The Global Energy Community's Leadership Imperative
by Rex W. Tillerson
President
Exxon Mobil Corporation
For the first time in history, the World Petroleum Council held its triennial
congress on the continent of Africa; this action is a well-deserved tribute
to Africa's growing role as a producer and consumer of energy in
the 21st century. The meeting, held in late September, was historic for
another reason, as it came in the wake of two natural disasters that demonstrated
the importance, interdependence and resilience of the global energy community.
Gulf Coast Hurricanes
In the last month, hurricanes have struck the very heart of production,
refining and supply in the United States, the world's third-largest
producer and single-largest consumer of energy. Hurricane Katrina hit
the Gulf of Mexico on Aug. 29, and Hurricane Rita hit Sept. 24.
These storms have had a devastating impact on the communities in their
paths, as have many natural disasters the world has faced. What distinguished
these from others – and what we, in the energy industry, should
now reflect upon – is the impact they have on the international
energy operations centered in the Gulf of Mexico region.
It is too early to draw definitive conclusions from Hurricane Rita. [Note:
This article was adapted from a speech delivered three days after the
event.] In the aftermath of the storm, several refineries remained closed
and much production was suspended. Although damage caused by Rita is still
being assessed and addressed, we can draw important conclusions from Katrina,
and it is these conclusions that I ask you to consider.
Hurricane Katrina caused the evacuation of 80 percent of the manned platforms
in the Gulf of Mexico, destroyed 40 platforms and severely damaged many
more. The hurricane shut nine major refineries, closed two major pipelines,
halted 95 percent of the Gulf of Mexico's oil production and close
to 90 percent of its gas production, and substantially curtailed import
facilities in the area.
It threatened to paralyze operations and panic markets, and it did, in
fact, propel prices sharply upward.
A Market-Driven Recovery
Instead of panic, what we witnessed in the immediate aftermath of Hurricane
Katrina was a rapid, market-driven recovery.
Within two weeks, all major import facilities and product pipelines were
operating at full or only slightly reduced rates, all but about 5 percent
of U.S. refining capacity had been returned and all but 15 percent of
U.S. oil production and 6 percent of gas production had been restored.
Markets responded accordingly. Crude prices returned to pre-storm levels.
Trading volumes normalized. Although prices at the pump remain high, they
stabilized at lower levels after the steep spike experienced in the immediate
aftermath of Hurricane Katrina.
Even the temporary regional price spike was evidence of a properly functioning
market. With supply unavoidably curtailed, prices rose and demand moderated,
which ensured large-scale shortages were averted.
How can we account for this remarkable recovery? Many energy companies
operating in the region – including mine, I am pleased to say –
made advance preparations, executed those plans effectively, quickly repaired
damage and adapted production and refining operations immediately afterward.
Global energy markets likewise rose to the challenge. The industry and
the investment community responded calmly and confidently. Traders reallocated
resources effectively and efficiently. Market mechanisms and financial
institutions operated smoothly. Under this extraordinary circumstance,
as under normal circumstances, markets worked.
Finally, local and national governments played a constructive role by
collaborating with the industry to dismantle impediments to trade, temporarily
easing regulations and releasing reserves of crude to meet the shortfall
created by supply-chain interruptions. The U.S. Strategic Petroleum Reserve
and all 26 member countries of the International Energy Agency (IEA) released
stocks to industry refiners, exemplifying successful industry-government
collaboration to address a severe energy-supply disruption.
Lessons from Katrina
I believe we can draw three lessons from Hurricane Katrina.
First, disruptions such as these remind us of the critical importance
of energy to all spheres of our economic life. In the immediate aftermath,
as floodwaters engulfed whole communities and assistance was en route,
stranded victims depended on three commodities above all else to survive:
food, water and energy.
Energy is not only key to progress. Energy is also often key to survival.
Hurricane Katrina should remind us of the essential nature of our industry.
Second, this crisis demonstrated the true extent of our global interdependence.
