In an exclusive interview with FUEL magazine, James Kinnear, former president and chief executive officer of Texaco and Saudi Aramco board member, shared some of his experiences and thoughts about energy security and energy independence for the United States. He also discussed his views of the roles countries such as India, China, Brazil and Saudi Arabia play when considering the use of conventional fossil fuel vs. diverse sources of energy, including natural gas and solar energy.
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James Kinnear, former president, chief executive officer, Texaco and Saudi Aramco board member |
FUEL: ‘Energy security’ has been a key question in U.S. public policy circles since the early 1970s. You have seen this issue evolve over the years of your extended career, and dealt directly with it as president and chief executive officer of Texaco. Can you share your thoughts on this long-standing public policy issue?
James Kinnear, former president, chief executive officer, Texaco: Obviously I favor, as an American citizen, energy security. However, one of the phrases that you hear a lot in Washington is ‘energy independence.’ I don’t believe the two phrases are necessarily synonymous because the world is an increasingly competitive place. We have to keep our energy costs in this country not higher, or not greatly higher, than they are in the rest of the world. Cutting ourselves off from – for example, as many politicians talk about – the Middle East doesn’t make an awful lot of sense. I believe in diversity of supply from around the world. I believe very, very strongly in conservation. I believe that motorcars can be made more efficient with existing technology today. I am in favor of raising the CAFE standards. I am certainly in favor of doing research on biofuels and solar power. But, the idea that we’re going to do this in order to isolate ourselves from the rest of the world: a) it’s not going to happen; and b) I don’t think it’s the right course of action for the United States. But, I believe that taking a strong and positive set of actions in the Middle East is one of the best things the United States could do. We’re starting to do it, and I certainly favor improving our dialogue with the Middle East.
FUEL: How can the United States best add to its energy diversity options – what resources should receive the most focus for cost-effective, diversity expansion?
Kinnear: We can talk about diversity of supply from various countries that crude oil comes from, and then we can talk about diversity of various sources of energy. For example, I think that solar energy in certain parts of the world for certain particular uses could be very, very important. I believe that biofuels may become important. I don’t think that ethanol is necessarily cost effective, but that doesn’t mean we shouldn’t be doing research on ethanol and other biofuels. Certainly, research on photovoltaic and concentrated solar is something that we should be doing.
We’re going to talk a little bit about natural gas. The world seems to have an unusually rosy outlook on natural gas. I am not so sure that natural gas should be used solely as transportation fuel. The reason I think that is if you replace gasoline with it, you’re replacing one relatively clean fuel with another relatively clean fuel. Perhaps you could replace a certain amount of diesel with it. But, if you’re really interested in cleaning the environment, really serious about it, you would put natural gas – to the extent it is available – under boilers and replace coal with it. That gives you the biggest bang for the buck. It has political ramifications of course, but I suppose everything has political ramifications. Natural gas is going to play a very big part in the energy diversity of the future. So, what do I look for? I look for natural gas; I look for nuclear; I look for biofuels. I know, however, that for the next 20 years, over 80% of the energy in the United States is going to come from fossil fuels. So I think we should not turn our back on them, we should spend our money on trying to figure out how we can make them better and how we can use less of them through conservation.
FUEL: We still describe ‘foreign oil’ to include oil imports from Canada and Mexico – should this definition change, much like oil sands were once not counted as ‘proven reserves’ from the country of Canada?
Kinnear: Well, it’s all ‘imported oil.’ I’m not sure that characterizing it as Middle East oil being bad and Canadian oil being good necessarily moves the ball forward. It is all imported oil from the point of view of the United States’ balance of payments. So, I’m not sure that by changing that definition you’ve really changed anything. As a practical matter, you will see that the Saudi Arabia imports into the United States are actually down. There are two reasons for that. One of them is that U.S. oil consumption is actually down over the last year. That’s the first thing. The second thing is that the growing market for Saudi Arabia is in the Far East. More of their oil is going to the Far East and less to Europe and the United States. If you look at the map, obviously you get a better netback by shipping it east than you do west, simply saving in transportation costs.
FUEL: U.S. strategy on offshore oil access is evolving – positive steps are being made. Given your experience on this issue, what do you think about the potential resource in the Atlantic Basin, and the deep waters of the Gulf Coast?
Kinnear: You know, I am an old oil man. The way you have to answer that question is: you never know until you drill a well. Certainly our success in the Gulf and the deep water has been rather spectacular. But, I’m not going to opine on whether the oil is there. The whole nature of our business is that you do all the seismic and geological studies that you can, but at the end of the day, you’ve got to go out there and drill a well.
FUEL: Refining margins seem to be under increased pressure. What is your outlook for that aspect of the industry?
