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REMARKS TO FORTUNE CORPORATE COMMUNICATIONS SEMINAR
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I’VE BEEN ASKED TO TALK TODAY ABOUT THE RESTRUCTURING PROCESS OCCURRING IN THE PETROLEUM INDUSTRY. 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.
RESTRUCTURING IS HAPPENING BECAUSE OF THE WAY OUR ECONOMY AND MARKETS OPERATE. 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 OUR SYSTEM WORKING. FREE MARKET FORCES ARE DICTATING WHAT IS HAPPENING TO OUR INDUSTRY. AND IF WE TRULY BELIEVE IN THE FREE ENTERPRISE SYSTEM, THEN WE SHOULD HAVE CONFIDENCE THAT RESTRUCTURING WILL RESULT IN A MORE EFFICIENT PETROLEUM INDUSTRY.
THERE HAS BEEN SOME OPPOSITION TO RESTRUCTURING IN CONGRESS. HOWEVER, I BELIEVE THAT THIS OPPOSITION STEMS FROM A BASIC MISUNDERSTANDING OF THE INDUSTRY AND THE REASONS FOR RESTRUCTURING. I’D LIKE TO BRIEFLY REVIEW WHY RESTRUCTURING IS TAKING PLACE AND HOW THIS WILL AFFECT THE INDUSTRY, THE NATION AND CONSUMERS.
THE OIL BUSINESS IS SOMETIMES DIFFICULT TO UNDERSTAND BECAUSE IT IS UNIQUE IN MANY WAYS. THE TECHNOLOGY AND ECONOMICS OF THE INDUSTRY ARE VERY COMPLEX. HOWEVER, THERE’S AN EVEN MORE FUNDAMENTAL PART OF THE OIL BUSINESS THAT MANY PEOPLE, INCLUDING SOME OIL EXECUTIVES, FAIL TO COMPREHEND.
THE PETROLEUM INDUSTRY FACES A UNIQUE SITUATION BECAUSE IT MANAGES DEPLETABLE ASSETS—RESERVES OF OIL AND GAS. THOSE RESERVES REPRESENT THE SHAREHOLDERS’ ASSETS, AND IF THEY ARE DEPLETED AND NOT REPLACED, THE SHAREHOLDERS SEE THEIR PRIMARY ASSET DISAPPEAR. SO IT IS IMPERATIVE THAT OIL COMPANIES REPLACE THE OIL AND GAS THEY PRODUCE EITHER BY EXPLORATION OR ACQUISITION.
ANOTHER UNIQUE FEATURE OF THE INDUSTRY IS THAT IT HAS A DOMESTIC RESERVE LIFE INDEX OF LESS THAN 10 YEARS. THAT MEANS IF DRILLING STOPPED AND PRODUCTION OF OIL CONTINUED AT THE CURRENT RATE, THE NATION’S RESERVES WOULD BE GONE IN LESS THAN 10 YEARS.
THOSE TWO FEATURES, DEPLETABLE ASSETS AND A LIMITED INVENTORY, PRESENT A DIFFERENT SET OF PROBLEMS THAN MOST INDUSTRIES FACE AND, UNDER CURRENT CONDITIONS, CREATE AN URGENCY TO RESTRUCTURE. . .I SAY URGENCY BECAUSE THIS NATION’S PETROLEUM RESOURCES ARE BEING PRODUCED FASTER THAN THEY CAN BE REPLACED. THIS HAS BEEN GOING ON FOR 15 YEARS. AGAIN, THE INDUSTRY IS VERY STRONG FROM A CASH FLOW STANDPOINT BUT VERY LIMITED ON THE NUMBER OF ECONOMIC PROSPECTS OR INVESTMENT OPPORTUNITY.
SOME SEGMENTS OF THE INDUSTRY ARE HAVING A MORE DIFFICULT TIME REPLACING RESERVES THAN OTHERS. 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. THE INDEPENDENT PRODUCERS, ON THE OTHER HAND, REPLACED 1081 OF PRODUCTION ON A COMBINED EQUIVALENT BASIS IN 1982. I’VE ONLY GIVEN THE 1982 FIGURES, BUT THE RESERVE REPLACEMENT PROBLEM GOES BACK MUCH FURTHER. SINCE 1970, THE DOMESTIC RESERVE BASE HAS BEEN STEADILY DECLINING. 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.
