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Speech

June 13, 2013

A Business Perspective On Global Energy Markets and Asia

Rex W Tillerson

Rex Tillerson Chairman and Chief Executive Officer

Asia Society Global Forum
Washington, D.C.

I am honored to address this distinguished group. For almost 60 years, the Asia Society has helped leaders of the world’s two most dynamic continents to share perspectives and deepen understanding.

And thank you Daniel Yergin for your perspective. Dan’s insights are rich in the fundamental facts and economic realities we need to guide our discussions on domestic and international energy policy.

It is for this reason that I commend the Asia Society for working to create a new think tank, the Asia Society Policy Institute (ASPI), dedicated to encouraging consequential dialogue about global business and trade, security and sustainability.

I am also pleased to hear that the Institute is already planning to formulate an energy initiative, and that today’s discussions will factor into its deliberations.

Dan has already provided his perspective from the commanding heights1 of history and economics.

Now I will bring the perspective of business: How we can meet the challenge of developing supplies of energy to satisfy rising demand in the decades to come. It is no small challenge.

I will begin by describing the tremendous scale of the challenge that the industry faces.

Then I will discuss the energy transformation that is sweeping North America, and the importance of technology in that transformation.

Finally, I will provide a business perspective on the policies and principles essential to enabling the long-term investments, partnerships, and innovation that can meet the energy challenges – in Asia and throughout the world.

The Scope of the Energy Challenge

From a business – and a policymaking – perspective, every meaningful energy discussion must begin by recognizing the fundamental human need for energy and its direct relationship to economic growth.

To this end, we publish the Outlook for Energy. In our Outlook, we examine how energy is consumed … how supply-and-demand trends are shaping markets … and what the future might hold for every nation aspiring to growth and progress.

What we see in the decades ahead is growth – population growth, economic growth, and energy demand growth.

We project that the global population will grow from about 7 billion people today to nearly 9 billion by the year 2040. And because of economic growth and increased trade and development, we project that global energy demand will increase by about a third between now and then. Now to put this in scale, this level of growth in energy demand will be greater than the current demand of Russia, India, Africa, Latin America, and the Middle East – combined.

We must also recognize that there is a humanitarian imperative to meeting these growing global energy needs. Approximately 1.3 billion people on our planet still do not have access to electricity for basic needs like clean water, cooking, sanitation, light, or for the safe storage of food and medicine. Therefore, whether we are leaders in business, policymakers in government, or decision makers in philanthropic organizations, the need to expand energy supplies has a humanitarian dimension that should inform and should guide our energy policy dialogue.

As the members of this Society know, much of the growth we will see in the next few decades will be driven by the dynamic economies of the Asia-Pacific region. In our view, Asia’s economy is likely to triple in size by 2040, and energy demand is projected to grow about 60 percent. So obviously there are some implicit energy efficiencies in there.

For businesses and industry, meeting the tremendous growth in energy needs will require significant investments of capital, time, and technology.

The International Energy Agency estimates that the global energy industry will need to invest about $37 trillion in energy-supply infrastructure through the year 2035. That comes to about $1.6 trillion a year. Simply executing $1.6 trillion of investment is no simple task.

In addition, the energy industry will need time to execute technologically complex and capital-intensive projects. Energy projects are the ultimate long-term investments. The spending patterns are long, even before the first dollar of revenue is realized. The completion cycles are also long – sometimes more than 75 years to depletion. And sustaining safe and reliable production along the way requires you to continually reinvest in the business.

Many of these projects are so large and complex they cannot be executed by a single company, or even country.  They require cooperative efforts and innovative partnerships to finance and execute.

From a business perspective, these different challenges demand policies that enable us to plan and invest over these very long timeframes … that provide stability so we can recover shareholder investments … and that encourage innovative technologies, cooperation, and trade to direct resources efficiently and maximize the value.

The North American Energy Transformation

Fortunately, the energy industry has proven, as Dan highlighted, time and time again, that we can meet the world’s growing energy needs.

With resource access and a positive climate for investment, we develop new technologies and expand proven techniques to unlock new sources of energy – in increasingly safe, secure, and responsible ways.

We need look no further than the historic developments occurring here in North America – these developments will play an important role in fueling Asia’s growth.

Our industry’s innovations are taking sources of oil and natural gas once dismissed as “uneconomic” and “inaccessible” and making them reliable, affordable, and environmentally responsible contributors to our global energy portfolio.

