Full text of Dick Cheney’s speech at the Institute of Petroleum Autumn lunch, 15 November 1999

Full text of Dick Cheney’s speech at the IP Autumn lunch 
15 November 1999

Your Excellence, Ladies
and Gentlemen, pray silence for the President of the Institute of Petroleum,
Mr Chris Moorhouse.

Thank you.

Its my privilege and
honour to welcome all our guests to this, the second Autumn lunch arranged by
the Institute of Petroleum. It’s very good to see so many friends, old and
new here today. Close to three hundred I’ve been told, so welcome. Guests
represent not only a broad cross-section of the UK energy industry, including
the major energy companies, contractors, suppliers, consultants, but also
representatives from many of the industries associated with the energy
business. My own guests include a broad cross-section of the senior
representatives of the Institute of Petroleum itself, welcome gentlemen, and
I would make special mention of Basil Butler and Larry Farmer who helped to
secure today the presence of our principal speaker. The breadth of
representation around the room clearly demonstrates a wish to have this kind
of opportunity to meet colleagues from the energy industry in such an
informal setting, but even more demonstrates a real wish to hear the views of
our eminent speaker today. So on behalf of all, I would like to say a very
special welcome to Dick Cheney. Dick Cheney is a household name around the
world, not only as the Chief Executive Officer of Halliburton, but also from
his previous long and distinguished career in US politics. He grew up in
Wyoming and was educated at the Universities of Wyoming and Wisconsin and
embarked on a career in public service. After appointments to the staff of
the Governor of Wisconsin and as a congressional fellow on the staff of a
member of the House of Representatives, in 1969 he joined the Nixon
administration. He served in a number of positions at the Cost of Living
Council, the Office of Economic Opportunity and in The White House, when
Gerald Ford took over the presidency in August 1974, Dick Cheney was invited
to serve on the transition team and later as Deputy Assistant to the
President. In November 1975 he was named Assistant to the President and White
House Chief of Staff, a position he held throughout the remainder of the Ford
administration. Returning to his home state of Wyoming in 1977, Dick Cheney
was elected to serve as the State’s sole congressman in the US House of
Representatives in 1978. He was re-elected five times. At the end of his
first term his Republican colleagues elected him to serve as Chairman of the
Republican policy committee. He later became Chairman of the Republican
Conference and House Minority Whip. As Secretary of Defence from March 1989
to January 1993 Dick Cheney directed two of the largest military campaigns in
recent history, Operation Just Cause in Panama and Operation Desert Storm in
the Middle East. He was also responsible for shaping the future of the US
military in an age of profound and rapid change as the Cold War ended. For
his leadership in the Gulf War Dick Cheney was awarded the Presidential Medal
of Freedom by President George Bush on 3rd July 1991. After leaving the
Defence Department in 1993, Dick Cheney served as a Senior Fellow at the
American Enterprise Institute and lectured widely around the country. He
currently serves on the Board of Directors at Proctor and Gamble, Union
Pacific and EDS. He is a member of the Board of Trustees of Southern
Methodist University and the American Enterprise Institute. He also serves on
the Board of Directors and the Public Policy Committee of the American
Petroleum Institute. Not surprisingly, with such a wide ranging career in
politics and now at Halliburton, Dick Cheney as a deep interest in the geo-politics
of the energy industry, so we are privileged today to have his unique insight
into the energy industry in the new century. Ladies and Gentlemen, I ask you
to join me in welcoming Dick Cheney.

Applause.

