understanding our shared energy future

Remarks by Rex W. Tillerson
Chairman and CEO, Exxon Mobil Corporation
Chief Executives Club of Boston; Boston, Massachusetts
November 30, 2006

 

Thank you, Robert for the introduction, and congratulations on building one of the most successful franchises in football.

I would also like to thank Peter Rollins and Boston College for inviting me to speak today.

 

Our Shared Energy Future
Massachusetts may seem like an unlikely place for an oil and gas executive from Texas to speak. 

But I gladly accepted Peter’s invitation because I feel it is important for our industry to engage the communities and industries represented here as a part of a national dialogue about the future of energy.

That’s because the future of energy is a concern not just of my industry, but of all sectors of our economy. Reliable and affordable energy supplies are vital to the continued prosperity of our nation.

And it is a future in which we all play a role in shaping — not only through the business community’s traditional support for innovation, efficiency, free trade and investment, but also through the promotion of education and human capital development, a subject I will return to.

During the past year, the national dialogue on our energy future has intensified, driven by concerns about fluctuating fuel prices, energy security, and climate change. 

This dialogue is welcome, because the issues are important. But it can only be constructive if there is a clear understanding of the challenges involved in securing the type of energy future that we all want — one that supports economic progress, enhances social development and protects our environment for future generations.

 

A Foundation of Understanding
By the year 2030 — less than twenty-five years from now — the world’s energy needs will be almost 50 percent greater than they were last year, driven mostly by growth in developing countries. 

Such growing demand for energy reflects a growing demand worldwide for escaping poverty, attaining higher standards of living and achieving greater prosperity. Energy use correlates directly with economic development, and in the hierarchy of human needs, energy ranks high. 

An immense industry is required to meet the world’s energy needs. The sheer scale of the global energy industry is often difficult to grasp, but it must be grasped to effectively understand how the application of new technologies or the implementation of new policies might impact it and ultimately consumers of energy.

Every day, consumers around the globe use 230 million barrels of energy, measured in terms of ‘oil equivalent’, from all sources. Oil alone is consumed at a rate of 40,000 gallons a second. Put another way, in the time it takes me to deliver these remarks, people worldwide will have used over 50 million gallons of oil.

To give you another perspective on our industry’s size, ExxonMobil is the largest non-government energy company, and has the largest market capitalization of any corporation in the world. Yet we produce no more than two percent of the world’s total energy. 

Enabling industry to meet the world’s rapidly growing and varied energy needs in an immense global market is the essence of the challenge we face in the future. 

It carries with it additional challenges. Energy security is one. The gap between U.S. energy consumption and domestic energy production — a gap on the order of 15 million barrels of oil equivalent a day, or 30 percent of daily demand — is filled primarily with imports of fossil fuels. Which countries are the sources of these imports? Do any of these have the power to control supplies or prices? And are energy trade channels and import infrastructure secure? These are important questions.

Another challenge inherent to energy is the environmental impact of its use.

Industry has made tremendous strides in developing cleaner fuels and lower emissions over the years to meet rising environmental expectations, but no energy source of sufficient scale to meet global needs comes without consequences. How do we manage the inevitable environmental impacts of increased energy use? This, too, is an important question.

 

Key Questions About Our Energy Future
With this understanding of the importance, scale and complexity of the challenge before us we can better answer those questions that have emerged — and those still submerged — in the national dialogue about our energy future.

Many question whether sufficient oil remains to meet our needs. Some worry that we will soon reach “peak oil,” or the point after which worldwide oil production begins to decline.

Oil, like all fossil fuels, is indeed finite, but it is far from finished.  The U.S. Geological Survey estimates that approximately 2 trillion barrels of conventional oil resources remain – or about twice the amount produced since the dawn of time. 

An additional 1 trillion barrels of unconventional oil resources — such as heavy oil and oil sands — are also believed to be recoverable. Don’t forget, too, our industry’s extraordinary track record of using technology to expand the resource base beyond all predictions is well established. 

Fossil fuels are not the only energy resource, of course. Alternative sources play an important and growing role in meeting the world’s needs, too. Some — such as wind and solar — are likely to see double-digit growth over the next 25 years, due in large part to government mandates and subsidies.  I expect that some of you here are involved either directly or indirectly in alternative energy ventures. 

