meeting the energy supply challenge through technology, teamwork and trade

Remarks by Mark. W. Albers 
Senior Vice President, Exxon Mobil Corporation
CERAWeek 2008, Houston, Texas
February 12, 2008 

Thank you, Dan, for the opportunity to participate in this morning’s panel, and for your leadership in organizing CERAWeek. 

I want to thank each of your for the significant commitment you have made in being here this morning.  You would not be here if you did not have an interest in what the future of the energy industry looks like.

You may have come with questions like: Are we running out of oil?  What is the role of global integrated oil companies with the emergence of national oil companies, or NOCs?  What effect will nationalism have?  What about energy independence?  Is it achievable or even desirable?

I am going to address each of these questions in the next twenty minutes. 

Our topic this morning is “Meeting the Supply Challenge.”  Although the nature of the supply challenge may be intuitive to many of us in this room, to the public at large, it is often misunderstood.

Many perceive the supply challenge as one of scarcity.  They fear that hydrocarbons — and oil and gas in particular — are dwindling fast, that peak production is near, and that the search for alternatives must accelerate if we are to prevent economic decline.

Oil is indeed a finite resource.  And alternative energy sources, such as nuclear power and biofuels, play an important and growing role in meeting global energy needs. 

But although oil is finite, it is far from finished.  According to the U.S. Geological Survey, more than three trillion barrels of conventional oil is estimated to be ultimately recoverable worldwide.  This estimate does not include unconventional resources, such as heavy oil and shale oil, which could add significant amounts to this sum. 

By comparison, an estimated one trillion barrels of oil have been produced in all of human history to date. 

As the National Petroleum Council concluded in its landmark report released last year, “The world is not running out of energy resources.”  The supply challenge, then, is not one of scarcity, as some believe. 

Much of the Earth’s remaining recoverable oil resources are found in complex geologic formations, in remote locations, and under harsh conditions.  Technology is needed to overcome these challenges and bring these abundant resources to market.

By developing and deploying these needed technologies on a global scale, international oil companies, such as ExxonMobil, play an important role in meeting the energy supply challenge.

But of course, the resource-owning governments and national oil companies with whom we partner obviously also play a critical role. 

Working together — and supported by stable investment environments, predictable policy and regulatory frameworks, access to attractive acreage, and the unique strengths national oil companies bring to bear — international oil companies are able to partner effectively and apply the advanced technologies we possess. 

At the global level, trade and investment within a free market framework are crucial to meeting the supply challenge.  Massive amounts of capital will be needed to meet future energy demand —  an estimated $22 trillion in energy supply and infrastructure investment over the next 25 years, according to the International Energy Agency.  Free markets facilitate investment and spur innovation.

In simple terms, meeting the supply challenge requires technology, teamwork and trade.  I would like to elaborate on these three elements, and explain how partnerships between international oil companies, national oil companies and host governments contribute to each. 

Let me begin with technology.  To consumers of our products, the importance of innovation to the oil industry is often not readily apparent.  Gasoline may not appear as technically sophisticated as many consumer electronic goods, for example.

But as many of you know, technology is the lifeblood of our industry.  It is also a powerful enabler of cost reduction, especially in a high cost environment such as we find ourselves in currently.  Technology infuses the entire supply chain, from the producing reservoirs to the service station.   

With technology, we are able to locate reserves far beneath the Earth’s surface.  Three-dimensional seismic mapping and Remote Reservoir Resistivity Mapping technologies make this possible.

With technology, we are able to reach offshore resources from onshore facilities with pinpoint precision, reducing costs, increasing value, and minimizing the environmental footprint, as we are on Sakhalin Island in Russia’s Far East.  Extended reach directional drilling makes this possible.

With technology, we are able to unlock trapped natural gas otherwise deemed too costly to recover, as we are in Colorado’s Piceance Basin with Multi-Zone Stimulation Technology.

With technology, we are able to breathe new life into mature reservoirs and produce more from existing developments, as we are in the Upper Zakum oil field offshore Abu Dhabi.  Enhanced Oil Recovery technologies make this possible.

With technology, we are able to transport resources safely and more cost effectively across vast distances, as we are from the Persian Gulf to the Gulf of Mexico.  New high-capacity LNG shipping vessels make this possible.

With technology, we are able to improve the efficiency of our refineries and maximize the value of the crude oil we refine.  Hydrocarbon molecule management makes this possible.

With technology, we are able to dramatically cut pollutants in the fuels we produce.  Advanced catalytic refining makes this possible.

