John Watson, CEO of one of the world's largest energy companies, spoke last week in Minneapolis about rising U.S. oil and gas production, the need for new pipelines and the case for allowing U.S. crude oil exports.
Chevron's top executive also took questions from the audience after his speech to the Economic Club of Minnesota, and from reporters in a separate session. Here are some of the questions and answers. A longer version is on the 3D Economics blog:
Q: A question on infrastructure. What do we need to do to continue to build out to where we should be?
A: There's a great deal of effort that's needed locally in the area of gathering lines and major trunk lines. The Keystone pipeline is the most visible example, but Canada has infrastructure requirements that they need to put in place by going east to west. We have issues with natural gas. Think about it this way. We're shutting down nuclear plants in the Northeast. We're shutting down coal-fired plants in the Northeast. Where is the energy going to come from? It's going to come from natural gas that needs to be imported to the area. How's it going to move to the area? We have to have pipelines. And you better have capacity that will be sufficient both at the wellhead and in the pipelines to meet seasonality requirements … The industry has to do its part, whether it's the joint work that's being done with the rail industry on safety, of moving products out of Bakken and elsewhere in this country. We need to keep the trains on the tracks, and over time need to upgrade the rail cars that are being used. We have to have good assurances in place, particularly with some of the aging pipelines.
Q: I'm interested in your projections for oil prices, because there has been downward pressure. What would be the effect of changing oil prices on our economy?
A: My general view is that oil markets are pretty well supplied today. On the other hand, there's relatively little true surplus capacity. The only country that has voluntary spare capacity now is Saudi Arabia. There's some capacity that's been offline because of some of the civil strife around the world … Unlike the typical manufacturer, where you build a plant and then it's online forever and that capacity doesn't go away, in our business there's this thing called the decline curve, and so it requires perpetual reinvestment. Some oil fields have long, slow declines. Some, like those in the unconventional business, the shales, have very rapid declines … The break-even cost for most supplies is in many cases $100 and higher. Some it's lower, but over time... you're going to see prices stay at or near the level they are, or potentially higher.
Q: You mentioned three objectives for good energy policy, one being preserving the environment. Where does curbing greenhouse gas emissions fit into that, and what can Chevron do to help?
A: ...I'm not aware of a company that has done more than my company. It's worth noting that, because I do understand the concerns that are out there, I understand the risks of climate change. My company has the largest carbon storage project in the world in Australia. We and our partners are spending $2 billion. We're a part of a carbon sequestration project in Canada. These are among the very largest in the world. We're the largest renewables producer, thanks to our geothermal business … Here in the United States, we're fortunate. Because of the boom in shale gas, it is naturally displacing coal. Here we have a circumstance where the U.S. is reducing its greenhouse gas emissions without significant intervention in the markets. There's been a great deal of conversation about a carbon tax, or other vehicles, cap and trade. We have one in California. If you think about pollution markets in general, they've been effective when you've had local pollution to deal with, and all emitters could be included. The U.S. is 16 percent of the world's greenhouse gas emissions, and falling. It's estimated that without much change we'll be at 13 percent … You need global engagement on those mechanisms for them to be effective, in my opinion.
Q: What do you see as the prospect, moving forward, of the U.S. exporting crude oil?
A: This is one of the issues that should be allowed on inspection. It doesn't need a lot of discussion when you think about it. Right now, we can export oil products — gasoline, diesel fuel and jet fuel. What you consume can be exported. You don't consume crude oil. It's just an ingredient in the products. We can put more oil on world markets if we don't artificially constrain U.S. exports of oil … As a practical matter, the imbalance we have in the United States is that we're producing more light oil, which doesn't fit our refineries very well. So the idea would be to export lighter oil that is being produced out of the shales and import heavier oil to fill out our refineries. It's more of an economic efficiency argument. We have some big projects underway to export natural gas from the Gulf Coast of the U. S. … I think the U.S. can do a great service to the world's economy by exporting natural gas to help the economies of Europe and Asia develop and have access to cheaper sources of energy than they would otherwise have. So I'm bullish on both, just as I favor exporting farm products and a variety of other goods.
Q: Can you comment on the policy implications of the rise of the Islamic State and instability in North Africa and Nigeria?
A: The effect on the ground of course is very difficult and heart-rending for the people involved. It's significant. People displaced. The impacts that are being felt on the business will in time also be significant. It's hard to get drilling engineers and geologists and the talent to go to places that have these kinds of instabilities. While some oil will continue to be produced in some of the hottest areas, I think over time you'll see investment slow and production decline. Now, there's enormous potential in the Middle East, particularly in Iraq. My company has a presence in Kurdistan, and we evacuated our expatriots, who will return in due course when it is safe to do so. We also have significant business in Nigeria. Most of the conflict you described is in the north. The oil-producing region is to the south. But all of these trends where government is overwhelmed and society becomes dysfunctional, I don't think they're good for consumers, they're not good for people, and they're not good for developing energy resources, where that's possible.
Adam Belz • 612-673-4405 Twitter: @adambelz
