managing economic and environmental risks through integrated energy solutions

Remarks by Michael J. Dolan
Senior Vice President, Exxon Mobil Corporation
CERAWeek
Keynote Plenary
February 10, 2009

Good afternoon. Thank you, Dan [Yergin]. I appreciate the opportunity to be here today and to share some perspectives from ExxonMobil on the theme of this year’s CERA Week: “Risk and the Rebuilding of Confidence.”

During this challenging economic period, the importance of effective risk management is obvious, and the role the energy industry must play in managing risk and helping rebuild economic confidence is paramount.

The importance of energy policies that encourage investment, reduce risks, and focus on the long term is equally clear. I would like to discuss each of these subjects in turn.

Importance of Risk Management
The energy industry has a long history of managing risk effectively – for the simple reason that it is essential to our survival. Each day, energy companies manage a variety of risks – operational risks, technological risks as well as risks related to project investments and the ups and downs of commodity prices. The fact that these risks go largely unnoticed by consumers is a testament to our industry’s success and reliability.

Since July 2008, crude oil has dropped in value from a record of nearly $150 a barrel to the current level around $40. Few industries could weather such a steep and sudden decline in the value of their core commodity. The fact that our industry is managing this volatility testifies to our long-term planning and effective risk management.

The energy industry is not only weathering the downturn, it remains a source of strength for the U.S. and for the world economy. We continue to provide affordable energy to consumers around the globe, while also generating billions in government revenues and shareholder returns.

ExxonMobil, for example, had total tax expenses of nearly $65 billion in the United States between 2002 and 2007, exceeding our U.S. earnings by almost $20 billion during that time. And for the same five-year period, our dividends and share-buyback programs put nearly $118 billion into the hands of pension-holders and investors, the great majority of whom are in the United States.

Our industry also supports nearly six million jobs in the United States alone. We are also a major employer and investor in human capital in operations around the world.

These facts – combined with our ongoing investments in new energy sources and new technologies – make it clear that a healthy energy sector will be critical to re-igniting economic growth.

The Energy Challenge
Apart from managing our business through swings in commodity prices, we must also focus on the dual energy challenge facing the world over the long-term – meeting increased global energy demand while reducing the growth in greenhouse-gas emissions.

Despite the current economic downturn, global energy demand is expected to increase 35 percent by the year 2030 as compared to 2005, even with substantial energy efficiency gains. During this same period, energy-related carbon-dioxide emissions are expected to rise by almost 30 percent – rising primarily in developing nations where populations and economies are growing the most rapidly.

To help put this potential new demand in perspective, consider the scale of China’s development. Today, China has one car or light-duty vehicle for every 100 citizens. In contrast, here in the United States, we have 78 cars or light-duty vehicles for every 100 citizens.

Similarly, per-capita electricity use in China is only one-seventh that of the United States.

Keeping these figures in mind, it is easy to see why continued economic growth in developing countries will lead to steep increases in global vehicle ownership and in electricity use – and consequently, increased energy demand and growth in CO₂ emissions.

Thus, we face both economic and environmental challenges as we work to find and produce reliable, affordable energy. To do this and reduce emissions growth will mean our industry must continue to pursue an integrated set of solutions.

Integrated solutions are solutions that, when taken together will help us develop new supplies of energy from all economic sources … accelerate gains in the efficient use of energy … and develop and deploy new technologies to curb greenhouse-gas emissions.

Reaching these goals will require governments around the world to provide stable and predictable policy frameworks to minimize risks, encourage investment, spur innovation, and let competitive markets drive solutions.

Integrated Solutions
One critical element of this integrated approach is to pursue all economic and environmentally responsible means to develop new energy sources and reduce emissions – both in the short term and over the long term. This includes increasing energy efficiency and progressing energy technologies through both incremental and breakthrough advances.

At ExxonMobil, we believe in applying this integrated approach to our own operations first. For example, our Global Energy Management System is one of our most important near-term solutions. This initiative helps identify potential energy efficiencies, which allows us to use resources more wisely and to reduce emissions in our downstream and chemical operations.

ExxonMobil began this energy efficiency effort by tapping knowledge from our operations around the globe. We looked at every link in the energy value chain; we documented best practices, and then applied those lessons to our operations worldwide.

Each day, as part of this initiative, we track more than 12,000 energy variables. And thanks to this effort we have identified $1.5 billion in potential efficiency savings since the year 2000, approximately 60 percent of which have been captured to date.

Another example of where we are finding near-term solutions is in our effort to increase production of lower-sulfur diesel, so we can supply a cleaner product. In December, we announced that we are spending more than $1 billion to increase diesel production at three refineries in Texas, Louisiana and Belgium. Diesel fuel demand is projected to grow about three percent a year in developed countries – and will be even higher in developing countries. With our expansions we are taking steps to help meet this growing demand.

ExxonMobil is also working with others to develop integrated solutions that, in the near term, could bring more efficient consumer use of energy in the transportation sector.

For many years, we have been collaborating with automakers and engine manufacturers to develop new, energy-saving technologies that can power a new generation of vehicles.

One development is a new technology called Homogeneous Charge Compression Ignition, which combines the best features of gasoline- and diesel-powered engines. Gasoline engines featuring this technology achieve ignition through compression, like a diesel engine, increasing the efficiency of combustion. The results could be up to 30 percent better fuel economy and lower emissions.

We are also working with tire manufacturers, where together, we have developed a new tire-lining technology that uses up to 80 percent less material in the manufacturing process, making tires lighter and keeping them properly inflated longer. A car with under-inflated tires burns up an extra tank of gasoline every year.

