Peter Dijur (my favorite oil guy) on the future of hydrocarbons.
Dijur "gets it"
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"A New Era for Energy Suppliers: Challenges and Opportunities"
REMARKS BY PETER I. BIJUR
CONFERENCE OF
THE CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES
THE GEOPOLITICS OF ENERGY INTO THE 21ST CENTURY
DECEMBER 8, 1999
I am honored to join such a distinguished gathering of scholars and policy-makers. However, when I received Sam Nunn's invitation to speak here, I was more than a little surprised. After all, I am a businessman, more comfortable with spreadsheets than political tracts.
At the same time, it occurred to me that much of what I consider day-to-day management you might consider practical geopolitics. As CEO of a company with investments in regions as diverse and challenging as the Middle East, The Caspian, West Africa and Latin America ? I fully recognize that the energy business is as much about political risk management as it is about drilling rigs, pipelines and refineries.
It also occurred to me that market trends gleaned from running a global energy company might be considered by you to be intelligence on the world?s most strategic commodity. So I accepted Sam?s invitation, and prepared by reading through a draft of the center?s "Strategic Energy Initiative," your thoughtful look at the world energy picture by 2020. This study suggests that the direction of energy ? supply, demand and prices ? will be vulnerable to geopolitical disruption. I cannot disagree.
No one can argue against the relevance of "Petro State" instability, or the world?s reliance on oil shipped through strategic sea-lanes, or the growing dependency of Asia on oil from the Middle East. It is the mission of this Center to follow these chains of dependency, and to make educated guesses about what is likely to occur in the century set to begin in twenty-three days.
However, if I may offer an observation in the style of Yogi Berra, there is a problem with the future: it keeps changing all the time.
Twenty years ago, few foreign policy experts predicted the end of communism as a world ideological force. Few foresaw that information technology would send growth in U.S. per capita income soaring above that of Europe and Japan.
The business perspective I will share with you may be wildly off. However, from my vantage point, I see powerful market forces at play as well as geopolitical ones. I see countries coming together over a commonality of interests. I see a world economy becoming far less vulnerable to regional economic or political hiccups. In short, I see a resilient world energy market not easily pinched or shut down by geopolitics.
My reasons for this cautious optimism result from the globalization of the economy; from the boom in both energy and information technologies; and from the resulting changes in the structure and very nature of the energy business.
Indeed, much of the change we are now experiencing is directly linked to two categories of technology, as defined by Clayton Christensen of the Harvard Business School. Christensen identifies one group as "sustaining" technologies -- inventions that help us advance mainstream products and services. They are evolutionary, not revolutionary. Every now and then a "disruptive" technology comes along ? a revolutionary invention that commands all business models to adapt, or die.
The first time the oil industry experienced a disruptive technology was 120 years ago when Thomas Edison demonstrated his electric light bulb. At that time, gasoline was a useless byproduct of the kerosene sold for lighting. Fortunately for my corporate ancestors, another disruptive technology came along?the internal combustion engine?and changed that useless byproduct into the fuel of the modern world.
As we close out this century, we are seeing signs of a gradual but inevitable movement away from the internal combustion engine. Will its substitutes be disruptive technologies, or merely sustaining ones? To put it another way, will the replacement of the internal combustion engine mean the end of hydrocarbons, or that hydrocarbons will be utilized in new ways?
Barring dramatic discoveries in solar power or fusion, I believe substitute engines like fuels cells or hybrids will still need hydrocarbons to operate. What will change is that gasoline diesel may no longer be the dominant fuel for the transportation sector. Rather, we will see a fractionalization of energy products based on a host of new transportation technologies.
But one way or another the hydrocarbon age will continue.
I do see a truly disruptive change already underway -- one based not on the fuel cell or any other mode of transportation. We are in the grips of perhaps the most disruptive technology in history. This is, of course, the Internet.
The worldwide web is both a driver and metaphor for the change we see around us. It is driving the democratization of information, the rise of consumerism and trade liberalization.
The Internet is the great metaphor of our time because successful businesses will not only have to adjust to it, they will have to look more like it. Goods and services will have to flow from unit to unit, business to business, without central direction.
In energy, online markets hold the promise of allocating energy products on a global basis with near-perfect efficiency. Energy companies will need to adapt to the Internet model, and do it fast, because an exploding world population will need sustained high growth.
