remarks to the Independent Petroleum Association of America

Remarks by Stuart R. McGill
Senior Vice President, Exxon Mobil Corporation
Grapevine, Texas, October 24, 2006
October 24, 2006

 

Thank you for that introduction.

I sincerely appreciate the opportunity to speak with you today.

This is a challenging time for our industry, and the IPAA is an important ally in educating policymakers and opinion leaders about key energy issues.

The independent sector is an indispensable component of the oil and gas industry, both here in the United States and internationally. Given the massive scale of the world’s energy needs, every participant is valuable; all are needed.

There is no such thing as “Big Oil” in today’s diverse energy marketplace — even ExxonMobil produces only 3 percent of the world’s total production.

And when you look at the role independents play in the United States, the numbers tell the story. Independents develop 90 percent of domestic wells and are responsible for supplying nearly 70 percent of American oil production and 82 percent of overall American natural gas.

And yet, most of the 5,000 member companies of the IPAA are small, privately held organizations, with an average of 12 employees.

Despite our differences in size and perspective, we all share the same objective — safely and efficiently delivering the energy needed to meet growing demand. When you consider the challenges and opportunities ahead, that’s a strong connection – whether you operate around the world or here at home.

 

Meeting Future Energy Demand
Now what about that future demand, and how might it be supplied?

Ongoing access to affordable, reliable energy supplies is the foundation for future growth and prosperity around the globe. It’s easy for those outside the petroleum business to overlook, but it’s something we in the industry are conscious of every day.

After all, energy fuels economic development. Energy powers business growth, transportation, market development, education, innovation — just about everything related to economic growth relies on energy.

Here in the United States and in other developed countries, we seek to maintain our economic strength and stability, and we count on reliable supplies of energy to enable us to do so. Around the world, developing countries look to economic growth to provide higher standards of living for their citizens, and they, too, need reliable supplies of energy.

In other words, regardless of where you are on Earth today, access to affordable energy is critical for growth and progress. This will be just as true in the future as it is today.

We expect that there will be a 40 percent increase in global energy demand by the year 2030, driven in large part by fast-growing economies and population growth in China, India and other developing countries. In what in our industry is a relatively short timeframe, people around the world will use over 320 million barrels of oil equivalent per day, almost 100 million more than is used today.

A wide range of energy sources will contribute to meeting this growing global energy demand. Wind and solar energy, for example, are expected to grow at a rate of about 10 percent per year. But even at that rate, by 2030 they will likely still provide less than 1 percent of the world’s total energy needs.

It is important to recognize that that some of the most talked about alternative energy sources have real limitations, at least with the technology currently employed.

For example, solar energy has very high costs and issues with intermittence.  Wind and hydroelectric power are challenged by siting considerations. And there are constraints to significantly increasing biomass fuels due to economics and competition with alternative needs such as food crops.

Despite advancements and incentives related to some alternative energy sources, oil and gas have the scale and flexibility to continue making the largest contribution to our energy needs for the foreseeable future.

We expect that oil and gas will maintain a 60 percent share of total energy over the next two and a half decades — roughly the same as today. To meet those needs, the oil and gas industry will be called upon to produce an additional 50 million barrels of oil equivalent per day by 2030, compared to what we produced in 2005.

There can be little doubt that our industry will be just as important in 2030 as it is today.

 

Participation in the Global Energy Market
However, keeping pace with demand will require us to source new supplies in North America — and from around the world. 

In recent months, we’ve all heard talk once again of the need for the United States to achieve energy independence. 

While at face value the concept of independence may sound appealing, the reality is quite different. We operate in a truly global energy market, where supply diversity is very real and very valuable in terms of ensuring availability and flexibility. Consider that in 2005, the United States imported oil from 35 different countries — at a rate of roughly 12 million barrels every day.

We saw the benefit of supply diversity following the devastation last year from hurricanes Katrina and Rita. While domestic production and refineries were shut-in or damaged, we were able to quickly and efficiently import gasoline and other fuels from Europe and elsewhere with little disruption to our economy.

