*** Cheney: ". . . the Middle East . . . is the prize" -- and now you know why we invaded Iraq and why we will not leave

*** Cheney, Autumn 1999:

Speech at the Institute of Petroleum,


?Thank you very much for that welcome and that introduction. I am delighted
to be back in London today and have an opportunity to spend some time with
all of you. To hear that resume reciting all ol my political background and
experience, of course oftentimes people say that work in the oil industry is
not really sort at an uppercrust kind of organisation and I say. ?Yeah, but
I used to be a Congressman and it?s clearly a step up for me to go from the
political world to the world of the oil and gas industry, I?m often asked
why I left politics and went to Halliburton and I explain that I reached the
point where I was mean-spirited, short-tempered and intolerant of those who
disagreed with me and they said ? Hell, you?d make a great CEO?, so I went
to Texas and joined the private sector. But I am delighted to be here and I
want to try to avoid, I understand last year when Sheikh Yamani spoke that
he was rather pessimistic about the outlook for oil prices and the ability
of OPEC to arrive at a price level and maintain it over time and I?m not
sure that it?s fair to come back a year later and second-guess and I hope a
year from now people won?t do that to me in terms of the forecasts I?m going
to make, but I do want to talk about the outlook, certainly from the
perspective of Halliburton, how we look at what may occur here in the future
and let me say at the outset that I am unreasonably optimistic about our
industry.

From the standpoint of the oil industry obviously and I?ll talk a little
later on about gas, but obviously for over a hundred years we as an industry
have had to deal with the pesky problem that once you find oil and pump it
out of the ground you?ve got to turn around and find more or go out of
business. Producing oil is obviously a self-depleting activity. Every year
you?ve got to find and develop reserves equal to your output just to stand
still, just to stay even. This is true for companies as well in the broader
economic sense as it is for the world. A new merged company like
Exxon-Mobile will have to secure over a billion and a half barrels of new
oil equivalent reserves every year just to replace existing production. It?s
like making one hundred per cent interest discovery in another major field
of some five hundred million barrels equivalent every four months or finding
two Hibernias a year. For the world as a whole, oil companies are expected
to keep finding and developing enough oil to offset our seventy one million
plus barrel a day of oil depletion, but also to meet new demand.

By some estimates there will be an average of two per cent annual growth in
global oil demand over the years ahead along with conservatively a three per
cent natural decline in production from existing reserves. That means by
2010 we will need on the order of an additional fifty million barrels a day.
So where is the oil going to come from? Governments and the national oil
companies are obviously controlling about ninety per cent of the assets. Oil
remains fundamentally a government business. While many regions of the world
offer great oil opportunities, the Middle East with two thirds of the world?s
oil and the lowest cost, is still where the prize ultimately lies, even
though companies are anxious lor greater access there, progress continues to
be slow. It is true that technology, privatisation and the opening up of a
number of countries have created many new opportunities in areas around the
world for various oil companies, but looking back to the early 1990?s,
expectations were that significant amounts ol the world?s new resources
would come from such areas as the former Soviet Union and from China. Of
course that didn?t turn out quite as expected. Instead it turned out to be
deep water successes that yielded the bonanza of the 1990?s.

A fundamental challenge for companies is to do more than replace reserves
and production. The trick obviously is also to replace earnings. For most
companies the majority of their profits come from core areas, that is areas
where they have significant investments, economies of scale and large
license areas locked up, but many of these core areas are now mature and it
can be difficult to replace the earnings from the high margin barrels there.
Some of the oil being developed in new areas is obviously very high cost and
low margin. Companies that are finding it difficult to create new core areas
through exploration are turning to production deals where they can develop
reserves that are already known, but where the country doesn´t have the
capital or the technology to exploit them. In production deals there is less
exploration risk but dealing with above ground political risk and commercial
and environmental risk are increasing challenges . These include civil
strife, transportation routes, labour issues, fiscal terms, sometimes even
US-imposed economic sanctions. Many companies are more comfortable dealing
with the below ground risk like drilling and reservoir performance than they
are with the above ground political risks.