If economic history teaches us anything, it is that GDP growth goes hand in hand with reliable, abundant energy. If world GDP is to grow, that world economy will need a level of supply, and a continuity of supply, that is unprecedented.
The challenge for our industry is to serve this new, global economy with cost-effective and clean energy. In this mission, we face three strategic questions, three variables, each with geopolitical implications:
What will demand look like between now and 2020?
Can our technology provide an adequate supply to meet this demand?
And how will we meet the requirement for steadily improving environmental performance?
Let me begin with demand, always the safest prediction: it will go up? steeply.
We should appreciate how much world demand has grown in just this decade ? the equivalent of more than 20 million barrels per day. This enormous appetite for energy will grow just as surely as the world?s population. Estimates vary, but it is likely that by the middle of the next century, world population will top out at nine billion people.
Already, if the world?s population were a village of 100 people, 60 of us would be Asians. And Asia?s proportion is destined to rise. As Asia and the developing world grows, so too will the western-style consumer mentality that is becoming more pervasive. Since 1985, China?s motor vehicle fleet has quadrupled from 3 million to over 12 million last year. There are already more stockholders in China ? 60 million ? than there are members of the communist party. India?s middle class is now larger than that of the United States.
Wherever satellite dishes and cell towers sprout over mud, brick, or thatched roofs, people are coming to demand this consumer lifestyle as an entitlement. So we know the demand curve will likely be as steep as the population curve.
In assessing supply, we need to first ask if abundant future resources exist in nature. Some pessimists believe we are already topping out.
Yes, oil is a finite resource. But, whenever I read about the end of oil, or of impending shortages, I am reminded of the writer who surveyed the resources of the world around him and came to this pessimistic conclusion:
". . . the world has grown old, and does not remain in its former vigor. It bears witness to its own decline. The rainfall and the sun?s warmth are both diminishing; the metals are nearly exhausted; the farmer is failing in the fields."
Those words come from Cyprian, a citizen of the Roman Empire writing around 250 A.D.
In 1939, the U.S. Department of Interior added up all the reserves in the world and reported that we would run out of oil in thirteen years. Almost thirteen years later, these American Cyprians issued an identical prediction.
Ladies and gentlemen, the Cyprians of 1999 are wrong once again. The oil is there, and it is plentiful.
I see two additional reasons why the 21st century will continue the age of abundant hydrocarbons.
The first reason is an economic integration born of geopolitical change. In the past decade the fall of communism and the liberalization of economies in Asia and Latin America have opened up vast energy resources previously inaccessible, or underdeveloped.
The second reason why hydrocarbons will remain abundant is improving technology.
Consider, for a moment, what technology allows us to do: Based on seismic data analyzed using 3-D visualization technology, we have the confidence to drop a drill bit into water more than 7,000 feet in depth, and drill down ? and even sideways ? another 20,000 feet. From a single 7-inch borehole, modern-day explorers can discover hundreds of millions of barrels of oil.
Technology also allows us to increase yield. Where 40 percent was considered impressive just two decades ago, we can now extract 70 percent or more of a field?s reserves.
Robert Esser of Cambridge Energy Research Associates sees worldwide production rising from 77 million barrels a day this year to 97 million barrels a day in 2010, without a peak in sight.
It is true that we have probably been able to harvest most of the proverbial low-hanging fruit. But the higher fruit coming within reach is equally plentiful. Consider the gas associated with oil production, which has historically been flared because there was no economic way of getting this energy to the marketplace. However, promising new technology could soon convert gas to clean diesel fuel ? transportable and economic.
Separately, the use of clean technologies such as gasification now enables us to convert coal, petroleum coke and refinery wastes into clean energy with far less environmental impact.
New technologies are not making hydrocarbons obsolete. Just the opposite. They allow us to turn previously uneconomic, environmentally difficult or remote hydrocarbons into valuable energy products. Together, these trends ensure a reliable and abundant supply of hydrocarbon energy.
Earlier, I spoke of the need to change the business model that has served us well over the past century. All players, from state oil companies to a new class of super-majors, are in the grips of a world market. This market places economic power in the hands of consumers, while taking power out of the hands of those that control resources. Well before 2020, enterprises ranging from Texaco to state entities like the China National Oil Company could be in competition with web sites to sell the distribution of energy.
