The Indispensable Industry

John S. Watson

By John S. Watson, Chairman and CEO
Chevron Corporation

Energy Institute International Petroleum Week

London, February 23, 2011

Thank you all very much and good evening.

Before I turn you over to Alastair Campbell, whom I'm as eager to hear as you are, let me briefly offer some general thoughts on the business we are in, and my sense of the road ahead. I'll spare you any bold predictions about events to come in the energy field, because over the years, we've all heard many forecasts for the future that came nowhere near the mark.

Just because a prediction is stated loudly and confidently does not make it true. Think back over the past decade or so of all the things that were supposed to happen but never did. There was the dot-com economy that would keep rising and rising, and the so-called end of the business cycle. There was the Y2K calamity that awaited us at midnight and at that very instant the new millennium began. Then there was the ever-expanding real estate market and all the new financial instruments confidently riding on its limitless growth.

The problem with broad predictions like these is that even very well-informed people have a way of accepting them as conventional wisdom even when reality is pointing in another direction. That trait inspired Alastair Cooke, the famed journalist, to remark that "man has an incurable habit of not fulfilling the prophecies of his fellow men." He was onto something there. And our industry, in particular, often seems to leave the outside experts confounded.

Over several decades, for instance, we've been warned that the world is on the verge of running out of hydrocarbons. More recent has been the notion that some combination of government subsidies and other mechanisms can shift the market away from fossil fuels altogether.

Today, you can still find commentators holding forth on both claims, even though proved oil and gas reserves keep rising and subsidies have yet to bring alternatives to commercial scale – points that I'll return to in a moment.

Hearing such things about the future of energy, it becomes clear after a while that we're not dealing with rational judgments in all cases, but with articles of faith. You have to know the difference if you're in the business of actually producing energy.

Dozens of countries are represented in this room, and it doesn't take a very deep analysis to see that every one of them depends for its economic growth on the use of fossil fuels. 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 will lead you back to the energy sources that we draw from the ground.

And that's the picture in a world of 6 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. Demand for traditional and new fuels will grow sharply. And serving that demand requires production, development and innovation on a scale equal to the challenge.

The good news is that the resources are there. Far from having reached any peak, the world's estimated base of recoverable oil, gas and coal is continually rising. In fact, over the past 30 years, while concern about resource scarcity was gaining some traction, the world's proved reserves of oil and natural gas increased 130 percent, to 2.5 trillion barrels.

The last several years alone have yielded deepwater and shale discoveries that couldn't have been imagined 10 years ago and, in any case, couldn't have been extracted. As vast as the world's energy needs are and will be, it is within our power to meet them.

The short of it is this. We are a primary component in the supply chain for global economic expansion.

As a part of the industry that is providing that energy, you need never doubt that you're involved in something useful, good and vital. Energy is as fundamental as any enterprise can be. Energy is the indispensable industry – at the center of everything. And that is not boasting. It's simply recognizing the scope and reach of our responsibility.

We're in a business where success and failure have very large consequences. A lot can be lost if we don't observe the highest of standards and keep our entrepreneurial edge. And the public good is served when we do big things and do them right.

With that public good in mind, and with a view to the opportunities we have in this industry, it seems to me that four key strategies will see us through.

The first is to rebuild the conditions that maximize investment. Even the best of energy companies can perform only as well as the legal and regulatory environment allows.

It's not a question of readiness. The industry is primed to invest all that is necessary to meet the world's demand. In 2011 alone, energy companies will make half a trillion dollars in capital expenditures worldwide. That capital will do more than bring energy products to market – as important as that is. It will also create jobs, support small and medium-sized enterprises, and develop new technology. The broader value of sustained energy investments cannot be overstated.

Yet even annual investment on that order will not be enough in the long run. And so the issue is, what will it take to draw out investment capital on the massive scale that is needed?

The answer is access to resources, rational regulatory and tax regimes, and a stable business climate. When Western economies suffer from the effects of supply shocks, the last people in a position to complain are those who have labored the most to restrict access, add regulations and lay new taxes on energy producers.

You and I work in one of the most heavily regulated industries in the world, and nobody here doubts that many of those regulations serve a useful purpose. But most of us could point to other rules and policies that make no sense at all, especially if the goal is to ensure a stable and affordable supply of energy.