Hurricane Katrina was a regional weather event that had a worldwide economic
impact. It sent shock waves through energy markets, supply networks, refining
complexes and production sites around the globe.
This confirms an important truth: Net energy-importing countries like
the United States cannot escape their dependence on foreign supply; likewise,
net energy-exporting countries cannot escape their dependence on foreign
demand. The hurricane showed that, with precious few exceptions, the notion
that any one nation can be energy independent is not realistic.
Finally, the response to Hurricane Katrina demonstrated the strength and
resilience of our industry. With timely and appropriate assistance from
government, the worldwide energy industry's vast network of interlocking
assets, functions, components, services and, above all else, its dedicated
professional workforce proved its mettle.
Hurricane Rita required that we rise to the challenge once again.
This is an achievement for which all of us in the global energy community
– industry executives and employees, government leaders, capital
investors, service providers – can be proud.
The Energy Challenge
It is with this achievement in hand and these lessons in mind that we
must urgently rise to another challenge: meeting the next generation's
energy demands.
It is an acute challenge. We are all familiar with the statistical projections
for future energy supply and demand. We know abundant petroleum supplies
exist. According to the U.S. Geological Survey, more than 2 trillion barrels
of conventional oil remains to be recovered, twice what has already been
produced in all of human history. Beyond that, it is expected that more
than a trillion barrels of frontier resources, like oil sands and oil
shale, will be recovered over time.
We also know, however, that demand for energy is growing at a tremendous
rate. World energy demand is expected to increase by almost 50 percent
in just 25 years, with 80 percent of the demand growth occurring in the
developing world. A broad range of energy options will be needed to meet
this demand, and we expect to see growth in the use of nuclear, biofuels,
wind and solar energy. Fossils fuels, however, are realistically the only
energy source with the scale and versatility to meet the challenge of
growing demand over this period.
This challenge comes at a time when the energy map is in flux. On the
supply side, although the Middle East is and will long remain the epicenter,
other production is shifting from mature areas in North America and Europe
to new supply sources in Russia, the Caspian Basin and Africa.
On the demand side, rapidly growing economies – especially China,
India and many other nations in Africa, Asia and Latin America –
are expected to consume an ever-increasing share of the growing energy
pie.
These dramatic supply-and-demand shifts in the energy map have further
increased the physical distance between producers and consumers. Such
shifts also continue to place a high premium on the wider application
of solutions such as liquefied natural gas (LNG), as well as the safe
and reliable transport of such options.
This, then, is the crux of the challenge we all now face: discovering,
developing and delivering the global endowment of hydrocarbon resources
in an efficient, economic and socially responsible way to a new generation
demanding – and deserving – higher standards of living.
Leadership in the Global Energy Community
Meeting this challenge will take the same qualities we have seen in the
aftermath of the hurricanes during the last month: foresight, flexibility,
fortitude and confidence in market forces. It will also require tremendous
investment and technological innovation.
Most importantly, it will take leadership. It will require right-minded
and steadfast leadership that is grounded in reality, honest and open
in approach, and firmly focused on the future.
This brand of leadership must come from all segments of the global energy
community: industry, investors and government.
The Role of Industry. First, private industry must invest wisely, manage
effectively, operate efficiently and responsibly, and prepare for tomorrow
through research and continuous technological innovation.
We must maintain our commitment to building local capacity. Our industry
has a strong interest and a responsibility to invest in the long-term
productivity and prosperity of the communities in which we operate. Such
investments pay long-term economic and social dividends for all.
On a daily basis, ExxonMobil strives to meet this challenge, and we are
doing so successfully. In Africa alone, we have invested $12 billion in
the upstream sector over the last five years and plan to double this investment
by the end of the decade.
We are conducting exploratory drilling in high-quality, untapped acreage
around the globe, from the Gulf of Mexico to the Gulf of Guinea to the
Gulf of Arabia.
In our operations, we apply our Operations Integrity Management System
on a global scale, setting industry benchmarks for effectiveness, efficiency,
reliability and safety.