The other major element that it is changing is the nature of competition.
One of the biggest questions is what the competitive field will look like in
the new industry after this current wave of consolidation in the oil
business. Clearly the main driver behind the biggest mergers are the cost
savings that are anticipated as a result of economies of scale.
Concentration and critical mass are clearly keys to success. There are also
cases where difficulty in sustaining and growing the companies as led
management to offer the firm to a bigger player. In the world-wide
competition for capital, there are imperatives for size and scale. Larger
companies tend to have the highest credit ratings and therefore the lowest
borrowing coats, but they also tend to have higher multiples in the stock
market. The share price premium becomes a valuable currency for take-overs.
They also have stronger financial staying power to undertake the larger
projects and to ride out the lean periods. The result of all this
consolidation is that now four out ot the five largest oil and gas companies
by market value are European. For oil companies I do not believe that the
bigger is better model is the only viable one. While Halliburton has
certainly grown bigger through its merger with Dresser and other key
acquisitions, this made sense in part because it gave our company both a
broader array of services and also greater depth in products and services.
For oil companies I see four basic typee of firms that I think will survive
and prosper in the new environment.

First, we will obviously have the super majors, but they have to be careful
to avoid the dragdown of facts and the distractions of physically merging,
plus the danger of becoming limbering giants. I think there is a good chance
they will avoid becoming bloated bureaucracies because they are very focused
on delivering cost saving synergies for their shareholders. The second type
of survivor will be those companies that have dominance in a region or a
market. These integrated companies may not be in the top five globally, but
they will be number one or number two in their respective markets. This
gives them the critical mass and concentration to compete and win on their
turf, Rapsol VPF is an example of this type of company; number one in Iberia
and the southern corner of Latin America and very profitable. A third model
for competing in the new century is that of what I would call the super
independents. These are firms that focus on one line of business but have
sufficient scale to have several core areas of material size where they can
go head to head with anyone. These combine the advantages of a super major
wfth the agility of an independent. A common element in these three classes
of firms will be critical mass and concentration. A fourth category of
survivor in the new competitive world will be what I call niche players who
can prosper off the properties that the bigger firms dont want or because of
the very special circumstances they find. Those in the special players will
obviously have to compete somewhat below the radar screen ot the more
dominant companies. The immense portfolio restructuring that we think likes
ahead in the wake of the recent large mergers should create opportunities
for competitors to strengthen their positions. New aggregators are likely to
emerge which, together with a lot of the brain drain from staff cuts at the
majors, could well provide the bigger companies with unexpectedly strong
competition in the decade ahead. In many ways the traditional role of oil
companies are changing. Increasingly we are seeing international oil and gas
companies concentrating on managing investment, financial, commercial and
political risk or above ground risk, while service companies are managing
technical, completion and operating risk. Meanwhile, national oil companies
are focused on managing their country?s national interest and its resources
and in the domestic markets. This is part of the new resource rationalism of
the 1990?s. NOC?s may own the resources, but when it is in the national
interest to bring in outsiders to help develop them, they do so. Venezuela
obviously is a clear example of what I would define as the new resource
nationalism. Some NOC?s are still looking outside their own borders, but I
expect that in the future the emphasis may well be closer to home. NOC?s can
focus on becoming regionally dominant players, leveraging off their strong
domestic base to move into neighbouring countries. This will occur where
there are links and synergies with their home business, not just going
global for its own sake. I think Petrobras in Brazil may be an example of
this in Latin America.

