U.S. Energy Policy: A Declaration of Interdependence

By David J. O'Reilly, Chairman and CEO
ChevronTexaco Corporation

Keynote Address

Houston, Texas, February 15, 2005

I am delighted to be here this morning, and ChevronTexaco is proud to be the first global sponsor of CERAWeek.

One of the most prized assets we have in our industry is knowledge. So I want to personally commend CERA [Cambridge Energy Research Associates] for its leadership in enhancing the industry's knowledge base through its own research and through events like this that allow us to learn from one another.

The opportunities and challenges the future holds for us are immense, and how we rise together and meet them is critical.

So, I would like to use our time this morning to discuss some of those major challenges and, in particular, the critical need for a new, enhanced U.S. energy policy to address those challenges.

Let me start today by saying that by almost any measure, 2004 was a great year for our industry. It was driven to a large extent by commodity prices and also by effective exploration, production, technology and increased operating efficiencies.

But make no mistake, as good as 2004 was, I believe our industry is at a strategic inflection point, a unique place in our history. And what we do right now - or don't do - to address the energy challenges we face as an industry and as a nation will have implications for years to come.

Let me take a moment to put our history in perspective. ChevronTexaco celebrated its 125th anniversary last year. As part of that celebration, we invited six former CEOs of Chevron and Texaco to a roundtable to gather their experiences and insights. They represented 55 years of collective leadership of the two companies. And the depth of history they recalled was extraordinary.

Several of our former CEOs remembered an altogether different regulatory climate - from the early restrictions on oil production by the Texas Railroad Commission to the federal government regulation of natural gas prices and to the Nixon-era price controls over oil and petroleum products.

Another former CEO remembered that 50 years ago, you could fly over Louisiana at night and read a newspaper by the light of the flares. Technical problems were routinely solved by a group of people with slide rules sitting around a table.

And another of my predecessors remembered more than somewhat fondly, "If a reporter called, you could say 'no comment' and hang up on him - and get away with it."

Think of how different it is today - how far we've come in terms of technology, environmental stewardship, operating efficiencies, governance and transparency - virtually every aspect of our industry. It really is remarkable.

I'll need to step back even further to explain why I think we are entering a new phase of the business.

The first cycle of the oil industry's history was driven by the rise of international oil companies - the so-called Seven Sisters - through the first two-thirds of the 20th century. The demand for oil was satisfied by private enterprise, sometimes at the expense of the owners of the oil.

In the second phase of the industry, beginning in the 1960s, OPEC came into prominence. The 1970s price shocks and resulting demand impacts led to a period of relatively plentiful supply.

I believe we are entering another phase that is being shaped by globalization in production and trade, economic growth and surging demand, and declining oil production in the OECD [Organization for Economic Co-operation and Development] countries.

These factors are making us more energy interdependent than we have ever been. They have created what is, in effect, a new energy equation.

The most visible element of this new equation is that relative to demand, oil is no longer in plentiful supply. The time when we could count on cheap oil and even cheaper natural gas is clearly ending.

Why is this happening now?

After all, there are more proved oil reserves today than there were in the mid-1980s at the beginning of a long era of cheap oil. How did access to stable energy supplies become such a challenge? What has changed?

Demand from Asia is one fundamental reason for this new age of more volatile and higher prices. The Chinese economy alone is a roaring engine whose thirst for oil grew by more than 15 percent last year and will double its need for imported oil between 2003 and 2010 - just seven years.

This new Asian demand is reshaping the marketplace. And we're seeing the center of gravity of global petroleum markets shift to Asia and, in particular, to China and India.

In fact, many expect global primary energy demand to jump 40 percent over the next two decades. It took humans 125 years to consume the first trillion barrels of oil, and we'll likely consume the next trillion within just 35.

But demand isn't the only factor at play. Simply put, the era of easy access to energy is over. In part, this is because we are experiencing the convergence of geological difficulty with geopolitical instability.

Although political turmoil and social unrest are less likely to affect long-term supplies, the psychological effect of those factors can clearly have an impact on world oil markets, which are already running at razor-thin margins of capacity.

Many of the world's big production fields are maturing just as demand is increasing. The U.S. Geological Survey estimates the world will have consumed one-half of its existing conventional oil base by 2030. Increasingly, future supplies will have to be found in ultradeep water and other remote areas, development projects that will ultimately require new technology and trillions of dollars of investment in new infrastructure.

Collectively, we are stepping up to this challenge. The industry is making significant investments to build additional capacity for future production. However, there are limits to what the industry can do alone. We need the active cooperation of all stakeholders in the energy value chain. And as the largest consuming nation in the world, the United States bears a unique responsibility in addressing global energy issues.

Which brings me to U.S. energy policy. Until recently, I didn't particularly think we needed an energy policy in the United States. But in light of our changing circumstances, I now feel the administration must refocus our nation's energy policy to meet the new energy equation. And Congress has its role to play as well - by enacting energy policy legislation consistent with these changing circumstances.

What has led me to this change of opinion? Four things.

One, as I mentioned before, the United States is becoming more energy interdependent in terms of our dependence on diverse sources of oil and gas, our position as the world's largest consuming nation, and as a significant and often-leading investor in international energy ventures.

