free trade, unilateral and economic trade sanctions




Investing for Growth: Perspectives of a New CEO

Remarks by Archie W. Dunham
President and CEO, Conoco Inc.
at CERA's 16th Annual Executive Conference
February 11, 1997

Thank you, Dan. And good morning! I'm delighted to be part of today's discussion of global investment.

The perspective I bring is that of a relatively new CEO. I've just celebrated my first anniversary as Conoco's chief executive. It's been an exciting year, much of it spent in the air traveling -- to meet with employee groups, customers, government leaders and partners. My body clock has gone through so many time zones, it's given up trying to figure out where home is.

Fortunately, Conoco's earnings in 1996 were excellent. High prices help! It's been a wonderful year. Our employees are energized and optimistic, and the security analysts have been praising Conoco ... which is nice for a change.

So I've been feeling pretty good! I went home one evening recently and was kind of bragging to my wife Linda about all the nice things being said about me. Thinking out loud, I asked the question, "I wonder how many really great CEOs there are in the United States?" She looked up and said, "One less than you think!"

She's always been a good counselor.

While the pace of activity has been hectic, it has focused my thinking on a number of important issues concerning investment and economic growth. I'd like to share a few of my thoughts with you today.

Dramatic changes are occurring in the business world. A great wave of trade and investment continues to wash over the world. The collapse of communism broke the dike. Today the spread of democracy and free market philosophy has reached all corners of the globe.

A decade ago, who would have thought that Venezuela would open its doors to foreign oil companies after nationalizing their assets 20 years ago, and that the industry would be planning to spend $25 billion there?

A decade ago, who would have thought the global electricity generating market would open so widely to private industry? Today private power producers own over 110,000 megawatts of generating capacity outside the U.S. That adds up to more than $100 billion of capital investment.

A decade ago, who would have thought that Vietnam would ask American companies to help build a grassroots refinery in Vietnam?

Speaking of Vietnam reminds me of a rather bizarre set of personal experiences that show how fast the world is changing. On May 1, 1975, I was in Baghdad negotiating a supply contract. The Iraqi hotel manager came to my room and said I should stay there all day. I asked why, and he said, "Today is May Day, and we're celebrating America's defeat in Vietnam."

Exactly 20 years later, on May 1, 1995, I was in Hanoi, negotiating with some of the same people who had directed the North Vietnamese war effort two decades earlier.

In 1995, I was in Hanoi, but the U.S. government would not allow me to visit Baghdad. In 1975, I was in Baghdad, but the war prevented me from visiting Hanoi.

Fortunately, history shows that political obstacles generally crumble under the weight of economic forces. That's not surprising, because the positive impact of international trade and investment on improving people's lives has become clear beyond any doubt. The energy industry is at the forefront of this progress. Let me give just a few examples involving my own company.

Conoco is rapidly strengthening its position in the growth markets of central and eastern Europe. In the early 90's we became the first U.S. company to develop a new oil field in Russia.

Last year we were first to acquire central European refinery capacity, in the Czech Republic.

Today, we're establishing one of the first integrated supply systems in that region, by supplying our Czech refineries with crude oil from Russia. Long-term, we hope to integrate North Sea gas into the system, by feeding it to a new cogen plant that will supply electricity and steam to the Czech refining complex.

And in Thailand, Conoco investment is creating a healthy, growing retail business that supplies consumers with quality motor fuels and convenience products, while providing jobs for more than a thousand Thai workers. The products will come from our new joint venture refinery in Malaysia, creating jobs and economic growth in that country as well.

These are just a few examples of what Conoco is doing. The energy industry should be proud of the way it has expanded the flow of capital and technology, and of the jobs and economic growth the new investment has stimulated.

How can we maintain the momentum in investment growth, especially when there continues to be so much ferment and change in the energy industry? Look at the tremendous impact of Silicon Valley on our industry. The boom in computing technology has enabled us to lower E&P costs so dramatically that an area as mature as the Gulf of Mexico has been transformed into a hot new play. In fact, it's boosted the potential for deepwater projects throughout the world.

For energy companies to be successful and grow in this dynamic environment, I believe that they must possess five special capabilities.

The first is skill at what I call performance management, which seeks to satisfy all stakeholders, but especially customers. This is the very basis of success. You must develop and maintain close relationships with your customers, know exactly what they need, and be able to supply them. No matter whether the customer is a homeowner shopping for an electricity supplier; an airline buying jet fuel; or a sovereign government acquiring technical competency to develop its petroleum resources.

