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The Major Challenges Facing Our Industry

Clarence P. Cazalot Jr.
President and Chief Executive Officer
Marathon Oil Corp.

We are at a time of dramatic, perhaps unprecedented, change and challenge in the global oil and gas business. A number of factors, such as changing geopolitical relationships, the emergence of new competitors, changes in supply and demand dynamics, social and environmental pressures, and demographic shifts, are transforming and reshaping our industry. But there is one indisputable fact that affects not only our industry but the world as a whole: Global demand for energy will continue to increase dramatically, driven in large part by population growth and the strong desire of developing countries to achieve economic prosperity. Experts may disagree about the rate of growth, but there is no dispute that growth in the demand for energy is inevitable.

The world’s population grows by a quarter of a million people every 24 hours. By 2030, it is expected that 8 billion people will occupy this planet, up from 6.5 billion today, with 95% of the growth occurring in the developing world. Secure, affordable, accessible, and ample supplies of energy are absolutely essential to both economic growth and a reasonable standard of living, so it is only natural to expect that developing countries, with their growing economies and populations, will drive increased energy demand.

Using ExxonMobil’s latest energy outlook, the world today consumes about 230 million BOE/D with oil and gas supplying about 60% of the total demand, coal another 20%, and the remaining 20% coming from such sources as nuclear, hydro, wind, and solar. By 2020, worldwide energy demand is expected to increase by about 55 million BOE/D, or 24%, from 230 to 285 million BOE/D, with about 80% of this growth in developing countries. Oil and gas will continue to supply about 60% of world energy demand by 2020, which means an incremental 30+ million BOE/D of oil and gas production is required. And that does not include the new production that will be needed to offset the natural base decline. This is indeed a daunting task, and 15 years is a relatively short period given the long lead times for large projects in our business.

To achieve such growth will require the full commitment of resources (people, capital, and technology) and collaboration between all global energy players, including international oil companies (IOCs) and national oil companies (NOCs) and governments. From my perspective, I see four major challenges that the industry needs to address to meet future demand for oil and gas.

Access to Resources

First, and perhaps most critical, is access to significant quantities of economically recoverable oil and gas resources. Other oil company CEOs have stated their belief that there are more than ample supplies of oil and gas globally to meet future demand, and I fully agree with them. But more than 80% of the world’s oil and gas resources are in the hands of NOCs and host governments and are not currently available to IOCs.

Some of these NOCs are moving forward to fully develop these resources and increase production. Saudi Aramco is the best example of this, but many other NOCs either are not doing so or are not doing so at sufficient levels. It is therefore critical that the IOCs be allowed to gain access to these resources as soon as possible and under reason-able fiscal terms so that they can apply their people, capital, and technology to the potential for increasing oil and gas production.

Recent high commodity prices have not helped; indeed, they have prompted increased resource and economic nationalism and fostered the emergence of aggressive new competitors. But IOCs and NOCs are simply going to have to find new, innovative, creative ways to work in partnerships that both increase value and meet the respective needs of both parties. Such partnerships would likely involve things such as

• Integration across the value chain (upstream, midstream, and downstream).
• Joint investments outside the host country.
• Different commercial terms and risk sharing.
• Greater shared control.
• More technology transfer and development of the local workforce.

The Cost of Services

The second major challenge is the availability of and increased costs for services across the board, including seismic, drilling, facilities, engineering, procurement, and construction. This too is a function of higher commodity prices, which have driven industry activity to a point that exceeds the service industry’s capacity to respond.

Capacity is being increased in some areas, particularly drilling rigs, where new builds will be available for onshore areas over the next 2 years and 
for deepwater areas starting about 3 years out. But building rigs and new equipment solves only part of the problem: trained, experienced people will be required to operate them, and this could be a limiting factor—all of which means that as we take on larger, more complex, longer-lead-time projects around the world, we are certain that our actual cost structure will be high, while we have no assurance of what oil and gas prices, our revenue stream, will be when these projects come on stream 4–6 years from now.

The third challenge is a continuing need for new, breakthrough technologies that can help find, develop, and/or produce more oil and gas. More than anything else, technology has been the driving force behind our industry’s continued ability to deliver increased oil and gas production safely, efficiently, and in an environmentally sound manner.

It really was not all that long ago that 600 ft 
water depth was considered the operational and economic limit; that we did not believe we could ever record and image reliable seismic data below salt; or that shales, which we all learned in geology could only serve as source or seal rocks, could actually be prolific reservoirs if stimulated and completed properly. What concerns me is that I do not believe that our industry is devoting sufficient people and capital to developing innovative and breakthrough technologies.

Comparative statistics bear this out. In 2004, the global oil and gas industry’s R&D was 0.3% of net sales vs. 16% for pharmaceuticals/biotech, 11.5% for software, and 7% for health. At Marathon, we have conducted an informal analysis of industry R&D, and from what we have been able to determine, a significant part (60 to 80%) of oil and gas R&D is focused on incremental advances (doing better what we do today) rather than new breakthrough or game-changing technologies.

Contrary to what the general public believes, our industry is fiercely competitive, and we all want to establish a technological competitive advantage, so there is not as much sharing or collaboration as there could be. We need collaborative partnerships, alliances, or joint ventures involving oil companies, service companies, governments, and academia, all pooling their knowledge to achieve breakthroughs in these targeted areas in far less time and at lower cost than if everyone goes about it alone.

The People Shortage

The fourth and final challenge is that of having sufficient well-trained and capable technical people. Much has been said about this issue, and we all know how we got here, but the real question is: What do we do about it? Solving the people issue will require us to do things considerably differently from how they were done in the past.

Perhaps foremost, we need to retain our baby boomer professionals past the normal 55–60 retirement age, per-haps through different work or telecommuting processes and innovative compensation schemes. Assuming we are successful, this buys us perhaps another 5 years, so we need to ensure that our older workers have ample time and incentive to transfer their knowledge and mentor younger employees.

Second, we simply must attract more bright young people into the science and engineering disciplines and then into our industry. To do so, we will need to reverse some negative perceptions, some earned and others not. We all know that ours is a high-tech, dynamic industry, the safety and environmental record for which is extraordinary given what we do and where we do it. And, as I outlined earlier, the economic well-being and standard of living of our world are dependent on our meeting the increased demands for oil and gas. I think young people are getting that message and they are smart enough to see the tremendous opportunities that they will have as the baby boomers move into retirement.

We also have to encourage the “new majority”—young women and ethnic and minority youth—the very people who have traditionally been underrepresented in science, mathematics, engineering, and technology. We need to entice them to study these difficult curriculums.

Finally, we will need to continue to improve our business and technical processes to allow greater collaboration, teamwork, and knowledge transfer from a variety of remote locations. Higher productivity and greater time allotted to value-added work will need to 
be achieved.

These four challenges are critical to our industry, 
but they are also critical to our world. Economic growth and a reasonable standard of living are in large part dependent on access to ample supplies of affordable and reliable energy, of which oil and gas will continue to be major contributors.

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