James Kinnear

“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 deepwater discoveries and these kinds of things,” says James T. Kinnear, former president and CEO of Texaco Inc.

Solving global energy issues requires collaboration from industries and governments on a number of levels. In an exclusive interview, James Kinnear, former president and chief executive officer of Texaco, and currently a Saudi Aramco board member, shares thoughts about energy security and energy independence for the U.S., the roles countries such as India, China, Brazil and Saudi Arabia play in conventional fossil fuel development, and the prospects for diverse sources of energy.

Kinnear headed Texaco from January 1987 to April 1993, and was executive vice president from 1978 to 1983. He has been a director of Saudi Arabian Oil Co. since August 2007.

Investor: Energy security has been a key question in U.S. public policy circles since the early 1970s. What is your perspective on this long-standing issue?

Kinnear: 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. I am in favor of raising the CAFE (corporate average fuel economy) 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—first, it’s not going to happen, and second, I don’t think it’s the right course of action.

But, I believe that taking a strong and positive set of actions in the Middle East is one of the best things the U.S. could do. We’re starting to do it, and I certainly favor improving our dialogue with the Middle East.

Investor: How can the U.S. 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 solar energy in certain parts of the world for certain particular uses could be 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 we should be doing.

The world seems to have an unusually rosy outlook on natural gas. I am not so sure that it should be used solely as a transportation fuel. 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, 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. 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 U.S. is going to come from fossil fuels.

Investor: We still describe “foreign oil” as including oil imports from Canada and Mexico—should this definition change, much like oil sands were once not counted as “proven reserves?”

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 U.S. balance of payments.

Saudi Arabia’s imports into the U.S. are actually down. There are two reasons. One is that U.S. oil consumption has actually gone down over the past year. The second thing is that the growing market for Saudi Arabia is the Far East. More of their oil is going to the Far East and less to Europe and the U.S. 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.

Investor: Refining margins seem to be under increased pressure. What is your outlook?

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 225,000 to about 600,000 barrels per day) and I might point out, the best refinery in the U.S. But one of the interesting things about the Motiva expansion is its improving CO2 footprint. The amount of CO2 emissions per unit of charge stock is going to be among the lowest in the U.S. 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 U.S. So that kind of thing is good.

Investor: Much has been made about our relations with Saudi Arabia, and the Middle East—how do you see that core oil and trade relationship evolving? What can we do 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 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 very important. I am glad Sen. (George) Mitchell is out there working, and the Obama administration seems to be taking this issue to heart. I am applauding these efforts.

Investor: 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?

Kinnear: Obviously, the growth rate in petroleum consumption is higher outside the U.S., for the most part, than it is inside the U.S. There is a lot of fossil fuel around the world. I don’t see a shortage.

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 deepwater 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 U.S. 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 U.S. 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.

Investor: 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 economically when perhaps that wasn’t true in the past. The same comments apply to deepwater production. When I retired from Texaco, we had the deepest well in the world—Green Canyon 184—in 1,800 feet of water. Today, Chevron is producing in 7,000-plus feet of water and making money doing it. These things change.

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. Gas is going to be one of the major fuels of the future. I think 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.

Investor: 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.

Do you get a real environmental improvement by replacing some of the diesel that is used in the big semi-trailers by methane? It is something that should be studied.

Investor: What about offshore Brazil? There has been a lot of discussion in the past couple of years about the promise and potential there of the pre-salt.

Kinnear: 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.

Investor: 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 a lot of stuff that we could do that would make our automotive fleet more efficient and use less gasoline per mile. 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.

Investor: 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 comprehensive 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 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.

Investor: Is there something further you’d like to mention?

Kinnear: 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- to 2 million barrels of oil per day. At the moment, they have surplus capacity of about 4 million barrels per day. It is the existence of this surplus 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. 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.

They have done a good job. I was out in Khurais Field in February. That is a brand-new, 1.2-million-barrels-per-day field that Saudi Aramco has just brought onstream all at one time. Nobody has ever done that. It was a US$7-billion project, and it works.

Investor: 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 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 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.