A second key capability is the management of risk. Energy markets and technologies are changing with lightning speed. They're driven not only by the conventional factors of science, engineering and finance, but also by politics and public opinion. Just think about the risks a company faces trying to establish a position in the Caspian Sea or Burma, for example.

New techniques are needed for analyzing all forms of risk -- technical, commercial and political. The quality of 3D seismic imaging is much higher than before. But is that extra piece of 3D seis worth its cost? What is the probability that the tax rate will be changed during the next five years? What are the political risks? Tools like decision and risk analysis are absolutely critical to structure our thinking about such questions.

A third key capability is the readiness and ability to form effective, value-adding alliances and partnerships. Partnering has become almost an imperative of our age.

Some make sense, others don't. Last year Conoco considered merging its U.S. downstream interests with those of another major company, but we couldn't agree on terms. On the other hand, we are partnering with Chevron in a very successful joint operatorship, the first of its kind, to develop the giant Britannia gas field in the U.K. North Sea. And Conoco has joined with Reading & Bates to build an ultra-deepwater drillship capable of operating in 10,000 feet of water.

The fourth key capability, and the basis for succeeding at everything, is management of people. Last year I visited more than twenty countries meeting with thousands of Conoco employees in groups large and small. I'm more convinced than ever that our skill in managing human resources will determine our future.

In the past, a company's success was driven primarily by its tangible assets -- a strong natural resource base, refining capability, or a strong market position.

In the future, a company's success will hinge on something different -- its skill in applying information and technology. Or to be more precise: the skill of its people in applying information and technology.

Highly motivated and resourceful employees have the performance focus and customer orientation I mentioned a moment ago. They're comfortable using concepts of risk management. They know how to work together, both internally and externally, in alliance and partnership relationships. And their personal goals are 100 percent aligned with those of the company.

Now, how do you create such highly motivated and resourceful employees?

What we're trying to do at Conoco is shape a new working relationship between employees and management. Employees are asked to contribute their ideas and creativity, their commitment to use wisely all the resources available to them, and their unflinching dedication to continuous learning and hard work.

In return, we give our employees plenty of running room -- the freedom to dream, challenge decisions, take risks, and make mistakes. It's my job to provide the resources -- sophisticated technology, market information, and training. Finally, I make sure our employees have an exciting, vibrant place to work -- a fast-moving environment that offers stiff personal challenges but also rich personal rewards.

Just 10 days ago I had the pleasure of announcing large bonuses for our non-management employees worldwide, as a result of their outstanding 1996 performance. The bonuses totaled nearly $46 million, 9-10 percent of base salary on average. One employee told me that his bonus would make it possible for his daughter to stay in college next year. That's the best news I could have had. It shows the impact such programs can have on morale and productivity.

The fifth and final key capability that will determine a company's effectiveness in investing and growing profitably is management of relationships, particularly government relationships.

Let me first address relationships between energy companies and governments outside the United States. I know from the many discussions I've had with government leaders that they face many problems. They must develop their country's national resources, raise living standards, and satisfy environmental and other goals, all at the same time.

Increasingly, they are a direct customer of energy companies. They buy more and more of the energy services we provide -- services to help find and produce their country's hydrocarbons, expand their power generation capacity, advance their refining technologies, and develop modern fuel marketing systems.

Beyond providing these basic services, company leaders must work with host governments to achieve two other goals.

One is making sure that the growth opportunity is sustainable. This means pursuing goals that are long-term as well as short-term -- improving incomes and standards of living today, but not in ways that threaten tomorrow's goals of clean air and water and a safe, secure environment for people to live and work in.

Company leaders must also help convince government leaders that to attract more energy investment in today's world, they need to do more than just privatize selected state-owned businesses, throw open the doors, and put up an "open for business" sign. Investors have many options on where to invest their capital.

Just as companies compete aggressively for the right to do business in a given country, governments compete for finite investment dollars. A country's appeal to investors will be determined by how fairly it treats industry, and by the quality of its legal and financial systems. Some countries are making significant progress in this area. Others are far behind. Those in the lead will capture the opportunities. It's a real horse race.

Let me conclude with some reflections on the relationship between U.S. energy companies and our own government.

America's energy companies must retain a position of strength if the United States is to remain a world leader. Our government can and should be a partner with industry in securing that objective.

