David J. O'Reilly, Chairman and CEO
26th Annual Oil & Money Conference
London, England, September 20, 2005
It is a pleasure to be here - to see old friends, renew acquaintances and strike up new friendships.
It's especially important to have this kind of camaraderie at the present time - when many of us are dealing with the recovery from Hurricane Katrina and its impact on global energy markets.
Katrina was a tragic event - the worst natural disaster to hit the United States. And even now, we are still assessing its impact on human lives. But the incident also highlighted the resiliency and spirit of our industry. I visited our operations in the Gulf of Mexico region just a week after the hurricane hit. The industry response I saw was massive.
It also demonstrated the fundamental character of our business in a time of crisis. Equipment and other resources were shared. Supplies from other parts of the world were rerouted. Support from longstanding partners was instantaneous.
This is an industry that knows how to compete. But we also demonstrated that in a time of crisis, we know how to cooperate for the greater good. Katrina is just another in a series of events that have given energy issues a new level of prominence and attention.
Energy is at the forefront of the global agenda. The fundamental reason for this is obvious. We have been experiencing a prolonged global economic expansion in which energy has two roles: cause and effect. Energy is fueling the global economic boom, which in turn is creating ongoing demand for even more energy.
Over the past two years, the global demand for oil surged by more than 5.5 percent, primarily driven by a robust 4.2 percent average growth rate in the global economy.
Going forward, that growth will be underpinned by the economic development of India and China, which together are forecasted to account for about 40 percent of world economic growth over the next quarter century.
As a result, the demand for both oil and natural gas is projected to increase nearly 45 percent in the next 25 years.
This global dynamic has prompted a broad and intense discussion about the future of energy. Do we have enough of it? Can we meet future demand? Are we investing enough in capacity growth? Is peak oil imminent? Are we investing sufficiently in alternatives?
These questions reflect a growing level of engagement among energy's key stakeholders - industry professionals, economists, businesses, consumers, governments, nongovernmental organizations, producers - about the future of energy.
Today, I would like to contribute to the discussion by making three predictions about our industry that might provide partial answers to some of those questions.
My first prediction: We will experience a significant increase in resources dedicated by the industry to meet these demand growth projections. In fact, this increase is under way.
Already, the seven largest independent oil companies (IOCs) have announced an increase in capital spending of $20 billion during the current three-year period, raising the total to more than $250 billion. Even more will be required in the next decade.
This increased level of investment is a necessity because we are facing a new energy equation - one in which capacity will have to be added to meet growing demand.
Hydrocarbon basins in OECD (Organization for Economic Cooperation and Development) countries are maturing or are in decline, new sources are in difficult-to-access locations, there are increasingly complex geopolitical issues to navigate and demand is continuing to increase.
There is a lot of work under way to address these challenges.
The industry is stepping up to the efficiency challenge. In the North Sea, for example, reservoir recovery rates have increased by about 5 percentage points over the past decade, and advanced recovery techniques have slowed the decline of mature reserves in the U.S.
We are meeting the development challenge by exploring for new resources in ultradeepwater and by developing heavy oil in Canada and Venzuela.
We are stepping up to the technology challenge and driving innovative applications in everything from seismic mapping to the drill bit.
All of these initiatives reflect the fact that energy is one of the most critical issues facing the global economy. And at an inflection point like the one we are witnessing now - when the demand curve has closed in on the supply curve - much attention has been focused on the issue of so-called peak oil.
Most of the debate about whether peak oil is imminent, however, misses the point. Oil will peak - that is a geologic fact. But the new energy equation is not static. It is dynamic and variable.
Current prices, for instance, are moderating demand growth and will bring about increased emphasis on conservation - whether it is through changing individual or collective behaviors. There is still enormous potential to further reduce energy use through conservation. In many ways, it is the lowest-cost new energy we have.
And as we begin to contemplate the future decline of oil resources, we are also beginning to contemplate where the next generation of energy will come from.
For the near future, extending oil production and expanding the global natural gas market will play primary roles. But we need to make sources such as coal and nuclear energy a larger part of the global supply mix for power generation.
And over the long term, the continuing revolution in technology and market forces will move emerging sources such as gas-to-liquids closer to the mainstream. They also will enable renewables such as wind and solar to become more competitive and economic.
All of which leads me to believe that peak oil, when it occurs, will actually resemble more of a long plateau - one in which transitions to new sources can be managed without major shocks or disruptions.