ExxonMobil has consistently led the industry in research and development,
investing over $600 million annually. As a result, we do not rely on “off
the shelf” technologies that represent the average, but on propriety
technologies that set a new standard.
At the same time, ExxonMobil is contributing to the communities in which
we operate.
In Africa we are collaborating with governments and businesses to build
indigenous capacity by making investments, purchasing local goods and
services, creating local jobs, supporting education and training and transferring
knowledge and skills.
For example, in Angola we offer extensive technical job training and support
for education. In Chad we recently opened an in-country training center
offering instruction in all facets of our operations. In Nigeria, 95 percent
of our workforce is Nigerian, and 100 percent of our local workforce is
given the training needed to succeed and advance. It is a pattern we replicate
around the world.
By investing in the local workforce and infrastructure, we are building
a legacy of economic progress, enabling host countries to reap the long-term
benefits of their resources. I know I speak for all international energy
companies when I say we view building local capacity as a business imperative
and a partnership responsibility.
ExxonMobil's community contributions extend far beyond the fence
line of our facilities. On a worldwide level, we support education, health,
safety and environmental initiatives for our employees, their families
and the communities in which we operate. We recently launched our Educating
Women and Girls program to help provide education and training opportunities
for women and girls in the developing countries where we live and work.
Through our Africa Health Initiative we have donated more than $10 million
in grants to help the fight against malaria. Employees in more than 20
countries in sub-Saharan Africa are participating in our StopAIDS program.
Investors. The second segment of the world's energy community that
is called upon to play a leadership role is the investment community.
Much will be required of investors to meet the future energy challenge.
The International Energy Agency estimates that over $200 billion per year
of investment is needed to produce the oil and gas the world requires.
That is more than $5 trillion by 2030, or about half the gross domestic
product of the United States, the world's largest economy. The IEA
estimates that about $10 trillion of additional investment is required
for the electricity sector alone.
We cannot, however, call on investors to act unwisely. Ultimately, investment
capital will flow to the companies that perform and the countries with
the most favorable business climates.
Leadership from Governments. Governments from resource-rich and importing
countries are the third segment of the global energy community. They need
to demonstrate leadership. To meet the energy challenge, governments must
act as partners in attracting investment.
Government can show leadership by providing access to acreage, opening
markets, reducing trade barriers, eliminating subsidies and market interventions,
providing fiscal certainty, upholding the rule of law, protecting the
sanctity of contracts, acting transparently and protecting human rights.
It is critical to remember that industry and host governments ultimately
compete for a share of the world's investment dollars. To maintain
investors' support, it is essential that we continually earn their
confidence by demonstrating a commitment to stability, consistency and
the long term.
If you lead in this way, industry and investors will follow.
Many governments in Africa and across the globe have shown this brand
of leadership, and ExxonMobil has found reliable partners in them.
Finally, leaders of civil society have a vital role to play in meeting
the energy challenge. It is critical for social leaders to participate
in an informed and reality-based debate about the global energy challenge
while recogniz-ing the need to strike a positive balance between the economic,
environmental and social priorities involved.
A Focus on Fundamentals and the Future
Meeting the next generation's demand for energy will require that
all of us – industry, investors, governments and our societies at
large – play our leadership role.
At current crude prices, the reward appears great; however, this will
change. Ours is a cyclical industry; what goes up will invariably come
down, and it will undoubtedly go up again.
What will not change is the presence of risk. Despite the tremendous gains
we have made in technology and safety, we cannot escape the reality that
a large proportion of hydrocarbon resources reside in physically challenging
parts of the world, many far from the world's consuming markets
and lacking sufficient infrastructure to export commercial quantities
of oil and gas.
Therefore, a focus on the fundamentals and on the future, not on fluctuating
spot prices, is paramount.
Petroleum is a commodity, arguably the world's single supercommodity.
No two commodities are the same, but many are susceptible to sudden and
sharp price fluctuations. The history of nearly every commodity market
indicates the only successful investment strategy is one that remains
steadfast during the inevitable price peaks and troughs.
