press release

Global Energy Address of Peter Bijur, Chairman and CEO of Texaco

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17th Congress of the World Energy Council
Monday, September 14, Houston, Texas

Peter I. Bijur

It's a distinguished panel that I have the opportunity to participate here in this afternoon, and I'm glad to be in Houston.

A couple months ago, I was rummaging around a bookstore and I came across a copy of one of the great classics, Edward Bulwer Lytton's The Last Days of Pompeii. I hadn't thought about that book in years. I have to confess I didn't buy it, but the title did help me decide what I wanted to discuss with you today. So let me raise the question: what are we in the last days of right now -- as we approach the millennium?

I could go through any number of outdated ideologies or technologies that will soon be buried under the ashes of history, as Pompeii itself was buried. But my basic message is this: I believe that we are living through the last days of the traditional oil company.

And its demise is related to the very topics of this conference -- technology and development. I believe the companies that transcend and prosper will be new corporate beings -- new in outlook, new in attitude and new in purpose.

Let me begin by telling you how I came to this conclusion. Some time ago I asked an international team of 30 people, drawn from all areas of my company's business, and also from the outside world, to figure out what was coming at us in the years ahead and what we needed to do about it. Jonathan Swift said that vision is the art of seeing the invisible. And that's what I asked the group to do -- to present a vision of the oil industry's future over the next 10-15 years.

The team's report, which I found remarkable, is a detailed document that strongly challenges the continued profitability and future viability of the traditional company.

Someone said that trying to figure out the future is a little like having bees in your head. And surely, the future is disorienting. But I believe there are compelling, motivating, if not unsettling, clues as to what is to come. The Texaco group distilled its findings into three scenarios that challenge the status quo of our industry. It also outlined the "official future," which is basically an evolution of the status quo. This is the plain vanilla forecast on which most of us, oil companies, base our strategic plans.

This "official future" foresees the oil industry continuing to operate pretty much as it does today. In spite of the financial turmoil that we find ourselves in, this is a future of continuing global integration, sustained economic growth and an increasing demand for oil. While technological change and environmental regulation promote fuel efficiency and alternative fuels, oil continues to dominate the transportation market.

Interestingly, after reading the three scenarios that challenge the official future, I actually found the official outlook to be the least plausible. The arguments for marginal, incremental change are not convincing -- not in this day and age. The future, after all, is not linear. History is full of sparks that set the status quo ablaze. In the words of Camus, history is "the sum total... of successive revolutions."

So what are the revolutions taking place around us as we meet here today in Houston, Texas? What will knock our industry off of its current course and, as I believe, make traditional oil companies -- if they do not change -- remnants of their former selves?

I believe all or parts of the following three scenarios have a reasonable chance of occurring. Although they are scenarios, not certainties, I will discuss them without adding qualifiers or background explanations.

The first scenario challenges the very basis of the oil industry as you and I know it. And what is challenged is the oil company's access to its very lifeblood -- oil itself. This declining access will not be caused by expropriation as in eras gone by, but by a change in the nature of competition.

We believe that host governments will gradually exert more control over their own national resources. They will be more selective in the kinds of companies they invite in. While nations have long desired the ability to develop their own resources and for their own companies to gain the expertise to run the fields, we see this becoming a practical reality.

We see innovative companies emerging, companies that will offer the necessary technical expertise without insisting upon ownership interest. These high-tech, high-service, high-solution companies will enable host governments to realize the full value of their assets. These new companies will also have the expertise to link their client countries to the consumer's markets.

So, where will this leave the traditional oil company? In this scenario the role of the oil company as an upstream producer will erode. The company that wins will be the company that reinvents itself as a solution provider. An oil company's value will shift from the value of its reserves to the value of its knowledge, the strength of its relationships and the integrity of its reputation. The oil company of the future is a service company providing technology and information, management, capital financing and networking. New players will enter the industry. Traditional oil companies who do not transform themselves will be reduced to trading oil or focusing downstream, where fierce competition will soon accelerate consolidations.

The second scenario relates to the challenge of new competitors who will insert themselves between the traditional supplier and the customer. This view challenges the assumption that customers will continue to interact with oil companies in traditional ways.

As an analogy, consider how new Internet companies have inserted themselves between traditional vendors and customers. You can buy books from rather than the local bookstore. You can buy automobiles today from America On Line rather than the local car dealer. If you think this cannot happen to the energy industry, let me tell you about a new company in California called that lets small businesses itemize over the internet the kind and amount of energy that they use. then puts bids out for this business on a daily basis.

In the United Kingdom and France, hypermarkets have captured the consumer and therefore the profit margins once reserved for the oil companies. Now the oil companies have been turned into bulk suppliers in those cases. In the U.K., the Virgin Group offers air travel, music stores, financial services and even a branded cola. Its customers obviously trust the brand. There is no reason the Virgin Group cannot have gas stations. In the United States, Wal-mart buys everything else in bulk with razor thin margins for suppliers, why not gasoline? Just because oil companies have distribution networks does not guarantee us, that customers will continue to patronize our brands.

