Chevron CEO Wirth on Energy Market Volatility

You're welcome. It's nice to be here. And, you know, I'm a Houstonian now, so it's like two years right home. I'm in like, yeah, two years.

Well, I don't think in the beginning it made a lot of sense. I mean, we made the first commercial discovery in California, in Pico Canyon in 1879. And we built our first refinery there in Northern California. Second refinery was built. It was the refinery called El Segundo. It was the second refinery. It's now a city that's named after a refinery. So the state grew up around us more than us going to the state. And so we are part of this state's history and for an awful long time. California is a big producer. It was one of the biggest producers in the world at one point. And we're an integral part of the economic story in California. Things have evolved, obviously. But it made sense for a long time. It doesn't make sense today.

Yeah, our view would be it's probably not quite that much. There are ships that have been transiting out, typically with transponders off, typically at night and with some support from the U.S. military. And that has helped fundamentals in physical markets. And so, you know, we've seen price action that has been a little bit, I think, different than people expected. But what has been true through it all, and we can talk about a little bit more if you'd like, is the market's been pretty incredible in terms of how it's adjusted, both on the supply and the demand side to buy time and address the risks that exist.

Yeah. Well, early on you saw the paper markets trade on expectations and narratives. And early on there was a lot of fear that prices were gonna go that high. Paper markets really take off. Physical markets followed. And then things have reversed as the narrative has been we're closer to the end than the beginning. There's a peace deal that's just around the corner. And physical markets obviously have had to deal with the realities of supply constraints. Early on, demand was strong. And in fact, you saw people buy further out, particularly Asian refiners that typically might buy a couple months in advance, covered themselves further. And so you actually had demand pulled forward at the same time as supply was shut off. And so that's where you saw differentials get very wide. But subsequently, you've got supply from spares, you've had supply from ships on the water that were sanctioned and were then allowed to unload, using commercial inventories drawn down. You're seeing turnarounds and maintenance activities deferred in facilities that allow supply to keep flowing. Some movements now through the straits as supply responds, as you would expect, and there's been a demand response. China had been buying a lot of oil for their SPR that has come down. You've seen certain measures, primarily in Asian economies, to reduce energy intensity of their activities. You've seen some substitution into coal and other things that has taken some pressure off of markets. And so both supply and demand have responded. And I think the market has bought time now that the reality is inventories are a lot lower today. Other than in China, where there still are very healthy inventories, what do any of the products or you look at crude oil. We've moved from comfortable inventories under normal times to what would be, you know, soon to be uncomfortable. And I think that's the real question is how much longer can these measures kind of ameliorate the risk? And at some point, they may not be able to.

And that's a little later than I would have said if you asked me six weeks ago. And so particularly the reduced buying out of China is something that we didn't anticipate at the degree that we've seen now. And so I think that along with now, the fact that we are seeing some of these flows out through the strait probably have pushed that timeline out a little bit more.

Yeah. I mean, I think the evidence would say you shouldn't fully believe that until you see the agreement signed and you see the actions begin to come into effect. Iran has a long history of being a kind of a patient and immovable negotiating force. And so this has been hard to call. And, you know, markets are hard to predict. Words are hard to predict. I think negotiations with adversaries like that or counterparties like that are also hard to predict. And so the market seems to be somewhat discounting these things. I mean, you mentioned yesterday, I think used the term whiplash. The car guy statement didn't seem to send the market up the way it might have a month ago. And the we're close to a deal didn't seem to send the market down. I mean, softened maybe a little bit, but I think the reactions to these things are less and less the more it gets repeated.

Yeah. I mean, there was, you know, the US hit a couple of ships just yesterday. That was not in the media initially. It's now out there that there were actually three fatalities on one of the vessels. And so there has been activity in both directions, and it usually gets out eventually. We tend to have sources that we see things pretty quickly. But yeah, there's been during the, since the ceasefire where the president said it's we're shooting at each other less or I forget the exact term that he used, but it's not a true ceasefire the way I think most people would think of a ceasefire. It's less shooting. Right. But they're not zero.