People ask about the future role for OPEC. Certainly the organisation
represents companies that have a vast amount of oil reserves and it has held
together for over a quarter of a century already. OPEC have shown the
ability for crisis management every time oil prices have dropped to single
digit levels, but the group may ultimately bring about its own undoing if it
shoots for too high a level for oil prices. As observers point out, in the
long run, this effectively underwrites higher cost oil exploration and
development around the world all at the same time, limiting demand growth
below what it might otherwise be. Nonetheless, I believe most of us in the
Industry have welcomed the restraint in the leadership shown by OPEC in
recent months and the improved outlook for the international oil markets. I
know I am pleased with the leadership provided by Saudi Arabia, Mexico and
Venezuela and in the long run I think the world will be best served, and the
consumer best served as well as producers, by stable prices at reasonable
levels. The oil industry will become more integrated in the new century but
not necessarily in the traditional sense of link ups between producers and
refiners. The new integration will bring together new capabilities, skills,
technology and risk management to create synergies that add value. From my
perspective in the oil service industry I see an integrated role for us in
helping to manage certain technical risk, leaving oil companies to retain
control but focus on investment decisions, commercial and political risk and
financial risk. Oil companies probably spend the most and make the lowest
returns on the actual development and operation of their assets. It is here
in the middle of the opportunity chain where service companies can add the
most value on the below ground aspects of the operation. Service companies
can assist oil companies in making knowledge based value added decisions and
implementing them quickly; through this type of integration oil companies
can better leverage their skills and resources to maximise value, focusing
on their core competencies. For NOC?s, working with service companies can
make use of the best technical expertise available world-wide, whilst still
retaining control and managing the state?s interest in its own natural
resources. Service companies are becoming more integrated themselves
oftentimes offering integrated solutions.
Let me say a word or two about the impact of technology in the new century.
Clearly technology has revolutionised the oil business in the last decade
with rapid advances in data interpretation, reservoir management, enhanced
oil recovery, directional drilling and deep water operations and the pace of
advancement is accelerating. The oil industry is saddled with this image
problem as a polluting manufacturing industry when in reality it has become
a knowledge based business. The application of technology and information
processing is remarkable. Our success as a company and as an industry will
depend even more heavily in the future on our ability to develop and deploy
new technology.

Let me say a word, if I can, about natural gas because we think there will
be tremendous growth occurring in this area in the years ahead. In terms of
the North American natural gas market, we are consciously bullish over the
next five years and beyond. The demand side has plenty of up side and gas is
likely to grab a greater share of US energy consumption in the decade ahead.
Virtually all new US power plants are likely to be gas fired and residential
penetration is growing fast as well. On the supply side, onshore gas outputs
should be weaker and this means that the demand gap will need to be met by
perhaps double digit growth rates and Canadian imports and various
significant increases in production out of the Gulf of Mexico. The industry
will need to get busy bringing on new production facilities and pipelines
systems to meet these needs. Deep water gas, obviously, will have a very
important role to play.

There are a number of factors which we believe will drive the growing role
tor gas on a global basis. The environment, obviously, will be a key driver
in the natural gas business in the new century as there is increasing
opposition to so called ?dirty fuels? like coal and high sulphur fuel oil.
Gas is the preferred fuel for power generation. There are continuing
technological innovations in gas for power generation, combined psycho
plants, greatly increased output efficiency. Gas to liquids is in the
threshold of commercial success. There is growing demand in emerging markets
like China, India and Brazil. For international oil and gas companies, gas
is increasingly a key element of the E and P portfolios - oil becomes more
difficult to replace while gas reserves and production will grow. Another
reason natural gas will have a huge role in the next century is that the
world?s gas resources are obviously vast. The Middle East and Africa have
over one hundred year?s supply of gas reserves at current low usage levels
and the former Soviet Union and Latin America have gas reserve to production
ratios which should last over seventy years. Even estimates of proved gas
reserves understate the volumes involved, since there is plenty of gas still
to be found and many existing discoveries have not been booked, usually due
to the difficulty of getting gas to market. As companies find more gas, they
need to find ways to monitise the remote fields, developing stranded gas
often entails new risk involved in building a new market to use the gas. The
three main options for moving this gas to market are pipelines, liquefied
natural gas and now gas to liquids. The world will get more and more
connected with gas pipelines in the new century as high strength steel and
automated equipment allow pipelines to become economical over long
distances. In LNG new markets will fundamentally alter the nature of the
business. The days of the twenty year take or pay contracts and top drawer
buyer credit ratings like Tokyo Electric are over. New buyers will be local
power generators in places like India and Turkey. Credit worthiness of new
buyers, contracts lengths and base floor prices will be under pressure,
introducing new risk. New structures will be needed to share the risk in
building the new markets amongst all the participants: producers, consumers,
governments and project managers. The long waiting list of green field and
LNG expansion projects may signal market limitations for LNG, problems for
putting together new projects are due in part to economic slow down in Asia.
LNG producers are facing greater competition and lower returns and they may
need to look at investing down the gas chain and re-gasification and power
as well. Long term, there are innovations on the way such as power
generation synergies with re-gasificatlon, cost reductions and smaller scale
projects that could permit floating LNG terminals.

