America’s oil giants are unparalleled in their power, complexity, and centrality to the American standard of life. With 30-year time horizons and international ties that go back decades, they see the world differently than virtually any other entity, public or private. Recently, I had a chance to sit down with John Watson, Chevron’s CEO, for a wide-ranging conversation. The following has been edited for length and clarity.
Henry Blodget: Ten years ago, nobody was breathing the possibility that the United States would become the world’s No. 1 energy producer. How did that happen?

John Watson: Our industry tends to be viewed as static because the end product doesn’t change very much. It’s gasoline you put in your tank. But we’re really a technology industry that produces oil. It’s a very innovative business. There are a number of players, very big and very small, and they’re constantly innovating, constantly competing.

So I think there’s a tendency to underestimate the incentive that is out there to innovate and do things in a different way. Hydraulic fracturing is not new, directional drilling is not new, but putting them together the way that some of the innovators in our industry did — and it wasn’t my company. A number of small entrepreneurs, some of them down to their last nickel, literally, were looking for a way to try to develop resources. And so that innovation, and the incentive that the marketplace provides, has fostered this environment. And it’s happened in many ways. Shale is the most visible and surprising. But when I joined the company in 1980, a couple of hundred feet of water was deep water. Now we’re doing work in 10,000 feet of water. Tremendous advancements in technology have taken place.

HB: And two or three years ago, all you heard was ‘peak oil’ in certain circles. Who is right? Are we going to run out, or is it infinite?

JW: There’s plenty of oil in the world. The limitation on producing oil and gas is not the amount of oil and gas in the earth. It’s the technology you apply get it out, the fiscal terms that are in place, the stability of the governments in place. And a variety of other above-ground risks, security amongst other things, that limit what can be produced and developed. In the United States, despite some restrictions, we have an environment in which the private sector has been allowed to innovate and develop resources. All the increase in production has taken place on private lands. Not on public lands. Not every country has that. Not every country has rule of law. There is a limit at some point [to the availability of oil in the world], but we’re a long way from it.

HB: The other thing that happened in the last year or two is that we’ve gone from people believing we’re in an era of $US100-plus oil and suddenly it was cut in half, $US50 a barrel. Why didn’t anybody see that coming?

JW: That’s a good question! We’ve been introspective about that ourselves. In one sense, we should have seen it. I’ve been at Chevron for 35 years, and this is the fifth time I’ve seen a 50% or more reduction. So why didn’t we see this one? I think the answer is that if you go back a year or so, supply and demand was in reasonable balance. Then the world economy slowed a little bit, a little bit more production came on from Iraq and Libya. Shale started producing a little better and you got out of balance.

What happens in our business is in general you put a lot of money in and then you produce. And if you misgauge that and you’re producing too much, literally prices can fall to cash costs. But if you’ve already made the investment, you’re going to keep producing. The operating cost to keep something running can be very low.

So it really amounts to a very steep supply-and-demand curve where once you get out of balance, prices can rise fast and they can fall fast. And typically in the past, OPEC or the Saudis would step in and make some production cuts. They have chosen not to do that. They have chosen that because their market share has gone from 50% 30 years ago to a third, OPEC as a whole. So they have chosen not to do that, so natural market forces are going to have to work. It will happen in due course, and the debate is how fast it will happen and where it will settle out when they rise.

HB: What’s Chevron’s best guess over the next few years? Are we staying at $US50, back to $US70, way over $US100 again?

JW: Well, remember I was the one that wasn’t able to predict the last decline? (Laughs)

HB: Absolutely! (laughs)

JW: I’ll just say that the forces are at work now both on the cost side and on the price side to come into a better equilibrium. I expect this year to be a big shakeout year. This is a tough year because there’s been momentum in the spin but you’re seeing rig counts drop. You’re seeing activity slow down. So 2015 is likely to be pretty choppy, and you’ve seen that.

I think that we’ll get into better balance in 2016, and I think you’ll see some price recovery. Where it ends up ultimately reasonable people could disagree on. What I’ll tell you is a lot of the big projects aren’t going to get started with the current cost/price relationships that we’re seeing. Once that momentum works through the system and the spending effects start to be felt, you’ll see prices recover.

North Dakota and Texas now provide about 50% of US crude oil production, up from 26% in 2010.

HB: The big projects that you refer to — how long do they take to come online?