Yeah. I can't speak on behalf of what their strategy would be. I think that's obviously based in the context of how they assess the risk, how they believe the Iranians are behaving in a manner that's consistent with whatever the agreement would call for. And, you know, the administration has used our forces around the world. We've seen it in a number of different places to enforce sanctions, to interdict ships at sea that are alleged to be in violation of sanctions. And so, you know, I wouldn't be surprised to see a military presence there for some time.

I think it's going to take time. You've got ships that are out of position, you've got production that's shut in. You've got, you know, it's a normally we've got a very efficient global energy system. It's massive, but it's also highly efficient. It has been put into a state of a different kind of an equilibrium right now. And for that to truly return, you've got to get inventories rebuilt in the Gulf and around the world. You've got to get production re-establishing ships repositioned. And that is weeks and months, not days.

Yeah, I think, you know, an event like this typically creates some longer lasting effects. And I think it's a little early to know exactly what those will be. But typically you see a lot of people concerned about energy security, resilience for their economy. You already see infrastructure projects underway in the UAE. I think you're likely to see other projects like that to build infrastructure to create optionality for logistics. I think you're likely to see countries establish reserves where they might not have before and maybe higher levels of reserves for countries that have had them. Will it diversify sources? I think, you know, this is a place where the US and the Americas are very well set up with strong energy resources, a lot of access to blue water ports and not the dependence on choke points that you see in some other parts of the world. I do think some of the things Secretary Wright talked about in terms of it's us, but it's Canada, it's Latin America. We're blessed with an abundance of resources in this hemisphere. And I do think you'll see this country in this hemisphere become a more important part of the global energy system.

Certainly the U.S. is in the midst of it's already the biggest LNG producer in the world, and there are any number of projects that are advancing here along the Gulf Coast. If we can deliver those projects, deliver the supply, avoid some of the things that again, Secretary Wright mentioned that an export ban would send a bad signal because if we were to be a reliable supplier, you don't want to put that question in people's minds. So I think we're blessed with a lot of gas in this country that will underpin not only our economy but the global economy for decades and decades to come.

Yeah, there's a lot of assumptions you would make to get there. I mean, the Middle East is in the Strait of Hormuz. You can think of it as the central artery in the global energy system right now. And it's been cut off also from a health stance, like having a heart attack. So finding a way to be healthier, have a system that's not as reliant on that, I think is important. I think you'll see steps taken to achieve that. I still think you'll see ships flowing through there. It'll be an economic way. The routes are, you know, getting oil on ships and into destinations is a very efficient way to do that. But I think you'll see optionality and alternatives that emerge in the system. So there's not as much single point risk concentrated in the stream.

We have less exposure than some of our large peers. We produce oil in an area called the partition zone that is shared by Kuwait and Saudi Arabia, petrochemicals in Saudi and Qatar, natural gas in Israel. But it's 5% of our production and others in our industry are 20% exposed. So we actually are looking at some opportunities to go into the Middle East. The risks are very clear, and there's some risks that I think people would view differently today. But the terms are also better than they've historically been. The Middle East has been a tough place to get a good return on your investment. And countries there have been willing to engage in negotiations that offer what we view as a fair balance of returns for investors. And so we've made some deals there over the last year or two in our discussions with others. And so we may actually, over time, have a little more Middle East exposure in our portfolio.

