changing fortunes: global energy security

Remarks by Rex W. Tillerson
Chairman and CEO, Exxon Mobil Corporation
Spruce Meadows Roundtable, Calgary, Alberta
September 7, 2007

Thank you very much for that kind introduction. I appreciate the invitation to talk with this group, and I hope to provide some context for the plenary discussions to follow.

This year’s “Changing Fortunes” roundtable concerns itself with energy security. There are many ways to approach the issue of energy security, but this morning, I’d like to suggest we focus on three questions: What does energy security mean in the context of today’s global economy? How best can we achieve energy security? And what are the hurdles to getting there?

There’s no question about it: Concerns about global energy security are top-of-mind around the world today. It’s easy to see why.

Prices at the pump. Civil instability in some of the world’s major energy exporting countries, and a new assertiveness by governments in others leading to uncertainty as to their future export capability. Add to this a rising concern around the globe about the environmental effects of our reliance on hydrocarbons, and it’s no small wonder that these days the question of energy security has become, in many people’s minds, a catch-all issue.

Spruce Meadows seems as good a place as any to take up the issue. Canada and the United States have a long history of cooperation and collaboration in energy development and energy trade. Our two countries share the longest border in the world, but our shared interests have always been broader than just in our own geographic proximity. We share a common view of the importance of energy to drive our economies… a common perspective on the importance of free markets and technology… a common commitment to help improve lives in the developing world… as well as a common commitment to global energy security and a common concern for the global environment.

Alberta is the center of Canada’s petroleum industry, and Spruce Meadows is a center for equestrian competition. Here at Spruce Meadows, overcoming hurdles is what rider and horse do. The course is long and complex, with many obstacles to be overcome.

It requires a thoughtful approach to completing the entire course, not just the individual obstacles. It requires discipline to clear each hurdle without incurring faults and to complete the course with the greatest possible efficiency. And that’s not a bad metaphor for the challenges our industry and our societies face in ensuring energy security.

Let’s first consider the fundamentals. What does energy security mean in the context of today’s global market?

For global economies, energy security simply means a reliable supply at a cost that supports economic growth. At the consumer level, energy security means having a reliable supply in the form of the energy needed at a price that allows consumers to go about their activities and maintain, if not improve, their quality of life.

Today, however, energy security is often confused with energy independence. And that leads to a different policy discussion, including a whole range of substitutes for hydrocarbons. As if we will simply replace our current sources of energy, most particularly oil and coal, with something we can contain and provide within our own borders.

Frankly, we might all wish that the solutions to our challenges were that simple. But the realities of our current energy situation — and therefore the shape of our energy challenges — are a lot more complicated than some popular views would suggest.

Energy independence is not only impossible for most countries, its pursuit can be counterproductive. The best way to achieve energy security is through diversification of energy sources — fostering the development of more energy from more sources and geographic locations through open, competitive markets. That mitigates the impact on the total supply from disruptions in any single country, region or source. This approach has provided reliable, affordable energy to the world’s economies for decades, even in times of periodic disruption.

The effectiveness of the interconnected global supply chain was demonstrated after Hurricane Katrina, when almost 30 percent of U.S. refining capacity was shut down. Strategic petroleum stocks were made available and European imports responded quickly, with the result that Americans only suffered short-lived, localized shortages and price spikes.

The point is that the nationality of energy has little relevance when buyers and sellers are able to operate freely in the global marketplace. Energy made in America — or made in Canada — is not nearly as important as energy made wherever it is most economic and most reliable. Such international energy engagement has been the path to greater energy security and will be in the future as well.

In contrast, “energy independence” implies nationalization, protectionism and even isolationism — and history shows this approach is ultimately counterproductive, leading to inefficiency, higher prices, supply shortages and trade wars.

Canadians know this. Despite producing more energy than it consumes — making it theoretically independent of imports — Canada has chosen not to withdraw from world energy markets, but to engage them, and to optimize and diversify its own energy portfolio.

Moreover, as a recent study by the U.S. National Petroleum Council noted, “Policies espousing ‘energy independence’ may create considerable uncertainty among international trading partners and hinder investment in international energy supply development.”

