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The Case for U.S. Multinationals

Speaker: John S. Watson, Chairman and Chief Executive Officer, Chevron
Presider: Alan S. Murray, Deputy Managing Editor and Executive Editor, Online, Wall Street Journal
November 29, 2012
Council on Foreign Relations

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ALAN S. MURRAY: Well, so good morning. I'm Alan Murray. I'd like to welcome you all to the annual Bernard Schwartz Lecture on Business and Foreign Policy. This is part of the council's CEO Speaker Series. The corporate program is comprised of 170 member companies, and it's designed to increase the connection between business and foreign policy.

Remind you all to turn off your cellphones, please. I see a lot of active -- Enzo (sp), I know you're an active tweeter. (Laughter.) You'll have to refrain --

QUESTIONER: (Off mic.)

MURRAY: Good. You'll have to refrain for the course of this -- of this meeting, please.

But it is an on-the-record -- on-the-record discussion.

And our guest is John Watson, the CEO of Chevron, one of the 10 largest companies in the world -- quarter of a trillion in revenues. We were just talking about 60,000 employees and probably 250,000 at any given time working for the company -- larger than most countries. It probably ranks somewhere around Ireland or Israel -- huge drilling operations in the Gulf, in West Africa, in Australia, in Kazakhstan -- so clearly knows a lot about foreign relations.

And the topic of today's discussion, as a advertised by the council, was "The Case for U.S. Multinationals," which I think is a great place to start our discussion because you're doing this at a time when in this country big business is not held in particularly high regard and Big Oil, in particular, by the public, by the administration. And I saw last week that even Republicans are now saying, oh, we can't -- we can't be perceived as the party of big business.

So what is the case for multinationals, given that political climate?

JOHN S. WATSON: Well, Al, thanks. It's good to be here,. Appreciate the chance to talk about this subject because I have a lot of passion around this subject. And we thought it would be provocative title.

And if I think about the case for companies like mine and others like it, I think in really three pretty simple terms.

One is the economic value that we create. I don't think it's realized that despite the fact that Chevron has 70 to 75 percent of its business overseas, that 85 percent of our shares are held here. So as we've created $170 billion in value through our stock price and dividends over the last decade or so, Americans have benefited from it -- your pension fund, your 401(k). Real value has accrued. And of course taxes are paid on those gains over time, plus 50 billion (dollars) in annual purchasing activity around the world. When we put in a cryogenic heat exchanger in Australia, we bought it from Air Products in Pennsylvania. So number one, there's real economic value that's created.

Number two, energy, this thing called energy. Every barrel of oil that we produce around the world benefits Americans because it keeps prices down. We can talk more later about American energy independence, but the facts are, every barrel we produce helps Americans because it keeps prices down. And the natural gas that we produce -- most of it does not come to the United States, but in a case like Bangladesh, 50 percent of the gas in the country Chevron produces, and at low prices. And that creates real value for that country.

And then finally -- and I think this is the area where it's perhaps least understood -- in an era where our military has less influence than it might have had in the past and we're not as effective from the bully pulpit, if you will, at the United Nations in terms of encouraging people to do things that are consistent with American ideals or values, actually the best instrument of American ideals and values are American companies operating overseas. We have the ethics; we have the practices; we have the hiring, training. We basically practice the ideals and values very well as ambassadors of the U.S.

Hillary Clinton made statements very much along these lines in her recent speech in Asia, in fact specifically mentioning our company.

And so I think those three things really combine to make a pretty compelling case that regardless of where we do business -- and by the way, most big businesses in this country do most of their business outside of America, given that's where the economies are growing -- there's some real virtue to the work that we do. And it's not -- it's not the -- it's not anything that's talked about very much in the -- in the public debate.

MURRAY: Why is it so hard to get that message across?

WATSON: Well, I think the perception is that when you think of a multinational company, all they're doing is moving jobs overseas. That's not really what we're about. Business in and of itself is conducted overseas. The U.S. is a -- is still a large piece of the world economy, at about 25 percent or so, but that number's shrinking. And the opportunities are very big overseas and the competition's tough. But American companies -- you want American companies to participate in those opportunities and to be successful.

I mean, our business, as I said, three-quarters overseas, but 50 percent of our jobs are here. And that's because the research that supports it -- we do have rule of law in this country, and so intellectual property -- and for intellectual property and other reasons, a lot of the research and home office activities are done here, and that supports jobs even if some of the manufacturing and other work is done overseas.

MURRAY: There was clearly a perception by people in positions like yours that the Obama administration in its first term did not embrace that view that you just articulated. I think you'd probably agree with that.

WATSON: Well, I don't think many politicians did. I hear from both sides of the aisle, actually.

MURRAY: Sure. But you were one of the first CEOs into the Oval Office after the election. Do you have any reason to think that the approach is going to be different in a second term?

WATSON: Well, I was encouraged. I was included in a group of a dozen or so of my colleagues that were asked to come in and speak with the president. And actually he was all ears. He listened very much and asked a lot of questions, and each of us had a chance to express our views. He of course was talking about his view of what we should do with the fiscal cliff, which we could come back to. But most of the discussion time was actually spent by me and my colleagues talking about the importance of competitiveness. That was the first thing that was brought by several of my colleagues and myself, is that it's important for America to be competitive. As you go through whatever changes in fiscal and tax policy, I hope we come out the other end making American companies competitive, because ultimately, we're the ones that create the jobs.

MURRAY: But what do you think when you wake up in the morning and you read a story in the paper with Republicans saying, you know what, the lessons of this election is we have to be less close to big business?

WATSON: Well, I actually don't think it's about big business. I think it's about being a -- being a supporter of free markets, free trade. I don't -- I don't expect any particular favors in my industry. I just want to have an environment. I would encourage our government, instead of focusing on creating jobs, to focus on creating an environment where companies like mine can create the jobs. And that's really the message. I believe in free markets. I believe in free trade. I believe in creating the conditions that will allow that to happen. And if we do that, American companies are going to be pretty darn competitive.