JW: A deepwater development can take seven to 10 years, and then it produces for 20 or more. We’ve spent five-plus years building a big liquefied-natural-gas project in Australia. That will produce literally for 30 or 40 years. You do have to take a long-term view. We’re still spending $US35 billion this year on new projects. We are continuing to spend, but we all have to strike that balance between what you want to do to invest through the cycle and what you need to do to balance the near-term financial priorities.

We’re continuing shale drilling, for example. We have a great position in the Permian Basin in Texas and New Mexico and we’re continuing to invest when others are cutting back because we think it’s economic to do so.

HB: Let’s talk about energy in general. Is Chevron in the camp that believes global warming is a hoax, or is it real? And if it’s real, what is the responsibility of an oil company in that?

JW: We’re certainly not in the former camp. I wouldn’t want to leave you with that impression. One of the challenges in talking about this subject is that we tend to jump right into that instead of stepping back a minute. I start from a more basic premise.

Everything you have in life — light, heat, mobility, the food you eat, the clothes you wear — every single thing you have is dependent upon fossil fuels. Eighty per cent of the world’s energy comes from fossil fuels. For most of the world, their priority is affordable energy. We are the envy of the world because we have tremendous diversity. We have renewables in this country. We’ve had hydropower for a long time, nuclear, oil, and gas and coal.

We are the envy of the world because we have tremendous diversity. We have renewables in this country. We’ve had hydropower for a long time, nuclear, oil, and gas and coal. Most of the world is just trying to keep the lights on.

We have this diversity. We have a rich portfolio of energy that we can choose from. Most of the world is just trying to keep the lights on or put the lights on.

When you start from a policy point of view, you have to ask: What are your priorities? The overwhelming priority is to sustain the quality of life that we have and for most of the world to achieve some semblance of the life we have. With that as a background, fossil fuels are essential to our life. Then you say, “OK, what are the effects, and what should we do about them?” That’s where we need to strike the balance.

My general view is before we can replace fossil fuels we are going to have to have an affordable alternative. There was a big study for Secretary Chu that laid out a blueprint. Don’t spend a lot of money subsidizing technologies that are not going to solve the problem. Invest in early-stage technologies, and we’ve identified about a dozen of them that may produce a step change in technologies.

No. 1: Husband the scarce resources that you have carefully. No. 2: There is low-hanging fruit that is economic to do in the way of energy conservation that we can put in place today. [No. 3:] we are blessed in this country with natural gas. It is naturally displacing coal and so it’s a blessing. Enable that development. I don’t mean subsidise it, enable that development, and that right there gets the United States on a pretty strong pathway.

Every country has its own energy objectives. I think most countries are going to continue, certainly in Asia and Africa, the developing nations, are going to continue to produce fossil fuels for a long time because it’s all they can afford. That’s certainly what China is going to do. I think that it is becoming apparent that the cost of a rapid transition when you don’t have an economic alternative is going to be expensive. In Germany and Denmark electricity costs are triple the average in the United States.

If policymakers in our country want to impose additional costs on American consumers and business, just be transparent about it and tell the American people what the benefit is going to be versus the costs. What I think we tend to not do well in this country is talk candidly about those choices that we’re making.

[For example,] in the Northeast, if you’re going to shut down coal plants and nuclear plants, you better build pipelines through the Northeast so you can get natural gas in, right?

HB: And so why aren’t we doing that? Is it local, national?

JW: It’s both. At a federal level the Keystone Pipeline gets all the attention, and certainly that sets a very bad example from a policy point of view with a key ally to the north. It happens on a local level and at the state level as there has been some difficulty permitting natural-gas lines. My industry has to do its part, don’t get me wrong. We have to be sure that we have the latest technology on pipelines. We have to be sure we work with the rail industry to be sure we keep the trains on the tracks and have the right sort of cars on the tracks. We have to be sure that we’re listening to the public and we’re out ahead of the concerns that are out there.

But fundamentally we have a great opportunity in this country and we just need to be sure we take advantage of it. I’m not in the coal and nuclear business. I think we’re gradually dissipating our advantage in those areas, and I think there’s probably an opportunity — even though it competes with my products.

HB: Do you think America’s energy independence represents a fundamental change? Is this going to be true for generations to come, or is this more of a temporary state of affairs?