A popular but mistaken hope resides in the idea that we can quickly shift the global economy to alternative sources of energy with the same convenience, reliability and affordability that economies and consumers are accustomed to.

Alternative energy sources such as wind, solar, biomass and hydro energy are important today, and they will be important in the future. Given the world’s growing energy needs, we need every BTU we can economically develop.

At the same time, however, we must not ignore the reality that, because these renewable energy sources start from a relatively small base, their growth will not significantly alter the global energy mix in the foreseeable future and their growth is chasing a much larger growing demand.

The reality is that the demand for energy, because of its enormity, which today is met primarily by hydrocarbons such as oil and natural gas, will continue to grow over the coming decades and necessitate continued growth in hydrocarbon supplies as well.

To deny that reality is to deny hope for developing countries. It is in developing countries that we will see the greatest increases in energy demand in the years ahead.

The global demand for energy in the year 2030 will be about 40 percent higher than it is today. And while demand in developed countries — including Canada and the United States — will continue to rise at more modest rates, our economies will continue to require oil and natural gas to sustain themselves. The larger share of the global increase in demand will occur in the developing nations.

Today, developing countries use about half of the world’s total energy. Between now and 2030, 95 percent of the world’s population growth will occur in these developing nations. The rate of their economic growth will be almost twice that of the developed countries. And many of those developing countries are just now reaching the point where individual wealth and energy consumption are about to accelerate.

For example, in China, today there is only one car or other light duty vehicle for every 100 Chinese citizens, while there are 78 cars for every 100 U.S. citizens. The per capita electricity use in the United States and Canada is more than 7 times that of China.

Considering these figures, it is easy to see why China’s continuing economic growth is going to lead to steep increases in vehicle ownership and electricity use. And that means significant increases in global energy demand.

For those of us fortunate enough to live in developed countries, it is difficult to imagine the lives of those struggling in developing countries. I’m speaking of the eighty percent of the world’s population who live in developing countries. About a third of whom live on less than two dollars per day. More than one billion live without electricity… one billion lack clean drinking water… more than 2.5 billion lack proper sanitation.

For developed nations to deny these developing peoples the use of the energy sources required for economic growth would be the equivalent of climbing to the top — and then pulling the ladder up after ourselves. There has never been economic growth without energy. From the earliest days of the Industrial Revolution, fueled by hydropower and wood, to today’s powerful global economy fueled by hydrocarbons. That’s a constant truth.

And so, the answer to the first question — what does energy security mean in today’s environment? — is the same as it has always been. It means a reliable and affordable supply of energy. It does not mean energy independence. It does not mean denying realities about growing demand. And it certainly cannot mean denying peoples in developing countries the fuel they require to be propelled out of poverty.

How can we best achieve energy security? The good news is we have adequate resources globally to supply anticipated growing demand. It requires we do the right things. And that we do things right. It won’t be simple and will present our industry and our societies with challenges to balance competing concerns.

From my industry's perspective, it has never been easy, even if in retrospect it looks to a lot of people like it was easier early on. Like a rear-view mirror, energy industry challenges seen in historical hindsight often appear smaller than they were in reality. Our industry has always faced high hurdles. And we have always found ways to get over them.

And that’s worth keeping in mind. It can give us confidence that we can surmount the new barriers. Moreover, those earlier challenges contain some important lessons about the continuing importance of technology and investment in our industry.

Many of you know the story of the Canadian petroleum breakthrough in 1947 when Imperial Oil decided to drill into a peculiar anomaly near Leduc based on a newly-invented technology, seismic recordings. They drilled the well principally to satisfy their curiosity about what caused that anomaly. But it turned out that they had found an enormous oil field. Soon, geologists noticed that there were similar anomalies nearby, and Canada went from producing only about 10 percent of its domestic oil needs to become a net exporter of oil.

That’s the Canadian oil story familiar to a lot of people. It looks almost like a stroke of blind luck with immediate payoffs. Forgotten by most in all that success is the fact that Canada’s last major find before Leduc had been a quarter of a century earlier in 1920. In fact, going into the year of the Leduc discovery, Imperial had drilled 113 dry holes in a row! The Leduc experience is emblematic of the same elements for success today and tomorrow. Persistent pursuit of technologies opens access to new supplies.