MURRAY: So fiscal policy is obviously part of that. And you've been paying attention to this active -- active in this discussion. Let me ask you, first of all, what difference does it make to your business how the fiscal cliff is handled and how we navigate through the policy challenges of the next six months or (year ?)?

WATSON: Well, at a basic level, I want the country to be successful, but for our business in particular -- our business is highly correlated with GDP growth. And so if we have a strong and growing economy, there will be demand for all forms of energy products, and that will be good for our business.

MURRAY: Well, what about the -- you hear so much about uncertainty. I mean, are you holding off on any particular investments because of uncertainty about how the fiscal issues are going to get worked out?

WATSON: Well, we have a record spending program this year, and -- in 2012, and we'll announce our program for next year, and it'll be very significant as well.

MURRAY: So no, not really.

WATSON: So we're continuing to invest.

What I will say is 75 percent of our spending is overseas, and there is more that we can do in this country if we were given access. Remember, 85 percent of our continental shelf is off-limits to development. Companies all over Europe, Australia, Canada, they develop their resources. We seem to keep a lot of resources off- limits to development. So I think that there is a tremendous opportunity for more energy business to be done in the state, whether it's building pipelines, to move products that's needed to be moved or developing the resources we have, both onshore and offshore.

MURRAY: Did you have the -- or have you had the chance to have the energy policy conversation with the president since the election?

WATSON: Well, the day after -- the day -- the day he was elected, I sent a letter off, and I talked about the very opportunity here. And there are different experts that are giving it different numbers, but the kinds of numbers are very big. IHS talks about creating a million jobs a decade -- (inaudible) -- next two decades, and that's a lot of jobs. We talk about 2 1/2 trillion (dollars) in tax and other revenue for the government. And really, all the -- the government doesn't have to do very much. They have to lease acreage, they have to issue permits, and they have to ensure that we keep a tax system in place that encourages the kind of economic activity they want.

MURRAY: So you -- and in the -- so let's go through those three things. Lease acreage: How big of a change in this administration's current policies are you looking for on that front?

WATSON: Well, I -- there was a lease sale recently. I'd just -- I'd just say, factually, over the last administration, leasing was down. Now, some of that was due to the moratorium in the Gulf of Mexico, which is understood. But we've had a long-standing policy in this country of just keeping vast tracts of land off-limits to development, particularly the eastern Gulf of Mexico, the Atlantic seaboard and other locations. And we can conduct this business well. As I say, European countries do it; I think we can do it. So access -- I think access is important.

MURRAY: And the second one was --

WATSON: Permitting.

Permitting has been a subject of concern, particularly for the smaller companies. I understand -- and actually, our company supported strongly raising some of the standards following the Macondo incident in the Gulf of Mexico, and we've done that. But I'd like to see more leasing, and I know some of the smaller companies that don't have the resources that we do would like to see more resources put on the permitting -- on the -- (inaudible).

MURRAY: Any reason to think those two things will be different in the second term than they were in the first term?

WATSON: Well, I think -- I think -- I think there is reason. I think it's been getting better over time, and I'll -- I'm cautiously optimistic that we'll see that. I do think we have to be sure that all domestic policy supports this sort of activity. So I do know that there are concerns about actions the EPA can take. In fact, that came up with the president. And he said -- he said, come and talk to me if you've got concerns about the actions the EPA might be taking that'll impede activity in your industry. So as I say, the conversation with the president was quite cordial and quite positive in terms of setting a tone. We now need to see what transpires.

MURRAY: And the third one is tax reform, which is an interesting issue. You have a lot of businesses out there pushing for corporate tax reform, the goal of which would be to bring down the tax rate by eliminating tax breaks. Your concern, I gather, is that somehow, in that equation, you get hit up for the revenue to pay for the lower rates.

WATSON: Well, actually, I'm a strong supporter of comprehensive tax reform.

I just want to be treated fairly. You know, we had a bill, the Menendez bill, that came up a couple years ago that was going to single out five companies for a punitive tax (stream ?). And I didn't think that was the way to go. I mean, it actually --

MURRAY: (Inaudible) -- oil companies.

WATSON: We, of course, were one of those five. But I mean, it -- you'd actually have a circumstance where Russian, Chinese and Venezuelan companies would get better tax treatment in the U.S. than Chevron. That didn't exactly seem right. And so I don't support that type of reform. What I do think needs to be done are the things you described: lower tax rates and move away some of the deductions and credits. And some of those would impact our industry, and so be it.

MURRAY: But the reason you have something like the Mendendez bill -- gets back to what we've been talking about for the last 10 minutes -- is because there is a political climate that isn't favorable to your company, your industry and big business generally right now. What can you do about that? I mean, that's a -- that's a question of public opinion. That's a -- that's a big, broad political trend. How do you change that?

WATSON: Well, I think there's an opportunity on many fronts. You try to make some public appearances, try and talk about the issues that are out there. I think every time there's an opportunity to talk about the contributions that we make, we need to be advocates in doing that. I do try to visit many of our politicians and make sure that they have what I perceive as the facts on these subjects.

I mean, I'll give you an example on taxes. Our -- Chevron's paid an average tax rate of 43 percent over the last five years. And our industry pays the most, and yet there's a perception we don't pay taxes. So I was in the White House regularly over the course of the last four years giving factual information out to officials in the White House and members of Congress, because the rhetoric sometimes can get away -- can get away with -- get away.

MURRAY: Does that work? Do facts work in this kind of environment?

WATSON: It's all I've got. (Laughter.) It's all I've got. And you know, sometimes it does, actually. You may recall the "use it or lose it" discussion that came up around leasing, which is -- which was a very disingenuous argument because what was included in the lease was not being used for those that were under development offshore that take a decade to develop. And so once you go in with numbers and facts and explain it to people, I've actually had a very good reception.

MURRAY: So we have all spent the last four decades, I'd say, listening to hand-wringing about the impending end of fossil fuels and supplies of fossil fuels. And all of a sudden today we find ourself in a situation where, particularly in this country, it's plentiful. There is no shortage. In fact, in the natural gas area, the problem is the exact opposite. You have too much. You know, there's a glut of natural gas. How does that change things?

