Chevron CEO on Drilling, Speculators and a Bubble

By Jad Mouawad

Before heading to Saudi Arabia for an emergency energy summit this weekend in Saudi Arabia, David O’Reilly, the chairman and chief executive of Chevron, spoke about why the U.S. Congress should allow more access to offshore drilling in the United States and offered his explanation of why oil prices have jumped to record levels in recent months.

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[Q.] President Bush this week called for lifting the moratorium on offshore drilling. What impact will this have on future U.S. oil supplies?

[A.]It is a good thing. The president is going in the right direction here. But I would have gone even further and lifted the moratorium with a presidential order.

But you also have to remember that the lag time between exploration and first production is still in the range of 8 to 10 years. Still, it would send a very strong message to the world that U.S. energy policy is shifting and is going toward a little more supply.

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[Q.] How much more oil can be produced in these regions?

[A.] That’s really impossible to know until we have more exploration. But I know the chances are pretty good it would expand our supply. Let’s suppose that we expanded production by one million barrels a day 15 years from now. At over $100 a barrel – remember this is a hypothesis – that would still mean $3 billion a month less in oil imports. That would have a demonstrable impact.

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[Q.] But there is strong opposition to offshore drilling.

[A.] I realize there is a discomfort. This has to be done very carefully. But we’ve demonstrated, in the face of very powerful hurricanes, that even under extreme weather conditions our offshore systems are pretty robust and environmentally sound. The Europeans have a strong environmental record but the Norwegians and the British have been able to safely encourage offshore developments. Brazil was a recent example of success offshore.

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[Q.] Democrats say oil companies are sitting on unused leases and they should drill there first before more regions are opened up to production.

[A.] What I would encourage the Democrats to do is to look at the facts. We should not be making these crass statements without facts. There are already existing limitations on leases. Already you have to use them or lose them. It takes time for geological exploration to occur. In our case, over 80 percent of our leases are being actively worked.

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[Q.] Oil prices are headed for their seventh straight year of gains, something that has not happened since the Civil War. Why such a sustained run-up in prices?

[A.] This is a case of demand-driven increases. The time we could count on cheap oil and cheap gas is ending. In prior periods, you’ve had price spikes because of big disruptions in supplies. But in this decade, the new phenomenon is that demand has been the main driver.

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[Q.] But hasn’t the oil industry failed to anticipate the surge in consumption growth that we’re seeing now by under-investing in the 1990s?

[A.] It is very easy to say that looking backwards. But you have to remember that oil was at $10 a barrel in 1998 and a lot of people were getting out of the business. It was a tough time back then. But those that were tough enough to continue investing then survived.

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[Q.] Oil prices have jumped from around $25 in 2002 to about $140 a barrel recently. Are we in a bubble?

[A.] I am a believer that most of this is related to fundamentals. Those are concerns about supplies. Last year, oil supplies did not grow in total. What the market is looking for is more visibility in future oil supplies. That is one of the main drivers for the difference of between the prices five years ago and the prices we’re seeing now.

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[Q.] What has been the impact of financial investors or “speculators?”

[A.]I am not quite sure that I know that. It is quite possible that they have added some volatility. But the bulk of the price of oil that we see today relates to concerns about the outlook for physical supplies in the long term.

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[Q.]Why have these higher prices not spurred more meaningful supplies?

[A.] The supplies are coming. But remember there is always a big lag. These are massive developments we’re talking about. They are $4 billion or $5 billion investments. It just doesn’t turn on overnight.

Originally published by The New York Times Media Group.

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