In Canada, for instance, we are deploying new technologies and techniques that are enabling the development of that nation’s vast oil sands. This resource base now has the potential to provide approximately 170 billion recoverable barrels – enough energy to fuel today’s North American personal vehicle fleet for about 45 years.

In the Gulf of Mexico, we have taken the concept of deepwater production from the drawing board, in the early days of my career, to execution in little less than a generation.

In the 1990s, we moved from shallow water to deepwater, and since then to ultra-deepwater depths of more than 5,000 feet below the ocean’s surface – and from there we drill down more than five miles beneath the ocean floor. And more recently, our industry has come together as never before and made tremendous strides in emergency response and risk management to deal with offshore conditions. With these ongoing discoveries and advances, we anticipate more than doubling both North American and worldwide deepwater production over the next 25 years.

Finally, across the continental United States and Canada, industry innovations are enabling us to unlock so-called new unconventional sources of energy that you heard about – energy located in extremely dense geologic formations, often referred to as shale gas and tight oil.

By integrating proven technologies such as horizontal directional drilling and hydraulic fracturing, we are bringing vast new supplies of oil and natural gas to America’s economy – safely and responsibly.

In fact, our industry technologies have now put within reach enough natural gas to power the U.S. economy at current demand for more than a century.

For businesses and policymakers, the benefits of our technological advances have also been a reminder of the extraordinary impact – the multiplier effect – of affordable, reliable energy for economic growth and opportunity.

Abundant natural gas is helping spur a rebirth in U.S. manufacturing – leading to more jobs, more production, and increased competitiveness from agriculture to petrochemicals to heavy-construction vehicles. In fact, one leading market analyst recently counted 200 companies that relocated plants back home from abroad.

The benefits of North America’s new energy supplies are not just benefiting the economy. They are bringing environmental benefits. Natural gas is cleaner burning than other major, carbon-intensive energy source, and it is helping us meet our shared goals for reduced emissions and environmental stewardship.

Thanks in part to the increased use of natural gas for power generation, the U.S. Energy Information Agency reported that energy-related CO2 emissions last year fell to their lowest level since the mid-1990s.

What makes this achievement all the more historic is that the United States has 50 million more energy consumers with an economy that is about 50 percent larger than it was in 1995.

These successes have put the United States in a position few dreamt of just a few years ago.

Industry investments are moving our nation from an era of scarcity to an era of abundance in energy.

Here in the United States, significant natural gas supplies are positioning us to meet not only our nation’s domestic needs but also to become a significant exporter for growing global needs.

Global Energy Trade

The economies of Asia are especially well positioned to benefit from increased trade in energy – and rebalanced supplies from around the world.

North America’s new supplies of natural gas are coming at a time when the energy industry’s technologies are opening new opportunities for the global transport of natural gas to the rest of the world.

This is yet another reminder to the world of the importance of business investment and innovation for meeting the human need for energy.

Over the past two decades, strong, international partnerships have helped to develop and make available liquefied natural gas – natural gas that has been super cooled, which facilitates its efficient transport on marine vessels.

With innovations like this and new production from Australia, Indonesia, Papua New Guinea, Malaysia, and even America, trade in liquefied natural gas can bring new flexibility and enhanced energy security to Asia and the rest of the world.

At the same time, new supplies of North American unconventional oil are already bringing new, positive dynamics to the global oil trade.

As North American oil production increases and the need for imports fall, more of the oil produced in the Middle East and elsewhere is available to serve Asian growth. This is important because between now and 2040, Asian oil demand will grow by about 15 million barrels a day – with the share of demand served by imports into the region rising to around 80 percent. So the rebalancing of supplies, made possible by increased North American production, is providing more stability and security around the globe.

But businesses alone cannot deliver these expanded supplies of energy.

We need policymakers in Asia, America, and around the world to do their part.

The Asia Society and the Role of Government

In this way, this is where the Asia Society’s new Institute can help.

We have seen that when governments allow access to resources … promote international cooperation … and support strong partnerships, nations benefit through expanded trade that creates economic value and enhances energy diversity.

Success in all of these endeavors depends on sound energy and economic policy.

Our industry’s risk-management techniques and advanced technologies have shown that we can safely and responsibly develop energy in some of the harshest environments and most delicate ecosystems on the planet.

But we need access.

