APRIL 1, 1965
The Industry Everybody Takes for Granted
AN ADDRESS BY
Mr. L. F. McCollum,
CHAIRMAN OF THE BOARD CONTINENTAL OIL COMPANY
Lt. Col. Robert H. Hilborn
If our guest of honour were to rise and address us without introduction, those of you who hadn't read your notices and who didn't know L. F. "Mac" McCollum, as you caught his buoyant bearing and outgoing optimism, might well be heard to murmur the old-fashioned phrase: "He must have struck oil or something" and you would have been so right.
In 17 years, as President and now Chairman of the Board, he turned the Continental Oil Company from a traditionally domestic company into one of the most aggressive in the international big league. Two years ago he may have talked himself into early retirement when he said, "When we hit a billion dollars in sales and a hundred million dollars in earnings, I'll quit." Sales have hit their target and, when I look at my fuel oil bills, I suspect that another cold winter could do it for earnings.
While his beginnings were in Tennessee, he was moved to Texas as a small boy. With ambitions to become a journalist, young Mr. McCollum enrolled in the University of Texas, switching to geology it looked easier. Upon graduation he joined Humble Oil, an affiliate of Standard Oil of New Jersey and roamed Texas for nine years as a staff geologist then to Tulsa, Oklahoma as exploration manager of Carter Oil Company, another Jersey Standard affiliate. In 1941 at 39, he was elected President of Carter. Two years later, Jersey Standard shifted him to New York as coordinator of the huge firm's worldwide production activities. He was headed, probably, for the top at Jersey Standard, but Continental went gunning for him and in 1947 they got their man. He took over as President to lead Conoco into the world market and they now explore, drill, produce and transport on a worldwide basis.
Of the many moderators and countless chairmen who have been privileged to present Mr. McCollum to expectant audiences, I suspect that few have been able to resist telling a tall Texan tale and I am not enough of a non-conformist to resist joining this group. I confess never to have been in Texas so there is no reason why I shouldn't believe everything I've heard about that great state. Large-how it can be contained within the United States defeats me; Wealthywhere a bank returned the cheque of a customer marked "Insufficient Funds" with a further courteous notation, "Ours-not yours"-and full of ebullient entrepreneurs, many; like our guest of honour, "in oil"-one of whom walked into Pan Am's Houston office and asked for a first class air ticket. "Where to?" asked the girl at the counter. "Doesn't matter," he said, "I've got business all over."
Mr. McCollum enjoys a 70 hour Texan work week, spending one third of his time in New York, one third in Houston and one third elsewhere. His wise counsel and sober economic judgments are sought in the worlds of business and government. He is a director of Morgan Guaranty Trust Company and Chrysler Corporation; a trustee of Cal Tech and, a director of the Institute for International Education in New York. He is a member of the Business Council's International Trade and Commerce Committee, and a past chairman of the U.S. Department of Commerce's Export Expansion Committee.
In his own industry he served his government during the past 16 years as chairman of seven specially appointed committees of the National Petroleum Council studying the United States petroleum productive capacity and reserves and for two years he was chairman of the 11,000 member American Petroleum Institute.
All of this obviously creates the problem of what to do with leisure time so he is a moonlighter in the areas of opera, classical music, hunting, fishing, golf, gardening and outdoor cooking of epicurean standard.
I am honoured to present the distinguished international oilman, the Chairman of the Board and Chief Executive Officer of the Continental Oil Company, who will address us on "The Industry Everybody Takes for Granted"--Mr. L. F. McCollum.
It is not only a privilege to appear before this distinguished audience, but it is stimulating to be in Canada. Canada is one of the most important oil countries in the world and as an oil man I feel right at home. Exciting things are happening in _' Canada, and I am especially pleased today, because I want to talk with you about some of the remarkable things that are going on in the international world of oil which have a direct bearing on Canada's future.
The nations of the world have been so preoccupied with political revolutions that the significance of the great energy revolution of the twentieth century is just beginning to be realized.
In the last decade, we have discovered an unbelievable abundance of oil and gas in the world. The world's consumption of liquid petroleum and natural gas just about doubled. Oil and gas now supply about half the world's total energy requirements. In Canada and the United States, they provide three-fourths of our energy requirements. At the same time, we have had spectacular success in learning how to put them to use.
