Heads of two of the oil and natural gas industry's biggest companies offered prescriptions for short-term and long-term industry headaches at a major Houston energy conference last week.
The chairmen of ConocoPhillips and ExxonMobil Corp. gave their views, respectively, on the crisis of investor confidence in the industry today and questions over the role of oil and gas in the world energy mix tomorrow at a weeklong conference sponsored by Cambridge Energy Research Associates (CERA).
Oil and gas industry executives need to be more "proactive" in order to restore confidence in the industry, said ConocoPhillips Chairman Archie W. Dunham at CERA Week's Feb. 11 luncheon keynote address.
Meanwhile, ExxonMobil Chairman and CEO Lee R. Raymond told attendees at the CERA Week opening address the same day that the industry will have a bright future in the coming decades, but that bright outlook may not include as much attention to the development of renewable forms of energy by major oil and gas companies as once anticipated.
Dunham on crisis today
"We're not going to be effective (in meeting the challenges of the energy future) until people trust us," he said. "The current crisis of corporate governance has reinforced traditional distrust (in) our industry. In Houston we're deeply aware of how the ethical lapses of a few CEOs have damaged the public's confidence in our interests and in corporate verity.
"Restoring confidence is going to require more than complying with the letter of the law," he insisted, urging executives to speak up. "I know that stepping before the TV cameras is distasteful for many executives. Many of us distrust the media—not without reason—but if we don't speak up for ourselves, there aren't many that will. And if we don't speak up, we're going to give the impression that we have something to hide," he said.
Dunham said the industry should strengthen corporate governance and develop a tough code of ethics and strict accounting practices. "We need to be tough on ourselves, and we need to let the public know that we're committed to upholding the highest standards of ethics. To restore confidence, we need to do the right thing, and we need to let the public know that we are doing the right thing."
Dunham said that a recent poll of senior business journalists on the quality of CEO communications in recent months revealed that while many CEOs claimed to be spending more time on external communications in the wake of recent corporate scandals, 88% of the journalists polled said otherwise, and 91% said that CEOs were no more likely to give interviews today than they were before the latest round of scandals broke. "If we really want to restore confidence, we'll have to do much better than that," Dunham said.
Strong directors needed
Reiterating a favorite theme, Dunham also commented on the importance of having knowledgeable, courageous boards of directors.
"It is not by accident that the companies that got themselves in trouble last year had relatively weak boards of directors," he said. "If you reviewed their annual reports, rarely would you find an active or retired CEO of a Fortune 100 company or someone of comparable stature sitting on their boards.
"As a result you rarely had a director with the business experience and seasoned judgment to challenge the CEO senior managers when they went astray, when they proposed unwise projects, or suggested that the board weigh conflict-of-interest policies in approving certain financial transactions.
"I don't want a rubber stamp board," Dunham said. "I want board members who will stand up and say 'Wait a minute are you sure you want to spend $200 million in the jungles of Papua New Guinea at this time? I think that's a dumb idea.'
"No leader likes having his judgment questioned," he added. "But it is precisely this kind of challenge that will keep your company from taking a hit below that waterline. A strong board can save you from making the kind of mistake that can destroy your company."
Politics of globalization
Dunham said that former US House Speaker Tip O'Neill, "that cagey, Boston Irish politician" was right when he said, 'All politics is local.'
"All politics is local; the only thing that's changed is that multinational corporations have to know local politics in more places than ever before.
"The process of globalization is coexisting with, or in some cases, colliding with local cultures to an unprecedented degree, and the outcome is by no means assured. We can't afford to take globalization for granted; we have to make it work."
Dunham said that takes a huge commitment of time, effort, and principle. "Now for me, (it's sometimes) doing business (above) the Russians' Arctic Circle and eating raw reindeer meat with (an indigenous) chief," he said.
"Elsewhere in the world, I would need to follow the prevailing customs of any one of 50 or so countries (where) ConocoPhillips does business today. I would do so because people don't do business with individuals they don't trust, individuals they're not comfortable being with."
Dunham said the same ideals apply at home. "We must recognize what we do within our own borders has serious implications for our neighbors (Canada and Mexico)." Despite setbacks, Dunham said, the industry continues to move toward its goal of a unified energy market for North America. In March 2001, for example, energy ministers of the US, Canada, and Mexico formed the North America Energy Working Group.
"The purpose of this working group is to continue the progress toward the unified continental energy market," he said. "This is an effort we should all support; this is the time for our industry to show leadership."
Quoting former US President Harry Truman, Dunham concluded: 'Progress occurs when courageous, skillful leaders seize the opportunity to change things for the better.'
Raymond on energy outlook
Energy demand, Raymond said, will continue to be driven primarily by economic growth. "We project that the world's demand for energy will reach close to 290 million (boe/d) by 2020—or about 40% more than today," Raymond stated.
"We expect conventional fuels will remain the dominant energy sources, at least through the midcentury," Raymond said. "I would note that we project wind and solar energy will continue to grow rapidly, but only due to government policies and incentives, not market economics."
Raymond put this scenario into perspective for the CERA conference attendees by explaining that solar power can cost as much as $100-250/boe to develop, adding, "The intermittent nature of solar energy can bring on additional costs."
He said, "Starting from such a low base today, wind and solar (power) are unlikely to exceed a 1% share of the world's energy needs by 2020, even with double-digit growth rates. Thus, oil and gas—representing 60% of energy supplies today—will remain the dominant energy source until at least the middle of this century."
Long-term technology research
ExxonMobil is continuing to research long-term technologies, however, including "advanced vehicles and fuels, improved internal combutstion engines, CO2 separation and storage, and other technologies," Raymond noted. "And we are also evaluating the use of hydrogen as an energy source," a topic that "has been getting more attention recently (see Watching Government, this page)."
Raymond noted, "There is understandably a great deal of interest in this subject. On the positive side, hydrogen is abundant, and once delivered to the vehicle, can be used emissions-free. However, it does not exist independently of other elements, meaning that significant energy and costs are required to liberate and distribute it for use in fuel-cell vehicles.
"When considering any fuel, the entire system of production, distribution, and consumption must be analyzed to assess overall efficiency and emissions.... On this basis, internal combustion engine technology remains the standard against which all alternatives must be measured." Raymond said.
Oil, gas stay energy backbone
"Oil and gas will remain essential to economic growth—not only in the industrialized world, but also in developing nations seeking to raise their standards of living," Raymond said.
As demand increases and oil and gas production declines, Raymond said, "we come squarely to the magnitude of the task before us. About half the oil and gas volume needed to meet demand 10 years from now is not in production today.
"As we have been saying publicly for some time, industry may need to add some 80 million (boe/d of oil and gas production capacity) over the next decade to meet projected demand—an amount equivalent to two thirds of today's production levels.