JW: Oh, I think we will have a competitive advantage as long as we continue to exercise that competitive advantage. I think we have a very secure system of energy supply. I think Americans should view it as a blessing. We have opportunity to take advantage of it and I think we’ve been able to do that largely on private lands. [In terms of prices,] I think there are real benefits to consumers. The way I describe it is when prices were high, our industry was investing very heavily and there were lots of jobs at a time when the countries needed it. Now prices are down and it’s tough times for the oil patch, but consumers are benefiting and there’s a stimulus effect from low prices. There’s a benefit either way. That’s the lens I look through. When I go overseas people say, ‘You are so lucky.’ Americans, you are so lucky. You have it all and I think we just have to be sure that our policies are consistent with that. [In America], we get some things right, and I think that’s why we’re succeeding.

HB: How is what is happening in Russia affecting the global market? Are you as worried — as a lot of ordinary citizens are — watching what appears to be a return to the Cold War?

JW: Well, we don’t produce oil and gas in Russia. We do have a relationship with the government. We are partners with them in a pipeline that runs from Kazakhstan to the Black Sea across Russian territory. One of the things that makes American companies successful is that we’re not political agents of our government. We play it straight. We were the only American company in Myanmar when it was a sanctioned country. We were one of the few American companies in Angola when they were at odds with the US government.

Known as ‘Pico 4′ and located in the Pico Canyon oilfield near Newhall, California, this well was drilled in 1876 and is considered the birthplace of California’s oil industry. A gusher, it produced 70 barrels of oil a day from 560 feet. It was drilled by California Standard Oil Works company, a predecessor to Chevron.

Our view is that Chevron and American companies can do a lot of good in these countries starting with our ethics, but extending into technology and development. At times when you have 30- and 40- or 50-year relationships with governments, you’ll have ups and downs in the political cycle. I try not to enter that fray. We abide by the laws that the US has. We cannot do business with Iran today. So we don’t do business with Iran.

HB: Chevron has moved a bunch of people from California to Texas. Is Texas better?

JW: Well, our headquarters is based in California and in fact our biggest position in the refining marketing business is in California. That’s where headquarters is and that’s where a lot of people are based.

The epicentre of the exploration business, the upstream business, is Houston, and so over time we’ve gradually migrated a lot of our headquarters-type activity closer to there. We’ve got a big presence in Midland, and we have one in Bakersfield, southern California. We go where the work is.

I think there are advantages to being in California.

I think there are advantages to being in California. There’s a big environmental community. There’s a big tech community. I think we’ve been out ahead of some in the industry thinking through some of the issues are where the sensitivities are with the American people.

We used to be called the California Company, so we’ve been here 135 years and I think we’ll be here a lot longer. One of the advantages to being in California is that it’s a little unusual for an oil company. There’s a big NGO community. There’s a big environmental community. There’s a big tech community, and I think California as a leader in trends there are benefits to being close to that. Some people think of it as a disadvantage. I don’t because I think we’ve been out ahead of some in the industry and thinking through some of the issues and where the sensitivities are with American people and environmental groups and others.

HB: So it’s not a function that California’s laws and taxes have just become egregiously restrictive and high? There are plenty of people in the finance industry who are moving across the border to Arizona. You’ve got people in Silicon Valley doing the same thing — if not Arizona, Nevada. It doesn’t have anything to do with that?

JW: I am concerned about the fiscal direction of the state. The governor is working on a number of initiatives. I think we have a tax system that’s very top heavy. I do think there’s risk that a lot of high-income earners are choosing to leave the state. I try not to whine about it because every company has a choice.

We’ve chosen to stay, but I hope the governor and the legislature and others will be responsive because it is a costly place to do business. Not just from a tax point of view, but from a regulatory point of view and otherwise. The state has some very successful areas. Silicon Valley gets a lot of attention. Hollywood gets a lot of attention. You’ve got depression in the central valley of the state, and so it’s a state of haves and have nots. It’s going to need to be addressed in due course. I’m a lifer in California. I was born and raised here, fourth-generation Californian.

HB: What keeps you up at night now? What is your greatest worry?

JW: Frankly, the biggest thing I worry about every night is will our employees be safe, and the contractors. We have 60,000 employees, but 300,000 people work on our job sites every day, contractors and others, and I want to be sure they’re safe. I think a lot about that, and I feel good about the position that we’re in.

There are a number of business issues that I think about. I won’t say price, per se. I think more about how we execute the work that we’re doing. I want to be sure that in a price downturn we’re still doing the right things in developing employees. One of the reasons the industry was in short supply of people is because during the ’80s and ’90s when prices were down we didn’t hire very many people. We’re going to continue to be on college campuses and hiring.