With technology, we are able to significantly reduce emissions by making the vehicles we drive more efficient.  Homogeneous Charge Compression Ignition, an on-board reformer, a new lithium ion battery separator for hybrid vehicles, and other vehicle technologies under development by ExxonMobil and our partners can make this possible.

And in perhaps the most dramatic illustration of the power of technology in the energy industry, the U.S. Geological Survey’s estimate of three trillion barrels of ultimately recoverable conventional oil worldwide is more than one trillion barrels higher than the estimate 20 years ago.  In a single generation, technology has essentially grown this resource by over 50 percent.

Technical achievements such as these require the intense collaboration of hundreds of scientists and engineers, plus a significant investment in research and development over an extended period of time.  Innovation in our industry neither occurs in a vacuum nor occurs overnight.  It also does not happen with inconsistent or wavering commitment.

Beyond the R&D phase, effectively deploying new technologies in the field, and across the supply chain requires project management experience and expertise.  It also demands a complete understanding of the full lifecycle of a resource.  

Furthermore, given the complexity and long-term nature of today’s oil and gas projects, technical innovation is necessarily a dynamic, iterative process.  It is not simply a matter of pulling available technologies off the shelf. 

Office and operations staff must dialogue constantly with research scientists to adapt and apply new innovations as they come on-line.  The exploration and development phase of a project can take over a decade, during which time new technologies are discovered and developed.

Finally, applying the newest technologies to large-scale, capital-intensive projects can be a costly process without project execution excellence.  This is especially true in today’s relatively high cost environment, where inefficiencies and mistakes are easily magnified.

Massive investments of capital and time in research and development… global project management expertise… real-time application of rapidly-evolving technologies… disciplined cost and safety controls… These are the unique capabilities that integrated international oil companies, such as ExxonMobil, can bring to bear. 

We not only develop new energy technologies, we apply and manage them effectively, and we do so in an environmentally-responsible way.  Through innovative integration, international oil companies are helping meet the world’s supply challenge.

This brings me to the second element of the solution to meeting the challenge — teamwork. 

Developing the energy resources required to meet the world’s growing needs requires not only technology, but access, investment, and management and operations experience — assets on which no single entity can claim a monopoly. 

A wide variety of entities — governments, national oil companies, suppliers, agencies, educational institutions, social interest groups, along with international oil companies — have roles to play.  Partnership and collaboration are vital.

Host nations’ governments that provide a stable political and economic environment naturally have an advantage in attracting investments.  Along with that, national oil companies bring a unique understanding of their natural resources.  Suppliers bring a dependable local supply chain for goods and services.  Universities provide an educated work force.  Social interest groups bring an understanding of linkages to local communities as well as an understanding of cultural and local environmental sensitivities.  

International oil companies complement these roles by bringing together people, proprietary technology and proven operations and project management capabilities.

A case study demonstrates this potential.  ExxonMobil’s partnership with Rosneft, ONGC and SODECO at the Sakhalin-1 project represents one of the largest single foreign direct investments in that country, and one of the most ambitious oil and gas projects ever undertaken. 

By mid-2007, ExxonMobil’s investment in Sakhalin-1 — including all aspects of the operation, from exploration through infrastructure development — approached $7 billion.   Our technology applications have included use of proprietary drilling techniques to drill wells over 11 kilometers long — setting new, back-to-back world records.  

We reached peak production in the first quarter of last year, just five years after the project was declared commercial, and it continues to perform as expected.  An incremental, phased development approach enables us to better manage the schedule and cost exposure of this massive, complex project.

And here’s the bottom line.  Direct revenues to Russia over the life of the project, which we expect to produce for nearly a half century, are expected to surpass $50 billion. 

The host country gains in other important ways as well.  The value of contracts awarded to Russian companies has reached approximately $4.4 billion so far — or nearly two-thirds of every dollar spent. 

The number of direct and indirect jobs created for Russian citizens will total more than 13,000 over the development of the project.  Hundreds are already receiving professional training, and as they do, we expect 90 percent of the project workforce to be Russian citizens in 10 years.

Sakhalin-1 shows how partnership between international oil companies, national oil companies and host governments can deliver greatest total value.

Greatest total value in this context means more than meeting the bottom line — it also means understanding the bigger picture.  The most effective partnerships are those based on communication and mutual understanding of the contributions and aspirations over the long-term of all parties involved. 

The energy sector and the opportunities it offers can have a transformative economic and social effect for many producing countries.

An understanding of the economic, educational, social, and environmental goals of a host nation’s leadership for its domestic energy industry is crucial to building a durable, long-term partnership benefiting all involved.  Such understanding starts with dialogue.