Oil and gas are the most flexible, easily transportable and the most versatile of any of the energy resources. Oil is now the single most important commodity in world trade in terms of value and volume. It accounts for half of the world's shipping. Furthermore, the world's incredible appetite for oil is such that in the next ten years alone, it is estimated that the Free World will consume as much oil as its total consumption to date.
The consumer has consistently had more petroleum products available at lower prices and the quality of these products has been steadily improved. Today's consumer expects a constant stream of new and better products. The world takes for granted that oil and gas will be available to meet any need-no matter how spectacular the demand becomes.
Despite the fact that oil and gas are used in thousands of petroleum-based products and services, very few peoples have any concept of the vast and intricate international oil apparatus required to provide these products and services. The international oil industry-it is really many industriesis the most complex and far flung in the world. The world- ' wide investment required for this, sounds like a national budget. Over the decade ending in 1962, the industry spent $106 billion in order to meet the growing demand for oil products. An investment increase of at least 50 per cent above this figure will be necessary to meet the requirements of the coming decade. Where does this money come from? By and large-and this is one of the industry's basic attributes-it has generated this capital from its own operations.
The industry has done business in many nations under every kind of political system in all stages of economic development. By its ingenuity and resourcefulness and the development of new technical skills, the international oil industry has recorded one of the greatest trade achievements in history. It has been a constructive catalyst in world affairs to a degree, and in ways which even international political organizations have been unable to match.
The use of oil and gas has come late in history. When discovered 100 odd years ago, man had no idea of its abundance in the earth's rocks, nor could he envision the multiple needs that oil and gas could and would create and satisfy. By 1900, the world's oil business was still very simple. Two countries-the United States and Russiaproduced almost equally between them 93 per cent of the world's oil. It was used only for kerosene and lubricants. There was only a trickle of oil from other countriesEurope, the Far East, Peru and Canada. Then in 1901, a 100,000-barrels-a-day gusher in Spindletop, Texas, changed the business. Within three months, six wells in Texas were producing as much oil as all the wells in the rest of the whole world! Men's imaginations caught fire! The oil explorers began to fan out over the globe, finding it in undreamed of quantities. The flood of new oil swept away old industrial methods and gave birth to the energy revolution.
When you look at today's oil and gas producing map, you will see that the occurrence of oil and gas respects no national or geographic boundaries. We are producing oil in 43 countries on every continent except Antarctica and even under oceans and seas. We are searching for it on land and sea in almost every country in the world.
Despite the fact that we are finding oil in so many different places, there are two areas which have the greatest concentration of resources-two centres of gravity for the oil world, so to speak-the region around the Caribbean including the United States' Gulf Coast and the Middle East Persian (or Arabian) Gulf area. Of these two, the Middle East is now the more important, containing 62 per cent of the world's oil reserves. Reserves are so vast that one tiny country, Kuwait, has present proved reserves which approximate the total proved reserves in the Western Hemisphere. Africa is also moving up fast as a major new oil and gas area. Libya alone, which did not produce a barrel of oil in 1958, now has proved reserves almost twice those of Canada. However-and this is the heart of the matter-the places where most of the oil and gas is consumed are not the places where the big reserves are located. The only three industrialized nations which have large oil and gas reserves and which can produce enough to be self-sufficient are Canada, Russia and the United States. Neveretheless, countries with little or no oil of their own find themselves supplied with products. Through the versatility and skill of the industry in matching supply and demand, oil from 43 countries wends its way into the nooks and crannies of the world. Western Europe, which has less than one per cent of world proved reserves, now consumes nearly half of all the Free World's production, excluding the United States. Japan, with her industrial development, is becoming a major consumer of petroleum.
The importance of oil and gas has led governments to assume roles which have influenced the operation of the international oil business. Consuming nations, without ade quate oil and gas resources, seek to assure themselves of an adequate and reliable supply at low prices. Producing countries with little consumption are equally determined to make the greatest national profit from their resources. Canada and the United States, who are both large consumers and important producers, have different but equally basic concern over their oil policies.