However, these alternatives build upon a relatively small base, and as I mentioned earlier, are expanding within a world energy system that is itself expanding significantly. 

For this reason, they will not fundamentally change the world energy mix, despite their impressive growth. Challenges of scale, cost and technical limitations must be overcome if they are to contribute in a material way. 

Several energy companies — including ExxonMobil — are supporting research and development into ways for alternatives to overcome these hurdles. But until breakthroughs are achieved and implemented worldwide, fossil fuels will remain the predominant energy source for the foreseeable future. No other energy source holds the same advantages of availability, affordability and adaptability.  

So the real question is not whether we will soon reach peak oil, but whether we can reach peak performance in the responsible production and use of oil and other fossil fuels. 

The answer to that question is as much a matter of policy as it is geology.  If policymakers enable investment, technology and the managerial expertise found in industry to be brought to bear on the available resources, we can produce, refine and deliver the energy we need in an economic and environmentally-responsible way.

A second question dominating much of the current national dialogue touches upon the issue of energy security. Can Americans achieve so-called “energy independence”?

As I mentioned earlier, the current energy demand-domestic supply gap in the United States is approximately 15 million barrels a day. More efficient use of energy can reduce demand, and increased use of alternatives can increase domestic energy supply, but no conceivable combination of the two can realistically close the gap. To leave the gap unfilled would have dire consequences for our economy and possibly our security. It would jeopardize the American Dream for our children.

But if energy independence is not a viable path to greater energy security, energy diversification is. As the investment bankers and fund managers in this room would attest, the best hedge against a market is a diversified portfolio. The same holds true for our nation’s energy supply portfolio.  More energy from more sources mitigates the impact from a downturn in any one supplying country or region.

Our experience during the hurricane season of 2005 proves the point. With as much as 25 percent of U.S. refining capacity shut down in the aftermath of Hurricanes Katrina and Rita, an influx of fuel imports from Europe helped meet the shortfall and there were no supply interruptions to our country.  Diversification, enabled by free markets, strengthens our energy security.

And free trade and investment are enabling the diversification of U.S. energy supplies.  Currently, Americans import crude oil from over 30 countries on six continents, and are importing more and more every day. 

About 55 percent of U.S. oil supplies originate in North America. No other region – including the Middle East — meets more than 15 percent of U.S. oil needs. It may surprise some to learn that the United States imports more oil from Mexico than we do Saudi Arabia.

What about biofuels, like ethanol? Could domestic production of these sources enable Americans to achieve energy independence? 

This question has also captured the popular imagination, and Brazil’s success in reducing oil imports in part has provided the inspiration.

Biofuels, like many alternative sources, play an important role. But they too currently face significant obstacles.

In the United States, corn is the principle source of ethanol. Currently, 13 percent of the U.S. corn crop is needed to meet 2 percent of U.S. total gasoline demand by equivalent volume. By 2012, mandated ethanol production would drive ethanol’s share of total U.S. gasoline demand up to 3 percent.  But to achieve this, about 21 percent of the U.S. corn crop will be needed – an increase of about 50 percent. 

As these trends indicate, we cannot produce enough ethanol from corn in this country to meet all of this country’s gasoline needs, much less total oil needs.

Brazil is an interesting case in point. Ethanol production in that country has been on the rise, in part because its principle feedstock – sugar cane — has a higher yield and lower cost per gallon of ethanol yield than corn.  Brazil now produces the same amount of ethanol as the United States does, for a gasoline market one-twentieth the size.

But what is often not discussed is that, while Brazil has boosted ethanol production by 3 to 4 times over the past 25 years, it has substantially boosted its domestic oil production by more than 10 fold over this same period. They became energy independent by increasing oil production.

In fact, about 85 percent of Brazil’s current liquid fuels demand is met by domestic oil production and about 15 percent by domestic ethanol production. 

Which brings me to a fourth question I am often asked: Can we boost oil production in this country? 

The United States is a mature oil province, meaning a sizable portion of the petroleum found here has been tapped. 

