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	REMARKS TO LOUISIANA ASSOCIATION OF INDEPENDENT PRODUCERS & ROYALTY OWNERS “RESTRUCTURING IN THE PETROLEUM INDUSTRY: THE FREE ENTERPRISE SYSTEM AT WORK” NEW ORLEANS MARCH 30, 1984 12:00 P.M.

(TIME: 15 MIN.)

I. THANK YOU, —————.

A. IT’S A PLEASURE TO BE IN NEW ORLEANS TODAY.

B.

C.

D.

II. THE TOPIC OF MY TALK IS A SUBJECT THAT DIRECTLY AFFECTS EACH OF YOU.

A. I AM SURE THAT MOST OF YOU HAVE TAKEN GREAT INTEREST AND MAYBE EVEN CONCERN IN THE RECENT EVENTS OCCURRING WITHIN THE INDUSTRY AND IN CONGRESS.

B. WHAT WE’RE WITNESSING IS A RESTRUCTURING OF THE PETROLEUM INDUSTRY. . .A PROCESS THAT BEGAN, ALBEIT SLOWLY, OVER THE LAST FEW YEARS AND HAS NOW GATHERED ENOUGH STEAM TO GAIN THE ATTENTION OF THE GENERAL PUBLIC AND CONGRESS.

C. CRITICS OF RESTRUCTURING ARE WORRIED ABOUT SEVERAL THINGS. . .

          1. FIRST, WILL IT HARM THE CONSUMER. . .

          2. SECOND, WILL IT HARM THE NATION’S CREDIT MARKETS. . .

          3. AND THIRD, WILL IT HARM THE NATION’S ENERGY SECURITY?

D. I’D LIKE TO ADDRESS ALL THOSE POINTS BECAUSE, FRANKLY, I DON’T SEE ANY HARM AT ALL COMING FROM RESTRUCTURING.

E. ON THE CONTRARY, I ONLY SEE GOOD COMING FROM IT.

III. WHERE THE CONSUMER IS CONCERNED, THERE IS NO DANGER OF INCREASED GASOLINE PRICES OR DECREASED COMPETITION RESULTING FROM RESTRUCTURING.

A. THE PRICE OF GASOLINE IS DETERMINED BY THE PRICE OF OIL.

B. AND OIL PRICES ARE DETERMINED BY OPEC. . .NOT BY MAJOR OIL COMPANIES.

[Text stricken: C. OPEC HAS CUT THE PRICE OF OIL FOR MANY YEARS NOW.]

[Handwritten addition: C.] [Text stricken: D.] THERE’S NO WAY THAT A FEW ACQUISITIONS IN THE DOMESTIC OIL INDUSTRY CAN CHANGE THAT.

[Handwritten addition: D.] [Text stricken: E.] TOO MUCH CONCENTRATION IN DOWNSTREAM OPERATIONS IS UNLIKELY TOO.

[Handwritten addition: E.] [Text stricken: F.] THE PETROLEUM INDUSTRY IS ONE OF THE MOST FRAGMENTED IN THE UNITED STATES.

[Handwritten addition: G. If the majors get too much money borrowed the independents are ready to drill [Text stricken: those] the prospects—we drill 80% of the wells anyway.]

IV. IF ANYTHING, THE RESTRUCTURING OF THIS INDUSTRY SHOULD BENEFIT CONSUMERS.

A. AFTER ALL, THIS PROCESS IS OCCURRING BECAUSE THE INDUSTRY NEEDS TO BE MORE EFFICIENT.

B. CONSOLIDATION AND STREAMLINING OF OPERATIONS—ESPECIALLY ON THE DOWNSTREAM SIDE—SHOULD LEAD TO COST-EFFICIENCY.

C. INEFFICIENCIES ARE ALWAYS DIGESTED SOMEWHERE ALONG THE LINE AND ARE ULTIMATELY PAID FOR BY THE CONSUMER.

V. THE SECOND FEAR MOST OFTEN VOICED ABOUT THE EFFECTS OF RESTRUCTURING IS WHAT IMPACT IT WILL HAVE ON THE NATION’S CREDIT MARKETS. . .AND THAT FEAR, I BELIEVE, IS ALSO UNFOUNDED.

A. IF YOU’VE NOTICED, THE BANKS HAVE BEEN STANDING IN LINE TO LOAN MONEY TO SOCAL, MOBIL AND TEXACO.

B. THERE’S JUST NO SHORTAGE OF CREDIT AVAILABLE.

C. I’VE BEEN AMUSED BY COMMENTS I’VE HEARD RECENTLY, ESPECIALLY THE ONE ABOUT SOCAL’S BID FOR GULF TAKING $13.2 BILLION OUT OF THE CREDIT MARKET.

