Remarks to the CERAWeek Conference

By George L. Kirkland, President
ChevronTexaco Overseas Petroleum Inc.

Upstream plenary session

Houston, Texas, February 15, 2005

As we all know, the oil business has just completed one of its best financial years ever. And we're all wondering the same thing - what the future will hold and what direction will oil and gas take.

Will there be adequate resources to meet demand and adequate investment to exploit the resources we have?

There are those who'd suggest we're in a revolutionary new position; others would say we're just experiencing one more swing of the pendulum in a long, long history of swings and changes.

I'd like to put our current situation into perspective and start by thinking back a little more than 30 years ago.

In reaction to the world oil shock of 1973, oil prices nearly quadrupled. From May 1973 to June 1974, the average price per gallon in the United States rose almost 40 cents, or 50 percent. As a consequence, daily consumption in the country dropped more than 6 percent in six months. The dollar lost more than 8 percent of its value in 1973 alone, and was devalued again in 1974. Stocks on the New York Stock Exchange lost more than $97 billion in value in six weeks.

A few short years later, in the wake of the Iranian Revolution, there came another oil disruption that caused a virtual economic standstill in the European Union [E.U.].

After posting a robust 3.5 percent growth rate in 1979, the combined E.U. economies grew at a rate of only one percent in 1980 and an anemic 0.1 percent in 1981. And the oil price pendulum began to swing the other direction toward lower prices.

Although many new arrivals in the energy industry might not believe it, there was a brief moment in 1988 when crude oil prices went to single digits.

Over the next 10 years, with lower oil prices, demand grew; prices were relatively stable, except for a one-year dive in 1998, and then the prices began to climb in 1999.

For those who have been in the industry for 30 or more years, we have seen these swings of the pendulum several times. Is the latest swing different? If it is different, how is it different?

Oil continues to be a critical component of economic and political infrastructure and stability; and gas is increasing in importance.

Forecasted global growth in energy demand is higher than we have seen in decades - again, not necessarily a revolutionary change but perhaps an extreme swing of the pendulum. And, of course, demand is at a higher absolute level.

We expect growth in world population of 1.5 billion over the next 15 years - the majority being in developing economies - those most in need of new infrastructure, industrial capacity and technological development. The development of these economies is highly dependent on secure, stable energy supply.

So, we could project demand to increase even as supply is an increasingly difficult challenge. By 2030, the conventional oil base, some analysts forecast, will be reduced to roughly one-half its original size.

Future supplies will increasingly have to be found in more challenging places - for example, in ultradeep water, in the untouched reserves of existing fields and in increasingly remote areas. We will also face increasingly difficult technological challenges in the search for energy in oil sands as well as in liquefied natural gas and gas-to-liquids projects.

Of course, as projects become larger and more complex, our capital investment requirements will become significantly greater. Five years ago, for example, ChevronTexaco had only two projects in the works with an investment cost more than $1 billion each. In 2005, ChevronTexaco has 20 projects that cost more than $1 billion each. In addition to these higher costs, we face longer lead times, greater technological complexity and longer execution times. To meet projected increases in energy demand, some estimates say the industry will need to invest in the range of $2 trillion in infrastructure over the next 20 years.

With these levels of investment, ChevronTexaco -- and all of the people in this room -- will need stronger long-term partnerships than ever before.

Another significant difference and a positive change today, vs. the 1970s and 1980s, is the issue of transparency. The public needs assurance that revenues generated by governments are known and allocated for the broadest public benefit, and shareholders need to be assured of the accuracy and availability of relevant information to align with their own risk/reward profiles.

With all these differences, can we invest enough to meet demand? Will we? Many are asking these questions.

Consider these two factors: Our critics say demand is rising to levels we haven't seen in decades and that industry revenues are soaring. They say we need to invest capital in amounts that are well beyond our current levels.

Some of the other questions being asked will also sound familiar to you: What is the appropriate supply/demand response? When and where is the surge in capital expected, given recent significant revenue growth?

Our responses are rooted in the history I discussed at the outset of my remarks. It would be nice to think that the current bull market in oil is a permanent phenomenon, but our industry's history will probably cause each of us to take a very deep breath before jumping to that conclusion.

Oil is an industry with a lengthy time horizon. We've seen swings before - and fully expect to again. Our lesson is simple: If you're going to survive over the long haul, you don't invest based on the extreme of the swings.

After all, while we all acknowledge there has been a shift in the economics of upstream, we don't know how sustainable the shift is and whether we're in a semi-permanent higher-price band or just in another swing of the pendulum.

We all have views on whether this is a shift or another swing of the pendulum. I look forward to sharing those views during the conference.

Thank you.

Updated: February 2005