It is important that we recognize that oil supplies from outside the U.S. will continue to be a vital part of our energy mix. 

Natural gas, too, is quickly becoming a global commodity. Traditionally, as you all well know, U.S. natural gas supplies have come from domestic sources.  But continuing growth in demand will require us to seek additional supplies from other locations, principally imports via liquefied natural gas.

Advances in LNG technologies are enabling natural gas to be delivered safely and efficiently anywhere in the world.  For example, new liquefaction trains, developed by ExxonMobil in partnership with Qatar Petroleum, are 60 percent larger than the previous generation. These developments, combined with significant increases in LNG ocean tanker capacities, enable us to achieve unit cost reductions of more than 25 percent, making imported LNG globally competitive.

Here in the United States, ExxonMobil is participating with QP and ConocoPhillips in the Golden Pass LNG terminal near Port Arthur, Texas.  Construction began in August, and we’re scheduled to begin operations at the site in 2009.

The Golden Pass plant is designed to process 15.6 million metric tons per year of LNG, which is equivalent to approximately 2 billion cubic feet of natural gas a day. Our goal with Golden Pass and other planned LNG facilities is to increase supply flexibility and ensure that homes and businesses have access to reliable, affordable supplies of natural gas.

By 2030, LNG imports will account for about 25 percent of the U.S. market, and we’ll need every bit of that total to meet growing gas demand. In other words, both domestic and imported natural gas will be required if our industry is to collectively meet the projected market requirements.

The fundamental reality of living in a global energy marketplace is this: if importing nations — including the United States — diversify their sources of energy and develop and use their domestic resources more efficiently, they will become less dependent on any one country or region for energy.

A key component of maintaining such an approach is to strengthen our partnerships with exporting nations. Ongoing positive, productive relationships with producing countries are vital if we are to ensure supply diversity.

 

But...Domestic Energy Resources Remain Critical
When we consider where our future energy supplies will come from, let's not forget that North America was richly endowed with its own resources.

While it’s true that our domestic industry is largely mature, there are many opportunities remaining.

ExxonMobil continues to invest significantly throughout North America. We are, for example, one of the largest acreage holders in the Gulf of Mexico, where we have nearly 4 million gross acres leased, with approximately 3 million of this in deepwater.

Technology will play a critical role in allowing us all to access hard-to-reach resources here domestically.

The reality is that our businesses today are technology businesses — as much or even more so than many industries that are considered “high-tech.”  Technology has given us the ability to supply energy from sources once considered impossible to access.

Technology is also critical in developing non-conventional energy resources.  For example, last year we initiated development in the Piceance Basin of western Colorado using our patented multi-zone stimulation technology, designed to commercialize this large, but low-permeability basin. While today we're producing only about 50 million cubic feet per day, the technology has now been proven, and we have near-term plans to ramp up production. With over 30 Tcf of resource potential underlying our 300 thousand acre leasehold, we expect to be producing Picaence Basin gas for the next 50-plus years.

At the Cold Lake field in Alberta, Canada, we’re using proprietary enhanced recovery technology to stimulate production of heavy oil and improve both the amount of reserves available and the economics of the project. The Cold Lake operation is the world’s largest thermal bitumen recovery project, with production averaging 138,000 barrels of oil per day last year.

Those are just two examples of projects and opportunities we’re pursuing in North America.  But industry alone – even with leading-edge technology — can’t deliver the full range of opportunities available. Access is also important.  Given that oil and gas resources are increasingly located in hard-to-reach or off-limits locations, governments need to ensure that industry has rights of entry that will enable us to maintain affordable and reliable supplies.

More so today than ever before, it’s clear that we need a mature policy approach to the question of resource access. This is a debate that needs to take place between government, citizens and industry in relation to areas such as federal lands in Alaska, the Rocky Mountains and on the Outer Continental Shelf.

