James J. Mulva, chairman and chief executive officer of ConocoPhillips, addressed a crowd gathered at the Petroleum Club at an event in his honor hosted by the Texas Alliance of Energy Producers.

James J. Mulva, chairman and chief executive officer of ConocoPhillips, made this point at an event in his honor hosted by the Texas Alliance of Energy Producers in late November 2007.

At the time of Mulva’s speech, the price of oil was hovering close to US $100 per bbl, and the mood, not only in the dining room at the Petroleum Club, but in the industry as a whole, was buoyant.

From the standpoint of the oil service companies, which are making record profits (and passing them on to shareholders), the high cost of oil is a boon. According to Mulva, however, the benefits of high-dollar oil are not being felt quite so strongly by the operators. “In everything we do,” he said, “the cost escalation is so great that we really have a challenge.”

With that said, the fact is that the company’s net income in 2006 was $15.6 billion, or $9.66 per share, compared with $13.5 billion, or $9.55 per share, in 2005. The 2007 numbers will reflect another profitable year.

With numbers like that, it’s perhaps a little difficult to dredge up sympathy for the company, but Mulva has a point. Unlike the fiscal take for service companies, the take for the operators does not go up proportionately with the price per bbl of oil. For the operators, Mulva said, “High energy prices aren’t necessarily our friend.”

Demand, however, is a friend (although from ConocoPhillips’ perspective, it may be more of an exacting taskmaster). Looking ahead, the long-term, global energy demand will continue to push the limits of available supply. Therein lies the challenge.

According to Mulva, cost escalation is only one of the issues with which operators have to contend. Limited human resources, not surprisingly, is also on the list of concerns. Fiscal take is another. And last, but not least, is access to reserves.

Reserves replacement is key and the time for increasing reserves through mergers and acquisitions is past, at least for ConocoPhillips. Growth, according to Mulva, will be organic. ConocoPhillips is planning to spend $15 billion/year on organic growth, 75% of which will go toward E&P for reserves replacement and growing reserves. The bulk of the remaining 25% will be spent on growing and expanding refining capacity and pipelines.

“Meeting growing worldwide oil demand is a huge challenge,” Mulva said. “It’s going to be pretty difficult to produce more than 100 million bbl a day.”

Reserves replacement will require the company to break new ground in a number of areas, including the Middle East, the Caspian, Asia and Russia, Mulva said. “We have to go where the resources are.”

The company’s ultimate goal is to sustain a strong balance sheet, “because we don’t know what tomorrow might bring,” Mulva said. The only certainty is that the future will bring challenges in terms of political risk, technical competence and profitability.

The ConocoPhillips website says the company is the third-largest integrated energy company in the United States, based on market capitalization, oil and natural gas reserves. It is the fifth-largest refiner and the sixth-largest reserves holder of non-government-controlled companies.

With operations in nearly 40 countries and assets of $173 billion, ConocoPhillips is unarguably a major international E&P player. Unfortunately, being in the big leagues doesn’t mean it’s always easy to play ball.

“It’s a really tough business day in and day out,” Mulva said.

Tough business it may be, but from where I stand, the E&P business is still one of the best businesses to be in at present. And that brings me back to my initial point about perspective.

Having just joined E&P, I have experienced a change in perspective myself recently. I spent the last seven years or so looking at the world from the vantage point of a magazine that focused exclusively on the offshore. At E&P, I’ll be seeing a large part of the onshore world for the first time.

Moving into production from exploration is going to be an interesting transition, and I am looking forward to the chance to see some exciting leading edge technologies as they emerge.

A change in perspective is a good thing from time to time. From my perspective today, there’s an incredible view.