The Future of the Oil Industry in the Middle East

By Richard H. Matzke, Vice Chairman of the Board
Chevron Corporation

Iranian Oil, Gas & Petrochemicals Forum

London, England

Speech in Farsi

Before I get started, I just want to say how pleased and honored I am to have this opportunity to speak with you. I especially want to thank the conference organizers for bringing us together today in what I hope will turn out to be an atmosphere of constructive dialogue, based on a shared respect for our diverse economic, cultural, and political beliefs and values.

Today, we're experiencing a period of high oil prices, prices which have invited close scrutiny of the role of OPEC and its influence on global economic growth.

Many economists are saying that the high prices we've seen in the past year or so could have an adverse impact on the economies of major consuming nations and quite possibly slow down global economic growth, if they're allowed to linger too much longer.

Sustained high prices could ultimately have an effect on the movement of global capital as well.

I'm sure everyone in this room remembers what happened the last time we went through a period of sustained high oil prices in the 1970s and early '80s.

Investment capital began to flee the Middle East, other OPEC nations, and land in places like the North Sea.

Today, there's a perception that high energy prices are directly related to OPEC's current production levels. This may have been true a few months ago, but I think it's less true now. I think all OPEC members, with the exception of Saudi Arabia, are now producing at maximum capacity or close to it.

Unfortunately, in the United States, high energy prices have provided a convenient political platform for certain constituencies to point a finger at OPEC and energy companies in general.

At the same time, however, multinational oil companies and OPEC countries, especially those in the Middle East, are perceived as responsible for driving the global economy.

Undoubtedly, the Middle East represents the heartbeat of our industry. And its significance will only grow with time.

After all, two-thirds of the world's proved oil reserves and one-third of its proved gas reserves lie in the Middle East. And those are just the known reserves. The Middle East also offers a huge potential for significant oil and gas discoveries in the future.

There's no doubt that these huge reserves are the main attraction, but these are other reasons why multinational oil companies are, once again, beating a path to the Middle East.

The Middle East is blessed with many assets that support the development of its energy resources.

First of all, there's existing infrastructure in all segments of the petroleum industry.

The countries of the Middle East are also blessed with a pool of available talent and a young work force. Iran, in particular, has a highly qualified work force.

The Middle East's close proximity to markets in Europe and the Far East helps reduce transportation costs.

And finally, Middle East oil and gas projects are characterized by low development and operating costs. Despite that, however, large, upfront capital requirements will still be necessary to bring those projects onstream.

Investment capital is just one area where multinational companies can play a role. Another is offering worldwide experience in the petroleum industry that's second to none.

As most of you are aware that the multinational petroleum industry has played a key role in the discovery and development of oil in the Middle East.

Although oil was discovered in Iran long ago, I'm proud of the fact that Chevron was the first U.S.-based multinational company to discover oil in the region, first in Bahrain, then in Saudi Arabia.

The development of the petroleum industry in the Middle East, assisted in large part by U.S. companies, has encouraged cooperation and constructive competition among the nations of the region.

Since the 1970s, the worldwide petroleum industry has gone through many oil price cycles, and OPEC vs. non-OPEC market-share fluctuations.

The primary cause for these fluctuations, in my opinion, is the closed economies of the Middle East, closed economies that drive private investment toward non-OPEC oil developments.

Swing production by closed countries has also helped to increase non-OPEC investment, which, in effect, subsidizes non-OPEC market-share gain. Because of that, OPEC's market share has dropped from about 53 percent in the early 70s, to about 39 percent in recent years.

The global market is not exploiting the low-cost, large reserves first, because the market has not been allowed to operate freely in the closed economies of the Middle East, where those low-cost, large reserves exist.

The most effective way for the countries of the Middle East to reclaim their global position is to allow free-market forces to attract private investment to OPEC countries, and to OPEC countries in the Middle East, in particular.

The future of our industry will be determined by where the capital flows, because multinational oil companies will only invest where they're allowed to invest and where they're permitted to make reasonable returns on their investment.

Today, the nations of the Middle East face the challenge of exploiting their energy resources by the most efficient and cost-effective means possible, so they can develop diversified economies that will reap the greatest benefits from the global economy.

Unfortunately, politics often gets in the way of their meeting that challenge.

Oil and politics often go together, particularly in the Middle East. The 1973 oil embargo and economic sanctions are just two examples of how oil and politics are linked.

Because of that linkage, the relationship between the multinational oil companies and the national oil companies has gone through many phases over the years, from close association to isolation.

Today, that ongoing relationship faces two key challenges in my opinion.

First, the closed economies of the Middle East must be opened up to the benefit of both the national and the multinational oil companies.

And, second, unilateral economic sanctions must be lifted.

Let me expand on those two points a bit.

During and after the oil embargo in the early '70s, the Middle East went through a period of nationalization. Countries were proud that they had broken the grip of the monopolies and regained control of their own resources. They could now develop those resources as they saw fit.

Back then, nationalization was viewed by many as the perfect vehicle to gain power, respect, and influence.

Unfortunately, with the departure of the private sector, went the unmatched ability of free markets to create healthy competition, so essential in today's global economy.

Many governments have come to this realization, especially Iran's. Iran was one of the first countries to open all segments of its petroleum industry to foreign companies.

