Houston as the Energy Capital: Moving Beyond Oil

   It is an honor to be here to address such an illustrious group. It is a great challenge I face, speaking to you tonight about the future of the city of Houston, the energy industry and our state. It is a challenge because so many of you have been at the forefront of Houston’s great rise as a global energy center. Houston is often referred to as the “energy capital” of the world because for decades, Houston has been at the center of innovation in the oil and natural gas business. We are the home to the amazing engineering advancements in deep water drilling. We are the incubator for advanced technologies such as real time seismic surveying, subsalt and horizontal drilling and deep conversion refining. Houston has been a notable center for R&D in the oil business as well as a center for creative banking and financial products serving the energy industry.

   The presence of the energy business permeates our city. Energy companies are omnipresent in our civil culture, as supporters of the arts, sponsors of holiday celebrations, key donors to important civic charities. They support university research, send their employees to clean our beaches and volunteer in our schools, and build among some of the finest towers in our skyline.

   Close to 50 percent of the Houston region’s economic base —those sectors of the local economy that export goods and services outside the region—is related to energy. In fact, approximately 5,000 energy-related establishments are located within the Houston region, including more than 400 exploration and production firms, more than 30 pipeline operators and hundreds of manufacturers of energy-sector products.

   Houston is home to 44 of the nation’s 200 largest publicly traded oil and gas exploration and production firms. All the major oil and gas companies have extensive operations in our city.

   In fact, in the United States, Houston is home to 30.2 percent of the nation’s jobs in crude petroleum and natural gas extraction, 14.9 percent of oil and gas field services jobs, and 42.5 percent of oilfield machinery manufacturing jobs.

   Two of the four largest U.S. refineries are located in Houston, and Houston’s refining capacity accounts for over one-eighth of the U.S. total.

   The benefits of being a center for energy businesses and trade are far reaching. The energy sector employs over 50% of all Houstonians. Houston’s position as the world’s energy capital brings in significant trade and tourism dollars, attracting international visitors, businesses and even foreign governments. Energy is a key attraction for the 70 international consulates based in Houston. Energy puts Houston on the map; many world leaders visit Houston during U.S. tours. In recent years, head of state visits include those by President Vladimir Putin of Russia, President Olusegun Obasanjo of Nigeria, President Hosni Mubarak of Egypt, and Chancellor Helmut Kohl of Germany.

   Moreover, serving as the world’s energy capital offers a strong basis for the future of the city. Analysts agree that worldwide demand for energy will grow strongly in the  coming decades, particularly as economies expand in the developing world, creating more demand for automobile fuels and electricity. The world will be looking to Houston, the energy capital, for vision and innovation in meeting this rising demand. The question
is: Can Houston continue to deliver?

Growing Energy Demand: The Challenges Ahead

   The challenge to meet this growing demand for energy, particularly crude oil, will be daunting in the years ahead. Crude oil consumption is expected to rise by more than 20 million barrels per day by 2030; the investment required to provide this volume of petroleum to the market could run up to two trillion dollars or more.

   The question of who will be responsible for making these massive investments to fuel the future world economy is a critical one, and the nature of the question is evolving over time. Unlike in past decades, when private, publicly traded oil companies played a major role in the worldwide exploration business, national oil companies will be responsible for a lion’s share of the increase in oil output and investment over the next
twenty years.

   Since the mid-1990s, the traditional role of independent oil companies in oil production has shifted. The oil production of the Big Five (the five largest independent American oil companies) has declined since the mid-1990s; Big Five oil production fell from 10.25 million barrels a day in 1996 to 9.45 million barrels per day by 2005, before rebounding to 9.7 million barrels per day in 2006. In contrast, for the next twenty independent American oil firms oil production has risen in the past decade from 1.55 million barrels in 1996 to about 2.13 million barrels per day in 2005 and 2006.

   For the independent oil companies, equity share buy-backs have absorbed a growing portion of cash outlays, rising from only 1% of operating cash flow in 1993 to 37.1% in 2006, while expenditures on exploration account for a decreasing proportion of the total, declining from 13.8% in 1993 to only 5.8% in 2006. It is interesting to note that, despite an almost 50% increase in exploration expenditures from 2005 to 2006,
these expenditures as a percentage of the total expenses only increased from 5.3% to 5.8%.

