Watson: Global accords can tackle more than climate change

US policies could do a better job recognizing that the world’s developing countries have needs and priorities beyond controlling greenhouse gas emissions, Chevron Corp. Chief Executive Officer John S. Watson told a Washington audience.

US policies could do a better job recognizing that the world’s developing countries have needs and priorities beyond controlling greenhouse gas emissions, Chevron Corp. Chief Executive Officer John S. Watson told a Washington audience. His Mar. 23 remarks before an Economic Club of Washington, DC, dinner came days before US President Donald J. Trump signed an executive order aimed at moving domestic energy policies away from a climate impact emphasis (OGJ Online, Mar. 29, 2017).

“Because the US represents only about 15% of the world’s [GHG] emissions and our economy is actually very energy-efficient, the issue is what’s going to happen in other countries, particularly in the developing world,” Watson said. “I travel extensively there and the people there have the same objectives we do. They want affordable energy, but they have other objectives. We want to be sure we meet all the objectives in addition to controlling greenhouse gases.”

He said during a wide-ranging conversation with Economic Club Pres. David Rubenstein that he does not favor a US withdrawal from the 2016 Paris Climate Agreement, but added that it could be better defined to consider developing and industrializing countries’ other needs.

“If you read India’s national plan—it’s online and is 40 pages long—it talks about the importance of alleviating poverty, having affordable energy, and having about $2.5 trillion to meet their commitments,” Watson said. “That’s a serious subject. Where’s that money going to come from? India can’t afford that amount. It’s a serious issue that merits more discussion than we’ve had.”

Asked whether he had spoken with retired ExxonMobil Corp. Chief Executive Rex W. Tillerson since he became US Secretary of State in the new administration, Watson said he had not, but added: “I hear he’s doing quite well.” He said later that Tillerson’s international experience negotiating with foreign governments during his ExxonMobil career undoubtedly played a large part in Trump’s selecting him to be the nation’s top diplomat.

“Our business overseas is a diplomacy business. It’s mostly quiet diplomacy,” Watson observed. “If we’re doing our job well, we may have a difference of opinion with a government, but we talk to them. We do build relationships with governments—at all levels.”

The present approach

Doing business overseas has changed for US-based multinational oil companies like Chevron, Watson said. “Governments have different priorities. They all want local content. They want to build the industry in their own countries. They want jobs,” he said, adding, “We do face those demands. In fact, they’re a part of many of our agreements. They want development. They want a better way of life, and they want [outside companies to do] more than just come in, extract, and leave. That was the model 50 years ago. It’s not the model now.”

He said Chevron was one of the first Western companies to come in after Kazakhstan became an independent nation following the Soviet Union’s 1991 collapse, and has a good relationship with President Nursultan A. Nazarbayev and his government.

The company is spending $3 billion/year there because the Tengiz field, where it has a 50% operating stake, has the sort of supplies that will need to be developed worldwide to satisfy future demand, Watson said. “The oil there is going to be needed, and it’s likely that prices will have to be higher than they are now to produce and transport it.”

He noted that while US oil and gas producers still are adjusting to the realities of lower commodity prices than their 2013 peak in some respects, they also have been remarkably resilient in others.

“There has been some natural decline that has helped balance the markets. What we’ve seen is the resiliency of the shale in the US where, for example, Chevron is one of the largest acreage holders in the Permian basin in Texas and New Mexico where we have some 2 million acres,” he said. “We’re able to produce a little bit more there at low prices. We’re continuing to egg on that supply imbalance at a time when supply isn’t needed. Our industry is able to contribute to hold markets in check.”

More production came on line because the oil and gas industry invested aggressively in development of resources that was considered unconventional previously starting in 2008 as global economies slowed down, he said.

Confluence of events

“Then several events took place at the same time. One was that Saudi Arabia, for reasons of market share, chose to increase production into what already was a surplus market. Another was that sanctions were placed on Russia and their currency was devalued, making them produce more cheaply. US shales began to produce more. There was a confluence of supply events at a time when the market wasn’t growing as fast, and prices fell,” Watson said.

Now, he added, “Inventories are at, or close to, an all-time high. Oil is everywhere that it can find a home around the world. One of the things that [the Organization of Petroleum Exporting Countries] has stated that it wants to get inventories back to a more manageable level, because they act as a buffer to any price increase.”

Technology breakthroughs clearly contributed to a US crude oil production renaissance led by rising production, Watson said. “We used to drill horizontal wells in the Permian basin and the lateral length might be a few hundred feet. Then it went to 500, then to 1,000 ft or so. We have experimented with different types of sand to hold those fractures open. The industry experiments and gets a little better. We’re able to get more production out of fewer rigs and fewer wells,” he said.

It was not until hydraulic fracturing, which US producers had used for decades, was combined with horizontal drilling to tap previously inaccessible tight shale formations that US oil and gas production began its dramatic rebound, Watson said. “The other part that’s underestimated is private property rights in this country. There’s tremendous incentive and innovation because of this. Most property in other countries is owned by the government, so their progress and innovation may not be as fast,” he said.

“There are [oil-bearing] shales elsewhere. We have properties that we own in Canada and Argentina, for example. None of them have proven to be as producible as what we have here in North America. Perhaps they will in due course,” Watson added.

Asked if he thought members of the 115th Congress were focused on matters that concern Chevron, Watson said he thought they were focused now on a broader agenda that includes broader issues like health care and federal tax reforms. “I’ve been asking them a lot about tax reform. All of us are curious about it,” he said. “I think everyone is in favor of it in principle until it affects them. I think business sometimes has very fractured on this. I think most people want lower rates and want the US economy to be competitive. The issue is how we can get there?”

Regulatory actions encouraging

He said he has been encouraged by some Trump administration actions to address federal regulations that have expanded. “The general public’s eyes glaze over when you talk about regulations. When you talk to business leaders, we can go down a list of regulations that are raising costs,” Watson said.

“I think they have contributed significantly to this economy underachieving,” he said. “I would not have thought we could run up $9 trillion in debt that would be a stimulus, drive interest rates to zero, and never see 3% growth. I think regulations are a big part of that—not just in my industry, but in many industries.”

When it comes to the biggest challenges the US oil and gas industry faces today, Watson said it was not necessarily getting costs down and earnings up. “Actually, there are two main areas of concern. One is replacing resources over time. We are in a depleting resource business, so we always have an eye out over many years,” he said. “There was a lease sale [Mar. 22] in the Gulf of Mexico and we participated. There won’t be any production from those leases for 6, 8, or 10 years. We also picked up a lease in Mexico that requires exploration. We think a great deal about the long term from a resource point of view.”

The second primary concern, he added, is “about making sure our people go home safely every day.”

“What I would like to hear from our elected officials is a positive statement about the role of private enterprise,” said Watson. “We remain a country that’s very popular overseas. Many countries still look up to the US. I think we have to have a positive narrative for our own people in this country to talk about all the things we have going for us. Energy is just one of them.

“Around the world, I think we’re the luckiest country,” he said. “We have oil, gas, and now this shale oil and gas. We have vast agricultural resources. That’s so much. I think we can do a lot by unleashing that and understanding what got us here is a very strong private sector.”

Contact Nick Snow at nicks@pennwell.com.

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