News outlets love to report on “record earnings” and “huge profits” and such with the popular press leaning to the hype and misinforming slant. The business press is much more honest but still leaves out much of the insight that investors and consumers need for long term planning. The needs for selling papers and screen views, and the near instant gratification of next quarters earnings for the stock trading folks tends to leave those of us looking out for the long term prospects pretty much on our own.

Last week I participated in the American Petroleum Institute’s Blogger Conference call with Peter Robertson, Vice Chairman, Board of Directors, at Chevron Corporation. Near the end, I was able to get in the question that most any long term investor and consumer wondering what’s being done wants answered. “Where’s all that money invested getting spent?” Well, in context the question was “ . . . could you describe the challenges for capital allocation?” (At page 14 of the transcript.) Podcast here.

Peter Robinson the Chevron Board’s Vice Chairman

Now Mr. Robertson is sharp, but he did answer the question in more than just oblique terms. I’ll just quote from the text. Then we’ll look at what’s there.

MR. WESTENHAUS: Well, there’s goals of course, you know, and there’s capital to be had and there’s a balance now between renewables and enhanced and new drilling. I mean, you guys got – it seems to me you must have some interesting meetings on what you decide to invest in.

MR. ROBERTSON: Yeah, yeah, we do. And you know, we’ve – in some ways, we’ve arrived at a very, you know, from a company perspective sort of exciting place, because we’re actually having to make choices these days as opposed to having to look for projects to – you know, to invest in. So I mean, we’ve got – but an awful lot of them are outside the United States. But we’ve got to – we’ve got a lot of projects. Of course, projects are increasingly expensive. We’ve got, I think, 40 projects in our budget right now, each of which for Chevron’s shares over a billion dollars. So that means that if you’ve got 30 percent interest in the project, it’s a $3 billion project or $4 billion or $5 billion, or whatever, but there’s 40 of them. So we have a lot of things to look at.

We are focused on a lot of natural gas projects. So I mean, we have the traditional oil and I would say maybe to back up just a second, within the next couple of years, most of our really big expenditures are around oil projects, and mostly deep-water and in some cases in Central Asia, but it’s regular sort of in some ways conventional oil. Really, in the sort of four or five years beyond that, it’s really all about natural gas projects.

So in a sense, we’ve been through a sort of period where most of our money has been going on oil projects. And frankly, from a shareholder perspective, you know, oil projects have probably been delivering the best returns. Natural gas is obviously – I mean, it’s the fuel of the present, but it’s also a fuel – there’s an awful lot of it around and it’s a fuel that we’re going to use a lot in the future and we’ve got a lot of projects that are just reaching the point where we can spend large amounts of money on them. So for the next few years, in some ways, it’s going to be about gas.

In terms of what goes to renewable fuels and sort of, you know, geothermal and all of those things, they’re still relatively small in the big picture because, frankly, a lot of it is still around technology. It’s not around building big structures, doing big physical projects, and so it’s not fair to really compare the amount of money we’re spending on renewable energy with the amount of money we spend building these big projects. We’ll get there on renewable energy when we get something that works, at scale and when we get to build projects that creates fuels that can – that the public can afford, we’ll be into a lot more of that.

So for the time being, it’s sort of oil transitioning into natural gas. Geothermals are relatively small even though we’re the biggest in the world, it’s still relatively small in the scheme of things and we do those as they come along as renewable fuels, as I said, is probably more about R&D right now and trying to figure out what works. Hydrogen is still about R&D. The hydrogen is still about R&D. And then, you know, on the other side of things, the energy efficiency, of course, is sort of a separate business in a way unto itself that we’re trying to work with customers and agencies to help them on efficiency.

So I don’t know whether that helps you or not, but I mean, we do have some tough choices to make and we would rather choose to do some of these big projects in the United States than to do them in some of the really difficult parts of the world where we do them.

So I mean, we’re – and our choices are choices in many cases, they’re really outside the United States, because it is so slow to get stuff done in the United States the permitting is so – and particularly on the downstream facilities on shore, it is very difficult to get things done in any kind of timeframe. And so some of those choices are made for us, frankly. End Quotes.

We see right off that from the perspective of the leaders in the big independent oil and gas companies that times are different. A few years ago when the petroleum business was slow with a glut of sorts on hand, there were much lower profits and dearth of things to invest in.

The problems are different now. What isn’t specifically said but sharp observers realize is that outside of the U.S., except for deep water Gulf of Mexico is where investment has to go. It looks like and the observer well knows too, that the oil prospects in the U.S. are simply out of bounds for political reasons based on environmental, esthetic and other concerns. That must be why in Chevron’s case that the near years out are going to be in natural gas, as most investments that are of acceptable risk will be in that part of the petroleum industry.

The pay off for us is in the insight Mr. Robertson offers about renewables, geothermal and others is in the sense of scale they have to have. At this level of a corporation, the terms are thousands of barrels per day, not per year. They’re working to deliver across the world to customers using thousands of outlets. For them to get involved with a renewable, and you can see they are intensely interested, requires sources that have processes that work, the process must work at the scales that make sense in the market dimensions they deal with, and result in products that are affordable for their customers. Once those seemingly simple criteria are met, well, the money would pour in at stunning amounts – IF the profit is there to fund them.

That makes it a balancing act as investors, consumers and voters. We need the transition to renewable carbon based fuels, but the really big money has utterly practical reasons to be doing something else for now. Just how an economy gets to the necessary processes that can scale the levels that a big oil sized business would home in on is happening, at small scale.

The model for high probability of bringing renewables to market is already there in ethanol. Ethanol had years of small, locally organized investors building plants, getting politically influential and working out the integration of their product into the economy’s whole. It can happen much faster with other renewables, the glut of cheap oil is gone, the political landscape is much more interested in non-fossil based carbon sourced fuels. All we need is some good processes and leaders.

The key quote to remember is “reaching the point where we can spend large amounts of money on them.” That’s a technological goal too.


1 Comment so far

  1. Stock Trading Secrets » Blog Archive » Where’d All That Money Go? on April 9, 2008 10:23 PM

    […] Fundamental Analysis wrote an interesting post today onHere’s a quick excerptThe needs for selling papers and screen views, and the near instant gratification of next quarters earnings for the stock trading folks tends to leave those of us l… […]

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