WHY CAN’T THE INDUSTRY FIND SIGNIFICANT NEW RESERVES? THE PROBLEM IS FINDING ECONOMICALLY FEASIBLE PROSPECTS TO DRILL. WE DISCOVERED THE INEXPENSIVE OIL IN THE UNITED STATES YEARS AGO. TODAY, OUR FINDING COSTS ARE T00 HIGH RELATIVE TO PRICES AND DEMAND. RELATIVE TO THE MIDDLE EAST NATIONS, THE UNITED STATES IS A HIGH COST PRODUCER IN A WORLD OF OVERSUPPLY.
WE RECENTLY CONDUCTED AN INTERNAL STUDY AT MESA THAT COMPARED THE DOMESTIC EXPLORATION BUDGETS OF 300 PUBLIC OWNED OIL AND GAS COMPANIES AND THE RESERVES FOUND. THE TIME FRAME FOR THIS STUDY WAS FROM 1980 TO 1982, OVER THE THREE-YEAR PERIOD, THESE 300
COMPANIES SPENT $166 BILLION FOR DRILLING AND FOUND RESERVES WORTH $109 BILLION. IN OTHER WORDS, THEY RECEIVED 66 CENTS IN VALUE FOR EACH DOLLAR THEY SPENT. THAT ILLUSTRATES THE LIMITED INVESTMENT OPPORTUNITY PROBLEM AND WHY SOME COMPANIES ARE ACQUIRING RESERVES.
CHARLIE MAXWELL OF C.J. LAWRENCE SPOKE ON THE SUBJECT RECENTLY IN A PIECE ENTITLED, “WHO GAINS AND WHO LOSES FROM BIG OIL MERGERS.” HE SAID, “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.”
MAXWELL ALSO POINTS OUT THAT THIS LINE OF REASONING ISN’T ANYTHING NEW. IT COMES DIRECTLY FROM ADAM SMITH’S WEALTH OF NATIONS, PUBLISHED IN THE LATE 1700s.
PUTTING THE SHAREHOLDERS’ MONEY TO THE BEST USE IS MORE THAN ECONOMIC THEORY AT MESA. IT’S OUR PRIMARY PURPOSE. [Text stricken: THAT’S WHY WE HAVE REFUSED OUR EXPLORATION EMPHASIS ON OIL PROSPECTS AND WHY WE’VE DEVELOPED A NEW DIMENSION TO OUR BUSINESS, WHAT HAS BEEN REFERRED TO AS A MERCHANT BANKING DEPARTMENT. WE HAVE THE IN-HOUSE SKILL TO ASSESS UNDERVALUED ASSETS IN THE OIL INDUSTRY.]
OUR PHILOSOPHY IS THAT THE SHAREHOLDER COMES FIRST, AND IT IS MANAGEMENT’S RESPONSIBILITY TO EXPLORE ALL POSSIBILITIES FOR ENHANCING THE SHAREHOLDERS’ INVESTMENT. 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. PETROLEUM COMPANIES HAVE AN OBLIGATION TO THEIR SHAREHOLDERS BECAUSE THEY OWN THE COMPANY. IF THE SHAREHOLDERS’ ASSETS ARE BEING ERODED THROUGH THE CONTINUED DEPLETION AND NON-REPLACEMENT OF RESERVES, THEN MANAGEMENTS MUST LOOK AT ALTERNATIVES TO ENHANCE THE SHAREHOLDERS’ RETURN.
RESTRUCTURING IS THE FREE ENTERPRISE SYSTEM’S WAY OF IMPROVING EFFICIENCY IN THE PETROLEUM INDUSTRY. IT’S MY OPINION THAT THE INDUSTRY WILL LOOK COMPLETELY DIFFERENT FIVE YEARS FROM NOW. AND THE NEW STRUCTURE WILL BE MORE ACCEPTABLE TO SHAREHOLDERS, CONSUMERS AND THE GOVERNMENT.