market solutions to the U.S. refining industry’s energy challenges

Remarks by Rex W. Tillerson
Chairman and CEO, Exxon Mobil Corporation
National Petrochemical and Refiners Association
March 21, 2006

 

I want to thank Bob Slaughter and the National Petrochemical and Refiners Association for the invitation to speak to you this morning. Founded in 1902, NPRA is nearly as old as our industry – and has served us well throughout its history. 

Under Bob’s leadership, it has provided crucial support on issues that matter most, and I am confident it will continue to do so well into the future.

 

Global Energy Challenges
We gather today in Salt Lake City as leaders of a vitally important industry at a time of tremendous global challenge. Today, I’d like to speak to those challenges and to the role the U.S. refining industry – operating in a free, open and competitive marketplace – can and must play in meeting them.

The petroleum products we deliver are essential to the lives and livelihoods of Americans. Ready access to clean, affordable energy has been a foundation of our nation’s economic success, an engine of tremendous job creation, and a vital part of Americans achieving their dreams. 

Continuing to provide Americans with the energy they need requires that our industry tackle the challenges on the horizon. Chief among them are growing product demand and ever-changing environmental expectations.

The International Energy Agency anticipates that, in just 25 years, energy demand worldwide will increase by almost 50 percent. That is an enormous figure, especially when you consider that already we consume 40,000 gallons of oil every second. In the short time it takes me to deliver this speech, Americans alone will consume nearly 9 million gallons. 

Most of the increase in energy demand will come from the developing world.  But product needs in this country are also expected to grow, albeit at a more modest rate – about 1 percent over each of the next 10 years. As such, the U.S. refining industry will also need to continue to expand our capacity to meet this growing domestic need.

In addition to the demand challenge, we face an environmental challenge. 

Ever-changing standards for our product qualities and for emissions at our facilities profoundly shape our business.  Developing and implementing economic ways to limit emissions from the refining and use of our products – sulfur and carbon dioxide in particular – is not just a matter of compliance, but a matter of competitiveness.

 

A Record of Accomplishment
In confronting these challenges, we build upon a proud record of accomplishment. At a time when our industry is under intense criticism, this record is worth recalling. 

Simply put, the U.S. refining and supply system is the most sophisticated and effective in the world.  

To meet Americans’ growing demand, we have consistently grown our refining capacity. In the case of ExxonMobil, through expansions at our existing refineries, my company has added the equivalent of 3 average-sized refineries in the last ten years. Our industry as a whole – all of you -- has added the equivalent of 14 new refineries since 1995. 

And over the last 25 years, the industry’s total throughput has increased by 27 percent – despite a 50 percent reduction in the number of refineries. Our industry is providing more fuel to Americans with fewer refineries.

As we have expanded refining capacity, we have also built the world’s highest levels of conversion capacity. In North America, we are capable of converting around 90 percent of crude and feedstocks into light products and petrochemicals. 

In addition, the U.S. refining industry’s feedstock flexibility is unparalleled. We process more heavy, high sulfur crudes than any region in the world, and we ran crudes of varying qualities from over 35 countries last year, reflecting the U.S. refining complex’s capability to receive crude from diverse supply sources, providing greater security and mitigation against potential periodic crude oil supply disruption.

We have also developed and deployed new technologies to improve our performance to the benefit of American consumers. Catalysis is a prime example. Catalyst technology has not only enabled us to greatly reduce sulfur levels in fuels, but it has also enabled us to increase our yields of light products. This has produced enormous benefits for consumers in the form of greater quantities of cleaner fuels. 

Finally, our industry is tapping attractive import channels to best meet demand. In 2004, the United States imported on average over 3 million barrels a day of petroleum products, ranging from gasoline to asphalt. 

High conversion levels, superior feedstock flexibility, new technologies, and open trade channels have not only allowed us to meet Americans’ demands, but to do so in an economic manner. The U.S. refining industry has a strong record of making petroleum products accessible and affordable to our consumers.

We also have a strong environmental record. Environmental expectations in the United States have risen over time – and U.S. refiners have consistently risen to the challenge. 

We have reduced the average sulfur content in gasoline by more than 90 percent to less than 30 parts per million. A new car today, running on new low-sulfur gasoline and equipped with the most advanced emissions technology, has 97 percent less emissions than a new vehicle had in 1970.

We have also shown steady progress in reducing stationary source emissions from our refineries. In ExxonMobil’s case, we have cut our emissions by nearly a half since the early 1990's, and we will do the same again by the end of this decade. This is even more impressive when you consider our significant increase in throughput during this period.