An alternative to LNG as a means of monitising gas reserves is gas to
liquids, or GTL which serves a completely different market. This is a well
established process for turning low value gas into high value, ultra clean,
refined products that are easily transportable meeting the coming demand for
green fuels. With a huge world market for refined products, gas to liquids
is much more flexible than pipeline of LNG projects which require rigid
contracts and offtake commitments. GTL products can be exported
inexpensively on product tankers and distributed through existing
infrastructures. The appeal of gas to liquids is that there is no
exploration risk as with oil, no market risk as there is when trying to open
up new areas to gas. The remaining hurdle has been the economics, but while
the conventional wisdom is that gas to liquids viability is still a way off,
there are commercial projects on the way right now that have attractive
rates of return with the right tax incentives and when viewed as part of a
larger strategy. For example, Chevron and Sasol?s plant Escravos GTL plant
in Nigeria is the enabler that permits things such as more gas processing
with associated liquids productions, lubes and an ethylene plant. The
project, together with Shell?s rebuilding of the MDS plant in Bintulu
Malaysia, and projects in Cutter and elsewhere show that GTL?s time is
finally arriving. The viability of gas to liquids will be further enhanced
through incremental improvements and radical technology breakthroughs in
areas such as process, catalyst and reactor technology leading to lower
costs, increased efficiency and greater scale and this could herald a
revolutionary new era for the international gas industry.

Companies are looking at all the sectors: gas transmission, gas
distribution, gas trading, power generation, electric utilities, even
electricity trading. Some think the opportunities are in owning the
infrastructure, while others see the preferred role in the merchant banking
function in the energy business, especially trading and providing financial
instruments. Still, others think the key is in having the customers and
cross selling services. In some instances, gas and electric utilities facing
the loss of monopoly positions want to diversify into higher growth,
unregulated businesses like oil and gas. For the other side, oil and gas
companies may seek the earnings stability of an utility business that can
broaden or integrate their business. These new businesses could cushion the
earnings volatility of the petroleum side of the business, for example one
of the companies whose earnings held up the best in 1998 during the oil
price downturn was Rapsol due to its stable income from Gas Natural. In any
event, gas and power will be of growing importance in the portfolios of many
energy companies with new forms of integration and this has the potential to
expose companies to new and unfamiliar risk. Firms have a lot to learn about
electricity price risk and spark spreads. In addition to new risk there will
be new competition. Major players may include names likes CMS, AHS, Duke
Energy, Reliant, Dominion Resources etc. In the minds of many, the energy
business is becoming a commodity business whether it`s oil or gas or
kilowatts. I think that in many ways it is also a service industry and in
any event, on the product side, one has to concede that these are
nonetheless unique commodities. Oil is unique in that it is so strategic in
nature. We are not talking about soapflakes or leisurewear here. Energy is
truly fundamental to the world?s economy. The Gulf War was a reflection of
that reality. The degree of government involvement also makes oil a unique
commodity. This is true in both the overwhelming control of oil resources by
national oil companies and governments as well as in the consuming nations
where oil products are heavily taxed and regulated. Essentially, the
petroleum industry deals with extreme risk and with billions of dollars on
the line.

