Thoughts on the Irish Energy Portfolio: Principles for Security
David J. O'Reilly, Chairman and CEO
Dublin Chamber of Commerce Annual Dinner
The Burlington Hotel, Dublin, Ireland, October 19, 2006
On behalf of Joan and myself, let me say how delighted we are to be here, in a great city and in great company.
After living in the States for nearly four decades now, I've become somewhat Americanized. It took awhile to adjust to some changes — the fact that Americans drive on the wrong side of the road, or that baseball's World Series only includes American teams.
It's wonderful to return home to a city that has been so transformed by the spirit of free enterprise. Ireland showed its new face to the world last month when it hosted the Ryder Cup for the first time. In addition to its charm and hospitality, Ireland showed that it had what it takes for the European side to win the tournament. There was the superb play of the whole European Team, especially Darren Clarke. The K Club itself is a symbol of Irish prosperity.
When I left 40 years ago, I thought if I could find a job, work hard and save, that I could one day return to Dublin and buy a house. Looking at today's prices, I'll have to keep on saving!
Fifty years ago, it was pedal power — not horsepower — that moved Ireland. Bicycles and busses were the way that most of us traveled. Cars were a luxury.
When I was growing up in the '50s, many of the country's leading employers were government enterprises like the Electricity Supply Board, CIE (Córas Iompair Éireann) and the telephone company. And, of course, the civil service itself.
The money sent home by emigrants was one of the country's largest economic drivers.
Eighteen of us graduated with a degree in chemical engineering. But there were only two job openings available. So most of my classmates and I did what the Irish had done for decades — we left the country to find work.
Back then, few could have imagined the Ireland of today. Vision, discipline and the courage to change can do amazing things for a country. An economy that was once isolated has been transformed. Ireland today is a lean, globally competitive supplier of services, technology and advanced products.
That national transformation took a visionary spirit. It was groups like the Chamber who positioned Ireland for success. They recognized that a small country could only prosper by lifting itself up and joining the global economy.
As my uncle, Tom Cox, commented in his book, The Making of Managers, this took a seismic shift in the national temper — from an attitude of dependency to one of self-confidence. Today, the results of that confidence are on full display. In The Wall Street Journal's Index of Economic Freedom, Ireland is now ranked No. 3 in the world.
Ireland today is dealing not with the pains of unemployment but with the challenges of growth — including the issue of energy and securing enough of it to sustain that growth.
Tonight, I'd like to talk about global energy markets and the implications for Ireland. But before I do that, let me take a few minutes to describe the evolution of the industry since I joined it in the '60s. Because, like Ireland, the energy business has dramatically changed during that time.
The Chevron name is not widely known here, but our company has been doing business here since 1924. We have more than 200 Texaco petrol stations across the country, and many of you know the Texaco Children's Art Competition.
I joined Chevron in 1968, and I've worked in almost every part of the business: research, exploration, production and petrochemicals. When I began my career, it was a relatively stable time for the industry. From 1948 to 1972, oil claimed its place at the center of the global energy portfolio. During that time, consumption of oil tripled in the United States, and it increased 45 times over in Europe and more than 130 times over in Japan.
Oil helped drive post-war prosperity, and that prosperity, in turn, increased the consumption of oil. Then in the early '70s, the industry began a broad and far-reaching transformation. Geopolitical changes began to rock the energy markets. OPEC became a powerful force. And the 1973 oil embargo made energy security a strategic concern for consuming countries. Producing countries gained the power to influence the price of crude oil by regulating supply. Partly as a result of that market power, oil prices rose dramatically.
In the early '80s, two trends collided to shake the industry again. Higher oil prices led to a wave of investment and new oil production outside the OPEC countries — in areas such as the North Sea and Alaska. At the same time, the world went into a recession, which substantially reduced demand for oil in industrial nations.
The results were dramatic. The price of crude oil fell from about $40 a barrel in 1980 to under $15 in 1986. The collapse in prices began a long period of industry consolidation, which lasted through the next decade. Two large bookends for this period were Chevron's acquisitions of Gulf Oil in 1985 and Texaco in 2001.
Those deals, along with other major mergers, helped reshape the industry. These acquisitions transformed Chevron. They greatly expanded the size of our company and gave us global reach. We further strengthened our position in 2005 when we acquired Unocal.
Today, Chevron is the sixth-largest company by revenue among the Fortune Global 500, and the 10th-largest in profitability. We have 53,000 employees and do business in more than 180 countries. We are involved in all aspects of the energy business — exploration and production, refining and marketing, chemicals, and power generation.
We produce about 2.7 million barrels every day. And to make that number a little more relevant tonight, that's enough oil to fill more than 200 billion wine bottles every day.
Our company — like Ireland — is positioned to thrive in a challenging business environment. And international oil companies today face significant challenges. Two main trends are shaping today's energy industry.
The first is rising demand driven by global economic growth. The U.S. Department of Energy projects that world energy consumption will increase by more than 70 percent over the next 25 years.
That growth is occurring on top of a supply-demand balance that is tighter than it's been since the 1970s. The world currently consumes about 84 million barrels of oil each day from a production capacity of about 85 million barrels a day. That thin margin gives energy markets very little capacity to absorb supply interruptions.
A second trend defining our business today is that many new hydrocarbon resources are located in challenging environments — places like the Arctic and the ultradeepwater, or in difficult geopolitical circumstances. They require major investments in technology, talent and community engagement.