Dick Cheney: -

Thank you very much for
that welcome and that introduction. I am delighted to be back in London today
and have an opportunity to spend some time with all of you. To hear that
resume reciting all of my political background and experience, of course
oftentimes people say that work in the oil industry is not really sort of an
uppercrust kind of organisation and I say, ‘Yeah, but I used to be a
Congressman and it’s clearly a step up for me to go from the political world
to the world of the oil and gas industry. I’m often asked why I left politics
and went to Halliburton and I explain that I reached the point where I was
mean-spirited, short-tempered and intolerant of those who disagreed with me
and they said ‘ Hell, you’d make a great CEO’, so I went to Texas and joined
the private sector. But I am delighted to be here and I want to try to avoid,
I understand last year when Sheikh Yamani spoke that he was rather
pessimistic about the outlook for oil prices and the ability of OPEC to
arrive at a price level and maintain it over time and I’m not sure that it’s
fair to come back a year later and second-guess and I hope a year from now
people won’t do that to me in terms of the forecasts I’m going to make, but I
do want to talk about the outlook, certainly from the perspective of
Halliburton, how we look at what may occur here in the future and let me say
at the outset that I am unreasonably optimistic about our industry. From the
standpoint of the oil industry obviously and I’ll talk a little later on
about gas, but obviously for over a hundred years we as an industry have had
to deal with the pesky problem that once you find oil and pump it out of the
ground you’ve got to turn around and find more or go out of business.
Producing oil is obviously a self-depleting activity. Every year you’ve got
to find and develop reserves equal to your output just to stand still, just
to stay even. This is true for companies as well in the broader economic
sense as it is for the world. A new merged company like Exxon-Mobil will have
to secure over a billion and a half barrels of new oil equivalent reserves
every year just to replace existing production. It’s like making one hundred
per cent interest discovery in another major field of some five hundred
million barrels equivalent every four months or finding two Hibernias a year.
For the world as a whole, oil companies are expected to keep finding and
developing enough oil to offset our seventy one million plus barrel a day of
oil depletion, but also to meet new demand. By some estimates there will be
an average of two per cent annual growth in global oil demand over the years
ahead along with conservatively a three per cent natural decline in
production from existing reserves. That means by 2010 we will need on the
order of an additional fifty million barrels a day. So where is the oil going
to come from? Governments and the national oil companies are obviously
controlling about ninety per cent of the assets. Oil remains fundamentally a
government business. While many regions of the world offer great oil opportunities,
the Middle East with two thirds of the world’s oil and the lowest cost, is
still where the prize ultimately lies, even though companies are anxious for
greater access there, progress continues to be slow. It is true that
technology, privatisation and the opening up of a number of countries have
created many new opportunities in areas around the world for various oil
companies, but looking back to the early 1990’s, expectations were that
significant amounts of the world’s new resources would come from such areas
as the former Soviet Union and from China. Of course that didn’t turn out
quite as expected. Instead it turned out to be deep water successes that
yielded the bonanza of the 1990’s. A fundamental challenge for companies is
to do more than replace reserves and production. The trick obviously is also
to replace earnings. For most companies the majority of their profits come
from core areas, that is areas where they have significant investments,
economies of scale and large license areas locked up, but many of these core
areas are now mature and it can be difficult to replace the earnings from the
high margin barrels there. Some of the oil being developed in new areas is
obviously very high cost and low margin. Companies that are finding it
difficult to create new core areas through exploration are turning to
production deals where they can develop reserves that are already known, but
where the country doesn’t have the capital or the technology to exploit them.
In production deals there is less exploration risk but dealing with above
ground political risk and commercial and environmental risk are increasing
challenges. These include civil strife, transportation routes, labour issues,
fiscal terms, sometimes even US-imposed economic sanctions. Many companies
are more comfortable dealing with the below ground risk like drilling and
reservoir performance than they are with the above ground political risks.
The other major element that it is changing is the nature of competition. One
of the biggest questions is what the competitive field will look like in the
new industry after this current wave of consolidation in the oil business.
Clearly the main driver behind the biggest mergers are the cost savings that
are anticipated as a result of economies of scale. Concentration and critical
mass are clearly keys to success. There are also cases where difficulty in
sustaining and growing the companies as led management to offer the firm to a
bigger player. In the world-wide competition for capital, there are imperatives
for size and scale. Larger companies tend to have the highest credit ratings
and therefore the lowest borrowing costs, but they also tend to have higher
multiples in the stock market. The share price premium becomes a valuable
currency for take-overs. They also have stronger financial staying power to
undertake the larger projects and to ride out the lean periods. The result of
all this consolidation is that now four out of the five largest oil and gas
