The Greatest Challenge

By George L. Kirkland, Executive Vice President for Upstream and Gas
Chevron Corporation

CERAWeek Remarks

The Westin Galleria, Houston, Texas, February 7, 2006

Thank you, Dan and David.

I am glad to be with you today, and Chevron is pleased to be the Global Energy Partner on this important occasion, the 25th anniversary of CERAWeek.

We are here to consider the future of energy markets and how they will affect global economic growth in the 21st Century.

When we consider the future of energy, it's clear that we have project challenges, we have resource challenges and we have technology challenges.

But perhaps the greatest challenge facing us is demonstrating our ability - and our leadership - in connecting energy supplies and markets. How effectively we do that will be one of the most critical factors in sustaining global economic growth going forward.

Let's first consider the market side of the equation. I don't pretend to have all the answers - and I certainly don't have a crystal ball - but I do believe I'm on solid ground if I say that we can expect continued demand growth. That's certainly not news to anybody here today.

But consider that in the next 20 years, the world will add almost 1.5 billion people and you begin to understand the magnitude of our challenge. By 2025, world energy consumption is expected to grow by over 40 percent. Over that timeframe, conventional hydrocarbons - oil and natural gas, as well as coal - will continue to meet roughly 80 percent of that demand.

Global demand for oil will increase from 84 million barrels today to over 105 million barrels in 2025, or 1.4 percent annually. But even more dramatic will be the growth in demand for natural gas, which is projected to rise over 2 percent annually in that time.

The supply picture is tight - as tight as it has ever been historically. We've seen what happens when Nigeria reduces its output, or when there's even the threat of a loss of supply from a major producer such as Iran. And that's only compounded by the limited worldwide refining capacity.

Supplies of conventional oil are anticipated to grow nearly 20 percent through 2025. But with world economies consuming over 30 percent more oil by that time, conventional supplies alone won't be sufficient to meet demand.

There's been plenty of debate about the notion of "peak oil." And I'm sure there will be even more discussion on the subject here at the conference. I'm very much a believer in the plateau philosophy - a leveling off of oil supply over many years.

My view - and Chevron's view - is that there are sufficient hydrocarbons to sustain world economies going forward.

This view is based on the fact that technology will deliver conventional resources from new frontiers, like the Arctic, in addition to unconventional sources of energy - liquefied natural gas, gas-to-liquids, extra heavy oil, oil sands, among others - that will step in to fill the gap. In fact, by 2025 estimates are that nonconventional sources will account for roughly 10 percent of the global oil supply.

There are plenty of molecules, but accessing them, extracting them, and moving them to markets to ensure demand is met and economies continue to grow will not be easy. Moving supplies to markets - reliably and affordably - will be among the greatest challenges the world faces today.

Those assembled in this room have a charge: we must work together to create a bridge between supplies and markets. How can we do more - individually and collectively - to meet this challenge? We all have a role to play. Let me pose the following questions.

What is the role of the industry?

International oil companies (IOCs) must do their part, providing capital, technology and organizational capability. During the next three years, the seven largest IOCs have announced a global spending program of more than $250 billion.

My company announced its largest capital spending program ever. In 2006 we plan to spend $14.8 billion, more than 75 percent of which will go towards exploration and production.

With the tremendous expense and increasing complexity of today's energy projects, technology will be critical to unlock new sources of energy.

In the U.K. North Sea, there's discussion of an offshore heavy oil upgrader. It sounds daunting, but that's a project I know our industry can build and operate - just as we can rise to the challenge of developing in the ultra deep water and the Arctic.

What is the role of government?

Governments should help create environments where energy companies are able to apply their resources robustly, reliably and responsibly to the development of energy. The best way governments can do that is by offering stable investment, tax and royalty regimes.

This message will hopefully be reinforced this year when the G-8 meeting addresses the critical issue of energy security. Ideally, their dialogue will lead to practical, yet progressive, energy security policies in the context of interdependent global energy markets.

Host nations must also enable access to resources, and I applaud countries such as Libya, Qatar, Saudi Arabia and Kuwait - among others - that understand the value of partnership with companies that can help them explore, develop and produce these resources in a safe, environmentally sound and cost-effective manner.

In terms of energy policy, the United States seems to be sending mixed messages. On one hand, the Energy Act of 2005 moves us forward and encourages production of both conventional and nonconventional sources.

Yet, in 2006, Congress is considering the abolition of foreign tax credits and other long-standing accounting rules that, if enacted, would change our investment risk profile, and make us less competitive in the global marketplace.

The same holds true for sanctions and access restrictions which place off limits ample supplies of energy, both domestically and internationally.

What is the role of national oil companies (NOCs)?

Sixty-five percent of the world's resources are held in the hands of NOCs, so they are a key part of the solution.

Many NOCs have come a long way in developing their oil economies and infrastructure. The challenge now is getting to the next level of production.

NOCs must be willing partners with IOCs who bring with them technology and organizational capability, in order to maximize the resource base.

And finally, what is the role of consumers?

Both institutions and individuals can contribute with a prudent use of natural resources. The market will work to drive increased energy efficiency, as it has in the past.

Chevron is assisting in these efforts. We have a company dedicated to helping organizations find energy efficient solutions that will reduce usage and costs. We are also partnering with government and private industry in research and development efforts that will help identify and commercialize alternative forms of energy.

So, as I've said, we have a challenge ahead of us.

Globally, we need higher levels of cooperation to maximize the value of resources we have. We need to cooperate on providing access to resources. We need to cooperate on policies that recognize the interdependent nature of global energy markets. And we need to cooperate on the large, complex infrastructure projects necessary to develop new sources of energy - and deliver these to market.

Connecting supplies to market is among the greatest challenges the world is facing today. But I am confident that by working in partnership we can be successful in this endeavor.

Thank you.

Published: February 2006