerned, too – because this is a matter of energy security and, ultimately, economic security.

We need to take steps that are necessary today to ensure adequate energy supplies for our children, our grandchildren and their grandchildren. In our business, we have to think and plan that far ahead with a long horizon.

Despite the technical challenges and large, long-term investments, we often encounter policies that inhibit development of new energy sources. At the local and regional levels, regulatory barriers and permitting processes make investment in vitally needed infrastructure – such as refinery expansion – very difficult.

Despite our preference to invest in California, we recently moved a refinery project to Mississippi because of the difficulty of getting permits here. That kind of regulatory environment ignores what should be California's energy endgame: the availability of affordable, reliable, environmentally sound energy so we can continue our quality of life and economic growth.

California has long shaped its own destiny. But the closer California gets to the end of the pipeline, the more its energy destiny will be determined by others.

Like America, California faces accumulating risks to meeting the long-term demand for clean, reliable and affordable energy. But meeting that challenge is something that California not only can do, but must do.

Because of its large economy, California is one of the largest energy consumers in the world. None of our businesses could exist without reliable, affordable energy.

The strength of California is built on the diversity of its people, its geography and its economy. Californians, above all, should champion the same principle of diversity when it comes to energy and understand that there is no single simple solution to our energy issues, no silver bullet. We need to develop a wide range of solutions that are realistic, pragmatic and economic.

If California can build a successful energy policy, we'll look back and see this time as a turning point – a time when we made the tough, but practical, decisions to solve the challenges of energy and growth. Our shared future demands nothing less.

Updated: October 2007