D. IT’S AS IF PEOPLE THINK THIS MONEY WILL SIMPLY DISAPPEAR.

E. FIRST OF ALL, THE U.S. TREASURY WILL TAKE ABOUT A $2 BILLION TAX BITE IN THE FORM OF TAX REVENUES.

F. AND WHAT BETTER WAY TO INCREASE TAX REVENUES.

G. GULF SHAREHOLDERS WILL MAKE MONEY, AND THE FEDERAL GOVERNMENT WILL COLLECT TAXES.

H. THAT’S THE WAY THE FREE ENTERPRISE SYSTEM IS SUPPOSED TO WORK.

I. HALF OF THE MONEY IN THE SOCAL-GULF DEAL IS COMING FROM FOREIGN BANKS.

          1. BUT BECAUSE 95% OF GULF’S SHAREHOLDERS ARE IN THE U.S., 95% OF THAT MONEY WILL POURED INTO THE U.S. ECONOMY.

J. THERE MAY BE A FEW INDIVIDUALS WHO WILL TAKE THEIR CASH AND STUFF IT UNDER THE MATTRESS.

K. BUT THE MAJORITY WILL TAKE THAT MONEY AND PLACE IT IN SAVINGS ACCOUNTS, [Text stricken: MAYBE START AN IRA OR, FOR THAT MATTER,] [Handwritten addition: some way] REINVEST IN THE OIL AND GAS INDUSTRY.

L. MANY WILL MAKE SOME LONG-AWAITED PURCHASES. . .LIKE A NEW CAR OR BOAT. . .OR MAYBE EVEN A DOWNPAYMENT ON A HOME.

M. THE MONEY FLOWING FROM THE CREDIT MARKET INTO THE HANDS OF PETROLEUM COMPANY STOCKHOLDERS WILL [Text stricken: RIGHT BACK] [Handwritten addition: directly] INTO THE ECONOMY.

N. FROM THE GULF-SOCAL DEAL, ALONE. . .THAT WILL BE $13.2 BILLION.

O. THEN YOU HAVE MOBIL-SUPERIOR. . .VALUED AT $5.7 BILLION.

P. AND EARLIER, WE HAD TEXACO-GETTY. . .WHICH AMOUNTED TO $10 BILLION.

VI. PERHAPS THE MOST MISUNDERSTOOD ASPECT OF THE RECENT MERGER ACTIVITY IN THE INDUSTRY IS THE PREMISE THAT THESE LARGE ACQUISITIONS WILL HURT THE NATION’S ENERGY FUTURE BY DIVERTING CAPITAL FROM EXPLORATION.

A. I DON’T KNOW HOW MANY TIMES I’VE HEARD PEOPLE SAY THAT THESE ACQUISITIONS WILL TAKE AWAY MONEY THAT COULD BE USED FOR DRILLING.

B. THAT SIMPLY IS NOT THE CASE.

C. BUT TO UNDERSTAND WHY, IT’S IMPORTANT TO LOOK AT THE WHOLE PICTURE. . .AT WHY RESTRUCTURING IS HAPPENING IN THE FIRST PLACE.

D. AND UNFORTUNATELY, MOST PEOPLE—INCLUDING MANY OF OUR CONGRESSIONAL LEADERS—DON’T REALLY UNDERSTAND THE INDUSTRY’S PROBLEMS.

VII. THE PETROLEUM INDUSTRY FACES UNIQUE PROBLEMS.

A. PETROLEUM COMPANIES MANAGE DEPLETABLE ASSETS—THEIR RESERVES OF OIL AND GAS.

B. IF THEY DON’T REPLACE THE RESERVES THAT ARE BEING PRODUCED, THEN THE SHAREHOLDERS’ ASSETS ARE BEING DEPLETED.

C. FOR YEARS NOW, THE INDUSTRY HAS NOT BEEN DOING A GOOD JOB OF REPLACING RESERVES.

D. SINCE 1970, U.S. RESERVES OF OIL AND NATURAL GAS ON AN INDUSTRY-WIDE BASIS HAVE BEEN STEADILY DECLINING.

E. IN FACT, THE INDUSTRY’S DOMESTIC RESERVE LIFE INDEX IS NOW LESS THAN 10 YEARS.

F. THE DECLINING RESERVE PROBLEM, OBVIOUSLY, IS A LONG-STANDING ONE.

G. BUT DURING THE 1970s, WHEN OIL PRICES WERE STEADILY RISING, THE RESERVE DEPLETION PROBLEM WASN’T AS APPARENT BECAUSE THE FOCUS WAS ON THE BALANCE SHEET—HIGHER CRUDE PRICES MADE EVERYTHING SEEM OKAY.