WATSON: I think we have a once-in-a-generation type of opportunity in the United States. And it's a function of advancements in technology that have been made in our industry. And so we're now independent when it comes to natural gas, and we actually are seeing oil production rise as well. I don't know that we'll become oil- independent, but we certainly can make good progress in that direction. And so I think it's a once-in-a-generation type of opportunity.

MURRAY: To do what?

WATSON: To improve our balance of payments, create jobs, create tax revenue for the government and bring us closer to an era where we feel that we have -- we can self-determine our energy future. We're getting very close to that if you look at the resource base we have in oil, natural gas and coal. Renewables make a contribution, and they'll make a growing contribution. But it's a small contribution at this point. Pound for pound, we've put enormous dollars into this effort, and the progress has been slow. And I think we have some challenges ahead.

MURRAY: But we should talk about that because the people in this room spent the last month digging out from the effects of an extreme climate event. Some people, at least, are making the argument that it is connected to global warming, which many people make the argument is connected to fossil fuel emissions. What's your view of all that?

WATSON: Well, I know the concerns that are out there by politicians. You know, Chevron -- we don't do original research on climate change. It's the government's role to do that, and we accept the determinations that are there.

MURRAY: But you're a scientist. You -- and this is central to what you're doing. You obviously have had to spend a lot of time thinking about this.

WATSON: My background's in economics. But -- (chuckles) --

MURRAY: Well, some people think that's a science. Some people don't. (Laughter.)

WATSON: But -- no, you know what, I understand the concerns of people -- (inaudible) -- but I watch very closely what they do. And I think it's very instructive today. If you look at our three biggest trading partners, China, Japan -- three of our biggest trading -- China, Japan and Germany, China's greenhouse gas emissions are racing ahead. They've gone by the United States, and they'll produce more greenhouse gas emissions than all the OECD countries combined in another 20 years. That isn't going to change. Japan -- terrible accidents at Fukushima, largely shutting down their nuclear business, burning fossil fuels instead.

Germany, which has had a safe nuclear industry for many years -- shutting down their nuclear industry, and while they talk about renewables, the reality -- it's going to be fossil fuels.

And so you have these apparent contradictions where we talk a lot about our concerns about the possible effects of climate change, but what we're really seeing is countries and policymakers feeling that whatever the risks are, they're not greater than the consequences in other areas.

MURRAY: But my question is -- and by the way, my compliments to you. Somewhere along the way, you got extremely good media training. (Laughter.) But my question is what is your -- what is your view about the --

WATSON: I answered the question pretty well. (Laughter.)

MURRAY: What is your view about the risks of global warming? What is your view of how fossil fuel emissions tie into what we just experienced here in New York?

WATSON: Well, I just told you, I'm not the scientist. And -- (inaudible) --

MURRAY: No, no, but you --

WATSON: We don't do the original research. So I told you, I accept the determinations that are made. I accept the determinations. But I think that's not enough. I think you have to say, well, what am I going to do about it? And there are some things we can do.

By the way, we're the largest renewables producer amongst the major oil companies. We have the largest carbon storage project in the world. We have an energy of -- a for-profit energy efficiency business. So we do a lot of things in this space. All I'm saying is that right now the best estimates suggest that, going forward 20 or 30 years, we're still going to be deriving 70 (percent) to 80 percent of our energy from fossil fuels around the world, notwithstanding all the efforts that we're making around climate change, notwithstanding all the (efforts ?) we're making --

MURRAY: There's nothing you can do about it?

WATSON: There's nothing you can do about it if you want light, heat, mobility and affordable energy.

MURRAY: If we don't all want to ride bicycles to work, we have --

WATSON: Well, if you -- if you go back to pre the industrial era, before the last hundred, 125 years, when we've seen the greatest advancements in living standard in recorded history, living conditions weren't very good. And we don't have an easy replacement. And I think that's the conundrum and the frustration people have.

MURRAY: And as a -- as a society, how big of a risk are we taking by continuing down that path?

WATSON: Well, I think that's the question. I think even --

MURRAY: Yeah, but I was looking for an answer -- (laughter) --

WATSON: No, you -- well, the experts put a broad range around that, don't they? And I think that's -- I think that's the conundrum and that's the question. Are you willing to give up your standard of living in the short run to try to make some changes when you see what China and the developing world is doing? A lot of -- a lot of advanced thinkers these days are thinking in terms of, one, energy conservation -- economic energy conservation, number one -- and spending money on step-change technologies.

There was a -- there was a study that was just completed in the last couple of months for Secretary Chu by the National Petroleum Council, which is not an oil industry thing; it's an advisory group to the president that had experts from MIT, all the best universities, all the best technologies, the automobile companies and others. And what it said is that no matter what you do, the internal combustion engine is going to be the primary mode of transportation for the foreseeable future. And they surveyed 250 different technologies and reduced it down to 12 that they suggested would be good for the government to fund, in a pre-commercial sense. In fact, it was quite challenging, and they recommended that we not fund development of technologies because you're trying to pick winners and losers that may not be economic, and you should be funding research at the advanced stage to try to develop these step-change technologies.

MURRAY: Well, so from an economist's perspective, if you think the risks are at the higher end of the range, not the lower end of the range, an economically sound way to do this is to -- is to put a price on carbon or to put a tax on energy broad enough so that it creates the incentives to deal with the externality that is being created by emissions. What do you think about that approach?

WATSON: Well, my view isn't much different than the president's view. He said now is not the time for that because it's a regressive tax, and it's not what the economy needs right now. I think as you debate that, you have to put that -- put that type of tax or any other additional tax into the bucket of things that you look at.

But it depends what your objectives are. Are your objectives to raise money, or are your objectives in the carbon space? I worry about what I call simple economics of supply and demand curves, and you raise the price, and therefore you're going to move us off hydrocarbons -- Europe's been paying $10 a gallon for gasoline for a long time, and I don't see many electric vehicles in Europe. So you will get price-induced conservation to some degree by a tax, but it tends to be a regressive tax, it hits businesses, and it does not necessarily usher in an era of new technology.

MURRAY: Let's talk about the Middle East, where your company has been involved for many decades -- gets messier and messier. You look at what's going on right now in Syria, in Egypt, in Gaza, in Iran.