In order to build on this positive progress towards privatization and partnerships, national and multinational oil companies both have key responsibilities. Both should strive to achieve fair and transparent deals in accordance with established global industry standards, deals based on win-win principles capable of passing the public bulletin board test in the host country.

Companies should:

  • Respect the history and culture of their host countries.
  • They should offer exceptional service as efficient long-term partners.
  • And they should act as responsible corporate citizens by protecting the environment, creating local jobs, maximizing local content by supporting local companies, and by training and developing local manpower resources.

Countries, for their part, should:

  • Accept the fact, as many have, that inviting foreign investment is in no way a negative reflection on their own capabilities. It's simply good business practice that creates jobs and prosperity.

    Chevron, for example, operates in many countries around the world. And many European oil companies operate in the United States.

    In fact, many Middle Eastern companies have major investments in all segments of the petroleum industry, in both the United States and in Europe. While this is certainly true, nobody disputes the fact that the U.S. and European countries are fully capable of running their own petroleum industries.

  • Countries also need to offer attractive fiscal terms, so companies can achieve a reasonable risk/reward balance, recognizing that they're in the business to create value and provide reasonable returns for their shareholders.

    Squeezing profit margins drive companies away and discourage innovation and long-term partnerships.

    The goal should be to create an environment where companies deploy their brightest and best talent through the right mix of incentives.

Closed economies, of course, are only half the problem. The other half is unilateral sanctions imposed by the U.S. government.

Unfortunately, unilateral sanctions are generally ineffective in accomplishing their stated goals.

At Chevron, our position regarding unilateral sanctions is clear. e believe that engagement is by far the better alternative at resolving differences among nations.

We have long held the position that unilateral sanctions hurt U.S. business and U.S. workers, by keeping them from doing business in markets that are open to our foreign competitors.

Iran's call for a "dialogue of civilizations" is the preferred means for resolving differences. t'sexactly what I mean by engagement.

The current diplomatic impasse, which prevents the resumption of normal diplomatic relations between the two countries, seems to turn on the question "should commercial relationships follow or come before diplomatic relationships?"

Unlike its relations with most other countries, such as China, U.S. policy towards Iran has been rooted in the assumption that commerce should follow diplomacy.

From my experience in the global oil business, and my understanding of the socio-economic challenges facing the Middle East, I believe that commerce should come before diplomacy, especially when diplomacy seems to have hit a brick wall.

Commerce has the potential to build a foundation of trust, and a network of interdependent relationships that can increase the probability of dissolving diplomatic impasses.

Although I applaud the lifting of sanctions on certain Iranian goods announced by Secretary of State Albright in March, more needs to be done.

During her announcement, Secretary Albright called for a "new season where mutual trust can grow between the U.S. and Iran."

I think there are a couple of things we could do to move that "new season" along a little faster.

First, allow U.S.-based energy companies to negotiate executory contracts in Iran and to expend $20 million annually on Iranian energy projects, as permitted to our global competitors under current U.S. law (ILSA).

And, second, eliminate unilateral U.S. sanctions prohibiting energy investments in Iran.

Iran is a pivotal country in the Middle East, by virtue of its geography, its demographics and its resources, and because it provides a critical link between the Persian Gulf and the Caspian Sea.

Obviously, I would like U.S. companies, especially Chevron, to be allowed to do business there.

And I think Iran would benefit from the presence of U.S. companies too, because it would create a better competitive environment. Iran could get the best bang for its buck.

U.S. companies could also provide Iran with access to a wider range of technological and financial resources. After all, the roots of the oil business lie in the United States where much of the technology and core competencies reside.

Iran would also benefit from the participation of U.S. oil companies because U.S. markets would be open to Iranian oil.

Finally, other U.S. industries like telecommunications, computers, and aviation would likely follow, stimulating Iran's economy still further and creating more jobs.

Of course, it's true that Iran can grow its production without the help of U.S. companies. However, without U.S. companies in the competitive mix, Iran can't take full advantage of the worldwide competitive marketplace to access capital and the latest technology, and ultimately increase the employment and prosperity of its citizens.

The world needs oil from multiple sources. Demand is expected to grow to 90 million barrels a day by 2010, which means our industry is running uphill against our own decline curves. That's why Iran will be a significant player in providing energy for the future.

I realize there are still some serious issues dividing the United States and Iran that need to be resolved.

But, after 39 years in this business, I strongly believe that the involvement of U.S.-based multinational oil companies in Iran can act as a positive catalyst for achieving a mutuality of understanding among our two nations.

I think it's safe to say that the exploitation of energy resources has often been a source of conflict among people and nations.

But I think we can also acknowledge that, historically, partnerships between nations and private enterprise have also helped resolve political differences.

Iran has clearly taken a leadership role in the Middle East, by recognizing what's best for its economy and its people.

Iran also recognizes that significant price swings and market-share fluctuations ultimately benefit no one, and, in fact, deprive the world economies of reliable, reasonably-priced oil.

They understand that providing a stable and low-cost source of oil and gas for the world's economies is best for everyone, producers and consumers alike.

I'm very excited about what I see in Iran today and where its oil and gas industry is headed. It's a nation with a long and proud history that's once again leaving its mark on history.

Speech in Farsi

Updated: July 2000