The Kizomba C project in Angola, which announced first production last month, highlights the value of such dialogue.  From the beginning, ExxonMobil’s affiliate Esso Exploration Angola engaged Sonangol and the government of Angola in a discussion of their long-term aspirations for the project. 

With a detailed knowledge of deepwater execution requirements and experience, Esso was able to further strengthen and expand the capabilities of Angolan companies by working together.  Nearly $1.5 billion has been spent on local goods and services, including contracts for in-country fabrication, logistics support, training, and development of Angolan personnel.

The results so far have been impressive.  Angolan supplies played an instrumental role in the implementation of the project, from subsea manifolds to helidecks.  The fabrication of high-strength steel turret components was the first of its kind in Angola. 

These efforts have resulted in sustained growth of Angolan capacity and expertise to support future oil and gas developments.

Effective teamwork requires dialogue, and a shared vision and shared commitment for energy resource development.  It is essential to meeting the world’s energy supply challenge.

But the extraordinary benefits of technology and teamwork are fully realized only in the context of the third element of the energy supply solution — trade. 

The global market for energy — characterized by the free flow of goods, services, investment, and ideas — unleashes the capital and the creativity needed to build partnerships and drive innovation.  In this way, interdependence facilitated by free trade is crucial to meeting the energy supply challenge.

Unfortunately, in the current relatively high price environment, some exporting and importing countries are losing sight of their interdependence. 

Instead, they are responding to the energy supply challenge by pursuing policies of resource nationalism, ranging from calls for “energy independence” for consuming countries, to “energy superpower” status for producing ones.

Calls for “energy independence” are especially loud in the United States.  In 2006, the gap between liquid demand and supply in the United States stood at about 12 million barrels of oil per day, or 60 percent of Americans’ daily demand for energy. 

This gap is filled primarily with imports of oil from over 35 countries last year.  North America is the source of most of the energy Americans use.  No other country accounted for more than 15 percent of U.S. crude oil imports in 2006.

This gap could be reduced by continuing to use energy more efficiently.  It could also be reduced by opening access to the wealth of domestic energy supplies currently ruled “off-limits.” An estimated 30 billion barrels of recoverable oil has been closed to production in the United States — an amount equating to 8 years of current U.S. crude oil imports.   For those seeking to reduce U.S. reliance on imports, opening access to these resources in our own backyard is a good place to start.

“Energy independence” is one side of resource nationalism.  Another is the form it takes in some energy exporting countries as a drive to become a so-called “energy superpower.” This drive has sometimes manifested itself in unilateral changes to existing contracts with international oil companies, or moves to further nationalize their energy industry.

Such actions have detrimental short- and long-term impacts. The risks associated with major energy projects are considerable.  

International oil companies need to be confident that contract terms will be honored — that the risks and rewards from a given project will be shared as agreed upon — or they will be less likely to make the needed technological upgrades or the future investments.

Resource nationalism, either in the form of energy independence or energy superpower status, threatens to stymie innovation and slow energy development critical to continuing economic progress worldwide.

The long-term costs of such counterproductive policies are borne to a large degree by citizens in consuming and producing countries alike.  

Consumers pay in terms of access to fewer energy supplies, which can lead to higher prices.  Citizens of producing countries pay in terms of lost revenues and missed opportunities as international investment declines, and with it, energy infrastructure and new opportunities for development and advancement.  And because oil fuels the global economy, supply delays limit global economic growth, which impacts host producing countries also.

At a time when we should open doors to trade, resource nationalism closes them. At a time when we should be building bridges of international partnership, resource nationalism builds walls. 

Resisting resource nationalism in all its forms and promoting free trade in its place is as essential to meeting the energy supply challenge as technology and partnerships.

Let me a say a few additional words about access.  Throughout the last 100 years of our industry’s history, access to resources has come in cycles, driven by economics and politics.  Periods of reduced access — such as the period our industry finds itself in currently — are often followed by periods of more open access, as the important contribution resources make to both local and global economies, and the critical need for them is better understood… and as political administrations come and go.

Given the enormous investments and long timelines involved in our projects, the energy industry naturally takes a long-term view — and we do when it comes to access as well. 

In conclusion, the supply challenge we face is not an issue of scarcity.  Abundant resources do exist to meet the world’s growing energy needs. 

It is instead an issue that demands new technologies, and building the partnerships and strengthening the free market framework that make technological innovation and its effective application possible. 

As global leaders in energy innovation, integration and management, international oil companies play a vital role in meeting this challenge.  So do each of the governments, companies, and organizations represented here today. 

It is not “either” IOCs “or” NOCs — it is “both.”  Together we can create more value than either one of us do apart.

By promoting technology, teamwork and trade, I am confident we can meet the energy supply challenge together. 

Thank you.