The Energy Economy: A Path to Prosperity

John S. Watson

By John S. Watson, Chairman and CEO
Chevron Corporation

Keynote Remarks to the Greater Houston Partnership

Houston, Texas, August 31, 2011

Good afternoon everyone. It is always a pleasure to experience Texas hospitality, and I'm especially honored to be a guest of the Greater Houston Partnership.

I always like visiting Texas – it's a chance to catch up with business friends who have moved here from the West Coast. I've even heard a new saying out there: If you want to find a happy California businessperson, just visit Texas.

A lot of my friends and colleagues are bullish on Texas. And frankly they're not too subtle about dropping hints that maybe Chevron should make tracks out of California and settle here ourselves. They point to the business climate in Texas, as do executives and entrepreneurs across this great country. There's no doubt that in this time of prolonged economic trouble, with full recovery not yet in sight, Texas is doing a lot of things right.

Chevron is, and will remain, headquartered in California. But of course we have a strong presence in Houston as well. We employ about 10,000 people, which is triple the number we had here in 2001, and, as you know, we're investing in downtown real estate. To accommodate our growth, we purchased an office building in 2004 on Louisiana Street and recently bought another one on Smith Street. We're currently in the process of acquiring a third property on Louisiana.

So, it's very clear we're committed to Houston, and to Texas.

It's not just because Houston is the center of gravity for the U.S. oil and gas industry. It's also because of the culture of Texas – and the people of Texas. This is a can-do state. And it's a state that recognizes the fundamental value of business and private-sector job creation.

In some parts of our country, we seem to have forgotten the fact that our prosperity and economic well-being are made possible by commerce and the free enterprise system. Free enterprise generates jobs and economic growth. It generates tax revenue to fund government services, schools and health care. It generates wealth to support the nonprofit sector. And our free enterprise system, at its best, generates one of its most valuable products – optimism in a better future for our children and grandchildren.

Texas understands this. That's why it has led the way in America's recovery from the great recession. The fact that more than a third of the jobs created since the recovery began are here in Texas is a reflection of this state's economic leadership. There are other signs as well, especially the sheer diversity of the Texas economy. Manufacturing, services, high-tech, healthcare, agriculture and a positive legal environment for business – all of these things are the foundation of a strong and sustainable economy.

But even Texas is not immune from the economic challenges facing our country. Even here, budget deficits are disrupting the economy and affecting communities across the state. So Texas, like California and other large states, is making deep and sometimes painful cuts in spending.

Now, reasonable people can disagree about the extent of budget cuts, or where they are made. But Texas remains committed to what I believe is the fundamental solution to our economic condition – not taxing our way out of it, but growing our way out of it.

And in any scenario for growth, energy can and must play a vital role. In Texas, you understand that, because energy has always been at the center of your economy. There's a reason for that, of course. Texas is at the center of a huge energy system that stretches from the Gulf of Mexico up through the mid-continent. So over the past century, financial and human capital has congregated here.

But there's more to the story than a single state prospering from one of its core industries. A strong oil and gas industry certainly makes a difference for Texas, but it's every bit as important to the future of our whole country. Take all the benefits that have come to Texas, and they are just a glimpse of the growth, jobs and security that America stands to gain from straight thinking on energy.

The oil and gas industry, after all, supports more than 9 million American jobs, and adds more than a trillion dollars to annual GDP. Even during the recession, our industry was still hiring, still investing and still generating tax revenues just about everywhere.

Our contributions to the economy are often overlooked or taken for granted, but let me put it this way: If you think economic growth has been weak for the past few years, just try to imagine it without the investment, job creation, and investor returns of America's oil and gas industry.

The people of Houston hardly need reminding that energy is the industry that makes all others possible. There aren't many industries that can fairly be called indispensable, but the energy industry is surely one of them. It is absolutely essential to growth, development and prosperity for the country as a whole.

On this point, I know there is general agreement here, because I've read the resolution passed by your board last month. It speaks of an energy policy that keeps America moving and producing – unapologetic about the daily needs of the most powerful economy on Earth. It shows a clear-eyed understanding of the energy this country requires, and will require far into the future.

I only wish the U.S. Congress would adopt such a resolution, because it so plainly captures the urgency of exploration and development, and the consequences of failure.

If you're in my line of work, you hear a lot of predictions about what the future holds for energy. I've found it's best to stay focused on the fundamentals – on trends like population growth and the pace of global development. Those data will steer you clear of any illusions about the world's energy demands, and what it will take to meet them.