Kinnear: Over many, many years, refining has not been a high margin earner in the oil business. On the other hand, we had some very good years. Now margins are quite low. There has been a tremendous amount of refinery capacity that has been built and is being built around the world. What that really tells you is that over a period of time, some of the older and less efficient plants are going to have to be shut down. I really do look for a consolidation and a weeding-out in the refining industry. In the big Motiva refinery at Port Arthur, Texas – Shell and Saudi Aramco are making a major investment. It is going to be the biggest (basically doubling its capacity from 225- to about 600,000 b/d) and I might point out, the best refinery in the United States. But one of the interesting things about the Motiva expansion is its improving CO2 [carbon dioxide] footprint. The amount of CO2 emissions per unit of charge stock is going to be among the lowest in the United States. So, spending this money and coming up with a very efficient plant – even under the poor economics we have today – you are going to see a plant that is going to be tremendously important in the energy situation in the United States. So that kind of thing is good. I do think you are going to see some of the less efficient refineries shut down.
FUEL: Much has been made about our relations with Saudi Arabia, and the Middle East – how do you see that core oil and trade relationship with the United States evolving? What can we do in the United States to improve common understandings about culture, trade and global economics?
Kinnear: I just think we have to keep on talking to them. I think Saudi Arabia has been, and is certainly now, a great ally of ours. They have been our friends for a long period of time. I think we should spend more time talking with them. I know that the U.S. Secretary of State [Hillary Rodham Clinton] went there and met with the King [Abdullah bin Abdul-Aziz] – I thought that was a great thing to do. I think that continual dialogue with Saudi Arabia, and not treating them as outcasts in this world, is a very important thing to do. I am glad that Sen. [George] Mitchell is out there working, and the [President Barack Obama] administration seems to be taking this issue to heart. I am glad that it does, and I am applauding these efforts.
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Texaco Headquarters, Harrison, N.Y., 1992 (Photo courtesy of James Kinnear’s office) |
FUEL: With the growth of India and China, and even Brazil, the demand for future crude oil and refined products will grow outside the traditional regions of North America and Europe. What impact will this have on global relations, economic strength, overall trade and sustainability for those countries?
Kinnear: Obviously the growth rate in petroleum consumption is higher outside the United States, for the most part, than it is inside the United States. There is a lot of fossil fuel around the world. I don’t see a shortage. I think that as the price of oil or fossil fuels rises in real terms, you will see things drawn into the mix that are not now used – the heavy crude oils, the tar sands, the very deep-water discoveries and these kinds of things. I do believe there is a significant amount of fossil fuel out there yet to be used. That doesn’t mean there isn’t going to be competition for the least-costly materials; certainly there is. As I pointed out, this is a competitive world, and the United States is a major economy – still the biggest in the world. We can’t afford to have a significantly higher energy cost than do our competitors. You have to remember that this is a competitive world – this is something that when I talk publicly, I keep leaning on. Yes, I think there will be a lot of oil out there. We have to keep our United States’ eyes on it so that we’re getting oil that really is economic for the success of our investment program in this country and for the success in keeping jobs in this country.
FUEL: Shale gas has become such a new supply and growth factor in North America. What about other parts of the world – do similar deposits exist? What is the overall outlook for natural gas; and do you see a role for gas in the transportation fuels market?
Kinnear: I don’t want to comment at length on that because I am not completely familiar with it. I understand there is some shale in Europe, but I am really not your expert on this subject. This is, again, one of the products of technology. As you will remember over the years, I am very much in favor – and very much aware of – the constant move and improvements of technology. This shale gas, we’ve known about it for a long time. Today, with horizontal drilling and high-pressure fracturing, we can produce it (and produce it economically) when perhaps that wasn’t true in the past. The same comments apply to deep-water production. When I retired from Texaco, we had the deepest well in the world – Green Canyon 184 – in 1,800ft [549m]
of water. Today, Chevron is producing in 7,000-plus ft [2,135-plus m] of water and making money doing it. These things change. But, now when you look at natural gas, there is a tremendous amount of natural gas in Qatar, we – Chevron – have a tremendous amount of natural gas in Western Australia. There is a lot of natural gas in the world. I think that gas is going to be one of the major fuels of the future. I think that shale gas has some environmental and political problems – as everything does – but it will be a major piece of the world’s diversification and energy growth platform.
FUEL: Can you expand on your previous comments regarding replacing some diesel with natural gas?
Kinnear: Diesel is certainly not as clean a fuel as gasoline. You’ve got a lot fewer automobiles and trucks that you need to do something with when you look at the use of diesel engines on the highways. I think that is something we ought to take a look at. Do you get a real environmental improvement by replacing some of the diesel that is used in the big semi-trailers by methane? I think it is something that should be studied. I haven’t studied it extensively. I don’t know everything about the economics, but I think it is something we should take a closer look at.