I think we used to think sort of superficially that we were involved in the Middle East because of oil. We're now in a situation, as you pointed out a few minutes ago, where that dependency is going to decline pretty dramatically. Does that mean we can be less involved in the Middle East mess?

WATSON: Well, I'm not sure I'm the greatest politician in the world, but I would say the world is still very much dependent upon energy from the Middle East. And I think it's terrific if we can develop resources here at home. Most of the benefit is really in the area of jobs, self-sufficiency, balance of trade, things of those sort. But the reality is, for oil, it's a world market. And so if you have disruptions, we'll be impacted.

Now, I think many people, when they think about national security, they think at a time when supplies were actually cut off, will we have physical supplies at our disposal? And in that sense, we would have more security. But I wouldn't suggest that because the United States may be sourcing somewhat less of its oil from the Middle East, that somehow we're now insulated and we don't have to worry about it. I -- (inaudible) --

MURRAY: So it doesn't really get us out of it.

WATSON: From an oil point of view, the world is still dependent, and that means prices are still a function of oil that's produced in the Middle East, not to mention the human trauma, which we haven't talked about.

MURRAY: China is obviously a big factor in this equation, tying up supplies of oil, gas. You must sell -- you must have an eye on China with the work you're doing in Australia. Talk about China's role in the energy market, narrowly, but also in the world economy more broadly.

WATSON: Well, China's economy is growing. If you think over a broad sweep of time, it's remarkable, the advancements that we've seen in China in terms of living standards, in terms of their moving closer to our economic system. We quarrel about trade issues, but if you look over a sweet of time, it's a remarkable progress.

And as their economy grows, as they come closer to having freer markets, energy consumption is growing. And so they have a voracious appetite for energy and are trying to scoop up whatever energy they can find, both inside their country and beyond. It's a necessity for them because their natural resource basis is limited relative to their population.

Their focus is on acquiring affordable energy. They've got a billion people living subsistence or something close to it, 300 million that live relatively well, but they have -- they know that they have to have affordable energy because they can't -- they can't afford expensive energy.

What we do, we're active in China, and we work with the three big companies there. We produced oil offshore for many years. We have an onshore gas project. We're looking for shale with them, and we sell some petrochemical products in China.

MURRAY: Are they good business partners?

WATSON: They have been very good. Yeah, I think they're still emerging, if you will. They have some very large companies, and they still have vestiges of some of the old ways, but they're moving very fast, and they're quick learners.

MURRAY: And how would you compare Chinese government energy policies with U.S. government energy policies?

WATSON: I think they're very pragmatic. They know what they need to do. And for example, they know they need oil, gas, coal, nuclear and renewables. They're working very hard on all five.

And I think in the U.S., we're trying to pick winners and losers; we've actually -- you know, one of the competitive advantages America has had for years is affordable energy. Power costs in the U.S. are a third of what they are in Germany today. German companies are starting to squawk because they're concerned that they'll be made uncompetitive by the costs of, frankly, their renewable program.

And so China is very aware of this balance their people can't afford expensive energy. And so they're very focused on bringing affordable energy. They have environmental objectives, to be sure. Most of their environmental objectives are centered around ambient conditions, cleaning the air and water.

MURRAY: Being able to walk in the street and breathe.

WATSON: It's very tough. They're where we might have been 40 years ago on that subject. They have real work to do in that area. And as a byproduct of that, some improvements in greenhouse gas emissions will come, but most of their improvement -- they will become more energy-efficient per unit of GDP, but the gains beyond that from a greenhouse gas point of view will be very minor per unit of GDP.

MURRAY: Russia -- can you talk about some about Russia and Russia's role in the world today? You're right next door.

WATSON: They're a very large oil producer.

MURRAY: (Chuckles.)

WATSON: Our -- and so that makes them a serious player in the energy business.

Our business there is relatively limited. We've worked hard to try to gain an opportunity there, but our biggest business, which we've had for some time, is a pipeline that takes oil from Kazakhstan across the Russian Federation to the Black Sea. And our companies' relationships are good. And they seem to be reasserting, naturally, state control over that industry as a strategic industry. And I watched some -- (inaudible).

MURRAY: How big a risk is that to -- you know, if you have investments in Russia right now as an oil company?

WATSON: Well, I think -- I think it really remains to be seen. I think -- if you look all in all, BP is a company that's had a lot of time there; over the time period they've been there, it's been a profitable business for them.

But it's tough sledding.

MURRAY: West Africa, Nigeria, the "Wild West" -- that's got to be a difficult place to operate.

WATSON: We have a big business in Nigeria. We're employing some 5,000 Nigerians today building a gas-to-liquids plant in the Niger Delta, something I didn't think we'd do 20 years ago as a company. So we are -- we have made big bets on Nigeria. We've had a presence there for a long time. We do a lot of things in the social space there with the communities. And we're working to try to broaden the contribution that we make there. But it's a -- it's a budding democracy, with emphasis on "budding."

MURRAY: That's a bit of a euphemism, isn't it?

WATSON: Well, it's just there's turmoil there. You have 150 million or so people. The wealth is very unevenly distributed.

MURRAY: And how do you deal with that? I mean, you're talking about security concerns; you're talking about corruption potential; you're talking about so many different things that you -- with those 5,000 employees that you have to keep an eye on. How do you do that?

WATSON: Well, the best thing you can do is be entrenched in the communities where you're operating. And in Nigeria, 85 (percent) to 90 percent of our employees -- in addition to the construction workers I just mentioned, 85 percent of our employees are Nigerian. They're from the local tribespeople. We have memoranda of understanding with all the communities where we talk about what's needed beyond the taxes that we pay, some of which do get recycled back to the communities. But there are individual things that we work on with those communities, so there are schools; there are clinics; there are other things that are needed. We work with them to try to bring additional value to them.

MURRAY: And how -- you talked about, in the U.S., the impediments to expansion that government imposes through regulatory standards, permitting, those things, et cetera. But when you move overseas into these difficult markets like Nigeria, Kazakhstan, China, how much help do you get from the U.S. government, from the State Department, from the CIA, from other agencies of government? How closely do you work with those?