Conservatively, we're looking at a 40 percent growth in global energy demand over the next 25 years. Over that same period, renewable sources are going to expand rapidly, but at nowhere near the pace required to keep up with overall demand. Most of our energy needs – roughly 80 percent – will continue to be met with fossil fuels.

Likewise, consider the world's developing nations. Every one of them depends on those same conventional sources for their economic development. Follow the supply chain of economic growth in any region – and above all, along that arc from India through China to South Korea. Without exception, it leads you back to the energy sources we draw from the ground.

And that's just the picture in today's world of nearly 7 billion people. Consider a world of 9 billion by 2050 – all of them wanting to live and prosper as we do, and no less deserving of that chance. That's the level of demand we'll be facing. Meeting that demand requires exploration and production on a scale equal to the challenge.

We can respond to a challenge like this in two ways. We can feel overwhelmed by the numbers and conclude that it simply can't be done, and lower our sights. Or we can have a more courageous response. We can face the challenge with all our powers of analysis, ingenuity and common sense.

If we do the analysis, a fundamental fact becomes clear. We have the resources. Far from peaking, the world's estimated base of recoverable oil and gas is continually rising. In fact, over the past 30 years, as the peak oil theory has gained traction in some quarters, the world's known reserves of oil and natural gas increased by roughly 130 percent, to 2.5 trillion barrels.

So we have every reason to be confident. As vast as the world's energy needs are, we have the ability to meet them. Delivering that energy should be seen as a tremendous opportunity for our country.

I don't think we can overestimate the size of that opportunity. In fact, I believe we're within reach of an energy renaissance in the United States – a chance to harness this country's resources, shake off years of stagnation, and prosper and lead as we've done before.

We could accomplish great things if America had a rational, robust and comprehensive energy policy. Such a policy would prepare us for rising demand. It would expand safe and responsible production at home. It would promote energy efficiency across the country. And it would encourage alternative sources, not by mandates and subsidies, but by allowing the market to identify the best new fuels and bring them up to commercial scale.

Make no mistake – this is not the kind of energy policy we have today. To the extent we do have an energy policy, it is paralyzed by a fundamental contradiction. On one hand, there is wide consensus in America that we should strive for energy security. Whether we can be truly energy independent is debatable, but we can certainly do much more to enhance our country's energy security.

However, many of our policies are moving us in the opposite direction. We need an energy policy that is aligned with our objective of enhancing America's energy security, not just in words, but in actions.

Let me give you an example of what I mean. Conservative estimates put the size of the oil and natural gas resources in the waters around the United States at roughly 150 billion barrels. That's the equivalent of more than 40 years of Saudi Arabia's current oil production. Much of that estimate, by the way, is based on an inventory taken more than two decades ago. If we conducted a new inventory with modern seismic technology, we might find that the resources are even larger.

But even as we talk about energy independence, the U.S. government has declared the Outer Continental Shelf on the East and West Coasts off limits to new development. And, as we know, the regulatory agencies have put a strong collar on the pace of development in the Gulf of Mexico and Alaska. While the U.S. government is issuing permits again in the Gulf of Mexico and has announced a new round of lease sales, exploration and production is still far short of where we should be.

Meanwhile, the United States is vigorously supporting the development of deepwater oil and gas in Brazil, one of the world's fastest-growing economies. The U.S. Export-Import Bank is preparing $2 billion in financing to Petrobras, Brazil's state oil company, to help develop offshore oil and gas resources. And President Obama, in a visit to Brazil this past spring, said he wants to assist the Brazilian government with technology and other types of help in developing its oil resources.

"And when you're ready to start selling," he told the Brazilian president, "we want to be one of your best customers."

Now, let me say that Chevron is a long and very proud partner with Petrobras. In fact, we're working with Petrobras on two major offshore developments in Brazil. And we agree with the president that the United States should support the vigorous development of Brazil's oil and gas industry.

But I would argue that we have an even bigger opportunity to build a stronger oil and gas industry in the United States, with results like job creation, revenue growth and economic expansion directly benefiting U.S. citizens.

No leader in our industry doubts that America can do this. We know what the possibilities are, because we see them every day.

For example, one of the prime reasons our resource base keeps expanding is that our technology keeps improving. Our industry has been relentless in exploring for new reserves. In just the last several years, we've developed deepwater and shale resources that we couldn't have imagined 10 years ago.

You've all heard of the Marcellus Shale formation, which stretches from New York to Pennsylvania to West Virginia. A decade ago, its size was unknown, and its resources seemed well beyond reach. Since then, the Marcellus has been estimated to be one of the largest natural gas resources in the world. And technology has now been developed to tap that resource – safely, efficiently and economically.

