TEXACO CHAIRMAN PROPOSES DEVELOPMENT OF NEW TYPES OF POLITICAL
RISK INSURANCE & MODIFICATION OF PRODUCTION CONTRACT TERMS
LONDON, Nov. 12 /PRNewswire/ -- Speaking at the 12th annual Oil and Money Conference in London today, Alfred C. DeCrane, Jr., chairman of the board of Texaco Inc. (NYSE: TX), presented a world-wide overview on the prospects for the oil industry in the 1990s.
He noted projections that petroleum demand would grow at an average annual rate of 1.5 percent throughout the remainder of the decade. "That means the world will require about 76 million barrels of petroleum liquids a day by the year 2000 -- 10 million barrels a day more than in 1990. That is equivalent to putting another Saudi Arabia on line," said DeCrane.
"Finding, producing and replacing that quantity of oil is a challenging assignment," he added. "Meeting the oil needs of the '90s will entail dealing with such important issues as productive capacity, deliverability, diversity of supply and mandated product formulations. But in the '90s, as before, where there are challenges, there are opportunities which will create operational and market niches for many."
DeCrane observed however, that the major integrated oil companies -- those that are strongly capitalized, broadly based, technologically advanced and international in scope -- are best equipped to handle the challenges of meeting this decade's energy requirements. DeCrane then focused on two issues in particular.
He outlined the potential benefits to both oil industry and host governments of modifying the typical 20- or 30-year term form of production contract commonly used outside the United States, to something that more closely resembles the "So-long-as..." contract form common in the United States. This modification would accelerate cooperation, technology transfer and financial success for each party.
"In the U.S., if production is established, the operator may continue so long thereafter as oil or gas is produced from the contract area in paying quantities, or drilling or well reworking operations are being conducted," DeCrane pointed out.
With the operator taking this long view, "such a contract encourages the needed investments in equipment and technology at the optimum time to obtain the best production profile," DeCrane said. "Contracts that cause uncertainty about the future discourage technology transfer and in-depth training of nationals by operators -- precisely the opposite of the effect desired by both governments and operators."
He observed, however, that the best contract imaginable will not solve the problem of political risk, referring to the obstacles to unleashing the vast resources of the various republics of the Soviet Union and their border nations.
"One of those obstacles is risk -- not the operational and technical risk we assume routinely -- but the unknown dangers that can be collectively termed political risk.' For an industry where hundreds of millions of dollars are routine initial investments to activate major projects like new field development -- and billions are becoming common -- acceptable assurances of risk protection from political and economic confiscation are essential. The political risk inherent in societies restructuring themselves in the most fundamental of ways is much on the minds of potential investors," said DeCrane.
"We at Texaco see merit in the strengthening of current protective schemes such as those of the World Bank's Multilateral Investment Guaranty Agency (MIGA). A solidly structured and implemented insurance- reinsurance program could significantly reduce exposure in this area of political risk."
DeCrane proposed that MIGA -- or some similar internationally backed group -- underwrite a primary layer of insurance, expanding the political and economic risk coverage they currently offer. "Then, MIGA would reinsure the risk with the particular republics or countries where the projects are to be located.
"Some portion of the premium would, of course, be remitted to the reinsurers. This provides them with a source of hard currency for reinsuring risks they are able to control completely -- namely, their own respect for, and protection of, the investment being made.
"Should the reinsurer default on the obligations of its contract, it faces 'foreclosure' on its insurance obligation and the strong and forceful demands of the primary insurer -- the group of nations with whom the offending party must really be prepared to deal, if it is to participate in world commerce.
"No doubt there are other approaches," said DeCrane, "but we certainly stand ready to work with other interested parties and with appropriate agencies to flesh out and implement some such program. Success at something like this should materially advance the world's access to these new areas of opportunity, and in turn enhance these areas' economic advancement."
The Texaco chairman also took the opportunity to address the European audience on how increasing environmental awareness all over the world is profoundly influencing the demand for crude oil, the cost of finding and producing it, as well as what kinds of products the industry is, and will be making from it.
DeCrane stressed that this environmental influence should become more focused, more prioritized and more cost-benefit oriented. If it does not, growth, advancement and human progress will be sadly sidetracked. Using, as an example, the enactment of the Clean Air Act Amendments in the U.S. last year, he encouraged the industry to see that a cost-benefit approach is taken.
"The world will have the opportunity to learn and benefit from debate and action in the U.S.," said DeCrane, with the potential that only sensible, cost-effective measures taken there be adopted elsewhere.
"We in industry must see that this cost-benefit approach is, in fact, taken. We are in a position to provide the facts and the information relevant to our industry, its capabilities, its limitations and its actual performance. It is essential if the public, and its representatives, are to make wise decisions," he emphasized.
"The public needs solid information if it is to make prudent choices between good policies and those that are well-intentioned, but economically questionable," DeCrane concluded.
/CONTACT: David J. Dickson of Texaco, 914-253-4128/
(TX) CO: Texaco Inc. ST: New York IN: OIL SU: TS -- NY043 -- 3411 11/12/91 11:15 EST