WATSON: One of the great ironies is -- I would separate domestic policy and rhetoric around domestic policy from interaction with the State Department. We have a terrific relationship with the State Department. And I think the reason why we have that is because they're on the ground, and they see what we're doing. Go talk to any U.S. ambassador about what the Chevrons of the world do, and they will tell you a very good story. They love us. The State Department loves us and what we do overseas, and American companies in general.

MURRAY: Is that a -- is that a leadership difference, or is that just inherent in the -- would be -- regardless of who was secretary of state and who was president?

WATSON: Well, I certainly think that Secretary Clinton travels extensively and has a good understanding personally. But I would also say that it's just the experience of being on the ground. If you don't have a passport and don't travel to these places, you're going to read what pundits say, and you won't know, and you won't see it on the ground. I would say career State Department employees are very well-informed about what's going on in their countries. And so they see what we do, and we interact with them. We also interact with intelligence agencies and others, and they see what we do. So I think -- it goes back to what I was saying earlier. I think it's a matter of trying to get information to the people so that they don't -- they don't believe the casual statement that might be made about what Chevron's doing here or what other multinationals are doing.

MURRAY: So I want to open it up to questions. But before I do that, one issue that has been dogging Chevron and dogging you for the last 20 years is this issue in Ecuador that has to do with spills that occurred -- Texaco, really, before the acquisition. You now have a $19 billion judgment against you in Ecuador. But more than that, it just seems to dog you everywhere you go. They're traveling around the world trying to get (out of the ?) countries to (attach ?) your assets. They come to your annual meeting and harass you at your annual meeting. I would not be at all surprised if there are one or two folks in this audience who are prepared to ask you about that issue. Well, why can't you get rid of it? Why -- it's -- you know, settle the problem and move on.

WATSON: Well, in the simplest terms, for those that haven't followed, we settled it once. We settled it with the government of Ecuador. We've settled it with their -- with their oil company. We've settled it with the indigenous people. We -- Texaco did that in the mid-'90s. And along come U.S. plaintiffs' lawyers, and here's what they've done. And by the way, we have it on video, videos they took of themself. We have it from emails that we've gotten through the crime fraud court filings that we've made in this state -- in this country.

And basically, what's happened is the following. The plaintiffs' lawyers have gone in, and they have blackmailed judges, bribed judges, falsified evidence, falsified expert witness, ghostwritten expert opinions and ghostwritten court judgments. And if you don't believe me, you should read half a dozen court filings in the United States where the crime fraud exception has been invoked.

You should read Judge Kaplan's rulings here in New York and you should read the rulings that have come out of international tribunal in The Hague. Basically you have a thoroughly corrupted judiciary with shameful actions by U.S. plaintiffs' lawyers, and we have to fight. I'm not going to pay criminal -- I'm not going to pay --

MURRAY: So you just have to live with it. There's nothing you can do, but you just have to --

WATSON: Well, we're --

MURRAY: I mean, is it just going to be there for two more decades?

WATSON: We're largely winning in the court of public opinion. You've seen much less written, because anyone who's done their homework knows it's a fraud. And so we're winning in the court of public opinion. We're making great progress in the courts.

But yes, we do have to fight it. We fight it till we win.

MURRAY: But it hurts you.

WATSON: Well, of course. But see, that's -- their plan was never to win. Their plan is to press us and to settle. And I have no intention of paying people that have committed criminal acts against (us ?).

MURRAY: How do you do the cost-benefit analysis on that?

WATSON: If I pay people that have filmed themselves committing felonies, they'll laugh at me, and they will go line up in the next country and file frivolous against us. So we suck it up. We fight them.

MURRAY: All right. Let's open it up --

WATSON: By the way, I would just say rule of law -- there's no more important thing the United States government can do than support rule of law around the world.

MURRAY: Let's open it up. If you have a question, please wait for the microphone; stand; state your name, your affiliation; and limit yourself to one question, because we're going to have a lot of questions.

And this woman right here, please.

QUESTIONER: Good morning.

WATSON: Good morning.

QUESTIONER: My name's Kassia Janacek (sp) and I'm with McKinsey & Company. And my question's about the U.S. as an exporter of natural gas. Right now there's plenty of development going on with LNG facilities being under development, and that of course assumes that the rest of the world needs our natural gas.

Could you kind of give your thoughts on whether or not you see any risk to that -- (inaudible) -- given that there is plenty of oil shale gas -- shale development that's available in other regions of the world, particularly given that you're active in Eastern Europe in that area?

WATSON: Yeah. I actually do support export of U.S. gas, and I -- on real simple grounds. We ask other nations to not hoard their resources and to export their oil and their gas and their natural resources or whatever it might be. I believe in free trade, and I think we should do the same thing here.

I think there are concerns that some would have that, well, we'll ship it overseas and then prices will come up in this country. But I think the market works pretty well over time, and so I think it's the right -- I think it's the right policy, a consistent policy, for the U.S. to take.

There are gas resources that are being found around the world. It remains to be seen how competitive and how much could actually be exported from the Gulf Coast of the United States. But shale gas overseas is still in its early stage. It's been very successful in this country. We're doing work in Poland and in other countries in Central Europe. We have some holdings in China and elsewhere. But it's early days, and there -- while I know there's been some enthusiasm that shale's going to take over the world, the development of oil gas from shale, it's going at a much slower pace.

There's some simple reasons for that. Part of it's geology, but part of it is we've drilled through shales in the United States for decades, and so we have a lot of knowledge about the geology in these shales. We don't yet have that knowledge -- it's more early exploration in most places around the world at this point.

MURRAY: Right here.

QUESTIONER: Good morning, Mr. Watson. Peter Trowtson (sp). I'm a visiting fellow here at the CFR. And with respect to offshore development, exploration, you know, the Macondo well was 6,000 feet of water, and now we're drilling in 10,000 (feet). Up in the Arctic, Shell's efforts this year -- I guess they're only in 150 feet of water. But nevertheless we're pushing further and further offshore with the amazing advances in technology that are out there.