   The Big Five independent oil companies represent over 20% of total current non-OPEC production so their failure to replace reserves and expand production represents a serious challenge for the global oil supply/ demand balance. In comparison, global market powerhouse Saudi Arabia controls 10% of total world oil production and about a third of total production of the Organization of Petroleum Exporting Countries (OPEC).

   Today, national oil companies (NOCs) control nearly 80% of global reserves of oil, and they also dominate global oil production. This raises questions about the ability of NOCs to meet growing global demand for hydrocarbons. OPEC production, which represents a lot of NOC output, is lower today than it was in 1979, despite growing demand and high prices. Moreover, there are serious questions about the capability of NOCs to use their resources efficiently, risking underproduction and higher prices. The problems afflicting a number of major NOCs include bloated workforces, expensive consumer fuel subsidies, and debilitating political interference. All of these factors reduce NOCs capability to return the maximum production per investment dollar.

   The trend is that NOCs as a group have been moving away from partnering with IOCs for investment in their oil resources. This could mean two things:

   1) If NOCs cannot increase their efficiency, world energy markets may
   be headed for a rocky future.
   2) The center of global oil exploration and development activity may
   move away from Houston-based companies,

   In order to maintain our edge as the world energy capital and sustain existing share of jobs in the global energy sector, Houston’s energy companies need to do more to maintain their traditional advantages in technology development and promotion. This will mean a greater commitment to R&D spending and a renewed focus on innovation and product development.

   Houston is the historic home of energy technology, thanks to its geographical advantages, the port, and the innovative industries that have made Houston their home base. Many of the most important technologies used in drilling and production around the world were developed right here in Houston. However, with the changes in the global oil market and moreover, with the shifts away from oil and toward alternative energies that appear to be drawing near on the horizon, Houston’s prospects as an energy leader are becoming more and more precarious. If, with the shift to NOCs, Houston loses this globally competitive position, the city’s potentially bright future will darken and diminish. As was the case in the aftermath of the oil bust in the mid-1980s, innovation will be the key to sustaining the energy industry in times of shifting economic landscapes.

   Right now, Houston is doing great. In 2006, job growth in Houston 10 the philosophical society of texas was double the national average. According to the annual survey of PricewaterhouseCoopers, Thomson Venture, and the National Venture Capital Association, venture capital inflows to Houston surged last year, to 30 deals totaling $212 million.

   Energy trading and lending is becoming an increasingly important segment of global financial markets. In the US as a whole, the number of energy hedge funds has risen almost threefold in the past three years, from 180 at the end of 2004 to now, at the close of 2007, over 530. Now, let us not forget: Houston calls itself the “energy capital”, not “the oil and gas capital”.

   Increasingly, other places—for instance, California, New York, and the coal states—are using public money and aggressive policies to promote innovation in energy technologies other than oil. If they succeed and Houston doesn’t step up its contribution as a player in the broader energy game, Houston stands to lose its status as the energy capital and with it, opportunities and jobs. Texas has been shockingly unsuccessful in attracting new federal grants for energy research; as of late, Midwestern states and California are winning the tenders. Our leaders must do more
to ensure that Texas remains the center of energy innovation and business. Otherwise, we are going to see our mantle passed on to states now hotly competing in the energy research space. California, New York, Massachusetts, Pennsylvania, even Montana, are committing millions of dollars to energy innovation, research and development. Texas is lagging this effort.

   For Houston to remain at the cutting edge of the energy business, it must consider how to maintain its position as the major player in the search of many new energy technologies, not just technologies for oil and gas extraction. Houston needs to explore its potential to lead advances in science and business in the energy sector.

   Carbon control technologies are going to be a leading business opportunity. Houston, as a major center of energy production and electricity generation, is well positioned to take a leadership role in creating and testing new carbon control technologies.