A hostile fleet, or a terrorist armed with a weapon of mass destruction, could still create a crisis by shutting down a critical sea-lane or pipeline. This is a threat so apparent that it is even the premise of the latest James Bond film. But the rise of a seamless, adaptive world trading system for energy, will make us less vulnerable to chokepoints. A multitude of new players will make it harder to hold the world economy hostage.
Will this happen? Perhaps it already has.
The world oil market adapted to the shock and threats of the 1990 Iraqi invasion of Kuwait in a matter of months. More recently, when the "Asian contagion" spread quickly to Brazil, then to Russia, President Clinton called it the "worst financial crisis in a half century." Yet within a year, the U.S., other western nations and the IMF were able to stop the crisis dead in its tracks.
The third geopolitical variable is the environment.
It is not a phase. It is neither a trend nor a nagging distraction. It is now central to the energy business. Thirty-three years in this business convinces me that energy and the environment can mutually co-exist.
In facing the environmental challenges ahead, though, we cannot dismiss the economic ambitions of billions of consumers. This, indeed, was a subtext to the drama at the WTO meeting in Seattle.
I see three world environmental challenges.
The first is the race between the world?s accelerating demand for oil and our improving technological expertise at finding it. The second is dealing with the impacts of production, distribution and consumption on local environments. The third is the impact of human activity itself on the global climate. I am hopeful that technology and a sound public debate can resolve the first two issues. The third is somewhat more daunting.
As far as policy specifics are concerned, I believe that the Kyoto Protocol, while well intentioned, is misguided. As currently designed, it is neither prudent, workable nor will it accomplish the goal of controlling greenhouse gas emissions.
Rather, I suggest the NGO?s and the government architects of this policy ? in concert with the business and scientific communities ? perform a course correction and turn their focus toward technology transfer and market-based solutions such as emissions credit trading. These, in my view, offer the best chance to control global emissions without inhibiting the economic growth so eagerly anticipated in the developing world.
Promoting world economic growth is not just a benevolent thing to do. It seems to me to be sound foreign policy. As I know Sam Nunn would say, a strong national defense must come first. But U.S. Security can also be served by building up the world economy. Globalization can blur regional and national differences. It is a force for stability that promotes a commonality of interests.
Of course, globalization is not a painless process. It can force change on every nation, just as it does on every company and industry. Globalization is forcing developing nations to adopt rational regulatory structures, greater transparency, and reduce crony capitalism.
The United States is not immune to challenges from globalization. As the recent announcement by Royal Dutch Shell to invest in Iran bears out, America?s many unilateral sanctions isolate us from important parts of the world, and make an example of the limits of even the world?s most powerful nation. Yet they do not accomplish their purpose, no matter how well intentioned.
The lesson of the global marketplace holds true for economic superpowers and emerging markets alike; one put this way by Thomas Friedman in his book, The Lexus and The Olive Tree:
"If you think you can retreat permanently into an artificially constructed third space, and enjoy all the rising living standards of the fast world without any of the pressures, you are really fooling yourself and your people."
Many people are not ready to join the "fast world." In the Seattle protests and in the capitals of the developing world, we see the centripetal pull of the global market meeting the centrifugal push of ideological, agrarian or nationalistic resistance.
The United States must remain the essential leader in protecting and promoting world commerce. In world energy markets, the best way for American policymakers to ensure that supplies remain resilient to geopolitical disruption is to promote the commonality of interests among nations. World energy supplies may continue to be vulnerable, but they will be less so than before if globalization continues.
In short, I believe the hydrocarbon age will continue, perhaps with less of the drama and intrigue than attended it in the past.
I think the New York Times best summed up the challenge that lies before us, when it wrote in an editorial last Sunday?
"Managing expectations in a wired but unequal world will be a central task of the future. Yet a study of humankind?s progress in the second millennium ? and especially in the last century ? gives reason for optimism . We may not know what the future will contain, but we have a better idea how to keep our balance as we go there and a good idea, too, that we can arrive with the best of our old values intact."
While the Times was writing in a macro sense, I have the same degree of optimism for our industry.
I am confident that we can fulfill our mission of providing the energy to fuel economic growth. In the 20th century, the oil industry was a partner to national interests and a player in geopolitics. Looking forward, I believe the energy business will be a partner to the global economy, and the hope it holds for billions who aspire to a better life.
Thank you.
Last update 12/08/1999 Copyright ¸ 1999 Texaco Inc.
All Rights Reserved
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