Oil is produced in distant lands as a result of huge risk and enormous
capital outlays, it is transported over vast distances, refined in expansive
refineries with very heavy outlays required to protect the environment and
to comply with strict and expensive regulations, distributed through a wide
network of pipelines, trucks and wholesale outlets and sold at stations in
prime locations and taxed heavily. It is the basic, fundamental building
block of the world?s economy. It is unlike any other commodity. The oil and
gas industry provides essential goods at the lowest possible cost with
regular reliability while still ensuring a cleaner environment and the
industry provides security of supply even though at the same time we are
required to manage huge political risk. What we do isn´t always approbated
by the public and this is part of our industry?s image problem that we need
to work on in the next century. Frankly the focus in today?s economy on
globalisation and emerging markets is old news to the oil industry. Ours are
global companies investing outside the industrialised companies at the turn
of the last century. People need to realise that the energy industry often
represents the largest foreign investment in many parts of the world and its
interest, insights and experience need to be considered. Oil is the only
large industry whose leverage has not been all that effective in the
political arena. Textiles, electronics, agriculture all seem oftentimes to
be more influential. Our constituency is not only oilmen from Louisiana and
Texas, but software writers in Massachusetts and specially steel producers
in Pennsylvania. I am struck that this industry is so strong technically and
financially yet not as politically successful or influential as are often
smaller industries. We need to earn credibility to have our views heard.

Another concern is the disruptive volatility of the industry. In the new
century the oil business needs to learn how to break out of the boom and
bust cycles we have experienced over the last century. Perhaps it is part of
being a commodity business, but it wreaks havoc with planning processes and
can drive smaller companies out of business and, needless to say, creates
problems for consumers as well. One hope might be that the new super majors
would use their financial staying power to keep capital spending steady
throughout the cycle or even to invest counter-cyclically. This would help
smooth out the bumps and of course the financial community could do its part
by taking a longer view of financial performance and not pressuring sound
companies to cut back during periods of weakness, however unlikely.
Technology can help smooth out the cycles by lowering costs. A key challenge
for companies in the commodity business is growth and there are basically
only two avenues to grow earnings: one is through increasing volume and the
other is through improved unit efficiencies. These two options have been
driving company strategies. On the volume side we can see the aggressive
production targets that some companies have announced of late. On the unit
efficiency side we have the cost cutting targets most firms announced for
1999 and beyond, as well as the mergers designed to generate savings through
synergies, economies of scale and reduction in overheads. The view is that
in the commodity business the lowest cost producer will be the winner.

In the last century and up to World War Two coal was king end looks to have
a lock as the primary source of energy. It was dethroned by oil, mostly due
to transportation fuels, but also because oil was less polluting and easier
to handle. Coal is still with us today, but oil is clearly dominant. In the
new century, will the oil age give way to another source of energy or to new
technologies? Some predict natural gas will erode oil?s performance, others
say that technology, fuel cells, telecommuting on the Internet or some other
breakthrough will lessen our dependence on hydrocarbons. Well, the end of
the oil era is not here yet, but changes are afoot and the industry must be
ready to adapt to the new century and to the transformations that lie ahead.
It will mean showing more speed and agility. As I have outlined today, there
are new areas to co-operate in, new risk, new competition, new roles, new
integration end a new convergence with power. This will be a challenging
environment as we cross the threshold into the new millennium. You don´t
hear our times referred to as the Space Ago anymore, instead it´s the
Information Age. You will notice they call it the Information Age, not the
Knowledge Age. Well, I would conclude today by saying that this industry
must be at the forefront of moving into the Knowledge Age. Successful
competitors will be those that best manage knowledge. This means technology,
expertise, best practices, country, market and competitor intelligence and
opportunity assessment. These will be the hallmarks of the energy industry
in the new century. I for one am proud to be a part of the industry and I am
optimistic about our future in the coming century.

Thank you.? - Applause.

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