Governments became keenly aware of oil's importance at the end of the First World War. The Allies, as Lord Curzon said, swept to victory on a sea of oil. Sir Winston Churchill, as First Lord of the Admiralty, was deeply perturbed about Great Britain's new reliance on oil for its Navy and trade fleets. He persuaded his government to buy a controlling interest in Anglo-Persian Oil Company-now British Petroleum-which brought in the Middle East's first oil gusher in 1908. This was a precedent-setting action of government participation in oil. The French Government immediately formed a company to go into Iraq. After World War Two, it extended state participation in oil and gas in Algeria. At that time, the Italian Government started a state company to market and refine, and subsequently went into foreign exploration. These are examples of governments of consuming countries trying to assure sources of supply in their national interest. Today, more than 30 odd countries, both consuming and producing, have national government oil companies controlling all or part of their nation's oil and gas business. Nevertheless, the international oil industry has been chiefly pioneered, structured and developed by the seven largest international and integrated oil companies, all of which are private enterprise companies, with British Petroleum being a bit of an exception. As recently as 10 years ago, these seven companies did 90% of the business. Today, they do less than 70%.
The more oil and gas found overseas, the more it has encouraged new companies to look for it. In 1945, only 13 American oil companies were operating abroad. Now it is estimated there are 200 such companies. My own company is young as an international company, and I can tell you from experience that we haven't been exactly welcomed with open arms by our competitors. It has been rough going and I can foresee competition increasing rather than decreasing. Russia has added to this competition with its re-appearance as a major oil exporter. It is trying to capture markets in good old-fashioned capitalistic style by selling under the going price, and also by barter and for political reasons. Russia has been rapidly developing its oil resources which may be more extensive than those of the United States. Despite the mixed economic and political considerations which motivated the re-entry of the Soviet Union into the world oil market, we should not discount the impact it will continue to have in the future.
Another significant new factor in the world oil picture is the Organization of Producing and Exporting Countries, formed in 1960, and commonly known as OPEC. OPEC members are Kuwait, Saudi Arabia, Iran, Iraq, Qatar, Libya, Venezuela, and Indonesia. Together, these countries account for 80% of Free World reserves and presently about 45 % of the world's production. Their oil is produced, transported, refined and marketed almost entirely by private enterprise, not by the governments. Furthermore, these are small consuming countries. OPEC's first objective is to obtain a larger share of profits. This they are currently achieving. The former 50-50 profit-sharing arrangement in the majority of these countries between governments and companies is increasing in favour of the governments. OPEC's second objective is to increase world oil prices. Because they are the major producing exporting countries of the world they feel they are in a strong position to dictate prices. But in the long run, competition in the market place will continue to govern the price of oil.
The biggest problem today in the international oil business is a surplus of oil, and it will continue to be for some time to come. This will be conducive to decreasing rather than increasing prices, which, of course, operates to the benefit of the world's consumers. The world's abundance of oil and gas, which is a long-range blessing, is actually the industry's short-term problem. We have an excess capacity of production and an excess capacity of refining, worldwide. But this is not slowing our efforts to find more oil or construct more refineries. The international oil industry is looking to the future, knowing that it must meet a rapidly growing demand.
Petroleum geology--while far from an exact science--is becoming more sophisticated every day. Improved exploration techniques and tools, and new discoveries, add impetus to the search for oil and gas which continues on a massive scale. Our technology is enabling us to drill deeper and deeper. Although we have only penetrated the earth to a depth of some five miles, we are already planning to conquer greater depths. With new scientific methods, we are producing more oil from new deposits than we did from past discoveries. We are also learning how to recover known oil reserves which we formerly thought could not be recovered. As one of the world's most eminent petroleum geologists, Wallace Pratt, has observed: "Where oil really is, in the final analysis, is in our own heads."
