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	REMARKS TO FORTUNE CORPORATE COMMUNICATIONS SEMINAR “RESTRUCTURING IN THE PETROLEUM INDUSTRY: THE FREE ENTERPRISE SYSTEM AT WORK” PALM SPRINGS, CALIFORNIA APRIL 9, 1984 11:30 A.M.

[Text stricken: (TIME: 15 MIN.)]

[Text stricken: I. THANK YOU.]

[Text stricken: [Handwritten addition: Expound—$761 m—just a nice real est. comm.—crap shoot. Lee—another law.]]

[Text stricken: A. IT’S A PLEASURE TO BE IN PALM SPRINGS TODAY.]

[Text stricken: B. [Handwritten addition: Sport shirts—no ties—a little like Midland, Tex. 3 years ago—you can tell who sold out in ’81.]]

[Text stricken: C.]

[Text stricken: D.]

[Text stricken: [Handwritten addition: Housekeeping function 100-100,000—Fortune.]]

[[Handwritten addition: $761 m out of $6.5 billion—MSA $500 m—8% just a nice real est. comm. Key quote of the deal—Keller CEO Socal crapshoot.]]

II. I’VE BEEN ASKED TO TALK [Text stricken: WITH YOU] [Handwritten addition: today] ABOUT THE RESTRUCTURING [Text stricken: PROCESS NOW] [Handwritten addition: process] OCCURRING IN THE PETROLEUM INDUSTRY.

A. IN REVIEWING MY REMARKS, I BEGAN TO THINK ABOUT THE MANY WAYS IN WHICH THE FUNDAMENTAL PRINCIPLES OF THE FREE ENTERPRISE SYSTEM ARE AT WORK IN THIS PROCESS.

B. RESTRUCTURING IS HAPPENING [Text stricken: SOLELY] BECAUSE OF THE WAY OUR ECONOMY [Handwritten addition: & markets] OPERATE[Text stricken: S].

C. [Text stricken: AND] MESA’S INVESTMENT IN GULF. . .AS WELL AS THE ACQUISITION OF SUPERIOR BY MOBIL. . .AND THE EARLIER ACQUISITION OF GETTY BY TEXACO. . .ARE ALL EXAMPLES OF [Text stricken: HOW] OUR [Text stricken: ECONOMIC] SYSTEM [Text stricken: WORKS.] [Handwritten addition: working.]

D. FREE MARKET FORCES ARE DICTATING WHAT IS HAPPENING TO [Text stricken: THE] [Handwritten addition: our] INDUSTRY.

E. [Text stricken: AND] IF WE TRULY BELIEVE THAT THE FREE ENTERPRISE SYSTEM IS THE [Text stricken: BEST IN THE WORLD,] [Handwritten addition: only way,] THEN WE SHOULD HAVE CONFIDENCE THAT [Text stricken: THE] RESTRUCTURING OF THE PETROLEUM INDUSTRY WILL RESULT IN A MORE EFFICIENT [Text stricken: ENERGY] INDUSTRY.

[Handwritten addition: The 3 recent deals, were caused Getty-Gulf-Superior—for either one reason or another—a large stockholders losing confidence in management—just cashing out—movement from weak management to strong management hands—the influence of a disappointing dry hole—Mukluck—Eng. Vs. Geologist contribute to the changes—all important to the process—some more important than others.]

F. THERE HAS BEEN SOME OPPOSITION TO RESTRUCTURING, [Text stricken: PARTICULARLY] BY A FEW MEMBERS OF CONGRESS.

G. HOWEVER, I BELIEVE THAT THIS OPPOSITION STEMS FROM A BASIC MISUNDERSTANDING OF THE INDUSTRY AND THE REASONS FOR RESTRUCTURING.

H. I’D LIKE TO BRIEFLY REVIEW [Text stricken: WITH YOU] WHY RESTRUCTURING IS TAKING PLACE AND HOW THIS WILL AFFECT THE INDUSTRY, THE NATION AND CONSUMERS.

III. THE OIL BUSINESS IS SOMETIMES DIFFICULT TO UNDERSTAND BECAUSE IT IS UNIQUE IN MANY WAYS.

[Text stricken: A.] THE TECHNOLOGY AND ECONOMICS OF THE PETROLEUM INDUSTRY ARE VERY COMPLEX.

[Text stricken: B.] [Text stricken: BUT] [Handwritten addition: However,] THERE’S AN EVEN MORE FUNDAMENTAL PART OF THE OIL BUSINESS THAT MANY PEOPLE,—INCLUDING SOME OIL EXECUTIVES, [Text stricken: I’M AFRAID]—FAIL TO COMPREHEND.