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In 1993, a Texaco service station in Port Chester, N.Y., sells gasoline for about US$2 less than the U.S. average retail price of nearly $3 for regular unleaded gasoline at press time. (Photo courtesy of James Kinnear’s office) |
FUEL: What about offshore Brazil? There has been a lot of discussion in the past couple of years about the promise and potential there of pre-salt. What is your thinking about those potential reserves?
Kinnear: I am really not an expert on that. I know that it is deep; I know that it is under the salt, and I have the impression that there is quite a lot of oil there. It is going to take a good price and a lot of brave people to go out there and develop it. But, I think that is a major resource for the future.
FUEL: What about transportation auto technologies? They seem to be improving rapidly.
Kinnear: Absolutely, I believe that hybrid cars are a good thing; and I think smaller engines are a good thing. I think smaller, lighter cars are a good thing. Aerodynamic improvements for our automobiles are also a good thing. There’s lot of stuff that we could do that would make our automotive fleet more efficient and use less gasoline per mile. Now, that doesn’t mean people are going to drive fewer miles – but, on the other hand – they will use less gasoline per mile.
FUEL: What are your thoughts about what we will see in future automobiles as it relates to improved mileage from conventional vehicles, evolving battery technologies and lower emissions? One of the things you were involved in with Corning was trying to improve cold-start emissions? Even with a small battery, a 40-mile [64-km] range, they are going to substantially reduce cold-start emissions.
Kinnear: Yes, because 30% to 50% of the pollution out of a car occurs in the first 30 seconds of operation. Until that catalytic converter gets up to about 600°F [315°C] it really doesn’t oxidize the unburned hydrocarbon. So, this is an area of opportunity. Now, Detroit has made some impressive progress. I think there is certainly more progress to be made.
I do favor the hybrids. The pure electric cars have to get their electricity from someplace – and you don’t see that discussed much. The other thing about them is that you also wonder about what happens to the highway tax. Most of the external economics of electronic cars just gets left alone in the policy debates.
FUEL: We welcome any final comments you have, Jim, about improving better understanding between industry and governments as well as international nations. Isn’t it true that we are indeed ‘all in this together’ – and each technology and each molecule can make a contribution in satisfying our compreh-ensive global needs for sustainability and future energy production?
Kinnear: Well, if there were a button to push, I would push it because I certainly agree that there should be better communication between industry, the U.S. government and global governments on these particular issues. I do think this administration understands the problems in the Middle East and is spending more time working on them. I think that is very, very important to us. I would like to see ways that the oil industry and the automotive industry could sit down with the government and explain some of the things that are really going on. You will recall that about 20 years ago we had the comprehensive oil-auto research program. Working together, we were trying to come up with the best combination of fuels and automobile technology for the American public. I think that is still an issue that can be improved upon. I believe that more continued cooperation with the oil industry, auto industry and government is essential for our overall success.
FUEL: Two final points: one about recovery rates on the traditional fields. I know that is an area where great progress has been made. What can we expect, worldwide and in Saudi Arabia, as technology advances in recovery per well drilled?
Kinnear: I think there is a tremendous opportunity there. About two-thirds of the oil we’ve ever found is still in the ground. In Saudi Arabia, we recover about one-half of the oil originally in place through advanced drilling techniques and salt-water injection. These are water drive reservoirs, and we’ve started water flooding very early. In Bakersfield, California, we have a recovery factor of about 50%. Worldwide, industry-wide, it is not that high. I do believe that there is a significant opportunity here. It has to do with research, and it has to do with, obviously, the price of oil in real terms. Reservoir management is an area that Saudi Aramco is really focusing on. They are spending multiple billions in research and development. They believe that eventually they can get the recovery factor up to 75% in Saudi Arabia.
FUEL: Thank you, Jim. Is there something further you’d like to mention as a wrap up to this interview that we haven’t discussed?
Kinnear: Well, I think we’ve covered the areas that I think are important pretty well. But, there is one other point I should make to you. We were talking about Saudi Arabia. You know, Saudi Arabia, as a matter of national policy, keeps surplus crude oil producing capacity. Their general policy is to maintain a surplus of 1.5 million to 2 million b/d. At the moment, they have surplus capacity of about 4 million b/d. It is the existence of this surplus producing capacity that tends to stabilize oil supply around the world. The mere fact that it is there is of great benefit to the economies of the world. I think this is an issue that a lot of people do not understand. Keeping spare crude oil production capacity is extremely expensive – but the Saudis do it. They are happy to do it. They believe that the world is getting the benefit out of it – and I agree with them.
I was out in the Khurais field in February. That is a brand-new 1.2-million-b/d field that Saudi Aramco has just brought on stream all at one time. Nobody in the history of the world has ever done that. It was a US$7 billion project and it works. Saudi Aramco is really very good at these big projects. Actually, they are excellent at them.
Frederick L. Potter can be reached at +1 703-891-4801 or fpotter@hartenergy.com
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