My question is how does the -- or does the failure of the U.S. to ratify the Law of the Sea affect your willingness to invest or to pursue further exploration?

WATSON: It hasn't -- we support ratification of that law. There -- it's been tied up in political discussion here in the United States. It hasn't impacted us dramatically at this point, but it would provide additional clarity, and so we've supported it.

You know, for the most part, our exploration effort has not been impacted to this point.

MURRAY: Right here.

QUESTIONER: Nick Branch (sp) with Lazard. Given the huge gap in the -- (inaudible) -- between the price of natural gas and oil and gas derived from petroleum, what do you are the prospects for introducing cars that are driven by shale gas rather than petrol?

WATSON: Oh, well, a good question. We -- well, we have them today, actually. The challenge for natural gas vehicles in this country is really related to infrastructure.

If you think about all the petrol stations -- as you (call them ?), all the gasoline stations -- that we have today, there's a tremendous infrastructure in place. There is less of that for natural gas vehicles. Right now, you have natural gas vehicles in place. They tend to have central fueling facilities, and there'll be truck fleets, for example, or delivery car --

MURRAY: Buses, city buses --

WATSON: Taxicabs, city buses. And so I think you'll see more of that sort of thing over time, and perhaps along trucking corridors.

At the consumer level, it's a little bit tougher because you don't have the installed base. And so when are you going to build the facilities? And which comes first, the facilities or the vehicles? They also tend to take up space; the tank tends to take up space in a passenger car vehicle. So it can be a little bit tougher for that reason. But I think there's promise. I just it will take time until the infrastructure is built out. And I think there's a logical progression through the fleets.

MURRAY: Is it better for transportation or better for power? Or is there enough to do both?

WATSON: Oh, I think the market will tell you which it's better for. I think in general, most natural gas is well -- is well- served in the power -- in the power business. But it has its place in transportation as well.

MURRAY: Right here, please.

QUESTIONER: Mr. Watson, thanks for your remarks today. Mark Serrell (ph) with Mickinzine Company (ph).

A quick question about fracking in the United States: There has been a lot of concern expressed by different communities about the safety of extraction. You said before that extraction can happen; it can happen safely. Some of the major issues around safety includes seismicity, well integrity and, if you're thinking about global warming, fugitive methane emissions from the extraction process, which is something that people still don't have a complete handle on. So I'm just curious at what you think the safety issues are and how you think they can each individually be effectively addressed.

WATSON: Well, I think there have been a series of issues that have been raised about fracking, and most of them have been fairly well addressed. The industry, our company in particular, we've tried to do everything we can to address the issues that are out there.

Low-level seismicity has been an issue for decades, it is well understood. I don't believe it's a serious issue. I don't think any -- I don't think there are studies that will tell you a serious issue. Truck traffic and noise around sites, that's a fair concern, and so we and others are trying to do our part. There was concern for a time around chemicals. We now fully disclose the chemicals that are used as process -- trace amounts, they're on public websites, not hazardous material. And so these issues we've been able to knock off one at a time, and I think we'll be able to do the same thing for any issue that's raised around fracking.

This isn't new technology. We've fracked a million wells in this country, so it's not new. Now, we have to have integrity about all our work. Any industrial process has to be done well. And so I'm willing to listen to what the concerns are. I know the industry's trying to get out ahead of any of the current concerns that are out there, participating in studies on emissions, et cetera. And I think we've made good progress.

MURRAY: Are you worried that you're being hurt in that effort by either other companies or by suppliers who aren't meeting the same standards you are?

WATSON: Well, I do think one of the learnings is that it's not just how Chevron its affairs, it's how everyone does it. And then so we're working very hard to raise the bar. If you look at fracking in general, it was a little company's business when it first started. It wasn't the big companies. The bigger companies are coming in now. And some of the small companies had good practices, some of them didn't. And so I think there has been an effort by us and others to try to raise the bar. For example, we've been working with the governor of Pennsylvania on that very subject. And I think -- I think it is our role.

I will tell you the two biggest incidents that have happened in this country, the Exxon Valdez and the BP Macono spill, hurt Chevron as much as it hurt those companies because of the acreage position we had in Alaska and because of the position we have in the Gulf of Mexico. And so the industry groups are working hard to raise the bar, raise standards and work with regulators to get the right set of standards in place.

MURRAY: On that point, by the way, I guess the EPA announced yesterday that BP would be at least temporarily suspended from any government work. Is that justified?

WATSON: You know, I don't know enough about the facts of how it's -- (inaudible).

MURRAY: But I guess -- maybe -- let me try and ask the question the other way because you know a lot of -- was there a -- when it came to BP, was there a different standard of operation that justifies a punitive approach?

WATSON: Look -- (chuckles) -- that is a subject of court and other actions that I'm -- it's probably not good for me to talk about. I've read what's in the public domain, and I think that incident has precipitated action by BP and action by the whole industry to try to get better at what we do. So if you're asking, are there learnings that they had and that we had from that, the answer is yes.

MURRAY: Right here, please.

QUESTIONER: Thank you very much. And taking up on the geopolitical consequences of the change that may come about when this country becomes more independent, let's say, do you detect any changes in your relationships with producers now?

Do you detect any concern on the part of other -- of producers that the shift in the market might affect their long-term plans, both politically, in terms of the kind of contracts you can make, and also in terms of marketing? As an example, does an oil producer establish a refining facility in a particular market to be able to move his particular grade or -- do you find that, and do you see that as a major issue going ahead?

WATSON: Well, there are impacts in the marketplace. Certainly, in this country, in the refining business, there are impacts of more light oil being produced and the need to import less light oil. So the crude -- there's a crude mix issue that really is a commercial issue that I think we'll work through, but there will be impacts.

In terms of the oil producers overseas, I think they watch very closely as they see discoveries being made and resources being developed. On the other hand, a country like Saudi Arabia has a much lower cost of doing business and developing their resource than we do. So they'll watch it very carefully.

In terms of how it impacts contracts that we have, we tend to be choosy in terms of the agreements that we sign. Obviously, geology is important, but so are the fiscal terms and operating environment in the countries where we choose to do business. And if fiscal terms aren't good enough, we don't participate.