Two, demand will not decrease any time soon. Three, reliable energy supplies are critical to sustained economic growth. And finally, I believe a constructive national discussion of energy policy would bring about a much better understanding of energy issues among key stakeholders, including the American public.

A new U.S. energy policy doesn't have to be complex. It simply needs to be driven by two strategic objectives: transparency and alignment. Let me explain.

We need to make our policy trade-offs clear. And we need alignment of energy policy with other policies central to our national interest: environmental, economic, trade and national security.

A number of these policies are now misaligned or do not recognize each other at all, inhibiting the development of new energy sources.

As one example, take a look at natural gas.

It is an environmentally clean fuel, and global supplies are plentiful. From an energy policy perspective, common sense would suggest that we develop natural gas supplies as quickly as economically feasible.

But U.S. environmental policy makes it difficult to access potentially significant resources in the Rocky Mountains and Alaska as well as offshore. And at the local and regional levels, regulatory barriers have made investment in vitally needed natural gas infrastructure very difficult.

If a preference for natural gas is going to be our de facto policy for the generation of electricity, then our national policy should encourage and enable the development of natural gas - whether it is exploration and production in this country or permitting the building of import terminals to bring natural gas from overseas sources.

Our policy should consider the role of alternatives to natural gas - coal and nuclear power, for example. These require trade-offs between energy supply and environment. We should also consider the role of renewables and especially focus on what can be done to improve energy efficiency, one of the best sources of additional energy supply.

Another example of aligning policies to encourage the development of new energy sources is in the arena of trade and diplomacy.

Development of new energy sources will require trillions of dollars of investment, much of it in the developing world. And sustained investment requires markets that honor fundamentals such as sanctity of contracts, rule of law and transparency.

Our diplomatic policies should encourage investment in oil and gas production to increase levels of production and improve access to global supplies. For example, despite its own plentiful reserves, Mexico is importing gas and petroleum products from an already stretched U.S. market. Our government should make it a priority to encourage increased investment in new supplies.

Another example - western Africa - is the source of light sweet crudes that are in very tight supply. Improving the security and investment climate of that region should be a priority in our foreign policy.

With the growth in Asian demand, China, Japan and Southeast Asia as a region are by far the largest importers of oil and gas and are particularly dependent on the Mideast. And as a result, we are seeing the beginnings of a bidding war for Mideast supplies between East and West.

What are the implications for U.S. foreign policy?

Ideally, each of the key policy areas - foreign policy, trade, the environment - needs to align around a common set of objectives to promote the sensible and safe development of energy.

But the United States has rarely made these kinds of trade-offs and alignments explicit in our national policies. This must change.

Safeguarding America's energy security must become a top priority of American policymaking. Energy security must be on the table when U.S. environmental, trade, and foreign policies are being developed. In short, we should recognize the interdependence of these policies in achieving our country's strategic energy objectives.

There is an example of how to do this right - a nation that has long recognized its strategic reliance on imported energy. And that nation is Japan.

Japan's goals for national policy are to attain the "3 Es" simultaneously: energy security, economic growth and environmental protection. Japan coordinates its foreign policy, energy policy, and industrial policies to accomplish those goals by strategically cultivating relationships with oil and gas producers and by diversifying its sources of energy.

Let's take a look at the results of this approach.

Japan's energy supply has been steadily diversifying. From a peak of more than 75 percent in 1973, oil now accounts for less than half of Japan's energy supply. Nuclear power has increased from less than 1 percent to almost 12 percent over the same period, and natural gas use has increased more than eightfold. That's the result of having a coordinated national strategy built on a full understanding of a nation's energy interdependence.

Now compare Japan with the United States and the rhetoric of our last political campaign. Virtually every candidate called for American energy independence - which is something that may sound good in a campaign, but has no grounding in reality.

With the political season now behind us, we can move from rhetoric to reality. We must create an energy policy that is pragmatic and holistic and that reflects the reality of the interdependent world in which we live.

Educating key stakeholders and the American public and getting the United States to think strategically about energy is an ambitious objective. And while making U.S. energy policy is the job of government, it can't be done by government alone.

There is a role for all stakeholders. And we in this room today have a critical role. That role is education.

You see, we understand the vital strategic importance of energy. We all understand that energy is a fundamental component of economic growth and national security. In fact, it is a fundamental component of the quality of life.

I think the American people need to be educated to get to the same set of understandings - and it will be a challenge.

Americans must begin to think about energy in the same way they would think about national security, or education, or healthcare - as an essential enabler of our quality of life. And to do that, we have to get our message out.

So I ask everyone here today to take responsibility for communicating the value of energy and the importance of aligning our policies to enhance that value.

In this year's State of the Union message, President Bush said that four years of debate about energy is enough, that it is now time for action, time to get something done. I couldn't agree more.

I began my talk today by recalling some of the insights of our former CEOs from their 55 years of collective experience. Let me share something one of them said that's especially pertinent.

Working as a project manager 40 years ago, he recalled, "We worked closely with people who agreed or disagreed with you, but we solved problems. We had an opportunity to build new things . . . [and] an opportunity to fix things that didn't work."

Ladies and gentlemen, I believe we have the same opportunity today, on an even grander scale - an opportunity to create a framework for the sustained growth of our industry, for robust global economic growth, and for reliable energy supplies for the world's growing population.

Let's take full advantage of that opportunity - together.

Updated: February 2005