The E&P Industry Beyond 2000: Meeting The Challenge Of Creating Value
Richard H. Matzke, President
Chevron Overseas Petroleum Inc.
International Conference & Exhibition
On this site, you can also find a press release summarizing this speech.
One of the most popular pastimes in our industry is predicting the future. I've been asked here to do just that -- and for the years ahead, I feel our primary focus . . . on all fronts . . . must be value, or meeting the challenge of creating value.
But before an industry can look forward, it needs first to look backwards, because getting where we need to go depends partly on understanding where we've been.
As a former working geologist, I've had plenty of experience "selling" prospects to management. And I remember being in exploration meetings where we talked about how many exploratory wells we were going to drill and how much money we had to spend.
It's funny -- but I don't recall ever talking back then about how much money we needed to earn.
I can't imagine that type of meeting even taking place today. And I think it's clear that a new approach to E&P is being addressed these days. This is obvious from the tone and direction of many of the papers at this conference.
Still, I think we should ask ourselves a question: Should the traditional exploration viewpoint still be one of the top priorities driving today's oil industry?
I. The Value of Traditional Exploration in Retrospect
In the past, companies of all sizes allowed the business of exploration geology to be driven by the imperative of frontier exploration. We spent a great deal of time and money on prospecting, and this is how we found the reserves that made it possible to build our industry.
So it made sense that exploration should be considered as something apart; something which shouldn't have to suffer the indignity of cost/benefit analysis.
We even created our own special financial term -- "capital and exploratory budget," or "C&E." This term survives today, and it shows the powerful hold that the traditional exploration view has had on our industry. And let's give credit where credit is due: All of us here owe our prosperity to yesterday's discoveries -- made by explorationists. And we owe much of our science, our technology, our tools and our success to these people.
But, in hindsight, we also know we spent a lot of real dollars chasing prospects that didn't pan-out. We can't afford to do that any more.
All of us are aware of the woeful facts. Consider, for example, the 1994 McKinsey report which evaluated a sample of 103 oil companies. It found that between 1980 and 1993 . . . these companies "destroyed" an aggregate total of $300 billion in shareholder wealth.
I know that's a harsh perspective. But it's an important view of the reality we need to face.
The fact is, we can't afford to limit our definition of E & P to just "exploration and production" any more. Today it's got to stand for a lot more . . . like Efficiency and Profitability.
Investment dollars today must seek only the best ventures that our best thinking and our best science can conceive.
And that raises some rather important questions: Does the new reality mean all the old fun is gone? Will explorationists get their marching orders from engineers -- or worse yet, from financial analysts?
The answer to that is no. But explorationists will have to form close working relationships with these people -- and others. And our industry will have to re-balance investments in exploration and weigh them against the imperative of adding value.
I'm reminded here of an AAPG lecture I attended just after I got out of college in 1961. There I was . . . with the ink still wet on my diploma. And the speaker was talking about the "end" of the industry as we knew it. This made a pretty big impression on me. But, of course, the speaker could not foresee the kinds of tools we have today. Personal work stations . . . horizontal drilling . . . 3-D seismic . . . advanced geochemistry . . . and so on. These are the tools that are opening today's new frontiers.
But in spite of our technology and the promise of advancements to come, I don't believe we have fully embraced the historic transitions occurring within our industry.
II. Opportunity, Jobs and Low Prices
I was in a meeting at our company recently and I said to the others: "There's as much opportunity today as there ever was." And someone else asked: "Opportunity for whom?" The reason for that question was obvious, because our industry has been engaged in another kind of E&P that none of us is happy about. That is, Elimination of Positions.
We've all seen the numbers . . . Hundreds of thousands of oil industry jobs have been eliminated in the past 10 years. For instance, my own company -- Chevron Overseas Petroleum -- has eliminated the vice president positions for both the exploration and production functions. Along with them, we've eliminated the departments and some of our earth science jobs as well. We felt we should put an end to the old structures so that we could better respond to new realities. The changes were painful for those who had to leave. And they've been hard also on those who stayed. I gain little comfort from the fact that we haven't been alone in this process, although I know other companies have cut even deeper.
The chairman of our company, Ken Derr, said recently that "cost cutting is not a corporate fad." And he went on to say, "This has become Chevron's way of doing business, and it must continue in order to ensure our competitiveness."
Other leaders are also saying that cost cutting in all areas will almost certainly continue. So it's fair for someone to ask: If 10 years of industry downsizing still isn't enough, then how can anybody stand up here and talk about "opportunity?"
I would answer this way: We know that the trends of risk management, technological efficiency and cost management are irreversible. We know our competitors will keep working to be tougher, faster and lower-cost.
At the same time, we know that investors, stockholders and host governments expect reasonable returns on their investments. This will no doubt continue. And the accountability for these returns will no doubt remain the foremost challenge for all of us.
On top of that, we must compete for available capital. And of course, we know we can't afford to risk major investments on the assumption that oil prices will increase significantly.
Finally, we know we can't expect to employ everyone tomorrow who was part of our industry yesterday. However, all of those hard realities are offset by one inescapable fact: The world needs oil.