I think southern Iraq is an example. We chose not to even bid in the bid rounds in Iraq, despite doing an enormous amount of work, giving lots of technology and other training to Iraqis. But in the end, it wasn't -- it just wasn't economic for us, so we didn't participate.

And I think countries see that over time, and if they don't have the right fiscal terms, they don't get investment, and they figure that out over a period of time, and they adjust their fiscal terms.

MURRAY: There's a question right here, and then one right behind you. But this one first, please. Yes.

QUESTIONER: I'd like to go back --

MURRAY: Could you grab the microphone there?

QUESTIONER: Oh, sure. Thank you. I'd like to go back to the climate issue.

MURRAY: And introduce yourself.

QUESTIONER: Yes, I'm David Fenton. I run a communications firm. I'm struck -- you're a very intelligent man. And the denial that your industry (in ?) is quite astonishing to me. I really can't figure it out at all. In the last three weeks we've had reports from PriceWaterhouseCoopers, from the World Bank, from the International Energy Agency, that if we burn your reserves and those of your fellow companies, we're going to get to 4 degrees centigrade additional warming on the Earth. That means no ice. It means a wrecked economy. It means totally unstable coastlines. It means the price of food becomes unaffordable for the world's poor. It is a survival issue for civilization. Now, my children will be watching this.

MURRAY: (Inaudible) -- question.

QUESTIONER: I'm almost done. Yeah, yeah, sure. And your answer is, well, we can't go back to the stone age. That's not true. And the McKinsey people can tell you how to do it, if you haven't read the report.

MURRAY: But David -- what's your -- yeah.

QUESTIONER: So what is your plan to help us avoid this? Your business plan isn't going to hold up taking us into that world. That's an illusion.

WATSON: I look at the IEA. I look at all the different studies that I've seen, including the one that was just done for Secretary Chu. And what it says is that we have a long way to go before we can replace the current forms of energy that we have today with affordable versions that are less carbon-intensive. We're investing in those. I -- we're the largest renewables producer, as I mentioned earlier. We have a big geothermal business. We're investing in advanced biofuels. But right now most of those seem like they're a long way off.

And so the policy question is what do you do. And what I'm suggesting is that there's a great deal that can be done in conservation, number one. There's a great deal that can be done in burning natural gas in the interim. And there's a great deal that can be done in funding research in step change and advanced technologies that will achieve the kind of objectives that you describe.

MURRAY: But on that -- on that point, the research piece, in terms of Chevron's 245, or whatever it is, billion (dollars) in revenues, is pretty small. It's a pretty tiny number.

WATSON: Our spend on renewables, you know, all in -- capital, operating -- is a couple billion dollars a year.

MURRAY: A couple billion dollars -- so you're talking about 1 (percent) or 2 percent.

WATSON: Look, I'm not in the business of investing in things -- as soon as we depend on subsidies to make money, those subsidies will be gone. So what we're trying to do -- we have a joint -- we have a -- for example, in biofuels area, we have a joint venture with Weyerhaeuser, tree-growing company. We don't know anything about growing trees and plants. So we partner with Weyerhaeuser to try to develop the next generation of biofuels.

There are three components to that. One is to find the right feedstock, a sustainable feedstock that's -- that has the right energy characteristics to it. The other is the supply chain.

It's hard to move that stuff around. And the third thing is the conversion technology. And we have not found, and I don't know that anyone has found, really, the right technology.

If you look at the Renewable Fuel Standard that's in place today that was passed during the Bush administration, or AB 32 in California, we don't know how to meet the standards that are in these -- that are in these laws -- don't know how to meet them. They're requiring cellulosic ethanol that is being made by the beakerful today. I'm not against cellulosic ethanol; it's just not being made at scale in an affordable fashion. And that's the trade-off.

Most of the countries -- as I -- as I travel around the world, most of the countries are -- we have a billion people in this world that are living in the relative wealth that we have. We have 6 billion that aspire to what we have today. And they want light, heat, mobility, and they want it at an affordable level. And they're assessing the same risks that you describe. And what they're saying is, I'll take -- I'll take the affordable energy for the time being until I'm more certain about the risks and the consequences of not pursuing affordable energy.

MURRAY: There's a question right here -- right there. Thank you. And --

QUESTIONER: (Name off mic) -- St. Paul's Foundation. Sir, I wanted to thank you for some of the work that you've been doing around the world. I was hoping you could share a little bit with us about how you use ethics in your business decision-making process, if you have, for example, ethics officers at the program level in various countries, and how you work through -- not just as an exporter of American values from a business point of view and, you know, worrying about the FCPA, but from a point of view of integrating with a local culture and trying to find out what's the best way to approach a business problem.

WATSON: Well, thank you for the -- for the comment. Our sort of platform for the ethics and values that we aspire to live up to every day comes through a document we have that's called "The Chevron Way," and it lays out strategies, but also the values that we espouse. And I talk about it every day. When I do town halls around the world, I talk about it. Now, we do have compliance -- we have big compliance programs all through the country, and we have certifications and hotlines and all the things you would expect because, frankly, the world is very corrupt. And we have to be sure that we live up to those high ideals. I think for the most part, we're very successful in doing that.

In terms of the local communities where we are, we work very hard -- if I go back 20 or 30 years, we used to write checks. And what we found is that writing checks wasn't very effective because the money wouldn't necessarily -- it would go to a reputable organization, perhaps, but they didn't have the capability to do the civic work or to build the school that we might have thought was going to be constructed. And so what we have -- what we've done over the years is we have developed programs where we try to build capacity in these areas so that if we're going to build a school, we'd better be sure that someone can operate that school.

And that involves a lot of on-the-ground work where we have, in the case of Nigeria, which is a big area for us, memoranda of understanding that we sign with local communities, with the people on the ground. And we do little things first, and we try to build on them and do something that's compatible with what the community wants and what the community values. But it also takes having a presence in that community. And that's why in Nigeria and Angola, Kazakhstan, we've got 80 (percent) to 90 percent of our employees are local. And they help us determine what the needs are in those local communities.

