Sound policies needed to develop oil, gas resources, Watson says

US government policymakers should use the opportunity that a dramatically improved US oil and gas outlook provides to generate more federal revenue by reforming the federal tax code, increasing access to public lands, and encouraging more thoughtful environmental policies, Chevron Corp. Chief Executive Officer John S. Watson suggested.

“We’re seeing unintended consequences from policies like the Renewable Fuels Standard, which is creating an ethanol blendwall,” he said during a June 11 appearance at the Center for Strategic and International Studies. “When it comes to greenhouse gas controls, we have to be transparent about both their benefits and their costs. The public demands honesty.”

Potential production increases from US tight shales won’t mean that overseas resource development isn’t necessary, Watson warned. “We don’t believe there’s as much global surplus oil capacity as some people say,” he said. “The only real surplus capacity is in Saudi Arabia. The world still needs new resources to replace what it uses. Producers also need the right prices to finance new projects.”

He said he could not recall when there were so many opportunities to produce so many different kinds of energy. “There’s no shortage of resources,” he maintained. “But you have to have the right commercial terms, physical security, and other environments in place to make it work. We’ve been in some countries for 50 years. The key is to be sensitive to the host government and the country’s needs.”

Countries ready to develop their resources bring US companies in because of their technology, he said. “But other inherent US corporate values—including transparency, rule of law, and environmental responsibility—also matter,” Watson continued. “We think Chevron brings a unique set of characteristics that host countries value.”

Working on biofuels

The multinational US oil and gas company has spent a lot of time and money improving its conventional resource technology, he observed. “But we’re also trying to find ways to use biofuels effectively,” Watson said. “We haven’t cracked the code yet, but we’re working on it. Renewables have their place, and they will grow. But right now, $500 billion of subsidies support them around the world. We have to make them affordable.”

He said Chevron’s biggest LNG involvement is in Australia, where the company has invested $45 billion in two projects. “There’s a lot of resource out there, but putting a successful project together requires having a lot of things go right,” he explained. “It takes 15-20 years to put a project together. Not all of them will be built. What typically takes one to final financing is getting contracts lined up.”

Watson said he hopes more domestic LNG export projects will be approved. “It’s the right thing to do,” he indicated. “We expect North American gas prices to rise a little, but it will be affordable over time. It probably will prevail as it competes with coal in the power generation market. Transportation is more complicated because so much infrastructure is needed.”

Proposed solutions will need to be affordable, he emphasized. “Governments want to feed and shelter their people, so their carbon use will grow,” Watson said. “Industrialized economies can become more efficient. But the idea you can force something expensive into the market may work in wealthier countries, but not in emerging economies.”

Contact Nick Snow at nicks@pennwell.com.

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