Yeah. So we have been explicit that we were not going to go in the power business as a merchant generator of power to sell power into the grid or to get into power distribution. There are good companies that do that, some of them in this room. And it's a different set of technical and commercial operating, regulatory issues that you deal with in that business. That said, we generate five gigawatts of power every day for our own use around the world. In places where we don't have access to a grid and where we have to have highly reliable, large scale power available to run LNG facilities, large complex upstream operations. So we got a lot of experience doing that. As the demand in the US became very, very clear, and as we have relationships with a number of the different hyperscalers, it became evident that a model that would look a lot like what we do today, which is isolated from the grid, power generation, high reliability, large scale is what data centers are actually looking for. It allows you to avoid the issues of raising electricity rates for ratepayers because you're not going through the grid. And we've done that. And so, particularly here in Texas where we're advancing our first project, there's enough gas to supply large scale power generation for multiple data centers for a long time to come. It's a business opportunity we'll look at. And it's a bit analogous, actually, to LNG. In West Texas, we've got stranded gas at prices negative sometimes because there's not enough capacity to go to market. There's a lot of gas there that hasn't even. We've only been drilling primarily for oil, and the gas comes along for the ride. There's a lot of gas that you can drill that doesn't have much oil with it, too. So large gas resource, if you can create demand for it closer to the resource and create a different business model, kind of like what LNG was a few decades back, that may be a business that we should be in. So we're going to explore. We're going to see. We're encouraged by some of the early discussions right now, will have to compete for capital with the other uses of capital at our company and deliver strong returns. But we think we've got some projects that can do that.

Well, you heard Secretary Wright, who, by the way, is the best Secretary of Energy we've had in this country, at least in the time that I've been dealing with the department. And so, you know, the administration reaches out and asks for input. They may not always agree. They might always, you know, they've got other considerations that they have to take into account. But unlike the prior administration, we really didn't have much dialogue with our industry. This administration does. It's not just Secretary Wright, Secretary Byrd and Secretary. Ambassadors. Secretary Rubio, across the board. We've got a very good relationship with open channels of communication. And they understand the role that American companies play not only in the economy here in the U.S., but around the world. And they want to be sure that they're getting good input as they formulate their policy actions. So I provide advice that represents what we see around the world in our business, and how we think they could factor that into their policy decisions ultimately, which are their call. And so I don't want to get too deep into specifics, but we give them factual based set of inputs. We try to be as candid about, you know, here's the opportunities, here's the risks, pros and cons on these issues and hope that they can then make decisions with better information.

Well, you know, gasoline prices in this country are politically sensitive. I think we have not reached a point where it's as urgent as it could have become, had prices gone higher.

We could. Yes, as I said, the markets have responded to buy time and mitigate risk here a little bit longer than a lot of people thought that they would. I don't think that can go forever. As we see the way inventories are being drawn down and with the risks that still exist in the Middle East, I think there is a motivator there to resume more normal energy flows out of that part of the world. And so that's clearly part of the consideration. The nuclear capabilities of Iran are a big part of the consideration as well. And so we'll continue to work with the administration to try to support a good resolution of this and stabilize energy markets.

Well, look, we've seen it in the past. It's an action that has been taken under other administrations. It's the wrong action when you want more supply. You know, typically taxes create less supply of something. And so creating taxes that discourage investment, that might push investment elsewhere, I don't think would serve our economy well on things that serve our consumers. If you go back and study what actually happened when we did this in the 70s, in the 80s, the revenue that was generated was a fraction of what had been advertised. The investment in production went down. And there's a very clear case study. You can look at the UK, which is doing it right now out of this industry, and they're seeing the very same thing. And so I think there's good evidence out there that this is not a policy that achieves the desired outcomes.

Well, I think they're speaking about energy more broadly, differently. They're talking about affordability. They're talking about energy reliability. Those used to be the messengers that we would encourage, but didn't hear much because we heard a lot about the climate and the environment. And I think everybody has been reminded in the United States, but around the world, that affordable and reliable energy is essential for the functioning of the economy. And we all want to mitigate impacts on the environment as well. But if you don't have affordable and reliable energy, you have a real problem. People vote with the lights on. And if they're hungry, if they're feeling constrained economically and they're concerned about energy supplies, they're not happy. And so I think it's important that people from both sides of the aisle recognize that affordable, reliable energy are fundamental to our economy and to all the people in the country. And we need policies that encourage investment in all types of energy to continue to provide affordable, reliable energy world.