Reasonable access, along with rational taxation and rule-making, are essential. So, too, is a predictable business climate founded on the rule of law, contract sanctity, and open and free trade. This has never been more important than now, given the recent instability we have seen this month in key energy producing regions.

If we take the long view, global markets are generally moving toward openness. We should do all we can to accelerate that momentum.

The second key strategy is to be relentlessly focused on safe and reliable operations.

We all know that our corporate responsibilities do not end with meeting market demand. We are expected, and rightly so, to meet the highest standards of safety and environmental protection.

No doubt there's been a good deal of discussion here about all that was learned after last year's event in the Gulf of Mexico. The Macondo incident was 10 months ago, and for us the lessons are not forgotten. We always manage toward incident-free operations. In our industry, when it comes to safety, the bottom line is zero.

Certainly, going forward we will operate under new and stricter standards – in the Gulf of Mexico and other places. Far from resisting those rules, our industry is helping to strengthen them.

This proactive, uncompromising approach to safety is the test we should all apply to any company, starting with our own. In an industry that's always edging up against the frontiers of geology and engineering, the best practices should be the only practices.

Technology is at the heart of the third strategy, which is to enhance ways that we produce energy, use energy, and develop new sources of energy.

All of us here are believers in technology because we've seen our industry make innovative leaps every year. We know that the smart application of technology can help recover more barrels per reservoir and lower the cost of producing those barrels.

Technology also can help us unlock the value in unconventional resources, which is one of the reasons we're witnessing such interest in shale gas. And technology holds great potential to help us use energy more efficiently – lowering per-capita costs and emissions from energy use.

Arguably the biggest challenge for technology is how it can be applied to the economic development of renewables and other alternatives to fossil fuels at industrial scale.

Right now, alternatives make up less than 15 percent of the global energy portfolio. Even under the most promising scenarios, it will take decades for alternatives to reach the affordability, reliability and scale of fossil fuels.

If one had any doubts at all, some European governments have gone ahead and proved it for us, by spending billions of euros in subsidies for renewables that aren't market-ready.

Don't misunderstand me. In the long-run, renewables are going to play an important role in meeting global demand, and my company will contribute to that.

Today, Chevron is the world's largest producer of geothermal energy. In fact, we produce nearly twice as much power from geothermal in Indonesia and the Philippines than all of the solar electricity generated for sale in the United States. We're also a significant investor in the development of biofuels, and we're leading our industry in energy efficiency.

So we're committed to renewables. But I've charged my company with developing a renewables business that is profitable and can operate at scale without subsidies. I believe that should be the basis of any sound public policy as well.

The right approach to building our energy future is to balance aspiration with reality, investing in solutions that can compete at scale reliably and affordably. We simply can't build a secure energy future through complex, command-and-control schemes that defy basic market principles. We can do it through human creativity, technology and innovation, sound economics, and strong partnerships.

That last point – partnerships – is the fourth and final strategy I'd like to address. We need to build new partnerships that match the size of the challenges before us.

It is the very nature of our business to involve multiple stakeholders – from national governments, to local communities, to private-sector partners in all our projects.

My company, for instance, is heavily engaged in world-scale projects in Kazakhstan, China and Australia, among many other nations. Look at each of these and you'll find a diverse range of partners, all putting technology, capital resources, management skills and local development goals to a common purpose.

For all the complexity of such ventures, the basic motivation behind them is a simple insight: When it comes to reliable energy, economic growth and environmental protection, everyone is a stakeholder and everyone is a beneficiary.

And even the biggest companies in an indispensable industry know they'll do better work in collaboration. Our success will not be measured by ours alone, but by the progress we share with many others.

At the outset I promised brevity, and perhaps a shorter way of saying all of this is that we in the energy industry face a great opportunity and a great responsibility.

In America, Britain and all across the world, millions of people are depending on economic growth while many more in other parts of the world wait for opportunities they can only imagine. No business enterprise is better positioned than we are to answer the need – by investing, innovating and elevating our standards.

In the financial troubles of the last few years, we haven't always seen the best of free enterprise at work. Yet only the spirit of enterprise – of hard work, risk and reward, innovation, and partnerships for economic and social progress – can set all of our countries on a better course.

Let it be the mission of our great industry to show the way. Let that be the mission of everyone here tonight.

Thank you all very much.

Published: February 2011