The Business Of Building Solutions

By Kenneth T. Derr, Chairman of the Board and Chief Executive Officer
Chevron Corporation

Annual Convention -- Division of Environmental Geosciences/Energy Minerals Division Luncheon

San Diego, California

This industry has gone through a lot of change in the last 10 years since the price crash of 1986. Most of us probably have many fewer earth scientists on our payroll today than we did then and our exploration budgets are undoubtedly less. However, one fact remains the same in our industry -- the most important profit-making opportunities are finding large new reserves of oil and gas and developing them efficiently. In both these roles, the earth sciences are critical to success, and I don't see that changing for a very long time.

Since this luncheon is co-sponsored by the Division of Environmental Geosciences, I thought today I'd give you a brief industry overview from an environmental perspective. Environmental issues are very important to us in our industry, regardless of which part we may be in. They also are very important to our employees and the general public.

Let me start by telling a story that I think many of you can relate to.

There's a gentleman who recently spoke to a group of people at Chevron headquarters in San Francisco. The speaker opened by mentioning that his ten-year-old son recently announced he didn't want to ride in the car with Dad any more, because cars burn gasoline, and gasoline is bad for the environment.

Well, "Dad" happens to be Professor Daniel Yergin, author of "The Prize," chairman of the DOE's Task Force on Strategic Energy Research and one of the world's leading authorities on the petroleum industry.

I don't know if Professor Yergin has gotten his son back into the car yet . . . but I'm happy to send him a report showing just how much cleaner-burning gasoline is today compared to 20 years ago even though it may cost a little more.

If that doesn't help, I suppose Yergin could always give the boy a quick lesson in economics, and where Dad's royalties and consulting fees come from.

Or, that failing, he could buy the boy a really comfortable pair of walking shoes.

I don't mean to pick on Professor Yergin, much less his 10-year-old son. In fact, their story is a good illustration of the main point I want to make today.

You've all heard the expression, "If you're not part of the solution, you're part of the problem." And when it comes to environmental problems and challenges, we in the energy industry are a very strong, very vital part of many solutions. But we're seldom seen that way by many of our publics . . . even, it would appear, by 10-year-old kids.

I'm here today to suggest that we take more active and aggressive steps to change the perception that we're "part of the problem." In particular, we need to look at how we formulate environmental solutions . . . how we package them . . . how we gain support for them . . . and how we communicate them to stakeholders.

The solutions I'm talking about are integrated solutions. I'll take a moment to explain just what I mean by that. Integrated solutions are a concept we take seriously at Chevron -- not just in environmental areas, but in all our operations worldwide.

Each of us, whether we're an oil finder, environmental specialist, marketer or manager, does more than just sell a product or perform a task. Instead, we look at the larger picture -- at the needs of our customers, other stakeholders, even society at large -- and try to help meet these needs in a strategic and integrated way.

I'll give you two recent examples of how we seized opportunities to meet customers' needs with integrated solutions. Interestingly enough, both examples come from outside the United States, where I believe our solutions and our technology often are more highly valued.

My first case in point comes from Venezuela, where Chevron had a long and successful history. We discovered the huge Boscan Field 50 years ago, and operated it through 1975, when Venezuela nationalized its petroleum resources and asked outside oil companies to leave.

In the early 1990s, Venezuela started to think about inviting the oil companies back. In particular, the country was looking for cash and technical and environmental expertise to help improve recovery from the Boscan Field, which was in decline. Venezuela also needed new markets for its very heavy Boscan crude.

Chevron saw the potential to meet not just one but all of these needs. We have a lot of experience producing heavy crudes, and our U.S. asphoperations were in need of economic feedstocks. In addition, our Pascagoula, Mississippi, refinery, has the technology to efficiently process heavy crudes.

Ultimately, our combined upstream and downstream capabilities made us attractive to the Venezuelan government. Our environmental and safety reputation helped also -- in fact, our first project in the new venture was a process safety management review in 1994.

We now are back in Venezuela as operator of the Boscan Field, where we believe we can increase production by 43 percent in the next three years. We have an alliance with Maraven to send Boscan crude to our Pascagoula refinery, and we have formed a joint venture with them to market asphon the U.S. west coast. And we're assisting in a number of remediation projects at Boscan.

We're considering other projects as well. In fact, on a recent visit to Venezuela, we signed a protocol to jointly explore other alliance opportunities -- for example, perhaps bringing our EOR expertise to mature fields in other parts of Venezuela, and pursuing opportunities to license some of our lubes-manufacturing technologies. On that trip, I was in Maracaibo to attend the ribbon-cutting for our new office -- well, actually it was our same old office building that I'm sure some here have worked in or visited -- marking our official return after a 20-year absence.

Chevron's experience in Venezuela is a classic example of integrated solution-building. Our technology and our reputation got us the foot in the door to create a win-win situation that has tremendous potential for additional business.

Another example of this kind of solution-building comes from our downstream side. Chevron is the creator and license-holder for a refinery process we call ISOCRACKING. It's a very efficient form of hydrocracking that provides a number of environmental and cost benefits.