But a sizable portion has not. In fact, the United States was endowed with the second largest oil and gas resource base in the world and even after more than a century of development and production is still ranked number 5 in remaining oil and gas. These domestic resources currently meet approximately 50 percent of our domestic demand, but it could supply more if more of it were opened to exploration, development and production.

Federal and state governments in this country have ruled off-limits an estimated 31 billion barrels of recoverable oil and 105 trillion cubic feet of natural gas. And the majority of those amounts are not found in the Arctic National Wildlife Refuge. They are found in the Rockies and off many of the coasts of the continental United States.

Industry has developed the technologies and acquired the experience to produce these resources safely and with a minimal environmental footprint and we are doing it around the world today. What we lack is the permission to access them. Access granted could lead to imports reduced. 

In addition to access, we need to continue developing the technologies to produce, refine and deliver hydrocarbon resources in an effective, economic, and environmentally-responsible way. The question — how do we advance energy innovation? — goes to the heart of our energy future.

In the discussion about technology in our industry, two things surprise me.  First, some today claim that the “era of easy oil” is over. It is true that today oil is not “easy” — but, over my 32 years, it has never been easy.  Changing conditions, growing demand and evolving environmental expectations test our latest technology and require our industry to continuously innovate further. Oil only seems easy after it has been discovered, developed and delivered. 

The second surprise to me is the perception that the energy industry is not particularly high-tech.

ExxonMobil topped the Fortune 500 list of U.S. companies last year. We invested over $1 billion last year in technology applications and R&D, and we currently employ over 14,000 scientists and engineers. 

Nevertheless, the magazine does not categorize us or any oil and gas company as a technology company, like it does many pharmaceutical, computer and airplane manufacturers.

Perhaps it is because our most well-known product — gasoline — appears simple when compared to a cell phone or a flat screen television. Even the term “fossil fuels” sounds primitive.

But, the fact is, the energy business is an extraordinarily technology-intensive enterprise, from the wellhead to the gas pump.  Innovations have enabled us to overcome incredible obstacles to decline a product that seems so simple and relatively unchanged for decades. 

In Russia’s Far East, for example, we have been using cutting-edge directional drilling technology to reach oil and gas reserves one mile deep and six miles laterally — about the distance from this ballroom to Boston College — with pinpoint accuracy to intersect the reservoir target the size of those double doors with a drill bit thousands of feet underground. 

Offshore West Africa, we use floating drilling vessels to drill in waters almost 4,000 feet deep and produce to massive floating and storage vessels. 

And at our refineries, we are using nanocatalysis to manage hydrocarbon molecules and remove impurities from our products. Technologies such as these have helped us dramatically reduce emissions from the use of our fuels. A new car today, running on new low-sulfur diesel fuel and equipped with the most advanced emissions technology, has 97 percent less emissions than a new vehicle had in 1970.

Our industry can and will continue achieving such technological feats – and continue making oil look easy, even though it is not — under the right conditions, and sustained by sensible policies — conditions and policies I will return to later.

For all the technological progress we have achieved in the energy field, we have yet to discover or develop an energy source that meets the world’s enormous needs with no environmental impact. There are no silver bullets to the energy-environment challenge. This is a reality we dare not ignore, and one we must not mismanage.

This is especially true when it comes to the issue of climate change. 

While our scientific understanding of climate change continues to improve, it nonetheless remains today an extraordinarily complex area of scientific study. Having said that, the potential risks to society could prove to be significant, so despite the areas of uncertainties that do exist, it is prudent to develop and implement strategies that address the potential risks.

In my view, this means we should continue to fund ongoing scientific research without conditions or preconceived outcomes to increase our understanding of all of the forcings which are part of this very elegant, but very complex climate system in which we live. This should include ongoing study of not only the possible forcing effects resulting from mankind’s socioeconomic activity, but equally — if not more important — understanding of the natural forcing elements that are and have been a part of the climate system since the dawn of time. 

While the scientific community continues this study, we should pursue public policies that start gradually and learn along the way with full recognition of the economic consequences of certain actions and we should bring all countries into the effort. This is a global-wide, century-scale problem. 85% of the growth of CO₂ emissions are associated with economic activity in the developing part of the world, with only 15% of the growth associated with developed countries. We should start on a path to reduce the likelihood of the worst outcomes… and understand the context of managing carbon emissions among other developing world priorities, such as economic development, poverty eradication and public health.