Canada and the United States occupy unique positions in the present and future of the international oil industry. Per capita income and per capita energy consumption are quite high in both nations. We have been blessed with ample oil and gas resources. Our national policies in respect to oil have encouraged their development. Incentives have been provided to the maximum number of risk takers to find and develop our reserves. This has been of great importance because we are small-field countries in comparison to other parts of the world. This is one of the major reasons why our costs of production are high compared to those of the Middle East. Each of us does have national oil problems. Canada is eager to develop more production and more markets. The United States has adjusted to becoming a net oil importer. In fact, the United States is the world's largest oil importing country. Its oil imports account for a greater proportion of the total United States' import bill--10 %--than is the case of Western Europe's as a whole, which is 9 %. Furthermore, the United States' total energy market is expected to grow faster in the future than in the past. However, the United States must continue import controls in order to maintain a healthy domestic industry. We must develop our remaining resources so that we can meet our growing demands without becoming dependent on foreign supplies.
Canada and the United States both have great unexplored potential oil and gas resources. We have trillions of barrels of liquid hydrocarbons which can be extracted from Canada's Athabasca tar sands and United States oil shales when it becomes feasible to do so. As the two countries in the world which have benefited the most from the development of oil and gas, we can appreciate the eagerness of other countries to industrialize and try to attain our standards of living. The international oil industry is doing many things to help accomplish this.
I am speaking now about contributions which can be measured in more than dollars or gallons. The search for natural resources has always been man's motivation to ex plore the world. You and I wouldn't be here today if men had not been motivated to explore the world by the desire for gold and spices. However, the search for natural resources in the 20th century is accomplished by a sense of social responsibility that is a bench mark of how far man really has progressed.
Most of the world's oil and gas has been found in the underdeveloped countries. With the development of these resources, the Middle Eastern countries alone have seen their income from oil grow from $238 million in 1950 to over $2 billion this year. In addition to this, the international oil business has helped develop these countries by building roads, bridges, schools, hospitals and churches. It has set up technical training schools and provided scholarships for study abroad. The international oil business is concerned with helping develop human resources as well as natural resources. These are things a dynamic world enterprise has pioneered in enlightened self-interest. Being an industry which has developed so late in history, it is composed of men who are products of civilized, responsible thinking--men who know that the best way to help themselves is to help others. This philosophy is dramatically illustrated in the contribution the industry has made to helping feed the world's hungry people. The combination of oil and agriculture may well be the most important melding of two natural resources in the history of man. It has done yeoman's service in powering the world's agricultural machinery to cultivate ever greater expanses of land. The petrochemical industry has developed new fertilizers, pesticides and weed killers, which have vastly increased food production. Petroleum products are helping reclaim dust bowls and literally making the desert bloom. Petroleum researchers have even recently discovered how to make a protein food supplement from oil. The partnership between oil and agriculture, aided by the other sciences, is rapidly outlawing the Malthusian theory. We are better able to deal with the consequences of a population explosion when our knowledge explosion and energy revolution are providing us with the means to help solve our problems.
One of the great hallmarks of the international oil industry is its adaptability. It has had to accommodate itself to a bewildering and frequently conflicting array of gov ernment oil policies. It has pioneered and solved great technical problems. While it is absorbed in meeting today's demands, it is creating and anticipating new demands through research and development. In doing all this, it has also had to work on a profit-making basis. With such a multiplicity of tasks, it manages to operate so smoothly--to lubricate itself, if you will forgive me--that no one is aware of all the various gears that have to be perfectly meshed to produce these results. Someone has said about government--that when it is working properly you don't even know you have one. So it has been with this phenomenal oil business. Everybody takes this industry--so vitally important in so many ways--for granted.
The question I would now like to ask you is one which I have asked myself. How would you have liked the responsibility of planning this global operation in order to have achieved these results? Obviously, no one company or single agency could have planned this world-wide operation which functions so well. Then, how did it come about? It is the result of competition between so many participants operating in pursuit of profit in the best tradition of the Western World. For you and me, as consumers, it is a blessed thing that the industry is organized the way it is. Perhaps I should have said "disorganized".
The industry is growing dynamically and the energy revolution has just begun. The achievements of the international oil business may well be insignificant in the light of the contributions it will undoubtedly make tomorrow--as it provides even more energy and as yet unknown products for the use of mankind.
Thanks of this meeting were expressed by Mr. Palmer Kent, Q.C., a Past President of The Empire Club.