In recent years, we've succeeded in licensing this technology to refineries in countries like Russia, Poland, India and Egypt. The licenses generate fees in the millions of dollars.

But equally important, our ISOCRACKING technology gives us an entree to talk with international refiners about their needs and problems. The technology enhances our reputation as a global environmental leader, and it establishes us as a world-class problem-solver. Again, it's a foot in the door to build new business opportunities, both upstream and down.

The kind of integrated approaches I've just described don't have to be limited to major capital projects or large, multinational companies. In fact, they shouldn't be. Each of us in the energy industry must see ourselves as a strategic problem-solver, able to pool our talents and resources with others . . . think creatively . . . and gain the best possible outcome.

In short, we need to make integrated solution-building part of our mindset; part of the way we do business.

We especially need to keep applying and enhancing this approach in the environmental arena, where, as I mentioned earlier, our industry already contributes some pretty effective problem-solving.

I'd be preaching to the choir if I were to try to list all of the industry's accomplishments in the past 30 years. They include dramatic reductions, often in the 50-plus-percent range, of pollution-causing emissions from both automobiles and stationary sources . . . improvements in our handling of produced water and effluents . . . and tremendous strides in energy efficiency at our fields and facilities. All of these reductions occurred during a period of major economic growth in the country.

And here's a remarkable statistic from API: U.S. refineries have reduced their output of waste so effectively that most now recycle more than they discard.

All of this costs money, of course. In 1993, the last year with published numbers, the U.S. petroleum industry spent more than $10.6 billion on environmental protection. That's a little less than the combined 1995 earnings of the three largest oil companies in the U.S. . . . or nearly twice the annual budget of the EPA . . . or $41 for every man, woman and child in America.

So if someone asks, "Are you part of the problem or part of the solution to environmental challenges?", I tend to have a ready and enthusiastic answer.

And yet . . . our image still is that of a problem maker. One reason is that, in a world that views things in terms of black and white and David and Goliath, we're usually cast as a major Goliath. That certainly has been the case in the recent gasoline-price controversy. And in the environmental arena, it's a persistent problem.

Last year, the National Petroleum Council published a report called "Future Issues" that gave some pretty blunt assessments of how our industry is perceived by our various publics.

It said we're seen as difficult to deal with . . . inflexible in our fight to promote our agendas . . . and lacking a unified vision of the future.

So are we part of the problem, or part of the solution? We know the correct answer. But it's apparent that we have to work harder, more cooperatively, and more creatively, to ensure that our stakeholders understand and embrace the solutions we are creating.

What I'm talking about are specific steps we should take . . . and initiatives we should support . . . to find environmental solutions that are integrated, strategic and realistic. In short, to find solutions that work.

First, we need to apply our research, technical and information-management skills as effectively as possible. This is an area that's very exciting, because technical problem-solving has always been one of the energy industry's strong suits . . . and, from a public perspective, one of its best-kept secrets.

I'll give a couple of examples of things we're doing at Chevron. I'm sure these reflect some of the types of efforts many of you are involved in as well.

At Chevron Overseas Petroleum headquarters in San Ramon, California, we have a group of earth scientists and engineers who are using remote sensing to understand and minimize the impact of exploration and production activities on Nigeria's coastline.

The same technology is being used to measure the impact of our operations on rainforest ecology in places like Papua New Guinea and Peru. In fact, remote sensing now helps us to avoid sensitive areas as we design our field operations.

Another example is a cooperative effort we're undertaking with the U.S. Fish and Wildlife Service, API, Amoco and others. We're developing a new method for testing the accumulation of chemicals and hydrocarbons in the food chain as a result of discharged effluents. It involves coating the inside of a polyethylene tube with a thin layer of fish fat that absorbs and holds toxins . . . providing an indicator that's reliable, uniform and cost-effective.

Some of our researchers are calling this new method the "virtual fish."

An example that may be familiar to many of you is the increasing acceptance of passive bioremediation, also known as remediation by natural attenuation, as the preferred method for cleaning up petroleum-contaminated soil.

Last year, Lawrence Livermore Laboratory published a study that confirms what Chevron and much of the industry have believed for some time . . . which is that this natural process can be both an effective and a cost-effective method of remediation.

As a result of the Livermore findings, the state now is considering ways to modify its underground tank regulations to better incorporate risk-based corrective actions.

This is a prime example of the kind of solution-finding we need to do more of -- efforts that are collaborative, creative, integrated and long-range . . . not to mention common-sense.

And speaking of sense, the examples I've given all make sense both scientifically and economically. This is my second point, and it's an important one to all of us.

As business people, we can't afford to spend our resources on environmental "solutions" with questionable benefits. My company's total environmental reserve, which is the amount we set aside to cover potential costs for remediation and related activities, is over $1 billion. Certainly we spend millions of those dollars every year on necessary and appropriate activities . . . but is there money in that reserve that I'd rather use for an exploration project, or some new service stations? Absolutely.