The political will, based on a realistic energy outlook, to allow further development of these and other energy resources in the United States has been in short supply.

Congress has considered a number of options on resource access, but we still have not achieved a legislative consensus that will underpin increased access — while at the same time, we call on other countries to increase production.  It is hard to expect to be taken seriously when calling on other countries to increase their supplies when so much of our own resource endowment is off-limits.

The broad coalition of consumer and industry groups that are calling for the nation to allow further development illustrates just how important this issue is to all of us.

It’s not an either-or question, as some try to paint it, between supplying more energy or pursuing greater energy efficiency. We can and should do both.

By continuing to apply advanced technologies to both conventional and non-conventional reserves – and by accessing all available resources — we can ensure that domestic energy supplies continue to play a major role in meeting U.S. demand well into the future.

 

Global Challenges… and Global Responsibilities
The challenges all of us face are very real – growing demand, the need to produce new supplies, expensive investments in technology and infrastructure, to name just a few.

But even if we’re successful in continuing to find, produce and deliver affordable energy supplies – as I know we will be – we still have additional work to do if we are to serve our industry appropriately.

First, we must communicate with and engage with the external world, beginning with policymakers and legislators.

We must work to inform these key audiences about the facts of our business.  Few people outside of our industry understand the massive investments that are required, the long-range planning we must undertake, the global scale of our markets or the cyclical nature of prices.

It is important that those in government with responsibility for creating the guidelines and regulations we all follow have a strong understanding of our business, and it is up to us to ensure that they have the information they need.

One example of the importance of this role is the current debate over royalty relief in the Gulf of Mexico. 

In order to stimulate production activity in deep water, the federal government structured lease agreements in 1998 and 1999 to increase the reward for those willing to take the very expensive risks involved.

Today, with oil prices higher, there is talk of "mistakes" and of restructuring those agreements.

Yet as a result of the Deep Water Royalty Relief Act, industry has drilled about 50 wildcat wells on 1998 and 1999 leases resulting in 15 commercial discoveries that will ultimately produce about 1.5 billion oil equivalent barrels according to industry analysts (Wood Mackenzie).

In other words, the original act accomplished what it set out to do, but now some are pushing for the rules to change.

The issue of contract sanctity is a critical one for our industry, since we cannot invest the large sums of money needed for exploration and production without assurances that the laws, terms and policies in place at the time deals are constructed remain in place.

Once prior year lease terms and conditions are changed, contract sanctity is eroded — with the result being a loss of confidence in the overall investment climate here in the United States.

Yet another example of the importance of communication relates to the discussion surrounding greenhouse gas emissions. 

The use of fossil fuels is a major source of carbon dioxide emissions. Given the important role that fossil fuels play in providing energy for the global economy, the issues of global economic development, future energy supply, and greenhouse gas emissions are closely linked. 

Our industry has a responsibility to contribute to policy discussions on these important issues. We should encourage policy approaches that promote global participation, encourage greater use of existing efficient technologies and stimulate research into technology breakthroughs.

Finally — and this is an issue I believe strongly in – we must encourage and support young people who want to work in our industry. Developing the next generation of engineers and geoscientists is critical, and all of us must help promote the study of mathematics and science and share the excitement and challenge of a career in energy with young people.

The IPAA, its members, ExxonMobil — all of us in the energy industry have important roles to play in building the foundations of tomorrow’s energy supplies.

 

Conclusion
In closing, I want to thank the IPAA again for the invitation to speak with you today. 

If I could leave with one thought, it would be this:

Our industry has been a significant part of the U.S. economy – and society – ever since its birth in Titusville, Pennsylvania, almost 150 years ago.

Since that time, we’ve faced many a challenge, and each time, we’ve overcome obstacles with ingenuity, hard work, know-how and a “never say never” attitude.

In so doing, we’ve contributed to the spread of prosperity and the growth of the modern economy around the world, and I confidently predict we’ll continue to play an essential role for the foreseeable future.

Thank you.