Consistent with this approach, we should take steps now to reduce emissions in effective and meaningful ways.

Improving the fuel economy of our light duty vehicle fleet is one such way.  Reducing emissions from coal-fired power plants must also be a priority, as worldwide carbon dioxide emissions from power generation are currently more than four times that from light duty transport.

The important point is that a variety of ways exist to mitigate carbon dioxide emissions, but weighing the options effectively requires understanding the potential scale, cost and economic and quality of life tradeoffs involved.

As we take steps today, we must also take steps towards tomorrow, through research and development into new technologies that could “change the game.”  ExxonMobil through its long standing relationships with manufacturers of automobiles and commercial industrial engines has ongoing promising research and development that could lead to improvements in conventional internal combustion engines leading to as much as 30% better fuel economy and lower environmental emissions.

The Global Climate and Energy Project, based at Stanford University, epitomizes the approach to exploring game changing technology. By accelerating research into promising new energy technologies with economic and environmental potential on a worldwide scale, scientists at GCEP are progressing towards breakthroughs that could lead to meaningful, worldwide emissions reductions.

GCEP scientists are researching how hydrogen and solar energy can be made economic… how engine and fuel systems can be made significantly more efficient… how carbon dioxide capture and storage can be made more effective… and how biofuels can be made more abundant.  ExxonMobil is proud to serve as the lead founding sponsor for GCEP’s groundbreaking work.

 

Directions for Energy Policy

Questions of peak oil, energy independence, biofuel potential, access to resources, technological innovation and climate change are defining our nation’s energy dialogue. A fact-based understanding about the global energy challenge and the industry, my industry, that provides energy to the world, is an absolute necessity to any consideration to an appropriate long-term energy policy. This wishful thinking will only lead us farther away from a long-term solution.

It is not enough to ask and answer, however. We must act. And it is the actions of policymakers that have the greatest impacts in shaping our shared energy future, because they create the legal and regulatory framework in which multi-billion dollar risk investment decisions must be taken.

Policies that promote free markets and investment and strengthen export-import partnerships broaden the diversification of our nation’s energy portfolio and enhance our energy security.

Policies that promote stable tax, regulatory and legal frameworks over the long-term encourage the investments needed to not only meet current needs, but also the technological advances required to meet future needs while reducing environmental impacts.

Policies that promote open access to untapped oil and natural gas resources in our own country can help reduce our dependence on imports in an effective and environmentally-sensitive way. Ours is the only country in the world with major oil and natural gas resources that as a matter of policy denies its own citizens the economic benefits of developing and utilizing those resources that belong to its citizens.

The solutions to the energy challenges we face will come from this generation’s scientists, engineers, managers, and policymakers – and the next. Policies that promote math and science education and provide visas for international students to study in this country are necessary to ensure the human intellect required is available and resident within this country.

As a former Congressman from Boston named John Kennedy once said, “Our progress as a nation can be no swifter than our progress in education. The human mind is our fundamental resource.”

We are not doing enough in this country to develop this most vital resource, which is so fundamental to developing our natural resources. 

American students’ performance in math and science is shockingly poor by the standards of most industrialized nations, and this bodes poorly for our future competitiveness and prosperity.

To reverse this trend, we must invest more in math and science education.  ExxonMobil is doing so, contributing over $42 million in proven programs nationwide last year. And we intend to contribute even more in the year to come.

Such investments have the power to not only produce new technologies, but also the power to produce better informed citizens, policymakers and future leaders.  Unless others join us in taking action in support of this cause, not only is our energy future in doubt, but our nation’s continued economic leadership is threatened.

Our nation’s educational needs are not limited to science and math. It is important that policymakers and the public at large become educated about the nature of the energy challenge, the workings of the energy industry, and the mechanics of energy markets. The most productive public dialogues are those informed by facts.

All of us in the business community can and should help promote this informed dialogue. 

And if we do so, I am confident we can reach the destination we seek — one where our economy is more competitive, our nation more secure, and our world more prosperous.

Thank you for your kind attention.