Webs of relationships between different industries will also begin to form. Microsoft says it wants to be the "CEO of the smart home." Its software will manage everything that comes into your house -- gas, electricity, cable, television, telephone. Microsoft would then subcontract these services to suppliers.

Eventually the distinction between oil, gas and electricity will blur as new competitors offer customers "units of power" from a variety of sources, rather than individual products. As another analogy, Sprint has announced that it will soon offer a service that bundles all of a company's telecommunications needs... voice, long distance, video, internet, data transfer... through a single connection and as a single product. What's more, the customer will only pay for the bandwidth that it uses. Sprint will, in effect, be selling units of telecommunications power, not individual products.

If oil companies do not think as broadly as Sprint and Microsoft, they will be reduced to the role of low-margin bulk suppliers.

Now, we come to the third scenario. Under this scenario, technology and environmental concerns become a tremendous force for change -- and more quickly than generally assumed. We will see multiple ways to power cars -- hybrids, advanced batteries, fuel cells, even cars that run on pure hydrogen.

How soon? Prices dropped dramatically and power increased exponentially with microchips. Why should the chemical reaction in fuel cells be exempt from such scientific breakthroughs? Who among us would want to bet against technology?

The head of General Motors himself says that no car company will be able to thrive in the 21st century if it relies solely on the internal combustion engine. The head of Toyota says that his company expects to increase its market share by introducing new technologies, like hybrid cars. That is a specific business strategy that should shake the complacency of many people. He also says that the companies that can't identify what technologies are needed will be absorbed. He was talking about auto companies, but he could just as well have been talking about oil companies.

The economics of the world itself changes when you park a car and then use its fuel cell to generate electricity for your home. The power grid of an entire country begins to look like the Internet rather than a mainframe. In fact, if all the cars on the road in the United States had fuel cells, you would have five times the electrical capacity of today's installed base. These changes may not occur first in the United States where gasoline is but a dollar a gallon, but in other parts of the world where gas is four or five dollars a gallon, where the economic incentives are much higher and the infrastructures are not as developed.

The result of all these changes is a much more complex market for energy and transportation products. Are we prepared for such changes?

We don't know, of course, exactly what will happen. But you don't have to embrace the specifics of these scenarios to accept that new economic, technological and environmental forces are loose in the world. Bertrand Russell once said that it's healthy now and then to hang a question mark on the things that you have so long taken for granted. It seems to me that is excellent advice for those of us in the oil business.

At Texaco our business units are utilizing our three scenarios of the future in their strategic planning and watching the marketplace carefully for signals of change.

The Harvard Business Review and staff recently carried an article with the arresting and prophetic title, "The End of Corporate Imperialism." Let me quote the authors, Professors Prahalad and Lieberthal. They write, and I quote "...while it is still common today to question how corporations like General Motors and McDonald's will change life in the big emerging markets, Western executives should be smart to turn the question around."

We in the oil industry, especially, should ask how the emerging markets will change us. Now I define emerging markets much more broadly than is customary.

First, of course, is the emerging market of developing countries. I believe we must align ourselves more closely with their aspirations, not just their economics. We must accept that they will be maintaining greater possession of their destinies and resources. In the progression toward economic development. We should strive to be companies that add value to these countries' economic and social growth. Our behavior should make clear that we care about their progress.

Second, we face the emerging market of relating to our customers in totally new and different ways. Our industry for too long has seen its job as finding oil, taking it out and then somehow disposing of it. Our research shows that people don't really like to go to gasoline stations; it's a chore. With new sensor technologies, what if a retail store like Sears could check your car's fuel level, add the necessary gasoline and charge it to your credit card -- all the while you were shopping in the store? How many people would still prefer pulling into a station and pumping their own gas? My point is that our own customers should be considered an emerging market.

Third and finally, we face the emerging market of alternative fuels, energies and services that we could offer. The foreseeable future says oil. But we would do well to remember the case of the Baldwin Locomotive Works. Once the world's largest steam locomotive maker, Baldwin downplayed introduction of the diesel engine as a competitor in 1939. Throughout the 1940's, Baldwin's ads proclaimed, "Steam is here to stay!" Today the Baldwin works is gone. And there is a lesson in that for all of us who are not open to the future.

If we are to emerge successfully from the old ways, if these are not to be the last days of the traditional oil companies, we must develop new outlooks, new attitudes and new directions.

This is a computer wafer and it's crammed with all kinds of microchips. These are getting faster and more powerful by the day. They are frequently used to symbolize the possibilities of the future.

This is an old drilling core from the 1950's taken from a well in south Texas. It is more earthy and solid than this flashy wafer. It's from a very different era of technology and attitude.

Although the oil industry uses the technology of this,

I wonder how much of our thinking and behavior still relate to the days of this?

That question will be tested in the years ahead. This industry knows how to explore for deposits of oil. I believe we also need to explore new ways of thinking and operating, because these are the reserves that will determine our success in the years ahead.

Ladies and gentlemen, in closing, just let me leave you with this one thought. Courage was once defined as the power to let go of the familiar. As we approach the millennium, the oil companies of the world must ask themselves, "do we have that courage?"

Thank you very much.

Updated: September 1998