ExxonMobil's Boss on Energy Security

To Lee Raymond, diversity of supply is key. He also worries about the Far East's growing thirst for oil and diminishing domestic supplies

Amid rising oil prices and war looming in the Middle East, ExxonMobil Corp. (XOM ) Chairman and CEO Lee R. Raymond took the stage on Feb. 11 as one of the keynote speakers at CERAWeek 2003, a Cambridge Energy Research Associates conference in Houston. Outspoken as ever, Raymond -- head of the world's largest publicly traded oil company -- answered questions from the audience after his speech. Here are edited excerpts from the discussion:

Q: As we look at the impact of continuing economic growth on energy demand, what are some of the key trends that are emerging for the industry?

A:

First, it's abundantly clear that economic growth will remain the primary driver of energy demand. The global economy has grown at an average [annual] rate of about 3% since 1970. We expect growth to continue at that pace over the next two decades, with reduced rates of population growth offset by increases in per capita productivity.

We expect energy-demand growth to be at a somewhat lower rate, reflecting significant but yet-to-be-achieved advances in energy technology and efficiency. We project that the world's demand for energy will reach close to 290 million oil-equivalent barrels per day by 2020 -- or about 40% more than today.

Q: Is the industry prepared to meet that demand?

A:

About half the oil and gas volume needed to meet demand 10 years from now is not in production today. The industry may need to add some 80 million oil-equivalent barrels per day over the next decade to meet projected demand -- an amount equivalent to two-thirds of today's production levels. With such truly staggering investments, we will need to continue to push [forward on] the technology front, with the help of the best scientists and engineers we can muster.

Q: What role will alternative fuels play in helping to meet that demand?

A:

We expect conventional fuels -- oil and gas -- will remain the dominant energy source, at least through mid-century. We project wind and solar energy will continue to grow rapidly, but only due to government policies and incentives, not market economics.

To put this in perspective: Solar power can cost somewhere between $100 to $250 per barrel of oil-equivalent. Starting from such a low base today, wind and solar are unlikely to exceed a 1% share of the world's energy needs by 2020, even with double-digit growth rates. Oil and gas represent 60% of energy supplies today.

Q: What role could hydrogen play in helping to meet energy needs?

A:

Hydrogen has been getting more attention recently. On the positive side, hydrogen is abundant, and once delivered to the vehicle, can be used emissions-free. However, it doesn't exist independently of other elements, meaning that significant energy and costs are required to liberate 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 -- a well-to-wheels analysis.... Significant breakthroughs will be required to lower the cost of hydrogen for it to be competitive against the ever-improving performance of the most advanced internal-combustion engine and hybrid technologies. In addition, anyone in our industry must recognize and should alert everyone to safety issues around hydrogen.

Q: What role will reserves play in helping to meet that demand?

A:

While there are sufficient reserves to meet world demand through at least the middle of this century, meeting the growing energy demand will require timely and successful resource development. Indigenous oil and gas supplies within mature market areas, such as the U.S. and the North Sea, will struggle to keep pace with demand. As supplies from local production decline, the industry must bring on a substantial number of new and remote developments to fill the gap.

Q: Which areas are likely to help fill that gap?

A:

We foresee increased volumes coming from West Africa, Russia, the Caspian, and the Middle East. Given the variation in demand growth rates and shifting supply sources, we also see increasing interdependency between importing and exporting countries. For example, net oil imports into the U.S. and Europe may grow by about 3 million barrels per day over the next couple of decades. While those increases are significant, they are dwarfed by an expected increase in Asia's net imports of about 15 million barrels per day.

The center of gravity for our industry is inexorably moving to the Far East. That will put the Middle East in an even more important and dominant position. It's a very, very serious long-term problem.... Twenty years from now, the Far East will consume more than the U.S. and Europe combined.

Q: What are the implications of increasingly higher U.S. import levels of crude?

A:

The prospect of higher import levels continues to raise concerns about security of supply. In our view, the key to security will be found in diversity of supply. Import independence is not realistic in most cases, and it's certainly not necessary if supply risks are managed effectively. Governments can do much to help this effort by promoting diversity through access to resource acreage in all regions.

Q: What role does the U.S.'s Strategic Petroleum Reserves play in energy security? [The U.S. Strategic Petroleum Reserve, established in 1977 following the Arab oil embargo, holds 600 million barrels of crude oil, about 30 days of U.S. demand.]

A:

Government-funded strategic energy reserves are appropriate as a shield against serious harm in the potential event of a severe and sustained supply disruption. But let me be clear: The use -- or threat of use -- of strategic reserves as a convenient instrument to merely affect short-term energy prices is not the purpose [of strategic energy reserves].

Equally undesirable are other actions that would artificially manipulate the market for the purpose of achieving such short-term price reductions. When allowed to work, the free market is exceptionally efficient, and it operates for the benefit of all.

Q: What are the prospects for natural gas?

A:

Worldwide consumption [of natural gas] currently represents about 20% of total energy demand. We think natural gas will capture about one-third of all incremental energy growth between now and 2020 and will supply about one-quarter of global energy needs -- second only to oil, at about 35% to 40%. This level of growth will require significant transportation and infrastructure investment. We expect [liquid natural gas] supplies to grow fourfold by 2020. Such growth is possible because of technology that allows us to connect more remote gas resources to markets.

Q: Natural-gas prices are high, so why aren't more companies drilling for natural gas? [Natural-gas prices are hovering around $6 per British thermal unit vs. about $2.40 a year ago.]

A:

If you don't have a place to drill, you're not going to drill. Reserves of natural gas in the lower 48 states [of the U.S. ] are declining. We're seeing the U.S. gradually slip into a lack of sufficient gas supplies to meet internal demand.... [Therefore], prices, on average, will be higher.

Q: What other key issues is the industry facing?

A:

Another important area that challenges leaders both in our industry and in the world's governments is the need to continually improve environmental performance. The evidence shows that economic growth and environmental improvement are compatible. Data in the U.S and Europe confirm that air quality has improved significantly despite increases in energy consumption during the past three decades. In the U.S., for example, lead has dropped 98%, particles by 75%, and sulfur dioxide by 39% since 1970. Other parts of the world have also experienced dramatic improvements.

In recent years, particular attention had been placed on the contribution of hydrocarbon use to global climate change. Proposals to address climate issues have included approaches that would have an adverse effect on economic growth and prosperity. Scientific research must continue so that we have a better understanding of global climate change and can reach the best policy decisions. Avoiding undesirable social and economic consequences are critical objectives in developing actions that minimize the potential risk of climate change from energy use.

Q: How do you respond to the public blaming the industry for high gasoline prices?

A:

It's difficult for people outside the industry to recognize the enormity of what we do.... If you can't recognize the scale of what we do, then a lot of the things we're criticized for are hard to put in proper context. We make three cents a gallon [on gasoline sales], and people think we make 50 cents a gallon. Only the government gets 50 cents a gallon.

By Stephanie Anderson Forest in Houston

Edited by Douglas Harbrecht

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