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Speech

April 2, 2013

Capitalizing on the Coming Era of Energy Abundance

Rex W Tillerson

Rex W. Tillerson Chairman and Chief Executive Officer

Texas Alliance of Energy Producers
Houston, Texas

It is a pleasure to be in Houston, Texas, and particularly to be among people who understand our industry.

You understand energy. You understand the challenges that confront our industry. And you understand the fundamental role of energy in powering our economy — enabling modern life and unleashing progress and development, not just here in the United States but around the world.

The Energy Challenge

Given our recent successes on so many fronts, it is appropriate to consider for a moment what our mission means to the world.

It is no exaggeration to say that billions of people around the world depend on the decisions we make, the risks we manage, and the challenges we are willing to take on.

The need for energy is universal because the role of energy is foundational. Energy is the stepping-stone for advancement and the gateway to opportunity. As an industry, we are all deeply conscious that humanity faces a tremendous and growing challenge: The need to develop new sources of energy and to do so in a safe, secure, and environmentally responsible way.

As many of you know, each year my company develops a detailed assessment of our view of the long-term outlook for meeting our world’s energy needs. We start with an economic outlook. We build up to energy demand, by countries and by regions. And then we build up to supply — how much and what kind of supply will be needed to meet that demand.

Simply put, the world will need our industry’s best — from ingenuity and investment, to risk management and operational integrity.

Now as we look at the world to come in the year 2040, we project that a growing population, along with rising prosperity, will increase global energy demand by about one-third more than where it is today.

Let me put that in perspective for you — that will be like adding more than the current energy demands of Russia, India, Africa, Latin America, and the Middle East combined.

A growing and more prosperous world will need a diverse set of energy mixes. We will need wind and solar, nuclear, coal, oil, and natural gas, wherever they are economically competitive.

We will see some rapid changes. We project wind-powered energy, for example, will grow sevenfold by 2040. Solar power generation will likely increase more than 20 times over this same period.

And yet, even at that very ambitious pace, wind will account for about 7 percent of global electricity supply, while solar will account for about 2 percent of global electricity supply.

We project that in the year 2040, oil and natural gas will continue to shoulder much of the world’s energy needs — about 60 percent — up from the 55 percent they supply today.

But these reliable, versatile, and familiar sources of energy are experiencing their own shift, one that is historic and attributable to many of the men and women in this room.

While oil — because of its unmatched qualities for transportation — will remain the world’s No. 1 fuel, natural gas is on the path to surpass coal as the world’s No. 2 fuel source.

In fact, we expect the world’s demand for natural gas will increase by about 65 percent, with natural gas satisfying more than one-quarter of the world’s total energy needs.

This shift to natural gas will bring economic and environmental benefits to our country and to nations around the world.

The North American Energy Transformation

In fact, in many ways, the energy transformation now underway in North America is still unfolding.

Technologies pioneered by the oil and natural gas industry are enabling us to unlock new conventional and unconventional sources of energy — safely, securely, and in an environmentally responsible way.

Recent history provides some perspectives for this transformation: In 1980, some believed we were running out of oil. At that time, the United States had proved reserves of a little more than 29 billion barrels of oil. From the year 1980 to the year 2010, we produced more than 77 billion barrels of oil — more than two-and-a-half times the proved reserves we had in 1980. And globally, over that same time span, proved oil reserves more than doubled.

Instead of facing an Era of Scarcity in energy that had long been predicted by Peak-Oil theorists, we are now witnessing the transition to a new Era of Abundance.

This transformative moment is possible because sources of oil and natural gas that were once dismissed as “uneconomic” or “inaccessible” are rapidly becoming reliable, affordable, and environmentally sound contributors to the global-energy portfolio.

In the Canadian oil sands, we are deploying new technologies to develop approximately 170 billion barrels of recoverable oil — enough energy to fuel today’s North American passenger vehicle fleet for nearly 45 years.

In America’s shale plays, horizontal drilling and hydraulic fracturing technology have unlocked the potential for recovering enough natural gas to help power the U.S. economy for close to 100 years.

And in deepwater around the world, our industry’s technologies will allow production to more than double over the next 30 years.

So from unconventional, to oil sands, to deepwater — these achievements are a tribute to the investment, innovation, and hard work of our industry.

The Benefits of Transformation

These new supplies are also reminding the public and policymakers around the world that our investments and innovations spur economic growth, create jobs, and strengthen energy security.

In 2011, the oil and gas industry generated more than half-a-trillion investment dollars in the United States in the form of capital, wages, and dividends.

An IHS Global Insight study reports that in Texas alone, unconventional oil and natural gas production has created 576,000 jobs, with about 1 million direct and indirect jobs predicted by the year 2020.

Across the country, the oil and natural gas sector currently supports 9.2 million American jobs, and could support another 1.4 million jobs by the year 2030.

This is an economic stimulus for which our industry can be proud.

During a time of tremendous economic challenges, our industry has brought hope and opportunity to places once written off. While inflation-adjusted average per-capita income in U.S. cities fell between 2007 and 2011, it rose for the 51 million people in America’s small cities, towns, and rural areas.

Most of the major urban areas that are thriving are associated in some way with the substantial increase in domestic energy production.

An IHS study shows that energy-related economic benefits are also evident in the 32 states without unconventional energy production. New York, for instance, has more than 44,000 industry-supported jobs — many of those, of course, the result of the Marcellus Shale development in Pennsylvania next door.

