Despite rising oil prices, a number of analysts have commented recently that the future for major global oil firms remains far from rosy. The Economist says big oil is “over a barrel,” and could see profits drop if they fail to meet production targets. Peter J. Robertson, vice chairman of Chevron Corporation, discusses the likelihood that global oil production will meet demand in the coming decades. He says he thinks it’s “a real stretch” to think that the industry will be able to produce the 125 million barrels per day that a recent National Petroleum Council report said would be necessary to meet demand in 2030. He says the underlying cause, however, is not the amount of oil that’s in the ground, but rather “above the surface” geopolitical risks. He singles out a lack of investment in production capabilities in many of the world’s major oil-producing nations.
Goldman Sachs yesterday [November 28] downgraded its rating for the entire integrated oil sector, from a rating of “attractive” to a rating of “neutral.” I’m not asking specifically about Chevron, but the sector more generally—do you think this assessment is off base?
It seems sort of strange. We’re in this world where we’ve got rapidly growing demand for energy. All the projections seem to be a 50 percent increase in energy [demand] in the next twenty-five years. As a result of this pretty dramatic increase in demand from around the world, and mostly the developing world, prices are higher. So the opportunities for integrated oil companies—integrated oil and gas companies—in many ways have never been better. The industry has got a strong future. For these guys looking at this quarter versus last quarter, it might be a slightly different story. But in terms of any length of time, there’s lots of opportunity and lots of business for our companies.
Lee Raymond [former chairman of ExxonMobil] recently spoke here at CFR about the National Petroleum Council’s latest report, which he worked on. The report projected, like you said, substantial increases in oil production globally, from about 80 million barrels per day now, to something along the lines of 125 million per day in 2030. Do you think those numbers will ever actually be met, or will the world be forced to adjust to lower total output?
Lee definitely worked very hard on the NPC [National Petroleum Council] study, but 350 people worked on it, of whom more than half were not related to the oil industry. So it was a pretty broad-range study, which we think, frankly, is pretty darn good. Having said that, one thing that maybe we’ll forget about is underlying decline rates on existing production. So to get an increase of 50 percent, from 80 [million] to 125 [million] the way you described—over a period of time at which the existing 80 [million] is probably going to drop down to a very, very low number, by fifteen years or twenty-five years from now—you’ve really got to get 125 [million], in some ways, times two. And that’s a real stretch.
It certainly has got nothing really to do with the oil and gas, or in this case the oil, that’s in the ground. It’s got to do with what we call above-the-surface, above-the-ground risks. It’s got to do with politics and the ability to get things done in a timely way, so that you can not only make up for the decline but keep increasing. So there’s kind of a natural plateau of production that relates to the ability to get things done in a timely way, rather than the oil in the ground.
Would you attach any number to that? Where you think it would plateau?
Not really. I’ve got no idea. There’s certainly the opportunity to go up from where we are today. But you can see that most of the oil companies are having real struggles meeting their production growth targets. Their targets are fairly modest, and most of them are having trouble getting to those numbers. So getting up to 125 [million] is too high, but I’d prefer not to attach a number.
At the recent OPEC meetings, a few of the OPEC members made the point that rising crude prices aren’t actually rising crude prices, but more a function of a falling dollar. And in fact it is true that priced in euros, the price of oil has fallen over the past year. What effects would we see, hypothetically, if oil were no longer priced in dollars?
People can convert currencies, so I’m not sure if it makes a whole lot of difference. The way it looks to us, if you at a base period of 2003—just to pick a time when oil was obviously a lot less—looking from a European currency, oil has probably doubled, and in dollars oil has probably tripled. So we’re seeing a dramatically higher increase in oil prices from the rest of the developed world. The rest of the developed world is used to already paying six dollars a gallon for gasoline, so a doubling of the oil-price component of that is not really that big of an increase for them. Someone who was paying two dollars fifty cents, or two dollars back in 2003, for gasoline, now is getting close to one-and-a-half times, or doubling, of the price of the product. So we see a much different picture from a lot of the rest of the world.
But in terms of the producers, whether they’re selling in dollars or euros, they can make their currency conversions—I know there’s risk attached to that, but I’m not sure it would change dramatically.