H. NOW THAT OIL PRICES HAVE STABILIZED AT $29 A BARREL, RESERVE DEPLETION IS QUICKLY COMING INTO FOCUS.

VIII. WHAT MANY PEOPLE FAIL TO SEE IS THAT THE REASON OUR RESERVES ARE DEPLETING IS NOT BECAUSE THERE ISN’T OIL TO BE FOUND.

A. THERE’S STILL OIL YET TO BE DISCOVERED IN THE U.S. AND EVEN MORE GAS — BUT IT WILL BE EXPENSIVE.

B. TODAY, THE INDUSTRY CANNOT FIND OIL AND GAS AT A PRICE THAT MAKES IT ECONOMICAL TO BUDGET LARGE CAPITAL EXPENDITURES.

C. THERE’S PLENTY OF CASH FLOW [Text stricken: AMONG THE MAJOR OIL COMPANIES TO] [Handwritten addition: in the industry to] DRILL ALL THE ECONOMICALLY AND TECHNICALLY FEASIBLE PROSPECTS THAT EXIST.

D. BUT IT DOESN’T MAKE SENSE TO DRILL REGARDLESS OF THE COST.

E. THAT WOULD BREAK THE INDUSTRY FINANCIALLY BECAUSE EVEN THOUGH WE MIGHT FIND OIL AT $40 A BARREL FOR EXAMPLE. . .OPEC WOULD STILL SET THE PRICE AT $29.

F. THE INDUSTRY CAN’T AFFORD TO PUT MORE MONEY INTO DRILLING AT THIS POINT BECAUSE IT ISN’T ECONOMICALLY FEASIBLE TO DO SO.
[Handwritten addition: Watch the rig count.]

IX. BENNETT JOHNSTON, THE DISTINGUISHED SENATOR FROM LOUISIANA, APPEARED WITH ME TWO WEEKS AGO ON DAVID BRINKLEY’S SUNDAY NEWS PROGRAM.

A. SENATOR JOHNSTON STATED THAT THE $29 BILLION INVOLVED IN THE LATEST OIL COMPANY MERGERS WOULD ONLY. . .QUOTE. . .“MAKE OIL COMPANIES BIGGER. . .INSTEAD OF FINDING MORE OIL.”

B. HE SEEMS TO BELIEVE THAT SOCAL, TEXACO AND MOBIL SHOULD TAKE THE MONEY THEY ARE USING TO ACQUIRE RESERVES AND, INSTEAD, USE IT FOR EXPLORATION.

C. SENATOR JOHNSTON’S SUGGESTION WOULD SIMPLY NOT BE ECONOMICALLY FEASIBLE—TO STOCKHOLDERS OR TO THIS NATION’S CONSUMERS—BECAUSE IT WOULD NOT FIND OIL ECONOMICALLY IF IT IS TO BE SOLD AT $29 A BARREL.

D. THAT KIND OF THINKING IS ONE MORE EXAMPLE OF THAT AGE-OLD CONGRESSIONAL MENTALITY: LET’S THROW MONEY AT A PROBLEM AND HOPE IT WORKS.
[Handwritten addition: Use Keller quote—“crapshoot”]

E. WHILE SOME CONGRESSIONAL LEADERS PROFESS GREAT CONCERN OVER OUR NATION’S ENERGY SUPPLIES, THEY ARE NOT INFORMED ENOUGH ABOUT THE ECONOMICS OF FINDING THOSE SUPPLIES TO MAKE INTELLIGENT DECISIONS.

F. CURRENTLY, THEY SEE BIG BUCKS BEING SPENT AND THEY IMMEDIATELY THINK THAT SOMETHING MUST BE WRONG.

G. IF THEY WERE AS CONCERNED ABOUT GOVERNMENT SPENDING AS THEY ARE ABOUT SPENDING IN THE OIL INDUSTRY, PERHAPS OUR FEDERAL DEFICIT WOULDN’T HAVE BEEN $195.4 BILLION IN 1983.

X. CURRENT MERGER ACTIVITY IN THE INDUSTRY WILL NOT DECREASE EXPLORATION.

A. ECONOMICS IS WHAT HAS BROUGHT DRILLING ACTIVITY DOWN FROM A HIGH-WATER MARK OF 4,531 RIGS IN DECEMBER 1981 TO ABOUT 2,200 RIGS THIS WEEK.

B. RESTRUCTURING IS SIMPLY THE FREE ENTERPRISE SYSTEM AT WORK IN THE OIL INDUSTRY.

C. THE INDUSTRY IS TRYING TO GET BACK ON ITS FEET.
[Handwritten addition: And if Congress will just leave us alone we will make it.]