Development of this world-class resource could generate more than $6 billion in federal, state and local tax revenue and employ up to 300,000 people by 2020.

Natural gas from the Marcellus Shale, along with other major shale resources like the Barnett and Haynesville formations in Texas, as well as the advances we've made in the deepwater Gulf of Mexico, have the potential to transform the energy equation in the United States. This is an energy opportunity like no other – demanding the best engineering talent and the highest environmental standards. In other words, it's a job for Americans. And the time to get moving is right now.

I'll match the ingenuity and know-how of my industry with any other. Our best minds are overcoming some steep obstacles, especially in deepwater production. The work our industry is doing in the deepwater about 120 miles offshore here is one of the greatest deployments of technology in our history.

How we develop new technology and apply it to our business is something we focus on a great deal at Chevron. And we've found the best approach to doing that is through collaboration and partnership.

One of our many research partners for example, is with Los Alamos National Laboratory in New Mexico. I recently had the pleasure of visiting Los Alamos to see the progress we're making in applying wireless technology to oil and gas production, among other projects.

And in June, Chevron announced another strategic partnership with NASA's Jet Propulsion Lab in California to jointly develop technology that can benefit energy production. These partnerships have the potential to make a significant contribution to America's energy future. So we applaud Energy Secretary Chu for his leadership in enabling these types of public-private partnerships.

Los Alamos and NASA are just two examples of the investments we're making in the future of energy. In 2011, Chevron will make more than $7 billion in capital investments in the United States and $26 billion worldwide. Our colleagues across the industry have been quite busy themselves. This year, worldwide, capital investments made by energy companies will approach half a trillion dollars.

Investment on that order is a powerful driver of growth and job creation, and my industry is primed to make even more. We'll do the investing, hiring, exploring and producing, if only the policymakers will let us do so. Even the best of energy companies can perform only as well as the legal and regulatory environment allows.

To take the next step toward energy security for this country, we need access to resources, fewer and simpler regulations, and tax policies that are rational and fair. Energy is one of the most heavily regulated industries in the world, and some of those regulations are entirely necessary.

We certainly saw that last summer in the Gulf of Mexico. And it's worth noting that some of the strictest new standards put in place after the Macondo incident were devised by the industry itself.

As for tax policy, we hear a lot of talk in Washington about the so-called subsidies given to oil and gas producers. The suggestion is that an industry paying an effective tax rate of 43 percent, or about $86 million a day in taxes, royalties and fees, is somehow not paying its full share.

What is actually at issue here are fundamental provisions of the tax code that apply to all manufacturers – thousands of companies. I'm sure everyone here would like to see major reforms in the U.S. tax code, but real reform involves consistency and fairness. To single out one category of manufacturers – the large U.S. oil companies – for punitive tax treatment is neither consistent nor fair.

In the near-term, recently proposed legislation actually would give Russian, Chinese and other foreign companies better tax treatment than Chevron right here in the United States, as well as overseas. In the long-term, it will slow down one of the few thriving industries in this country, discourage hiring at a time when jobs are scarce, and move America farther from the goal of energy security.

If that longstanding goal for our country were not incentive enough, right now we have even more in the balance. And I believe there's been a shift in the debate about energy and our whole economy, and how they are connected. The past three years of underperforming growth and jobs numbers have clarified our options. What's true in the field of energy holds true for enterprises of every kind across this country. We cannot be legislated into innovation, nor taxed into productivity.

To achieve full economic recovery and then some, we need to go back to our strengths – personal initiative, private investment and the belief in free enterprise that has carried us this far.

If we have to relearn this lesson state by state, we can start right here in Texas. Setting aside the rightful pride you have in your home state, the fact is that every part of America could be achieving the same kind of economic revival that we are seeing today in Texas.

Among other things, it will take the kind of commitment and conviction you've shown here in the Greater Houston Partnership. A good business climate usually starts with men and women who take the time, and make the effort, to promote private enterprise in their own community. You at the Greater Houston Partnership have each done that, and it helps explain why this city and state are today setting the standard.

Don't let up, either – especially as we approach the 2012 elections. Be aware of who we are sending to Washington, and why. We must hold elected officials accountable for their actions, inactions and the corresponding effects on our country and its competitiveness.

Whatever your political party, every one of you is needed as a voice for the private sector. You've helped to move your state firmly in the direction of shared prosperity, rather than shared sacrifice. And your example can do the same for the rest of our country.

The stakes have never been higher.

Thank you very much.

Published: August 2011