Geopolitically, for the United States…
Well it’s probably more psychological than anything else, but it clearly would send a signal that at least that part of the world—the oil-producing part of the world—didn’t have as much confidence in the future of the United States and the U.S. dollar than they did have. But that would be psychology, it seems to me—which often turns out to at least have short-term effects.
Since the mid-1980s, the percentage of global oil production coming from the Persian Gulf, and the percentage coming from OPEC countries, have both seen substantial increases. Do you think that trend is likely to continue?
Before the period of the mid-eighties, they dropped off a lot. So Middle Eastern countries had a lot of production capacity that was untapped in the mid-eighties. And obviously what’s happened here is that demand in the world has been so strong over the last twenty years that it’s caught up with that existing productive capacity. So now, with the single exception of Saudi Arabia, everybody that can produce—and there are some, for obvious reasons, that can’t—are producing closer to capacity. We do know that the Saudis are making very large investments in their productive capacity. And I do think that their productive capacity is going to grow, and can grow.
When the situation in Iraq stabilizes, there’s a significant opportunity for Iraqi production to grow. To double or triple, over a period of time. And when and if the situation in Iran settles down, to where international companies can invest in Iran, there’s an opportunity to increase production there. So there’s a lot of “ifs” associated with it, but there’s clearly the potential for significant increases in production from the Middle East.
A number of analysts now say the technical workforce within the U.S. energy sector is aging, and isn’t being replaced at a fast enough rate. Do you agree with this assessment? And what does the United States need to do to guarantee a skilled energy sector workforce for years to come?
It’s certainly aging. The need to create a lot of new production in the world over the last twenty years has been pretty minor—relatively minor. We’ve been making up for decline rates, but really the need for additional production, as a result of the fact that there was always excess capability in the Middle East, has meant that the industry hasn’t grown a lot, hasn’t hired a lot of people. And as a result of not hiring a lot of people, many of the universities that used to run geology courses or petroleum-engineering courses, closed them down over the last twenty years, because there wasn’t the demand for these people.
Now, all of a sudden, the world is tight on productive capacity. There’s a need to grow the productive capacity significantly, and to do that we need a lot more people. But the idea that science and engineering are important—that they’re not the job for mechanics—somehow leadership in the United States has to talk more about the importance of engineering and science and put a lot higher profile on that than we’ve had in a long time.
Is deep-water drilling the best remaining exploration play for oil firms?
It all depends what you have access to, and limitations on access. If you had no limitations on access, we could all collectively increase production in the Middle East. We could all increase production in Russia. There are huge resource bases in Russia that are not being invested in. But given that a lot of that is off-limits at this point for the oil, then you’re left with deep-water, which is a very attractive area. You’re left with some very distressed resources—I don’t know whether distressed is the right word—but certainly complex resources in Canada and Venezuela, and certainly other places where there’s oil that requires very special processing or very sophisticated processing.
If you want to get into natural gas, it’s the same thing there—there’s large resource bases that we have access to, but it takes very complex processing, takes lots of money. But those are the kinds of things international oil companies will have access to. Deep water, to me, is a part of that. It’s very high technology, it’s very complex, it doesn’t have the long lives that these big heavy-oil resources or shale might have. It tends to be very quick. You find something in deep water, you produce the majority of it over six or seven years, and you’re out of there. The things you can do in western Canada or Venezuela are much longer lived. But it’s the combination of those two things: We’re either going to get very complex resources, taking a lot of capital, a lot of resources on-shore, or we’re going to get this deep-water stuff.
Looking well down the line, maybe ten to fifteen years from now, and adjusting for inflation and what not, do you think the price of oil will be higher or lower?
[Laughs] Higher than today? I doubt it. But we’ve got lots of demand in the world, and it’s all going to depend on access. It’s going to depend on how well we do in the world on becoming more efficient. Leadership, both in this country and in others, could make a lot of progress on efficiency, and maybe slow down the demand increase. There’s plenty of gas in the world, and plenty of oil in the world, to keep prices well below where they are today. The question is, can we get access to it, will the investments be made, and what will the demand look like? In many of the countries that have these resources, the investments just aren’t being made. Investments aren’t being made in Russia at the rate they need to be. They’re not being made in Mexico at the rate they need to be. They’re not being made in Venezuela at the rate they need to be. They’re not being made in Kuwait at the rate they need to be. And Iraq. What happens in these places will define what the price of oil and gas is ten, fifteen years from now.