HB: You have this extraordinary statistic at the company: The average employee tenure is 31 years. People seem to join as 20-year-olds and work for Chevron forever. How do you do that in this day and age?

JW: I think our average employee is in their 40s now, but we’ve been going through what we call a crew change where a lot of people of my vintage, they’re starting to cycle out and we’re bringing in a lot of people off college campuses and otherwise.

I live in California. I’m from Silicon Valley.

I have a lot of tech friends and the common view is that jobs are portable. You build your skillset. You can’t trust the company you’re with and you move on. That may be true in some business, in some careers, in some technologies.

That is not what we tell the people we hire. I just described we’re in a long-cycle business, and we don’t hire people knowingly that we don’t think can stay with us.

I have a lot of tech friends and the common view is that jobs are portable. You build your skillset. You can’t trust the company you’re with and you move on. That is not what we tell the people we hire. We’re in a long-cycle business, and we don’t hire people knowingly that we don’t think can stay with us.

Obviously some choose to and some don’t, but my view is people leave a company when they don’t think they have opportunities. We have tremendous opportunities for people.

HB: How do you differentiate? When you’re on a college campus pitching Chevron, what are you saying? “Oh, you don’t want to go work for Exxon. You want to come to Chevron because …” Why?

JW: I’ve never believed in negative marketing. It may sound corny in this day and age, but we talk about values. You go back to the ’60s and ’70s — we thought we were idealistic in those days. Well, the kids are really idealistic today, whether it’s on environmental issues or otherwise. You have to be progressive in your views and prove you live up to your values.

A lot of people we hire start with internships, and we have an incredible retention rate after they have been inside and they see that we do a pretty good job, not perfect, but a pretty good job of living up to those values. They like the culture in our company. Then you have to have an offering that’s competitive when it comes to training and development. For most disciplines we have a five-year period where they’re guaranteed several different assignments, training, development, and mentoring.

I think the great fear for a young man or woman is that they’re going to get pigeonholed and they’re going to get lost inside a big company. By ensuring some mobility, some training, some interaction with others, I think you can get them off to a good start in their career.

HB: What’s the life like for young employees at Chevron? You go to Silicon Valley it’s all about free food and slides and scooters going all over the place and riding around the campus in self-driving cars. Do you have all that stuff?

JW: That is not our culture. I think it’s about a challenging career. We have to pay competitively. It may be that in some markets you have to have free food and all those things to retain people. I don’t think that’s really key in the long run to retaining good people. Those same companies that have all those things have ultra-high turnover.

HB: Can you talk about the challenges of finding science and engineering talent. How hard it is to find great people?

JW: We recruit globally, and certainly we recruit at a broad range of schools that offer the degrees in engineering and technical degrees that we need. We do a lot of things to be sure that we’re connected well with the academic community so we know who the promising students are. We also recruit internationally. In many countries where we operate we’re one of the largest employers, and jobs with our company are highly desired, whether it’s Thailand, Indonesia, Nigeria, Angola, we’re a good draw.

We would love to see more young people going into science, technology, engineering, and maths, and so we do a lot of work starting at the elementary-school level. We can’t be everywhere, but we do work with STEM-related programs, Project Lead the Way, supporting curriculum in STEM, things of that sort. We try to help with the feeder pool, but it’s a national issue and I would love to see greater diversity. Right now less than 10% to 15% of the graduates of the big engineering schools are women. I’d love to see more women. I’d love to see more underrepresented minorities in that group. We’re getting better. As a company our visible diversity is rising, but I’d love to have a broader pool to draw from in total and from a diversity perspective.

HB It’s hard to be the guy at the top. Who are your sources of inspiration, or whom do you turn to for advice?

JW: I’ve been very fortunate inside the company. From the day I joined, I have had people who have been willing to take the time to talk to me and to help me. Some of those are peers. Some of those have been a very senior level. Certainly my two predecessors helped me quite a bit.

Outside the company I draw inspiration from a lot of places, from a pure admiration point of view. You know, Lee Kuan Yew just passed away and I’ve had a chance to meet him. Certainly if you think about trying to create prosperity around the world, taking Singapore from where they were to where they are today is a modern-day miracle, and whatever the criticism might be it’s a tremendous accomplishment. I think in my industry we’re looking to create prosperity. A better way of life comes from having affordable energy, and that’s what we’re trying to do. I admire people that have created that prosperity. In his case energy wasn’t the issue, but he put in place a whole system that did just that.

Extracted in full from Business Insider.