companies by market value are European. For oil companies I do not believe
that the bigger is better model is the only viable one. While Halliburton has
certainly grown bigger through its merger with Dresser and other key
acquisitions, this made sense in part because it gave our company both a
broader array of services and also greater depth in products and services.
For oil companies I see four basic types of firms that I think will survive
and prosper in the new environment. First, we will obviously have the super
majors, but they have to be careful to avoid the dragdown of facts and the
distractions of physically merging, plus the danger of becoming lumbering
giants. I think there is a good chance they will avoid becoming bloated
bureaucracies because they are very focused on delivering cost saving synergies
for their shareholders. The second type of survivor will be those companies
that have dominance in a region or a market. These integrated companies may
not be in the top five globally, but they will be number one or number two in
their respective markets. This gives them the critical mass and concentration
to compete and win on their turf. Repsol YPF is an example of this type of
company; number one in Iberia and the southern corner of Latin America and
very profitable. A third model for competing in the new century is that of
what I would call the super independents. These are firms that focus on one
line of business but have sufficient scale to have several core areas of
material size where they can go head to head with anyone. These combine the
advantages of a super major with the agility of an independent. A common
element in these three classes of firms will be critical mass and
concentration. A fourth category of survivor in the new competitive world
will be what I call niche players who can prosper off the properties that the
bigger firms don’t want or because of the very special circumstances they
find. Those in the special players will obviously have to compete somewhat
below the radar screen of the more dominant companies. The immense portfolio
restructuring that we think likes ahead in the wake of the recent large
mergers should create opportunities for competitors to strengthen their
positions. New aggregators are likely to emerge which, together with a lot of
the brain drain from staff cuts at the majors, could well provide the bigger
companies with unexpectedly strong competition in the decade ahead. In many
ways the traditional role of oil companies are changing. Increasingly we are
seeing international oil and gas companies concentrating on managing
investment, financial, commercial and political risk or above ground risk,
while service companies are managing technical, completion and operating
risk. Meanwhile, national oil companies are focused on managing their
country’s national interest and its resources and in the domestic markets.
This is part of the new resource rationalism of the 1990’s. NOC’s may own the
resources, but when it is in the national interest to bring in outsiders to
help develop them, they do so. Venezuela obviously is a clear example of what
I would define as the new resource nationalism. Some NOC’s are still looking
outside their own borders, but I expect that in the future the emphasis may
well be closer to home. NOC’s can focus on becoming regionally dominant
players, leveraging off their strong domestic base to move into neighbouring
countries. This will occur where there are links and synergies with their
home business, not just going global for its own sake. I think Petrobras in
Brazil may be an example of this in Latin America. People ask about the
future role for OPEC. Certainly the organisation represents companies that
have a vast amount of oil reserves and it has held together for over a
quarter of a century already. OPEC have shown the ability for crisis management
every time oil prices have dropped to single digit levels, but the group may
ultimately bring about its own undoing if it shoots for too high a level for
oil prices. As observers point out, in the long run, this effectively
underwrites higher cost oil exploration and development around the world all
at the same time, limiting demand growth below what it might otherwise be.
Nonetheless, I believe most of us in the industry have welcomed the restraint
in he leadership shown by OPEC in recent months and the improved outlook for
the international oil markets. I know I am pleased with the leadership
provided by Saudi Arabia, Mexico and Venezuela and in the long run I think
the world will be best served, and the consumer best served as well as
producers, by stable prices at reasonable levels. The oil industry will
become more integrated in the new century but not necessarily in the
traditional sense of link ups between producers and refiners. The new
integration will bring together new capabilities, skills, technology and risk
management to create synergies that add value. From my perspective in the oil
service industry I see an integrated role for us in helping to manage certain
technical risk, leaving oil companies to retain control but focus on
investment decisions, commercial and political risk and financial risk. Oil
companies probably spend the most and make the lowest returns on the actual
development and operation of their assets. It is here in the middle of the
opportunity chain where service companies can add the most value on the below
ground aspects of the operation. Service companies can assist oil companies
in making knowledge based value added decisions and implementing them
quickly; through this type of integration oil companies can better leverage their
skills and resources to maximise value, focusing on their core competencies.
For NOC’s, working with service companies can make use of the best technical
expertise available world-wide, whilst still retaining control and managing
the state’s interest in its own natural resources. Service companies are
becoming more integrated themselves oftentimes offering integrated solutions.