   Houston is also well-positioned to play a major role in energy science. One important step is to recognize the potential for nanoscale science for the energy industry–including enhanced hydrocarbon extraction, carbon sequestration, hydrogen technologies and renewable energy such as wind and solar. Rice University has established nanotechnology programs dedicated to advancing and improving solar and energy transmission technologies through the development of nanophotonics and quantum wire technologies. Nanophotonics uses ultrasmall structures—engineered to be as tiny as a strand of DNA—to improve the performance and efficiency of solar panels. Quantum wire technology uses infinitesimally small carbon-based tubes to carry energy across vast distances with little or no energy loss. This energy transmission technology will allow distant energy sources to be distributed economically as a stable energy source around the world. With the advances being made through nano scale technologies, solar power has the potential to be a significant contributor to the field of renewable energy.

   Houston can, and must, tap into its position in nanoscale science to move itself into important and emerging areas of science and business.

   In order to establish its preeminence as a leader in these new fields of energy technology, Houston needs to redefine itself as a center for energy science innovation as it has in the medical field. Houston can be a leader in reshaping the manner in which electricity is transmitted, stored and delivered to consumers, including innovation in fuel storage as well as in the hardware and software for distributive generation.

   Houston is emerging as a major center for wind energy. Texas is the third windiest state in the country; therefore, it is no surprise that over 30 wind development projects have been implemented in Texas since 1992, with more than half of those since 2005. Texas has a jump start in the field with a major project in Nolan County that is poised to be one of the largest wind power projects in the country. Currently, wind generators in the United States produce about 6.6 billion kWh per year of wind energy. It is estimated that this could rise to 75 billion kWh in the coming years. Texas can do more to support and conduct research in order to position itself as a leader in this form of alternative energy.

   On another front, nuclear business is growing in Texas. The Nuclear Energy Institute says Texas has a strong showing on its list of nearly 30 proposed nuclear plants in the United States, with six proposed for Texas, to be added to four currently operating plants. There will be strong demand to replace the existing nuclear technical facilities and specialists in the coming years. The United States is losing its abilities to build and

   Biodiesel is another means of alternative energy for which Houston has great potential to become an industry leader. Examples of regional development in this sector include Galveston Bay Biodiesel, a developer and operator of biodiesel facilities and Houston Biodiesel, which also plans to build a 35 million gallons a year biodiesel plant in Seabrook, Texas, working together with Lansing Ethanol Services LLC and Lansing Trade Group LLC. But massive federal research grants for biomass energy are being granted to state universities in the Midwest and West coast, instead of in Texas, despite its large agricultural sector and strong university base.

   The bottom line is Houston political leaders and industry leaders need to get out in front on the energy technology issue.

   The rapid pace of development within the renewable energy sector has forced the major oil companies to adapt and seek joint ventures with firms not normally associated with the petroleum industry. One example is the proposed joint venture between Tyson Foods (which formed a renewable energy division last year) and ConocoPhillips to produce, market and sell biodiesel originating from the fat of poultry and pork fat. Another is ExxonMobil Chemical, which has, in conjunction with its Japanese affiliate, Tonen Chemical Corporation, announced the commercial production 12 the philosophical society of texas of microporous films as a separator for the batteries utilized by hybrid and electric vehicles. According to the MIT Technology Review, this new separator, which acts to keep positive and negative electrodes in a cell apart, will ideally keep lithium-ion batteries from overheating by slowing the reactions—allowing the battery to cool off, instead of bursting into flames. As also indicated within the MIT Technology Review, by improving the safety of lithium-ion batteries, such technology would allow carmakers to replace the nickel hydride batteries presently used in hybrids with lighter lithium-ion batteries, thus improving fuel economy.

   Houston can be a leader in the alternative energy arena but the public policy framework for our future role as energy capital is critical. Houston needs tax incentives and other drivers to direct investment in future technologies. It should also expand the research and development infrastructure of the area and promote institutions that link businesses to technology. It should prominently host international energy technology and innovation meetings.

   Houston can be the most visible, pro-active innovator in world energy, if there is a concerted effort to take up the opportunities that are emerging and available to us now. Houston, the energy capital of today, can carry forth this status as a global leader into a new age, and maintain its influence well into the future.