MURRAY: I know we've got a couple questions on this side of the room. I just want to make sure that I'm -- let's do here and then over here.

QUESTIONER: Peter McNally with Kingdon Capital Management. You brought up your decision to -- or not enter Iraq. But you elected to enter Kurdistan this summer.

WATSON: Yeah, we did.

QUESTIONER: How do you -- how do you see the relationship between Erbil and Baghdad playing out? And what role, if any, is the U.S. State Department helping you with in terms of getting an agreement between the two sides?

WATSON: Well, the State Department is working very hard to try to foster better relationships there. And I'm not current on their day-to-day efforts. I do know that our decision to go into the north was premised on the conditions that we see, both economic, geologic and, frankly, securitywise.

And it's a fundamentally different entry than those that went into the south. In the south, there were big discovered resources. There were billions of dollars that were going to be invested early. And we felt the returns weren't worth the risks that were there. In the north, it's more exploration that we're taking on. So we've picked up a couple of blocks. We'll do exploration work. There are still risks, to be sure, operating in the north. There's transportation of the oil out. There'd be fundamental agreements with the central government and other risks that are there. But we're taking -- but the investments we're making are more modest. And our expectation is by the time that we find something and develop it that those issues will be worked out.

MURRAY: Did you have a question, or you -- and then there was another one back here.

Yes, sir, right there.

QUESTIONER: Grant Vingoe from Arnold & Porter. Do you feel that you face particular challenges in dealing with state-owned enterprises around the world? And do you think that North American governments, Canada and the United States, should adopt special rules for dealing with state-owned enterprises investing in North American resources?

WATSON: Yeah, that's a -- that's a tough question. There are two sides -- there are sort of two parts to the answer to it. On the one hand, there's one question that state-owned or partially state-owned enterprises have a home field advantage where they operate, as you would expect. The flip side of that is when those state-owned enterprises go elsewhere, I think we have an advantage. And they may bring resources from their country, but we're viewed as largely independent economic agents, and so we're trusted.

When President Sirleaf in Liberia wanted a company to come in and start exploration work in her country, she said -- she waited 10 months for us to clear all the hurdles we had to enter he country, and she said, well, Mr. Watson, I want an honest company, I want a company I can trust.

And so I think it cuts both ways.

In terms of allowing these companies to invest in the U.S., in general, I am pro-free trade, and I do think that we should allow those types of investments.

We have expressed concerns at times in the past that there's explicit state funding of these kinds of investments. I think that's a little bit different story. But --

MURRAY: It's -- that's interesting from a business perspective. Can you talk about it from the broader perspective as well? You talk about Chevron sort of promoting our values around the world. Core to those values are our concepts of democratic capitalism, which clearly aren't accepted by a lot of other countries, China being one of them. China's been pretty vociferous lately about saying, hey, take a look at what's going on in Washington. That's not working. We have a different way.

How is that playing? You have a good ear for how that discussion is going on around the world.

WATSON: As I said earlier, I look at China, if you'd -- and the world at large as largely moving toward markets. It's only in this country where we're -- (laughs) -- moving a little bit in the other direction. Most countries of the world are actually moving closer toward us and moving closer toward markets.

Now some would say there's too much state intervention in China and in other locations. I won't argue that. But look at it over a sweep of time and look at privatization efforts around the world. Look at the countries that are succeeding and growing. I think there is a move in that direction. I think the U.S. can -- would do well to set that same example.

MURRAY: Yeah.

(Off mic) -- questions?

QUESTIONER: (Off mic) -- again. Could you expand a little a little bit on the prospects of shale in China -- (off mic)? Could you expand a bit on the prospects for shale in China? You touched on it very briefly in your remarks.

WATSON: Huge shale holdings in China. Unclear how much hydrocarbon is in that rock and unclear whether it can be economically extracted yet. They have ambitious goals, but it's early days would be the way to describe it.

You have to -- think of developing shale as a little like a factory: that you have to gear up a huge, huge infrastructure to drill the wells, and you have to be confident about the geology and the conditions that you have before you'll do that. So there's a great deal of testing and I would call it exploration going on right now, drilling a lot of wells, to be sure that we can assess the resources that are there. The Chinese are very optimistic, but I -- my view is I think it will take some time.

MURRAY: We have time for maybe two more questions. Yes, ma'am. Right back there.

QUESTIONER: I wonder what it would take -- Elizabeth Bramwell. I wonder what it would take for alternative fuels to be profitable on their own merit, as opposed to being subsidized. What price of oil would it take today to make them profitable?

WATSON: I think it depends who you talk to and it depends on the fuel that you're talking about. In some cases, some forms of renewables are already economic and are working today. And we've had hydropower in this country for a long time. There are locations where wind -- where wind is competitive today. In some locations solar can be competitive.

I think the issue is for many of these -- certainly for wind and solar, they're not storable, and so the wind blows and the sun shines at times when it's not needed. And I think integrating that power into the grid can be a challenge at times.

Then biofuels -- we have economic biofuels today. Corn ethanol -- it can survive without subsidies today in some -- in some locations. And we'll see if other advanced biofuels can make that grade. I think it's -- I think it's going to be tough to produce them at scale at this point.

MURRAY: Last question?

Yes, sir. Right back here.

QUESTIONER: (Name inaudible) with Greenberg Traurig. You spoke about other areas of the world and your problems in Ecuador.

What opportunities do you see in Latin America, particularly in Mexico under the new administration?

WATSON: Well, we do -- we do have a presence in Brazil, Argentina, Colombia and -- as well as other -- Suriname, we just entered. We don't -- we don't have a big presence in Mexico, and I'm not holding my breath. That's mostly on the long history that Mexico has and their view of the industry as being very important to their national identity. Service companies have been able to enter the country. The day when it's open entry for international oil companies like Chevron, I think, will be a long ways off.

We talk with them. We participate. You know, we hear some of the discussion on that topic. But it's a -- it's a very emotional issue for Mexicans.

MURRAY: I want to thank you all for coming. The next meeting of this group is December 11th. Walmart CEO Mike Duke will be here. And John Watson, thank you very much. (Applause.)

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