The energy transformation our industry has helped put into motion is also powering a renaissance in American manufacturing.

Vast new supplies of unconventional natural gas are helping revitalize America’s steel industry, which is helping to rebuild the nation’s infrastructure and auto manufacturing. The new supplies are also reinvigorating America’s petrochemical industry; increasing agricultural competitiveness; and boosting American manufacturing of bulldozers, farm equipment, and other heavy vehicles for export.

Our achievements are not just reshaping our economy for the better. Our industry and technologies are also helping our nation meet shared environmental goals.

The U.S. Energy Information Administration has estimated that in 2012, energy-related U.S. carbon dioxide emissions fell to their lowest level in more than 15 years.

We serve 50 million more American consumers than we did in 1995, with an economy that is 50 percent larger than we had in 1995. And yet our CO2 emissions are close to what they were in 1995.

The Role of Business Confidence

Such economic, social, and environmental benefits are the fruits of innovation. And innovation requires commitment — a continuous stream of long-term planning and disciplined investment that in turn demands confidence that businesses can make a return on their investment.

To sustain such innovation and deliver growing supplies at the pace the world requires, the International Energy Agency estimates that the global energy industry will need to invest about $37 trillion in energy infrastructure between now and the year 2035. That comes to $1.6 trillion a year.

Executing a $1.6 trillion-a-year project is going to be a challenge.

The demand on our industry will be immense. With these financial needs will come the additional need for disciplined evaluation, risk management, and sustained commitment.

Energy projects are the ultimate long-term investments. The spending patterns are long, even before the first dollar of revenue is realized. The payouts are long and the completion cycle is also long — often with resource development spanning more than 75 years, requiring reinvestment all along the way.

The Need to Support a National Energy Consensus

For this reason, it is vital that our industry work to build public policies that enable investment, planning, and innovation.

Within our national discourse, the public has come to recognize the importance of energy, and the need for affordable and reliable supplies. Unfortunately, many in Washington have been slow to recognize the opportunity to enter an Era of Abundance in energy if we put the right policies in place.

Over the last few decades, our industry has proven that economic growth and energy security are best strengthened by public policies that support open markets and free trade — policies that recognize the power of technology and the need for sustained investment to drive innovation.

We must build policies that respect the specific roles and responsibilities of the industry and of our government in energy development.

The Responsibilities of Industry

Our industry has a responsibility to uphold the highest standards of operational integrity — from planning and investment, to construction and project completion.

It is not enough to state a goal of operational integrity and safe operations. We must establish management systems to turn those goals into measurable actions, and build a culture of accountability and continuous improvement.

Public trust, after all, depends upon skillful execution from all of us.

The Responsibilities of Government

Government, for its part, is uniquely positioned to hold the industry accountable. Our industry recognizes that.

Only government holds the public trust to promote the rule of law, to open avenues of free trade, and to maintain a level playing field.

Policymakers, however, must also recognize the impact of their oversight. Their choices can carry costs to investment and innovations that are borne by the broader economy.

Regulation must be governed by sound science and economic assessment of its costs and its benefits.

The regulatory process should provide a clear and efficient route to compliance, not an obstacle course. In addition, once the regulatory process is put in place, it should be respected, not randomly rewritten or re-litigated.

Consider for example the public debate and controversy over hydraulic fracturing. Our industry has applied this technology for more than 50 years, and we have hydraulically fractured more than 1 million wells in this country.

Yet policymakers and regulators from the federal level to the state level and even to the municipal level continue to question the safety and health risk to the public.

If there were serious threats, would they not have emerged after 1 million-plus applications of the technique over more than 50 years? It would certainly be difficult to conceal them if they were there.

If fracking were a new drug treatment undergoing clinical trial, it would have been cleared decades ago. Yet we revisit this issue endlessly. In some areas of the country, we are prohibited from fracking, despite the fact that this technology is enabling the most transformative economic shift of the past half-century.

Engaging the Public

We know that that achieving the full potential of our technologies will require engaging the public to build a stronger consensus for sound policies.

Over the past few years, we have engaged the public as never before. But we must do more.

We must enter the public discourse to support a level playing field for all competitors. The government should not be picking winners and losers — either through subsidies, mandates, or targeted tax treatment.

In particular, our industry must step forward to support free trade because free trade creates jobs, increases investment, and expands our economy’s strength and resilience at all levels.

We must explain that our technologies now offer the promise to redefine the role of the United States in the global energy landscape. The new energy supplies that our industry is bringing to global markets can increase U.S. competitiveness and allow exports to nations in Asia, Europe and beyond.

On this final point we must make clear in this new Era of Abundance that our goal is not “energy independence.”

Our goal — and every nation’s goal — should be energy security. Energy independence is a mirage that would limit global markets. Energy security is a goal we can attain by diversifying energy sources, improving trade, and encouraging international investment and partnerships to expand the global pool of supply around the world.

At this point in our nation’s history, it is not enough for us to drive economic growth, create jobs, and expand the supplies that provide energy security for all. We must become involved in the public dialogue about energy issues and lend our knowledge and focus on facts and science to enrich understanding and clarify decision-making.

Our industry has so much to be proud of. We have a long history of extraordinary achievement. And in recent years, those achievements have been especially visible to the public.

In the years ahead, we will face many challenges — but we have proven what is possible if sound policy allows our industry to invest with confidence in the future and in the opportunities we see coming in the decades ahead.

I thank you for your kind attention, and welcome your questions.

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