But as challenged as some of these resources are, we do not believe that the world is running out of oil and gas. There are still plenty of molecules in the ground. The big task facing energy companies is to economically and responsibly develop those supplies and deliver them to the market.
No challenge has a higher priority. It drives our business, 24 hours a day, seven days a week, 365 days a year. Last year, the five major international oil companies spent roughly $70 billion developing new energy supplies. This year alone, Chevron will invest about $15 billion in new projects. And we're making our investments across the whole energy spectrum. Let me offer two examples.
We recently completed a well called Jack in the Gulf of Mexico. It is located about 175 miles (282 km) off the Louisiana coast in 7,000 feet (2 km) of water and more than 20,000 feet (6 km) under the seafloor. On your next flight over the Atlantic, take a look down. That's about as far as we drilled the well — the deepest ever completed in the gulf.
We estimate that this area may contain anywhere from 3 billion to 15 billion barrels of oil. At the high end, that could increase current U.S. oil reserves by 50 percent.
While oil and gas will remain our core business for decades to come, we're also investing in next-generation energy. For example, we are part of a company that is building one of the largest biodiesel plants in the United States. Early next year, it will be producing clean-burning fuel from soybeans and other renewable feedstocks.
We've also launched several partnerships with universities and governments to accelerate alternative energy technologies.
There is a common theme to these projects. It's at work across our company, from deepwater drilling to biofuels — and that's the power of technology. Time and time again in our industry, technology has helped us develop more energy, do more with energy and do more with less energy. Technology has helped expand the boundaries of the Irish economy, and technology will continue to keep expanding the boundaries of energy.
I was thinking of boundaries recently as I was returning to the United States from Vienna. As I flew over Dublin and looked down, I thought of Thomas Cahill's description of Ireland as "a little island at the edge of Europe." Today, we might justifiably describe Europe as a large continent at the edge of Ireland.
Boundaries change when people make them change. And Ireland today clearly has an opportunity to change the boundaries of national energy policy in far-reaching and positive ways. So, let me close my remarks with a few thoughts on that subject.
In Ireland, there are many points of view about the best way to achieve energy security. One perspective believes that energy independence is the answer. This is unrealistic.
There are 193 countries in the world today, and not a single one of them is energy independent. In the context of a global energy marketplace, policies focused on independence are counterproductive. They create demand uncertainty and discourage producing countries from making the investments needed to supply the markets.
A second point of view is that consuming countries can negotiate bilateral agreements with energy-producing countries. This, too, has its risks. As we're seeing today in many resource-holding countries, terms and conditions can change — quickly and significantly.
A third perspective recognizes the need to address energy security through international cooperation. I believe this is the right direction. In the world's energy marketplace, moats can't help us; we need to build more bridges.
At Chevron, we think that energy security is best addressed by acknowledging the healthy interdependence of markets, diversifying energy supplies and using energy appropriately and efficiently.
Let's consider these priorities for a moment. Energy efficiency remains the cheapest and most plentiful form of new energy that we have. We've made progress in this area, but there is still much more to do. The U.S. economy, for example, has doubled since the 1970s while energy use has risen only 25 percent. Yet a recent audit of large businesses in the United States showed that enormous potential savings still exist.
Ireland is taking two good steps to increase energy efficiency — setting conservation targets and launching a campaign to educate the public on the benefits of efficiency.
At the same time, oil and gas consumption should be put into the right perspective. Ireland is a robust consumer of hydrocarbons. There's a reason for that — it is economic growth. And that's an inherently good thing.
I suggest that the best path forward is not to turn away from hydrocarbons but to embrace more efficient and appropriate uses and to diversify into other energy sources as they become viable.
If we were creating an energy policy on a clean sheet of paper, it might look something like this:
- Power generation would come from clean coal, nuclear and renewables such as wind and waves, where Ireland is demonstrating leadership.
- Natural gas would be dedicated to residential and commercial uses.
- And oil would be used exclusively for transportation, with biofuels taking an increasing share as technology advances.
The point is that if we use hydrocarbons appropriately — for their highest-value uses — we will extend their longevity while allowing a measured transition to other sources of energy. This will enhance energy security.
I was encouraged when I read the Green Paper on energy that was recently published. It reinforces many of these ideas, particularly continued investment in oil and gas while stepping up efforts to conserve and develop new sources. Most important, the Green Paper will be the catalyst for a broad national debate on the future of energy, because, ultimately, energy security can only be achieved through collective action.
Industry is investing heavily, but those investments won't be optimized without the right government policies. Markets work. And if governments allow them to work, markets will arrive at the right solutions.
It would be a mistake to force a transition from oil and gas before replacements are economically viable. Such a move would carry broad and negative economic consequences.
So, as you develop a 21st-century energy policy, I ask all of you to remember that it was openness and engagement that allowed Ireland to escape economic stagnation and race past the rest of Europe. When you think about energy, don't let go of those principles.
Consuming countries like Ireland require a well-functioning international energy market to sustain growth. Openness, interdependence and a stable climate for energy investment remain our best hopes. The same model that is allowing Ireland to prosper economically is also the most promising path to energy security.
To be sure, we face challenges. But, I'm an optimist. The energy markets are a bit like a rugby pitch. And as Munster showed this year, courage, hard work and grand dreams can deliver exceptional performance.
I see the world succeeding. But success begins with a critical recognition. Producing countries, consuming countries and participants in our industry must all recognize that when it comes to the challenge of energy security we're all playing for the same team.
Thank you very much for inviting me to speak tonight.
Updated: October 2006