C. THE PETROLEUM INDUSTRY FACES A UNIQUE SITUATION BECAUSE IT MANAGES DEPLETABLE ASSETS—RESERVES OF OIL AND GAS.

          1. THOSE RESERVES REPRESENT THE SHAREHOLDERS’ ASSETS, AND IF THEY ARE DEPLETED AND NOT REPLACED, [Text stricken: THEN] THE SHAREHOLDERS’ [Text stricken: ASSET BASE IS BEING ERODED.] [Text stricken: [Handwritten addition: Has seen]] [Handwritten addition: their primary asset disappear.]

          2. SO IT IS IMPERATIVE THAT OIL COMPANIES REPLACE THE OIL AND GAS THEY PRODUCE [Text stricken: THROUGH] [Handwritten addition: either by] EXPLORATION OR ACQUISITION.

[Handwritten addition: And, there are problems in both methods—cost of finding for exploration & how do we protect the added reserves from acquisition.]

[Handwritten addition: There is plenty of money in the industry to either approach.]

D. THE OTHER UNIQUE FEATURE OF THE PETROLEUM INDUSTRY IS THAT [Text stricken: IT HAS] [Handwritten addition: we have] A DOMESTIC RESERVE LIFE INDEX OF LESS THAN 10 YEARS.

          1. THAT MEANS [Text stricken: , AND THIS IS A VERY SIMPLISTIC EXPLANATION, THAT IF THIS COUNTRY WERE TO] [Handwritten addition: if we stopped drilling and we] CONTINUE PRODUCING [Text stricken: ITS] [Handwritten addition: our] OIL AT THE CURRENT RATE, [Text stricken: ALL OF OUR OIL AND GAS] [Handwritten addition: our] RESERVES WOULD BE GONE IN LESS THAN 10 YEARS.

E. THOSE TWO FEATURES PRESENT THE OIL INDUSTRY WITH A DIFFERENT SET OF PROBLEMS THAN MOST INDUSTRIES FACE AND, UNDER CURRENT CONDITIONS, URGENCY TO RESTRUCTURE.

F. I SAY URGENCY BECAUSE [Text stricken: THE FACT IS THAT] THIS NATION’S PETROLEUM RESOURCES ARE BEING PRODUCED FASTER THAN THEY CAN BE REPLACED. [Text stricken: [Handwritten addition: and]] [Handwritten addition: this been going on for 15 years.]

[Handwritten addition: Again the industry is very strong from a cash flow standpoint but very limited on investment opportunity—this will cause very exciting periods for the oil industry.]

IV. SOME SEGMENTS OF THE INDUSTRY ARE HAVING A MORE DIFFICULT TIME REPLACING [Handwritten addition: reserves] THAN OTHERS.

A. FOR INSTANCE, IN 1982—WHICH IS THE LAST YEAR FOR WHICH DATA IS CURRENTLY AVAILABLE—THE MAJOR OIL AND GAS COMPANIES REPLACED ONLY 63% OF THEIR COMBINED EQUIVALENT PRODUCTION.

B. THE INDEPENDENT PRODUCERS, ON THE OTHER HAND, REPLACED 108% OF PRODUCTION ON A COMBINED EQUIVALENT BASIS IN 1982.

C. I’VE ONLY GIVEN [Text stricken: YOU] [Handwritten addition: the] 1982 FIGURES, BUT THE RESERVE REPLACEMENT PROBLEM GOES BACK MUCH FURTHER.

D. SINCE 1970, THE DOMESTIC RESERVE BASE HAS BEEN STEADILY DECLINING.

E. PRUDHOE BAY, WHICH WAS DISCOVERED IN 1968, WAS THE LAST BIG ADDITION TO THE U.S. RESERVE BASE AND IT ADDED 9.6 BILLION BARRELS.

V. WHY CAN’T THE INDUSTRY FIND SIGNIFICANT NEW RESERVES?

A. THE PROBLEM IS FINDING ECONOMICAL[Handwritten addition: ly] [Handwritten addition: feasible] [Text stricken: DRILLING] PROSPECTS[Text stricken: .] [Handwritten addition: to drill.]

B. WE’VE DISCOVERED THE INEXPENSIVE OIL IN THE UNITED STATES. [Handwritten addition: years ago]

C. [Text stricken: WE’RE NOW LOOKING FOR HYDROCARBONS THAT COST MORE TO FIND AND PRODUCE.]

[Handwritten addition: Very simply, our finding costs are too high as an industry—the USA is a high cost producer. For example, today in LA Times—Unocal wants $2.7 billion in price support $67 per bbl, more than double the current $29 per bbl. It is a disaster without government support.]

VI. WE RECENTLY CONDUCTED AN INTERNAL STUDY AT MESA THAT COMPARED THE DOMESTIC EXPLORATION BUDGETS OF 300 PUBLIC [Handwritten addition: owned] OIL AND GAS COMPANIES [Text stricken: TO] [Handwritten addition: and] THE RESERVES FOUND[Handwritten addition: .] [Text stricken: WITH THAT MONEY.]