Let me say a word or two
about the impact of technology in the new century. Clearly technology has
revolutionised the oil business in the last decade with rapid advances in
data interpretation, reservoir management, enhanced oil recovery, directional
drilling and deep water operations and the pace of advancement is
accelerating. The oil industry is saddled with this image problem as a
polluting manufacturing industry when in reality it has become a knowledge
based business. The application of technology and information processing is
remarkable. Our success as a company and as an industry will depend even more
heavily in the future on our ability to develop and deploy new technology.

Let me say a word, if I
can, about natural gas because we think there will be tremendous growth
occurring in this area in the years ahead. In terms of the North American
natural gas market, we are consciously bullish over the next five years and
beyond. The demand side has plenty of up side and gas is likely to grab a
greater share of US energy consumption in the decade ahead. Virtually all new
US power plants are likely to be gas fired and residential penetration is
growing fast as well. On the supply side, onshore gas outputs should be
weaker and this means that the demand gap will need to be met by perhaps
double digit growth rates and Canadian imports and various significant
increases in production out of the Gulf of Mexico. The industry will need to
get busy bringing on new production facilities and pipelines systems to meet
these needs. Deep water gas, obviously, will have a very important role to
play.

There are a number of
factors which we believe will drive the growing role for gas on a global
basis. The environment, obviously, will be a key driver in the natural gas
business in the new century as there is increasing opposition to so called
‘dirty fuels’ like coal and high sulphur fuel oil. Gas is the preferred fuel
for power generation. There are continuing technological innovations in gas
for power generation, combined psycho plants, greatly increased output
efficiency. Gas to liquids is in the threshold of commercial success. There
is growing demand in emerging markets like China, India and Brazil. For
international oil and gas companies, gas is increasingly a key element of the
E and P portfolios – oil becomes more difficult to replace while gas reserves
and production will grow. Another reason natural gas will have a huge role in
the next century is that the world’s gas resources are obviously vast. The
Middle East and Africa have over one hundred year’s supply of gas reserves at
current low usage levels and the former Soviet Union and Latin America have
gas reserve to production ratios which should last over seventy years. Even
estimates of proved gas reserves understate the volumes involved, since there
is plenty of gas still to be found and many existing discoveries have not
been booked, usually due to the difficulty of getting gas to market. As
companies find more gas, they need to find ways to monitise the remote
fields, developing stranded gas often entails new risk involved in building a
new market to use the gas. The three main options for moving this gas to
market are pipelines, liquefied natural gas and now gas to liquids. The world
will get more and more connected with gas pipelines in the new century as
high strength steel and automated equipment allow pipelines to become
economical over long distances. In LNG new markets will fundamentally alter
the nature of the business. The days of the twenty year take or pay contracts
and top drawer buyer credit ratings like Tokyo Electric are over. New buyers
will be local power generators in places like India and Turkey. Credit
worthiness of new buyers, contracts lengths and base floor prices will be
under pressure, introducing new risk. New structures will be needed to share
the risk in building the new markets amongst all the participants: producers,
consumers, governments and project managers. The long waiting list of green
field and LNG expansion projects may signal market limitations for LNG,
problems for putting together new projects are due in part to economic slow
down in Asia. LNG producers are facing greater competition and lower returns
and they may need to look at investing down the gas chain and re-gasification
and power as well. Long term, there are innovations on the way such as power
generation synergies with re-gasification, cost reductions and smaller scale
projects that could permit floating LNG terminals. An alternative to LNG as a
means of monitising gas reserves is gas to liquids, or GTL which serves a
completely different market. This is a well established process for turning low
value gas into high value, ultra clean, refined products that are easily
transportable meeting the coming demand for green fuels. With a huge world
market for refined products, gas to liquids is much more flexible than
pipeline or LNG projects which require rigid contracts and offtake
commitments. GTL products can be exported inexpensively on product tankers
and distributed through existing infrastructures. The appeal of gas to
liquids is that there is no exploration risk as with oil, no market risk as there