This is especially true in our industry, where lead times and planning
horizons for major projects span many years, even decades. A long-term
investment strategy is the best and only means to achieving the greatest
total returns for investors, as well as the greatest total value for host
countries.
Short-term price fluctuations do not significantly affect the pace of
our projects at ExxonMobil. We neither accelerate our pace of implementation
when prices are high, nor do we decelerate when prices are low, beyond
what is sustainable over the long term. Nor should current prices significantly
affect the pace of investment or market liberalization.
Where industry, investors and governments have worked together in this
risk-reward framework, it has proven largely successful for all concerned.
Private-sector investors have captured a reasonable return on the resources,
technology and human capital they have dedicated. International oil companies
have been able to build capacity for themselves and for the communities
in which they operate. The citizens of host governments have enjoyed direct
economic benefits through taxes and royalties, and indirect benefits through
jobs and economic growth.
ExxonMobil's projects in Angola are a prime example. In Angola we
have deployed the world's largest floating production storage and
offloading vessel, large enough to hold 2.2 million barrels. We successfully
brought the Kizomba "B" project on stream this year, more than
five months ahead of schedule, and, together with our other Angolan production
facilities, we are already producing more than 550,000 barrels of oil
a day.
We could not have accomplished this significant technical, scientific,
managerial and financial feat without the support of the government of
Angola and its national oil company. We could not even have launched this
ambitious project, which was first conceived more than a decade ago, without
sufficient incentive for investment.
Further examples can be found elsewhere in Africa, where we are privileged
to partner with the national governments of countries including Nigeria,
Equatorial Guinea, Chad, Cameroon, Madagascar and São Tomé
and Príncipe.
Shaping the Energy Future
In summary, I would like to recall the theme of the World Petroleum Council's
congress this year: "Shaping the Energy Future: Partners in Sustainable
Solutions."
We have the ability to shape the future of energy and overcome the challenge
we now face. This challenge is equally severe but far greater in scope
than the one posed by the recent hurricanes.
The solution is leadership: leadership from all sectors of the global
energy community. Let us resolve to show the leadership necessary to take
on this challenge – together.
Rex W. Tillerson is president of Exxon Mobil Corporation.
A native of Wichita Falls, Texas, Mr. Tillerson earned a bachelor of
science degree in civil engineering at the University of Texas at Austin
before joining Exxon Company, U.S.A. (EUSA) in 1975 as a production engineer.
He held several engineering, technical and supervisory assignments in
the EUSA Production Department throughout Texas and, in 1987, was named
business development manager in the EUSA Natural Gas Depart-ment, where
his responsibilities included developing long-range plans for the commercialization
of Alaska and Canadian Beaufort Sea gas.
In 1989, he became general manager of EUSA's Central Production
Division, responsible for oil and gas produc-tion operations throughout
a large portion of Texas, Oklahoma, Arkansas and Kansas.
Mr. Tillerson moved to Dallas in 1992 as production advisor to Exxon
Corporation and then to Florham Park, New Jersey, as coordinator of affiliate
gas sales in Exxon Co., International.
Three years later he was named president of Exxon Yemen Inc. and Esso
Exploration and Production Khorat Inc., and in January 1998 he became
vice president of Exxon Ventures (CIS) Inc. and president of Exxon Neftegas
Limited. In those roles, he was responsible for Exxon's holdings
in Russia and the Caspian Sea as well as the Sakhalin I Consortium operations
offshore Sakhalin Island, Russia.
In December 1999, he became executive vice president of ExxonMobil
Development Company. He was elected to the position of senior vice president
of the Corporation on Aug. 1, 2001. Mr. Tillerson became president of
the Corporation and a member of its board of directors on March 1, 2004.
Mr. Tillerson is a member of the U.S.-Russia Business Council, the
Engineering Foundation Advisory Council for the University of Texas at
Austin, the Society of Petroleum Engineers and the American Petroleum
Institute.
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