For instance, we have yet to fully apply some of most game-changing technologies to nations outside North America. In fact, government and industry are still assessing the size of the global endowment of unconventional resources. In Asia, as you’ve heard, there are promising formations that await detailed study. There are also potential areas for development outside Asia – in Latin America, Northern Africa, and Eastern Europe … and of course right here in the United States.

But the potential barriers to development and increased energy security are rarely a matter of technology or geology. Success is most often determined by regulatory frameworks and financial incentives in the business environment.

Even when a nation does not have a rich endowment of resources, we have learned that open markets and free trade can bring nations the energy supplies they need. But only governments can open the avenues of free trade. In the years ahead, as the economy and energy landscape evolves worldwide, leaders in the United States and Asia will need to examine how their own policies can support international cooperation and energy trade.

One of the most promising developments on this front is the ongoing effort for the Trans-Pacific Partnership.

The eleven nations that have been working to lower trade barriers and end protectionist policies under this Partnership are a diverse mix of developed and developing economies. But all of them understand the value of open markets to growth and progress for every nation. The prospects for the Trans-Pacific Partnership were recently strengthened as the participating nations announced they will welcome Japan’s entry into the Partnership.

Government leaders across Asia have also signaled they understand the potential value of natural gas trade for their economic advancement. Japan’s trade minister recently addressed an audience here in this city, saying that “a new flow of LNG supply from the U.S. to Asia would be an essential game changer that would contribute to energy security as well as to economic and geopolitical stability in Asia.”

By exporting natural gas – which is currently restricted by federal policies in the United States – the United States could shore up the energy security of Asian allies and trading partners and stimulate investment in American domestic production.

A study commissioned by the U.S. Department of Energy confirmed late last year that the U.S. economy as a whole would benefit from such exports. Not only did these benefits hold through a variety of scenarios, the study also found that the larger the exports, the larger the net economic gains – in terms of increased investment, job creation, and expanded production.

As we take on the energy challenges of the future, we will also need government leaders who understand the value of sound and stable policies to long-term planning, investment, and cooperation.

Simply put, the size and complexity of energy projects require national oil companies and international oil companies to work together as never before, drawing on each other’s strengths and leveraging each other’s capabilities. The world needs the human capital, financial resources, technology, and expertise that often can only be brought together in international partnerships.

Principles for Sound Policy

As the Asia Society’s Policy Institute builds its energy initiative in the months ahead, let me recommend several policy principles that can help enable long-term investment in energy.

First, economic growth and technological competitiveness are most robust when energy policies are efficient and market-based. The incentives to deploy new technologies – and serve consumers most efficiently – are strengthened when the playing field is level and the government does not pick winners and losers.

Second, the regulatory pathway in every nation should provide certainty and promote understanding between government officials and business leaders. Development is most effective and efficient when government is a source of clarity in how business can meet safety and environmental standards while advancing innovative, long-term projects.

Third, governments can help responsible long-term development by building sound and stable legal, regulatory, and tax policies. With such policies in place, businesses can better evaluate opportunities, plan and invest, thus maximizing value for all.

Sustained investment over the past few decades created the technologies that have unlocked these new transformative supplies of energy. Tomorrow’s technologies will be just as dependent on research-and-development. Industry needs policies that enable us to continue to make those commitments for the future.

Fourth, governments should uphold the rule of law and the sanctity of contracts.This is at the heart of the U.S. success story, with our federalist system and private property rights providing opportunities and incentives to advance breakthrough technologies and techniques – especially in unconventional energy development.

Conclusion

You know, we live at an extraordinary moment in history.

Citizens in nations around the world are advancing. New opportunities are arising through technology and trade.

For decades, the world has been well served by the flexibility and security created by the energy industry and global energy markets. As we consider the energy challenges in the decades ahead, we now have an opportunity to build on success by learning the lessons of the past few decades of energy investment and innovation.

We must embrace the free flow of energy, capital, and human talent across oceans and borders.

If we do, the energy industry has proven that we will forge the long-term partnerships and develop the new technologies to unlock sources of energy safely and responsibly. We will strengthen energy security for all nations.  And we will build new bridges of trade and progress between countries and continents.

There is no better way to fulfill the noble goals of the Asia Society than to work toward trade, cooperation, and sound policy in the energy sector. With the right policy principles in place, it means a brighter future for all.

I thank you for your kind attention.