And the reason companies like mine have to keep up such large reserves is as a hedge . . . not necessarily against real problems . . . but against regulations and command-and-control mandates that require activities that fail the test of good science, risk assessment and cost-benefit.

You're all familiar with examples of what I'm talking about: mandated soil remediation projects that would make dirt clean enough to eat for the next 70 years . . . or provisions of the Clean Air Act that actually prohibit regulators from taking costs into account.

I find these situations frustrating and ironic, particularly in the context of global environmental needs. Even as many developing nations are looking to U.S.-based energy companies for our state-of-the-art solutions to environmental problems, here at home we're sometimes being pushed and wrestled and squeezed into a zero-risk stranglehold . . . when this country's air and water are, for the most part, much cleaner than they were a generation ago.

You've probably guessed that I'm at the point in my speech that's headed "Regulatory Reform" in big letters. I'm sure you've heard from other speakers a fair bit of talk and maybe a little podium-thumping over the last few years about the need for a common-sense approach to the U.S. regulatory process.

I agree with that talk, by the way . . . even if I'm not much of a podium-thumper. But I want to conclude my remarks today with a slightly different tack on regulatory reform . . . which is that I'm hopeful and optimistic that we may see some positive results.

It's true that we're not making sweeping progress across the board. Some of the more reasonable national reform bills got caught up in legislative wrangling last year, and coming elections don't hold much promise for resolution, at least not this year.

So you're probably wondering why I'm hopeful and optimistic.

My answer lies in an area I've touched on already, which is that many companies like Chevron . . . many environmental specialists . . . many regulators . . . many politicians and special-interest groups . . . are increasingly taking a collaborative, integrated, win-win approach to problem-solving . . . including the problem of what to do about restrictive environmental regulations.

We're learning to meet each other halfway.

It's a slow process, but let me give you a few examples of what I'm seeing.

Over the past three years, I've served on the President's Council for Sustainable Development. The Council, whose 25 members in total included Cabinet members Hazel O'Leary, Bruce Babbitt, Carol Browner, and the late Ron Brown, along with leaders from business, heads of most of the large environmental organizations and a number of public interest groups. The Council issued its report of findings in April.

As you might expect, the conclusions of such a diverse group didn't line up perfectly with all my beliefs. But two points came through that I agree with wholeheartedly.

One is the need for regulatory reform. The other -- and I see this as closely related to this reform -- is an acknowledgment that economic growth and environmental excellence aren't just compatible; they depend on each other.

If you think getting the term economic growth into the report was easy, you are wrong. But it is there many times: the clear concept that without economic growth, a country cannot afford environmental protection is clearly stated.

The report also states that the current regulatory system of command and control doesn't work. Rather, the report recommends market-based and market-driven solutions to environmental problems. And it endorses more cooperative partnerships . . . between federal and state agencies . . . between agencies and communities . . . and between the public and private sectors . . . to find and implement these solutions. Words like "cost-benefit" and "good science" are in the report. While we all won't agree on the specific details of a new system, the concepts were clear.

Recommendations like these exemplify the kind of integrated solution-building I've been describing. They acknowledge that there has to be more to solving our environmental problems than pitting one interest group against another.

Toward that end, we need to change our industry's reputation for being inflexible. We need to demonstrate that our interests aren't that different from those of the public. And we need to go a step further -- to sometimes, in fact, take the first step -- to partnering ourselves with customers, competitors, small and medium-sized businesses, regulators, the scientific community and others who can help find environmental solutions.

I recently read an interview with William K. Reilly, former head of the EPA. After several decades of civil service, he now works for an international investment firm.

Reilly, you may recall, oversaw passage of the amended Clean Air Act and led the U.S. delegation to the 1992 Earth Summit in Rio.

Reilly said that most of the big sources of pollution have been tackled in the United States . . . the pulp plants, the steel mills, and, yes, the refineries . . . what we generally call point sources. Now, the challenge is to confront a much larger set of non-point sources, such as agricultural and urban run-off. And Reilly feels the way to accomplish that is to harness the resources of the private sector.

Reilly said we've run out the string on command-and-control government regulations. He said that the monolithic, centralized approach to problem-solving no longer is effective. California Governor Pete Wilson has been saying much the same thing. Wilson has long been a fan of private enterprise's technology . . . its resources . . . and its ability to get things done.

Wilson also recently proposed abolishing about 4,000 of California's state regulations. That sounds like a lot, and it is . . . but there's plenty more where they come from. The current number of state regulations on the books is more like 32,000.

I agree with ideas like Reilly's and Wilson's, as well as with the change in attitude they reflect. I think we, as a nation, are evolving toward a new, more pragmatic, more cooperative approach to solving environmental problems. There's an increasing realization that good science and good economics play a very real role in this approach.

And I like to think that there's also an increasing realization that the energy industry, with our collective talent, our technology, and our ability to collaborate and package good ideas, also plays a key role.

We can be part of the solution. That's something we all should be proud of, and should strive to continue. Whether we will be an important part of the solution depends on us!

Updated: May 1996