D. MARKETS AND FINDING COSTS FOR OIL AND GAS HAVE PERMANENTLY CHANGED FROM WHAT THEY WERE 10 YEARS AGO.

E. AND THIS INDUSTRY IS STRUGGLING TO MAKE ADJUSTMENTS SO THAT IT CAN OPERATE PROFITABLY IN THIS NEW ENVIRONMENT.

F. THE DECISIONS ON THE ACQUISITIONS SHOULD BE LEFT TO THE PEOPLE WHO OWN OIL COMPANIES—THE SHAREHOLDERS.

G. THE SHAREHOLDERS ARE THE ONES WHO HAVE TAKEN THE RISK BY PUTTING UP THEIR MONEY, AND UNDER THE FREE ENTERPRISE SYSTEM, THEY EXPECT TO MAKE A PROFIT.

H. UNFORTUNATELY I BELIEVE THAT TOO MANY PEOPLE—INCLUDING MANY OF OUR CONGRESSIONAL LEADERS—DON’T CONSIDER SHAREHOLDERS THE OWNERS OF THE COMPANY.

I. INSTEAD, THEY THINK THAT OIL COMPANIES ARE OWNED BY A HANDFUL OF MANAGERS.

J. THAT IS A FUNDAMENTAL MISCONCEPTION ABOUT THE WAY PUBLICLY-OWNED BUSINESSES WORK.

K. SHAREHOLDERS OWN THE COMPANY, AND THEY ARE ORDINARY PEOPLE FROM ALL WALKS OF LIFE.

          1. THEY’RE CLERICAL EMPLOYEES, TEACHERS, REFINERY WORKERS, PROFESSIONAL PEOPLE. . .OR THEIR SHARES ARE HELD IN PENSION FUNDS AND RETIREMENT PLANS.

XI. WHAT IS EVEN MORE FRIGHTENING ABOUT THE PROPOSED LEGISLATION IS THAT THERE IS NOTHING TO STOP IT FROM SPILLING OVER INTO OTHER INDUSTRIES AND AFFECTING OTHER SHAREHOLDERS.

A. AND THE IMPACT OF THAT WOULD BE IMMENSE.

B. THERE ARE 42 MILLION STOCKHOLDERS IN THE UNITED STATES, ACCORDING TO A 1983 NEW YORK STOCK EXCHANGE SURVEY.

C. THAT’S ONE OUT OF EVERY SIX AMERICANS.
[Handwritten addition: most have a spouse—80 mm]

D. IF OUR NATIONAL LEADERS ARE GOING TO CONSIDER LEGISLATION AGAINST STOCKHOLDERS, THEN WE MAY AS WELL BEGIN PUTTING A WARNING SIGN ON STOCK CERTIFICATES.

E. IT WOULD BE SOMETHING LIKE THE CAUTION LABEL ON A CIGARETTE PACKAGE.

F. WARNING: IF YOU BUY THIS STOCK, BEWARE THAT IT MAY BE HAZARDOUS TO YOUR FINANCIAL HEALTH BECAUSE IF YOU STAND TO MAKE MONEY ON IT, THE GOVERNMENT MAY SAY THAT YOU CAN’T. [Handwritten addition: You may be killed financially.]

XII. IN CLOSING, I’D LIKE TO SAY THAT I AM VERY CONCERNED ABOUT [Text stricken: THE] [Handwritten addition: some of the recent] PROPOSED LEGISLATION AGAINST OIL MERGERS. [Handwritten addition: that was defeated.]

A. AT THE SAME TIME, I’M VERY CONCERNED ABOUT THE INDUSTRY.

B. RESTRUCTURING IN THIS INDUSTRY IS ABSOLUTELY NECESSARY AND VERY URGENT.

C. AND CURRENT ACTIVITY—WHETHER IT BE MERGERS, ACQUISITIONS OR THE FORMATION OF ROYALTY TRUSTS—IS SIMPLY THE FREE ENTERPRISE SYSTEM WORKING TO IMPROVE EFFICIENCY IN THE INDUSTRY AND GIVE SHAREHOLDERS A BETTER RETURN ON THEIR INVESTMENT.

D. THE FREE ENTERPRISE SYSTEM IS [Text stricken: THE BEST IN THE WORLD] [Handwritten addition: what makes America great], AND IF WE ALLOW RESTRUCTURING TO TAKE PLACE UNDER THE SYSTEM—AS IT SHOULD—WE’LL SEE THAT EVERYONE WILL BENEFIT. . .SHAREHOLDERS, CONSUMERS, GOVERNMENT AND THE NATION.

E. THANK YOU.

F. I’LL BE PLEASED TO ANSWER ANY QUESTIONS YOU MAY HAVE.