is when trying to open up new areas to gas. The remaining hurdle has been the
economics, but while the conventional wisdom is that gas to liquids viability
is still a way off, there are commercial projects on the way right now that
have attractive rates of return with the right tax incentives and when viewed
as part of a larger strategy. For example, Chevron and Sasol’s plant,
Escravos GTL plant in Nigeria is the enabler that permits things such as more
gas processing with associated liquids productions, lubes and an ethylene
plant. The project, together with Shell’s rebuilding of the MDS plant in
Bintulu Malaysia, and projects in Cutter and elsewhere show that GTL’s time
is finally arriving. The viability of gas to liquids will be further enhanced
through incremental improvements and radical technology breakthroughs in
areas such as process, catalyst and reactor technology leading to lower
costs, increased efficiency and greater scale and this could herald a
revolutionary new era for the international gas industry. Companies are
looking at all the sectors : gas transmission, gas distribution, gas trading,
power generation, electric utilities, even electricity trading. Some think
the opportunities are in owning the infrastructure, while others see the preferred
role in the merchant banking function in the energy business, especially
trading and providing financial instruments. Still, others think the key is
in having the customers and cross selling services. In some instances, gas
and electric utilities facing the loss of monopoly positions want to
diversify into higher growth, unregulated businesses like oil and gas. For
the other side, oil and gas companies may seek the earnings stability of an
utility business that can broaden or integrate their business. These new
businesses could cushion the earnings volatility of the petroleum side of the
business, for example one of the companies whose earnings held up the best in
1998 during the oil price downturn was Repsol due to its stable income from
Gas Natural. In any event, gas and power will be of growing importance in the
portfolios of many energy companies with new forms of integration and this
has the potential to expose companies to new and unfamiliar risk. Firms have
a lot to learn about electricity price risk and spark spreads. In addition to
new risk there will be new competition. Major players may include names likes
CMS, AES, Duke Energy, Reliant, Dominion Resources etc. In the minds of many,
the energy business is becoming a commodity business whether it’s oil or gas
or kilowatts. I think that in many ways it is also a service industry and in
any event, on the product side, one has to concede that these are nonetheless
unique commodities. Oil is unique in that it is so strategic in nature. We
are not talking about soapflakes or leisurewear here. Energy is truly
fundamental to the world’s economy. The Gulf War was a reflection of that
reality. The degree of government involvement also makes oil a unique
commodity. This is true in both the overwhelming control of oil resources by
national oil companies and governments as well as in the consuming nations
where oil products are heavily taxed and regulated. Essentially, the
petroleum industry deals with extreme risk and with billions of dollars on
the line. Oil is produced in distant lands as a result of huge risk and
enormous capital outlays, it is transported over vast distances, refined in
expensive refineries with very heavy outlays required to protect the
environment and to comply with strict and expensive regulations, distributed
through a wide network of pipelines, trucks and wholesale outlets and sold at
stations in prime locations and taxed heavily. It is the basic, fundamental
building block of the world’s economy. It is unlike any other commodity. The
oil and gas industry provides essential goods at the lowest possible cost
with regular reliability while still ensuring a cleaner environment and the
industry provides security of supply even though at the same time we are
required to manage huge political risk. What we do isn’t always appreciated
by the public and this is part of our industry’s image problem that we need
to work on in the next century. Frankly the focus in today’s economy on
globalisation and emerging markets is old news to the oil industry. Ours are
global companies investing outside the industrialised companies at the turn
of the last century. People need to realise that the energy industry often
represents the largest foreign investment in many parts of the world and its
interest, insights and experience need to be considered. Oil is the only
large industry whose leverage has not been all that effective in the
political arena. Textiles, electronics, agriculture all seem oftentimes to be
more influential. Our constituency is not only oilmen from Louisiana and
Texas, but software writers in Massachusetts and specially steel producers in
Pennsylvania. I am struck that this industry is so strong technically and
financially yet not as politically successful or influential as are often
smaller industries. We need to earn credibility to have our views heard.