In many ways Washington has shown it can be an effective partner. Virtually every company investing in Russia today would agree that the U.S. government has championed our interests there very effectively. The government's work in Russia should be seen as a model worthy of replication in other countries.

Unfortunately, however, the ability of America's energy companies to compete in many parts of the world is jeopardized by one negative aspect of U.S. policy -- the use of unilateral economic sanctions.

Some of my colleagues at Conoco wish I wouldn't raise this touchy subject. They believe we're almost "radioactive" on the issue of sanctions because of our experience with the Sirri project in Iran in 1995. But I believe that the issue of sanctions needs to be discussed much more openly.

Currently, the U.S. has imposed sanctions against about ten countries. Stiffer sanctions are possible against some of these, and new sanctions may be imposed on a half dozen other nations. Together, these countries represent a substantial chunk of the global market.

I don't question the goals of economic sanctions. Sanctions are often used in the fight against some of the most challenging problems in the world today -- human rights abuse, weapons proliferation, drug trafficking, and terrorism. And I recognize that there are times when the United States must stand alone for what we believe to be right. In those times, U.S. companies will always stand with our government.

But sanctions -- especially unilateral sanctions -- should only be used as a last resort. My advice to Washington, simply stated and offered with respect, is as follows.

First, we should begin a systematic search for alternatives to economic sanctions as they're currently applied. Sometimes it seems as though sanctions have become virtually the only tool in our foreign policy kit. When I see the list of potential target countries, I'm reminded of the old saying: "When your only tool is a hammer, every problem starts to look like a nail." In thinking about the effectiveness of sanctions in general, I'm inclined to wonder if we are hitting our thumbs more often, and harder, than the nail.

Which brings me to the next point. If sanctions are deemed unavoidable, we should try everything in our power to make them multilateral, rather than unilateral. It's joint pressure from many countries that is most likely to bring meaningful results. I realize of course that in many cases the U.S. is already trying to do this.

That leads to my final point on sanctions. If we cannot convince our allies to act with us, and yet we feel compelled to act alone, at least revisit the decision from time to time. Don't wind up the economic sanctions clock and walk away. I urge our leaders in Washington, periodically, to carefully analyze the direct and indirect cost of unilateral sanctions to American workers, companies, the economy and our long-term security, and to build in renewal provisions that require an assessment of the costs and effectiveness of sanctions before leaving them in force.

If, after a careful analysis, it becomes apparent that sanctions are not achieving the desired effect, be prepared to drop them until we can persuade other countries to join the cause, or until we have discovered a more effective approach.

U.S. companies are well equipped to help our nation achieve its foreign policy objectives by doing what they do best: spreading investment, developing markets and creating jobs and opportunities around the world. We should be used as another tool in America's kit, a tool for positive change.

In conclusion, let me restate the key capabilities I believe are essential for energy companies who want to be leaders in investment and growth:

The growth of energy investment across international borders is too important for it to be restrained. Business -- and government -- should join hands to ensure that investment remains a vital force for global economic progress and a better world for us all.

Thank you very much.

ARCHIE W. DUNHAM
President and Chief Executive Officer
Conoco Inc.
Houston, Texas

Archie W. Dunham is president and chief executive officer of Conoco Inc. and an executive vice president of E. I. du Pont de Nemours and Company, Conoco's parent. He serves on both companies' boards of directors and is a member of DuPont's policy-making Office of the Chief Executive.

Dunham joined Conoco in 1966 as an associate engineer in Houston. For seven years he worked in various positions within the natural gas and gas products department and the corporate new project development group. In 1973, he became manager of the gas products division, followed by an appointment to Harvard University's Management Development Program.

He was elected executive vice president of Douglas Oil Company, a Conoco subsidiary in Costa Mesa, California, in 1976 and became president of the subsidiary in 1979. He returned to Houston in 1981 as vice president of logistics and downstream planning. In 1983, he was named vice president of transportation, natural gas and gas products. After participating in Stanford University's Senior Executive Management Program, he became executive vice president of petroleum products, North America, in 1985 and was simultaneously elected to the Conoco board of directors.

In 1987, Dunham became group vice president of DuPont's chemicals and pigments sector at DuPont headquarters in Wilmington, Delaware. He assumed the same position for polymer products in 1989 and the following year was promoted to senior vice president, DuPont polymers.

He is a past chairman of DuPont's Environmental Leadership Council.

Dunham returned to Houston in 1992 as Conoco's executive vice president, exploration production. He held that position until becoming president and CEO in January 1996.



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