Another particularly productive area of innovation in our near-term efforts to improve consumer use of energy has been in vehicle-battery technologies. In 2007, we introduced new battery separator films, developed by our petrochemical company, for lithium-ion battery systems. These films have the potential to improve the energy efficiency and affordability of next-generation hybrid and electric vehicles. If just 10 percent of the light-duty vehicles in the United States were hybrids, fuel savings and related carbon-dioxide reductions would be the equivalent of taking five million cars off the road.

Near-term energy improvements are important, but not enough. At ExxonMobil we are also actively focused on finding integrated solutions for the long term.

ExxonMobil is working on long-term solutions that could be transformative in the transportation sector. Our scientists and engineers are collaborating with their peers from other industries on a potential breakthrough technology that could advance the use of hydrogen fuel cells. This new technology, called On-Board Hydrogen Generation, has been under development for more than a decade and will be applied first to industrial vehicles.

This technology converts traditional hydrocarbon fuels into hydrogen directly on-board a vehicle, eliminating the need for separate production and distribution facilities for hydrogen. Measured on a “well-to-wheels” basis, the On-Board Hydrogen Generation system could be up to 80 percent more fuel-efficient, and emit 45 percent less carbon dioxide, than today’s automobiles.

Another potential innovation that could have a significant impact on carbon dioxide emissions is carbon capture and storage.

ExxonMobil is already participating in one of the best-known and longest-running CCS sites in the world – at the Sleipner Field in Norway. As part of this effort, we have worked on the capture and geologic storage of more than one million metric tons of carbon dioxide each year since 1998.

In the United States, we are advancing a new technology for producing natural gas called “Controlled Freeze Zone,” which could also have important carbon capture and storage applications.

Controlled Freeze Zone is a single-step cryogenic separation process that freezes out and then melts the carbon dioxide and removes other impurities found in sour gas. The high-pressure liquid stream of carbon dioxide could then be injected underground, where it could be safely stored, or re-used for deployment in reservoir management to enhance oil recovery.

Such technology has enormous potential, and we have committed more than $100 million to complete development and testing of this technology at a demonstration project in Wyoming.

It is important to remember, however, that gains in efficiency and technology occur over time. Research, development, and deployment in the energy field are often measured in decades, not years. Dramatic changes do not happen overnight, due to the sheer complexity of the technologies we develop and the enormous scale of the global energy market. Technological transformation takes time.

The history of energy over the last century helps put such transformation into perspective. For example, it is estimated that at the beginning of the 20th century, coal and wood provided more than 95 percent of the world’s energy needs. From that point, it took more than half a century for petroleum – a cleaner and more versatile alternative – to surpass coal as the world’s largest energy source. It took nearly 50 more years to develop the technologies and build the global infrastructure so that natural gas, an even cleaner-burning source, could play a sizable role in the world’s energy mix.

In the months ahead, it will be critical for our industry to discuss the long timeframes inherent to our business – and advocate support for energy policies that allow for the long-term planning and investments that can open up new supplies and encourage technological development.

At ExxonMobil, we are committed to the sustained and disciplined investment needed to make a difference to the energy challenge over the decades to come. And we are continuing to invest today in new energy supplies, increased energy efficiency and new energy technologies despite the current economic downturn.

That is our record. Over the past 25 years, ExxonMobil has invested more than $380 billion worldwide in future energy development – which is more than our total earnings during that same period. And since 2004 alone, we have invested more than $1.5 billion in activities to reduce greenhouse-gas emissions and improve energy efficiency, with plans to spend at least half-a-billion dollars more on additional energy efficiency initiatives over the next few years.

Minimizing Policy Risk
To continue making these needed long-term investments during both good times and bad, we depend on a stable and predictable legal, tax and regulatory framework. In providing this framework – and resisting the urge to micromanage markets – governments can play a constructive and necessary role in helping industry meet the world’s energy and environmental challenges.

It is ultimately a question of risk. Policies that increase risks for industry are likely to decrease needed investments. Policies that reduce risks are likely to increase long-term investment and expand the availability of reliable, affordable energy that is essential to our economic progress.

One example of this is in the area of policy options to reduce greenhouse-gas emissions. There are many proposals under consideration, but one policy option we believe is preferable: a revenue-neutral carbon tax. A carbon tax can provide the transparency, the administrative simplicity and the regulatory predictability we need to achieve our shared environmental goals.

To put it another way: A carbon tax reduces policy risks for businesses and investors in a way that cap-and-trade schemes do not. In addition, by reducing other taxes – such as income or excise taxes – we can make a carbon tax revenue neutral and offset the impact of higher taxes on the economy.

In short, a carbon tax is better positioned than cap-and-trade as a policy option to help us meet our aspirational goal of reducing the growth of greenhouse-gas emissions – without introducing the uncertainty of new financial intermediaries, the volatility of fluctuating prices or the complexity of vast, new bureaucratic agencies.

By reaching out to inform the public on these policy options and by working together with policymakers, we can ensure that our energy policies provide the long-term stability our industry needs to do what we do best: manage risk and provide energy to the world. With a positive policy and investment climate in place, we can continue to pioneer solutions that power our economy, increase energy efficiency and curb greenhouse-gas emissions.

Conclusion
As we go forward, our industry has an additional opportunity.

We can provide confidence in the midst of the current economic weakness and financial uncertainty. For more than a century, our industry has managed significant risks – through ups and downs, business booms and commodity busts. We know there are opportunities and ideas yet to be discovered. And with the help of sound and stable government policies, we know from experience that our industry will be an important source of strength for re-igniting economic growth and building a better future for all.

Thank you very much.