One thing is certain. Increased production will be a complex endeavor, with higher levels of financial, operating and political risk. And the best way to mitigate those risks is through partnerships: the ability to join together with the right parties to find solutions to meet market needs.
That brings me to my second prediction: The relationship between IOCs and national oil companies (NOCs) - the two major sources of new production - will continue to evolve in ways that benefit both parties and, ultimately, global energy markets.
We are entering a period of the reassessment of the IOC/NOC value proposition - an age in which we increasingly recognize our mutual interdependence. For example, 85 percent of global oil reserves are in the hands of governments and NOCs. It is critical that these resources be developed in a timely and efficient manner to meet global energy growth.
There is a broad spectrum of development levels, capabilities, resources and needs among the world's NOCs. Successful partnerships will be built on pairing the specific needs of a particular NOC with the special competencies of IOCs.
In Libya, for instance, IOCs are lining up to provide a full range of investment - capital, technology, and skills. In Venezuela, IOCs have brought technology to the heavy oil fields of the Orinoco Belt. On a broader level, the benefits of successful partnerships between NOCs and IOCs are the bedrock values of predictability and reliability.
Strong partnerships mean that producing nations can depend on predictable access to markets and consuming nations can depend on reliable access to supplies. Both mitigate volatility and create an environment for sustained investment.
Finally, I would say that the new paradigm for NOCs demands a new kind of response to today's global economic expansion - a response that embraces more investment, more collaboration and, ultimately, higher production.
NOCs that are setting the bar for this new kind of response are Saudi Aramco, which plans to increase production to 12.5 million barrels per day by 2009, and Qatar's national oil company, whose current investment in liquefied natural gas and gas-to-liquids may represent one of the most intensive capital investment programs in the world.
Optimizing the development of resources controlled by governments will have a direct bearing on the health and stability of the global economy - and global economic growth will be determined in large part by the supply response from an organization that holds these resources.
In fact, the response of both NOCs and IOCs to global demand over the next few years will have a great impact on the reputation of our industry and, in some capacity, on our license to operate.
I am confident we will respond the right way.
This leads to my final prediction: If we rise to meet these challenges over the next several years, the world will gain a much deeper recognition and appreciation of the value provided by the global energy industry.
I believe that as good as our industry has been at finding, developing and marketing energy, we have not done enough to educate our stakeholders about the challenges we face, the tradeoffs that are necessary in developing energy supplies, and the vast economic and social value that our industry provides.
Generating discussion and understanding of those issues is the goal of Chevron's new advertising campaign, which I hope most of you have seen by now.
It is an unconventional campaign because we are in an unconventional period of our history. It is an attempt to stimulate dialog among stakeholders all along the energy value chain, from producer to consumer. And it is an attempt to place the development of energy in the proper context - to create broader understanding about supply and demand fundamentals and the decisions that are necessary to arrive at pragmatic solutions.
As part of the campaign, we set up an interactive Web site - willyoujoinus.com - as a forum for discussion and debate about these issues. The response has been phenomenal. It has engaged a wide spectrum of stakeholders and generated a number of ideas on how to extend the conventional supply base and what the next generation of energy might look like.
The early reaction to the campaign has demonstrated two things to us. One, there is an eagerness to engage on the important issues related to the development of energy. And two, there are a lot of ideas about the best solutions to these issues.
The wide range of ideas being discussed on our Web site - from the impractical to the highly sophisticated - reflects an intangible but important factor in the new energy equation we face today ... human ingenuity.
Ingenuity is how we find new solutions - either by design or by some unexpected convergence of events. In our business, ingenuity is taking many forms.
There is the ingenuity of injecting CO2 underground, which will not only help manage greenhouse gasses but can facilitate the development of clean coal and, eventually, the development of hydrogen power.
There is the ingenuity of rethinking the refining process to dramatically improve product quality and yields. There is the ingenuity of subsea processing, moving platform technology to the seabed to improve efficiency and reduce costs. And there is the ingenuity of a single compact fluorescent light bulb that can, over its life, save the energy equivalent of one-quarter ton of coal.
It is ingenuity like this that fundamentally drives my optimism about the future of our industry. When we contemplate that future, it is important to remember that past is prologue.
And if the past is any indication, our industry will rise up to the challenges of the 21st century, just as we are doing in the Gulf of Mexico right now and just as we have time and again over the past century.
So, what can we collectively do to deliver on my predictions?
- Commit to invest in the future growth of our business.
- Work more effectively as IOC/NOC partners to increase capacity along the value chain.
- Do the above, and communicate what we are doing to meet energy demand growth.
Updated: September 2005