In a recent issue of the AAPG Explorer, Warfield Hobbs noted that world crude consumption is projected to grow 30 percent between 1992 and 2010. Gas consumption is expected to grow 53 percent. So let me now offer a prediction: Most of us in this room will have full careers in the petroleum industry.
But a lot of that depends on how we deal with change. We may work in new organizations. We may switch companies. Or we may not even work directly for oil companies.
The trends of outsourcing, consulting and expanded capabilities within service companies have only begun to run their course. The opportunities will be different than they've been in the past -- but they will be there.
In fact, it's almost impossible to keep up with all the examples of real, long-term work being created by the world's growing petroleum appetite.
You can look to almost any point on the globe . . . such as the southern cone of South America, where a major new natural gas industry is only now coming to life. Or China, with its fantastic economic growth and urgent need for new oil and gas reserves.
Meanwhile . . . Venezuela has forecast that private investment alone in its oil and gas sector will be more than $20 billion over the next decade. And OPEC will need at least five times that much just to sustain its current production levels.
I haven't even mentioned Africa, the deepwater U.S. offshore, the North Sea or the independent republics of the former Soviet Union. So let me repeat my earlier statement: There's as much opportunity today as there ever was. But the opportunities are more varied now, so we cannot approach them the way we did in the past. Many of them aren't being offered the way they used to be. And while the once-closed nations are opening to investment, they aren't looking for traditional deals.
Still, even with all that going on, I think we all know the biggest reason for the changing nature of opportunity: oil prices. Low prices aren't just part of the business environment . . . they are the business environment. And I think it's clear we can expect this situation to continue.
One of the unfortunate ironies is that our industry's need for technology is going up just as our ability to pay for it is going down. And this is one of the reasons money once spent on prospecting is today being drawn toward other investments.
Our industry faces yet another irony: our traditional interest in higher oil prices stands in conflict with our dependence on the low prices that support the growth of demand.
Our low-price world may lack the excitement of the late '70s and early '80s. But I think maybe that kind of excitement is best confined to the tables at Monte Carlo.
III. The Value Challenge to Geologists
Our industry has always placed the highest value and bestowed the highest status on the oil finder. The industry still needs the oil finders. The explorationists. The geologists. We know that without their contributions, our industry would die.
But geologists also need the industry. And because the industry is changing, geologists must also change. So let me tell you what I feel the industry will value in geologists in the future. Again, we're going to look at a few more possible definitions for E&P.
One of these is Economics and Planning.
Our industry needs the geologist who understands . . . and accepts the value of these fundamentals. We will value the geologist who appreciates both financial limitations and performance requirements. And we'll need the geologist who fully participates in the planning process that helps meet those requirements.
The industry will also value a geologist who continuously works on still another kind of E&P -- Enhancing the Portfolio. And we will value the geologist who develops and maintains the so-called "soft skills" needed for non-traditional E&P. And by that I mean Environmental and Political challenges.
Soft skills include flexibility and the ability to react quickly. And language skills, appreciation for diversity and cultural sensitivity. It's true that companies with special technical expertise will continue to have a competitive edge over the rest of the industry. But I would also argue that in our low-price world, the soft skills are becoming just as important.
I'm talking about the things that secure true partnerships. In these kinds of alliances, all parties view the shared enterprise as being more important than its separate parts.
The geologists who acquire these new skills will be able to help their companies get out ahead of change. And they will do this by continuously finding ways to re-define their own function.
This might sound like a fancy way of saying that earth scientists should think of ways to eliminate their own jobs -- and I know many have been asked to conduct that kind of exercise in recent years. But I think re-defining the function of geologists is helping re-establish their value as well.
And I believe that as that happens, those in the geologic sector will come to see and understand -- and maybe even look forward to -- the contributions the industry needs them to make in the future. In short, the valued geologist will be a team player, fully integrated with the other upstream functions, and someone who can build cross-functional networks.
Try to imagine the geologist who sees a reduced prospecting budget as an opportunity to earn a greater return on an exploration dollar. This is the geologist who welcomes the review of his proposals by management -- a person who wants the company to choose the most profitable oil and gas investments regardless of whether they involve exploration. Picture someone who is more interested in exploring for value in oil and gas assets than he is in merely looking for volume.
This geologist realizes that being good at buying and developing producing properties is just as worthy as being good at probing new basins -- and that getting extra production out of existing fields may be more valuable than tapping new ones.
There's something else our industry will continue to value in geologists. And these are their traditional character traits: optimism . . . creativity . . . and resourcefulness.
These will become more important than ever, because we've got some very demanding challenges ahead. Our industry today places a higher value on performance than it does on activity.
The better barrel -- not just the barrel. The superior target -- not just a lot of targets. The new approach -- not the one that always made sense in the past.
We can't stop change. But we can recognize it, manage it and even instigate it. If we stay ahead of the curve, we can use the process of change to our competitive advantage. And we can do this for ourselves, our companies and our industry.
E&P still stands for Exploration and Production. But it must also stand for Efficiency and Profitability . . . Economics and Planning . . . Enhancing the Portfolio . . . and meeting Environmental and Political challenges.
I believe that each of us has the ability to respond to the changes in our industry.
And each of us has the potential to meet the challenge of creating value.
Updated: September 1995