There’s never a technological final fix in this industry — new finds, new production methods always require new technologies.

Moreover, the Leduc example reminds us of the extraordinary time horizons required for investments in this industry. ExxonMobil, for example, has made an investment in Russia with a very long time frame. Oil was first discovered at Sakhalin Island in the 1970’s, and we expect that production will continue through the middle part of this century. All told, that’s about 75 years.

When you consider the average life span worldwide today is about 67 years, there are several generations of geoscientists and engineers that work on this resource over its life.

Economists talk about something they call “patient capital.” Given the time frames in our industry, I would submit that most of the investment decisions we make in the energy industry epitomize that concept.

Technology and long-term investment will be even more important going forward.

For some time now Imperial has been producing the heavy oil at Cold Lake in Canada. Evaluation drilling and production pilot testing for the Cold Lake project began in the 1960’s and the 1970’s. The first commercial production there began in 1985. Originally the project had a capacity of about 25 thousand barrels per day and expectations based upon then available technology that 13 percent of the oil would be recovered.

Last year, Imperial achieved a record daily production of 160 thousand barrels per day. The recovery factor has increased at Cold Lake from 13 percent to more than 30 percent — all as a direct result of continued focus on research and technology development, including developing unequalled expertise operating in thermal conditions.

I cite these examples because they are among the ones I know best. But there are other similar examples across the world, not just coming from ExxonMobil, but also from our colleagues throughout the industry, some of whom are here today.

It is this history of overcoming significant technological hurdles that allows our industry to take on even more challenging resource deposits — from the Orphan Basin where water depths can exceed 3,000 meters, with icebergs from January to June, to Canada’s vast oil sands here in Alberta.

One day, some will look back and consider our time the era of “easy oil.”

The point of these examples, as I like to put it, is that the most productive territory we need to access in order to meet global energy demand going forward is not along the Gulf Coast of the United States… not in offshore Alaska, Canada or Russia… nor in the oil sands of Alberta. The most productive territory to access is between the ears of engineers, geoscientists and technologists. It is their ideas and creativity and experience that will devise a steady flow of new technologies to keep enlarging the flow of energy resources.

Although it’s not usually thought of in that light, the energy industry is very high-tech. The very terms “fossil-fuel” and “crude oil” don’t exactly suggest sophisticated technologies at work. But none of the examples I’ve just cited — nor any of the other hundreds you can find in the energy industry — would be possible without cutting-edge technologies.

If we do the right things, and if we do things right, we will have the energy resources to fuel the huge increases in demand.

The globe is endowed with adequate oil and gas resources. The issue is whether those resources will be developed in a timely way to meet rising demand.

Today, national oil companies control in excess of 75 percent of the global proven oil reserves, while international oil companies now control less than 10 percent of the world’s oil and gas reserve base. ExxonMobil is the largest of the publicly-traded international oil companies, our contribution to the global oil market is about 3 percent. The question is whether the technologies, the investment capital and — most importantly — the know-how can be brought to bear on the global resources to see them delivered to meet anticipated demand requirements.

According to the International Energy Agency, more than $20 trillion in new energy investment will be required through 2030 to meet the world’s growing energy need. That’s $3,000 for every person living today.

If these enormous sums of capital investment are to be realized, fiscal and legal frameworks appropriate to the level of risk are necessary. Unfortunately, the creation of stable legal frameworks, regulation and taxation is hindered today by widespread public and political perceptions of the industry’s profitability over the past two or three years. Regrettably, policies designed to pursue energy independence in the name of energy security are likely to inhibit actions by industry to provide greater energy security. Restricting access outright or placing costly conditions on access that raise cost and risk, ignore the progress that industry has achieved to develop and produce energy resources under the most challenging of conditions with care for the environment.

Elsewhere, governments of some oil producing nations are seeking to capitalize on the current high crude prices by renegotiating existing contracts or further nationalizing their energy industries. Those actions will discourage needed investments and technology upgrades. The very large capital investments and long time frames required for today's enormous energy projects make continuity and stability in energy policy even more critical.

The International Energy Agency projects that more than 90 percent of new oil supplies will come from the developing world in the next twenty years.