In addition, our industry is responding to the new ethanol mandate. We are working hard to make our blending of ethanol more widespread, and we are committed to overcome the significant logistical and distribution challenges the transition involves. These challenges are especially acute as the annual driving season approaches.

Too often, these achievements – and the hardworking men and women in our industry behind them – do not get the recognition they deserve.

Day in and day out, our industry is laboring behind the scenes to deliver clean fuel to the pump, performing countless technical, logistical, engineering, managerial and financial tasks in an effective, efficient and environmentally-sound way.

And this superior system has directly benefited our consumers by consistently providing ample, affordable, clean, secure energy supplies to meet their growing needs.

 

Competition a Key to Success
What drives this performance?  First and foremost, it is the free, open and highly competitive marketplace in which we operate.

Our industry is more competitive today than it has ever been, and American consumers are the beneficiaries.

You see this intense competition in our increased production rates... in our high rates of capacity utilization… in the greater efficiencies we have achieved over time.

According to the American Petroleum Institute, the cost to refine, distribute and retail gasoline in 1980 averaged about 99 cents per gallon in inflation-adjusted terms. By 2005, that margin was cut in half, to 48 cents per gallon.

These results would only have occurred in a highly-competitive marketplace. 

 

The Challenges Ahead
Building on our record of accomplishment, the U.S. refining industry is well-positioned to help meet the future energy challenges we face.

Moderate U.S. demand growth will require changes in capacity. This capacity will come from multiple sources. Expansion of existing refineries and new capacity additions, many of which have been recently announced, are a primary means. 

Supported by mandates and subsidies, biofuels will supplement these sources. 

In addition, imports will remain an important part of our nation’s future product supply.

In the past, we have delivered the needed capacity through these various means. And if markets are permitted to determine the most economic, cost effective mix of these sources, I am confident we will meet the needed capacity in the future.

A second challenge we face is meeting our nation’s expectations for cleaner air and water. 

It is especially acute for our industry now, as we adapt our operations to meet a cascade of new regulations, including New Source Review reforms, low sulfur diesel regulations and renewable fuels mandates. 

Meeting this challenge in the future requires constructive engagement between our industry and local, state and federal government agencies. 

It requires that regulations reflect sound science… use rigorous cost-benefit analysis… are based on performance… and allow adequate lead time to implement.

And a good place to start would be rationalizing the some 20 grades of boutique fuels.

Solutions to the environmental challenge, like the demand challenge, must reflect market realities if they are to be economic and sustainable. 

 

Staying on the Path of Competitive Markets
In helping meet our nation’s future energy challenges, the path forward for the U.S. refining industry is clear. It is the path we have successfully followed in the past, and it is the only way forward towards future success. It is the path of market-based competition.

Markets are the best means of ensuring the proper mix of energy sources are made available to meet Americans growing product demands.

And markets are the best means of determining how to effectively implement changing environmental standards.

These benefits, however, are being questioned, as policymakers and regulators consider new subsidies, mandates, controls and even punitive taxes.

These measures would only increase costs and reduce supplies for American consumers over the long run by interfering with market demand signals crucial to determining the proper market supply response. And they would undermine the ability of American consumers to compete in the global marketplace.

The history of our industry is littered with the waste and negative impacts of government attempts to interfere with the efficient workings of the market.

Take a look at the impacts of price controls and crude allocations in the 1970’s.

These policies led to gasoline lines for consumers and inefficient refining operations. This became clear when the controls were lifted and many small, inefficient refineries promptly went out of business. This led to the efficient growth of capacity I described earlier.

Or take a look at the windfall profits taxes of the early 1980’s, When the federal government targeted energy companies with this punitive tax, it drained $79 billion in industry revenues that could have been used to invest in new oil and gas production, according to the Congressional Research Service. As a result, as many as 1.6 billion fewer barrels of oil were produced domestically.  

I know of no example in our industry when government intervention has produced a long-term benefit to the American consumer. 

To avoid a repeat of this history, we must continue to actively exchange ideas, information and analysis with the policymakers and regulators who shape the market in which we operate.

We must better explain the benefit to American consumers of competitive markets… of responsible environmental regulation… of stable and predictable investment environments.

And we must explain these facts not just as companies, but as an industry.  The National Petrochemical and Refiners Association offers a powerful collective voice with considerable influence. When we speak with one voice, we can have a significant impact.

Our nation faces many energy challenges, and these challenges are growing. We can never forget that the U.S. refining industry must lead the way in providing solutions. 

Through market-based competition, we can continue to provide American consumers with the adequate, affordable, clean and secure fuels and products they deserve. And I am confident we will. 

Thank you.