A. THE TIME-FRAME FOR THIS STUDY WAS FROM 1980 TO 1982.

B. WHAT WE [Text stricken: DISCOVERED] [Handwritten addition: found] WAS THAT OVER THE THREE YEAR PERIOD, THESE 300 COMPANIES SPENT $166 BILLION FOR DRILLING AND FOUND RESERVES WORTH $109 BILLION.

C. IN OTHER WORDS, THEY RECEIVED 66 CENTS [Handwritten addition: in value] FOR EACH DOLLAR THEY SPENT.

[Handwritten addition: This won’t work—limited investment opportunity for exploration—why not acquire it does make more sense.]

VII. [Text stricken: THAT POINT ILLUSTRATES WHY COMPANIES ARE LOOKING AT ACQUIRING RESERVES.]

A. [Text stricken: IT MAY BE THE BEST INVESTMENT FOR THEIR CAPITAL.]

B. [Text stricken: CHARLES T.] [Handwritten addition: Charlie] MAXWELL OF [Text stricken: CYRUS] [Handwritten addition: C.]. . .LAWRENCE SPOKE [Text stricken: TO THAT] [Handwritten addition: on the] SUBJECT VERY WELL RECENTLY IN A PIECE ENTITLED, “WHO GAINS AND WHO LOSES FROM BIG OIL MERGERS.”

C. “DIFFERENT COMPANIES HAVE DIFFERENT FINDING COSTS. WE ARE CONTENT TO LET THOSE MANAGEMENTS THAT CAN BRING NEW OIL SUPPLIES ONSTREAM AT THE LOW END OF THE RANGE OF COSTS DO THEIR SUPERIOR THING. FOR THOSE WHICH CANNOT, IT MAY BE IN THE PUBLIC INTEREST THAT THEY BUY RESERVES FROM THOSE WHO CAN, AND STOP WASTING THEIR SHAREHOLDERS’ AND THE PUBLIC’S MONEY ON A FRUITLESS HIGH-COST PURSUIT.”

D. MAXWELL ALSO POINTS OUT THAT THIS LINE OF REASONING ISN’T ANYTHING NEW.

          1. IT COMES DIRECTLY FROM ADAM SMITH’S WEALTH OF NATIONS, PUBLISHED IN THE LATE 1700s.

VIII. PUTTING THE SHAREHOLDERS’ MONEY TO THE BEST USE IS MORE THAN ECONOMIC THEORY AT MESA—IT’S OUR PRIMARY PURPOSE.

A. [Text stricken: AND] THAT’S WHY WE HAVE REFOCUSED OUR EXPLORATION EMPHASIS ON OIL PROSPECTS AND WHY WE’VE DEVELOPED A NEW DIMENSION TO OUR BUSINESS, WHAT [Text stricken: YOU MIGHT CALL] [Handwritten addition: has been referred to as] A MERCHANT BANKING DEPARTMENT.

B. WE HAVE THE IN-HOUSE SKILL TO ASSESS UNDERVALUED ASSETS IN THE [Text stricken: MARKETPLACE.] [Handwritten addition: oil industry. We also know the managements of these companies (this is an important factor.)]

C. OUR PHILOSOPHY IS THAT THE SHAREHOLDER COMES FIRST, AND IT IS MANAGEMENT’S RESPONSIBILITY TO EXPLORE ALL POSSIBILITIES FOR ENHANCING THE SHAREHOLDERS’ INVESTMENT.

D. IT IS MY BELIEF THAT THIS SAME ATTITUDE MUST BECOME AN INDUSTRY STANDARD IF THE OIL AND GAS BUSINESS IS TO THRIVE IN THE FUTURE.

E. PETROLEUM COMPANIES HAVE AN OBLIGATION—FIRST—TO THEIR SHAREHOLDERS BECAUSE THEY OWN THE COMPANY.

F. IF THE SHAREHOLDERS’ ASSETS ARE BEING ERODED THROUGH THE CONTINUED DEPLETION AND NON-REPLACEMENT OF RESERVES, THEN MANAGEMENTS MUST LOOK AT [Text stricken: THE OTHER WAYS] [Handwritten addition: alternatives] TO ENHANCE THE SHAREHOLDERS’ RETURN.

IX. RESTRUCTURING IS THE FREE ENTERPRISE SYSTEM’S WAY OF IMPROVING EFFICIENCY IN THE PETROLEUM INDUSTRY.

A. IT’S MY OPINION THAT THE INDUSTRY WILL LOOK COMPLETELY DIFFERENT 5 YEARS FROM NOW.

B. AND THE NEW STRUCTURE OF THE INDUSTRY WILL BE MORE ACCEPTABLE TO SHAREHOLDERS, CONSUMERS AND THE GOVERNMENT.

[Text stricken: [Handwritten addition: Thank you.]]

[Text stricken: [Handwritten addition: Work in “right caliber” job.]]

[Text stricken: [Handwritten addition: 13.2 billion—6.5b—26—400,000 stockholders.]]

[Text stricken: [Handwritten addition: FTC—10.1%-5.8%.]]