As new national players enter the oil supply market, it is inevitable that international energy development is likely to be increasingly influenced by geopolitical concerns and less by the free play of markets. This is not — and should not be — a surprise. Oil has never been viewed by governments as just another commodity of interest only to suppliers and consumers. Since Lord Curzon declared that in the first World War the Allies “floated to victory on a sea of oil” our industry has been a center of attention. That means that countries around the world must integrate their energy policies into trade, economic, environmental and foreign policy considerations.

As policymakers, industry participants and investors address the challenge of meeting future energy security expectations, they do so in a global context of rising concern surrounding greenhouse gas emissions and the risk associated with climate change.

The Earth’s temperature has warmed, and the potential risks to ecosystems and societies are sufficient to warrant action, sensible action — by consumers, by industry, and by governments. There is no silver bullet, no single solution. And research into the causes of climate change needs to continue.

As I indicated previously, the facts are that while alternative energy sources are important, the world will continue to rely on fossil fuels as the dominant source of energy supply for very many years to come. Only by accommodating this truth can we pursue the most sensible response to climate change risk. Let me highlight a few examples where near-term actions are likely to bring benefits.

The first is energy efficiency. Investment in energy efficiency is an economic win-win. Carrying out our daily activities while consuming less energy addresses both energy security and climate change concerns. The widespread adoption of currently available energy efficiency best practices is likely the most significant near-term action to mitigate the rise in greenhouse gases.

In the transport sector, developing and commercializing technologies that allow conventional fossil fuels to be used more efficiently will be required, as there is no readily available alternative transportation fuel that can be provided on a scale or convenience necessary.

In the near term, continued advances in diesel and gasoline engine design will provide incremental benefits. In the longer term, the combination of on-vehicle fuel reformers and advanced fuel cells holds the promise of step-change efficiency improvement.

In the area of power generation, carbon capture and sequestration has the potential to mitigate large fixed sources of carbon dioxide emissions. Much work needs to be done in this area, both in commercializing the required technologies and implementing a secure legal framework that sensibly addresses potential liabilities.

As a private company ExxonMobil is addressing climate change risks in a variety of different ways. We have moved aggressively to make our own operations more energy efficient. Since 2000 we have identified steps to improve energy efficiency at our refineries and at our chemical plants by 15 to 20 percent. We have implemented more than half of these opportunities so far, reducing the greenhouse gas emissions of our operations by an amount equivalent to taking 1.5 million cars off the road.

We are also working to develop new vehicle and fuel technologies to reduce emissions. And we continue to support research of potential breakthrough innovations that could help meet growing energy needs worldwide with dramatically lower emissions, while allowing consumers to go about their daily activities with the same convenience, reliability and affordability that they have come to expect. We know there is a lot that our industry can and must do. Consumers and governments also have to take effective action.

As policymakers consider regulations aimed at reducing greenhouse gas emissions, the various approaches under consideration should be tested against a few simple principles: It should be economy-wide; market-based; transparent and predictable; apply to all fuels; and be applicable on a global basis.

Current options under consideration range from direct regulation through performance standards, to cap and trade systems, both upstream and downstream, to carbon taxes. Whatever the approach, it needs to maintain the flexibility to adjust to changes in outcomes, whether they relate to the severity of climate change or the impact on economies of the policy change.

Finally, for those of you who have not yet had the opportunity to read it, I'd recommend the recent report I cited earlier prepared by the U.S National Petroleum Council. This report is likely the most comprehensive ever produced regarding the future role of oil and gas in the energy mix. It makes thoughtful recommendations in the areas of energy supply, efficient energy use, the vital role of research and development and the pressing need to educate and train a new generation of technologists.

In closing, I hope the points I have made reinforce that energy security requires a global approach. Global energy security is not just about the United States or Canada or any other single consuming or producing country. All nations, exporting and importing, developed and developing, have a stake in the smooth functioning of the global market for energy on which our security depends. Neither U.S. energy security nor Canadian energy security can be separated from global energy security.

Consumers need producers and producers need consumers, and it is that shared economic interdependence, if managed wisely, that will provide the energy security that all of the world’s citizens want and need.

Thank you for your kind attention.