Another concern is the
disruptive volatility of the industry. In the new century the oil business
needs to learn how to break out of the boom and bust cycles we have
experienced over the last century. Perhaps it is part of being a commodity
business, but it wreaks havoc with planning processes and can drive smaller
companies out of business and, needless to say, creates problems for
consumers as well. One hope might be that the new super majors would use
their financial staying power to keep capital spending steady throughout the
cycle or even to invest counter-cyclically. This would help smooth out the
bumps and of course the financial community could do its part by taking a
longer view of financial performance and not pressuring sound companies to
cut back during periods of weakness, however unlikely. Technology can help
smooth out the cycles by lowering costs. A key challenge for companies in the
commodity business is growth and there are basically only two avenues to grow
earnings: one is through increasing volume and the other is through improved
unit efficiencies. These two options have been driving company strategies. On
the volume side we can see the aggressive production targets that some
companies have announced of late. On the unit efficiency side we have the
cost cutting targets most firms announced for 1999 and beyond, as well as the
mergers designed to generate savings through synergies, economies of scale
and reduction in overheads. The view is that in the commodity business the
lowest cost producer will be the winner. In the last century and up to World
War Two coal was king and looks to have a lock as the primary source of
energy. It was dethroned by oil, mostly due to transportation fuels, but also
because oil was less polluting and easier to handle. Coal is still with us
today, but oil is clearly dominant. In the new century, will the oil age give
way to another source of energy or to new technologies? Some predict natural
gas will erode oil’s performance, others say that technology, fuel cells,
telecommuting on the internet or some other breakthrough will lessen our
dependence on hydrocarbons. Well, the end of the oil era is not here yet, but
changes are afoot and the industry must be ready to adapt to the new century
and to the transformations that lie ahead. It will mean showing more speed
and agility. As I have outlined today, there are new areas to co-operate in,
new risk, new competition, new roles, new integration and a new convergence
with power. This will be a challenging environment as we cross the threshold
into the new millennium. You don’t here our times referred to as the Space
Age anymore, instead it’s the Information Age. You will notice they call it
the Information Age, not the Knowledge Age. Well, I would conclude today by
saying that this industry must be at the forefront of moving into the
Knowledge Age. Successful competitors will be those that best manage
knowledge. This means technology, expertise, best practices, country, market
and competitor intelligence and opportunity assessment. These will be the
hallmarks of the energy industry in the new century. I for one am proud to be
a part of the industry and I am optimistic about our future in the coming
century.

Thank you.

Applause.

Chris Moorhouse: -

Ladies and Gentlemen I
would just like to conclude today by giving a vote of thanks to Dick Cheney
for coming to speak to us today. I think it’s been a marvelously inspiring
speech. I picked up a couple of things: what we do isn’t always appreciated
by the public – I definitely feel that from time to time – and that we are
the only large industry which has not been politically influential. Finally,
as far as the Institute of Petroleum is concerned, I picked up on the remark
that the industry must be ready to change and I would add to that its
institutions too. So thank you very much and thanks once again to Dick
Cheney.

Applause.