Tuesday, November 6, 2007

Former Chairman and CEO of ExxonMobil, Lee Raymond, speaks in the MIT Energy Initiative Colloqium

The MIT Energy Initiative brought Lee Raymond, former CEO/Chairman of ExxonMobil, to come speak to the MIT energy community about the recently published National Petroleum Council report "Facing the Hard Truths about Energy".

The format of the event was a "fireside chat" with MIT Institute Professor John Deutch peppering Lee Raymond with questions and then open audience Q&A.

John Deutch opened the session by expressing his pleasure that Lee Raymond has a PhD in Chemical Engineering. Very much in the spirit of Deutch's excellent MIT class, with Prof. Richard Lester, on "Applications of Technology in Energy and Environment". Deutch pushes in this class for the need for technologists to push their knowledge set into the practical to allow them to be industry, political, and thought leaders going forward.

Raymond opened by describing the history of the National Petroleum Council. The uninterested observer would just assume that it is an industry group like the American Petroleum Council. However, the audience learned a bit more.... the NPC was formed during WWII as an industry/gov't partnership to work to solve the strategic problem of ensuring U.S. oil supply. Now, the NPC is officially a federal advisory council that reports to the DOE, specifically to the Secretary of Energy, MIT's own Samuel Bodman currently. The NPC has previously published a report on Natural Gas. The current report was commissioned by the Secretary of Energy himself.

Raymond made opening points about the importance of large/long scales when thinking about solving energy problems. He pointed out that large scales are needed to "move the needle" in energy and that massive capital outlays over long time-scales are required to effect change in the energy industry.

Deutch's first question revolved around the prediction by the report that the world will produce and consume 120 million barrels per day (mbd) by 2030, the current number being ~80 mbd. Raymond responded that the resource is there and that the key question is whether we will be able to get at it: meaning will the required capital be made available, will policy and environmental limitations allow for it, and will the human capital be available to make it happen. He also pointed at that the wells currently accounting for the global production of 80 mbd are in production decline, so to get to 120 mbd by 2030 will required the addition of more like 60-70 mbd of new capacity, nearly equal to what we currently have! To me, doing what we have done so far in the history of oil once again, but in 23 years this time, seems daunting.

Another of Deutch's questions related to the important role that national oil companies (NOCs) in politically fragile countries play on the global oil scene. Raymond said that if the past predicts the future, he didn't have a lot of confidence that a lot of good things would be happening here. However, he pointed out, the fact that many of these countries rely nearly completely on oil income for their GDP would indicate that they will continue pumping, even through politically turbulent times (as long as this is possible!). Raymond emphasized the importance of the rule of law and transparency for allowing for a more efficient global oil industry to operate.

Raymond/Deutch also pointed out that ExxonMobil controlled ~80% of both production and reserves in 1973, whereas NOC's have about the same position now. An important trend to be aware of. Deutch wondered what the role of the multinational oil companies will be going forward with the NOC's playing such a prominent and growing role. Raymond stated that he believes that "best-in-class" multinationals will always have a place in the global oil industry, as NOC's have the need for capital, technology, and project management expertise that will reside in the multinationals for the foreseeable future. He also pointed out that the revenue difference for an oil field run "averagely" well versus the best run field means differences of $1B's per year, illustrating the core value of project management expertise.

Raymond was asked by Deutch to think like a startup guy for a moment and consider which technologies/problems in the energy arena are most exciting to him now. He pointed out subsurface characterization, "the ability to see into the earth", as one key area. He also pointed to the importance of flexible refining of crude oil: the ability to quickly characterize crude oil and optimally process it into refined products, as a very important area.

When asked by an audience member about the strategic importance of Antarctica for "Western friendly" oil resources, Raymond went straight to discussing deep water resources. He pointed out that we now can produce at 5000ft of water and explore at 10000ft. I believe he was trying to point out that deep water is one critical strategic reserve area for the West, as well as to emphasize the importance of technology development to open up West friendly reserves (opening up environmentally sensitive areas with delicate technology approaches?, increasing the resource base by being able to hit ultra-deep water?)

When asked about the importance of a variety of oil alternatives, Raymond pointed out the existence of a "false choice", meaning there is no either/or here but simply a need for as many market-viable solutions as possible. One very interesting point he made is that natural gas should not be used for power generation. It is just too valuable for the creation of high value energy products. He emphasized the logic of focusing much more on clean coal, making a low value product that is better suited to power generation an environmentally acceptable choice. Very interesting as the role of natural gas in the power section has grown like crazy in recent years.

He emphasized that one big surprise that came across to him as the NPC worked on the report was how difficult the infrastructure issues around biomass-energy are, that collection and transport of biomass and bio-energy products look very difficult from an infrastructure.

Raymond also emphasized the importance of energy in foreign policy. He noted that the U.S. is no longer the center of the energy universe, that the demand center of the universe has become the Far East, while the supply center is the Middle East (there was a time when the U.S. was the center of supply as well!)

Raymond has his hands tied a little when it comes to controversial topics, because he does not want to reflect poorly on the company he essentially built, ExxonMobil, with off-hand comments that get published far and wide in the media.

However, MIT's beloved John Deutch is another story (thank goodness!), and was not slow to mention the key geopolitical energy issues that are on everyone's minds, mentioning Iran, Venezuela, and Chinese dealings with certain African countries as key examples.

Raymond was asked - perhaps more told - by an audience member (an MIT alum and retired GE employee who had attended the Peak Oil Conference, referenced in Ed Carlevale's post below) that the age of cheap oil is over. Raymond had a nice quote in response, saying that "the age of cheap oil is over is a cheap comment". He pointed out that traditionally oil production costs have been in the single digits, while they are just now into the double digits. Even a doubling from current costs would put us in the $20's/barrel. My thoughts here: So is it fair to say that the era of cheap oil is over?? There is a limited resource availability, but that resource can still be produced at pretty low cost. So is there limited but relatively low production cost supply and increased demand results in high prices. We should remember that in contrast to the 1970's, the current spike in oil prices is much more a demand-side driven phenomenon than a supply-side issue.....

As a closing fun note, I was impressed to find out that Raymond completed his PhD in Chemical Engineering with a global chem eng rockstar prof in 3 years. Having taken 6.5 years myself, I am duly impressed.

All in all a very engaging and interesting discussion with one of the men who has formed the modern global energy landscape. I was impressed by Lee Raymond's cordiality and frankness.


Anup Bandivadekar said...

Great Summary Dave! Thanks a lot! Unfortunately, I was away and could not attend this event.

A couple of comments:

* I am sure that more than just a couple of people were surprised and impressed by Raymond. An ex-CEO of Exxon comes with a lot of labels, so I am sure that seeing him in person might have helped.

* As for the cheap oil being over: Given the utility of oil as a fuel and materials source, I might argue that even 100 dollars a barrel is not that expensive. To take a cue from one of your favorite commentator (Yergin), I don't think that we have abolished business cycles. Those who expect that oil prices can only rise, and base their business decisions on such as assumption reflect on this.

* Finally, I could not agree more with the comment about use of natural gas in power sector. It is too precious a resource to burn. The clean coal issue ties well with your post above about CCS.

Thanks again for a great summary. I hope that they videotaped the event, so that I can watch it at a later date.

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