U.S. Energy Industry post-Enron: The View from Houston

 Real Audio of Briefing 

Copyright (c)2002 by Federal News Service, Inc., 620 National Press Building, Washington, DC 20045, USA.   For information on subscribing to the FNS Internet Service, please email Jack Graeme at info@fnsg.com or call (202) 824-0520.

MR. MILLER: Well thank you, and good morning everyone. Certainly appreciate all of you coming out on this Friday morning because I know you've got very busy schedules. And we'll try to move the time along very quickly and efficiently for you.

I'd like to begin this morning with a very positive note, and it's really the message that we have for the morning, and that Houston is and remains a healthy and very vibrant city. You might even say that in spite of the events of last year, Houston is in fact thriving in 2002. And in fact, the Greater Houston Partnership predicts that Houston will add something like 15,000 jobs this year.

The energy industry continues to have a strong presence in Houston's economy, but as you may be aware that the region and its people are increasingly diverse. Houston's economy is now less than 50 percent energy-driven and has expanded considerably in the aerospace, health care and high tech industries. In fact, according to the Houston Technology Center, the Houston region is home to the second-largest number of technology companies in the United States. In addition to manufacturing, health care, construction, banking and engineering services, which are really the stalwarts of the Houston economy, they continue to perform well and, in fact, ahead of national norms.

I would also stress that the energy industry in Houston is much more than Enron; it's much more than power and gas trading or commodities brokerage. Houston is the leading domestic and international center for virtually every segment of the oil and gas industry -- exploration, production, transmission, marketing, service supply, offshore drilling, and technology. The Texas Gulf Coast itself has some 3.8 million barrels a day of crude refining capacity, which is about 23 percent of the U.S. total. About 25 percent of the nation's gasoline supply is provided by Texas refineries, and about half of that comes from the Houston area. The industry is important not only to Houston, but it is critical to our country's continued global leadership.

The Houston Gulf Coast also provides nearly 50 percent of the nation's base petrochemical manufacturing capacity, and that is nearly four times that of its nearest U.S. competitor.

In June 2001, the Houston region held 29 percent of the nation's jobs in crude and natural gas extraction, 13 percent of the oil and gas field services jobs, and 38 percent of the oilfield manufacturing mining jobs. Six of the 20 largest publicly traded oil and gas exploration and production firms are headquartered in Houston. The remainder have subsidiaries, major divisions or significant operations in the Houston area.

Houston's manufacturing industry is robust and helps to drive both the U.S. and the world economies. In 1997, the most recent year of the Census of Manufacturers, the Houston region accounted for some $80 billion in shipments, which is up 46 percent from 1992, just five years earlier.

Now I'd like to spend just a couple of minutes on a topic that has dominated the news in the past few months, and that is the fall of Enron -- a topic that certainly is top of mind for the business community, the administration and government regulators, the financial markets, investors and stakeholders.

The investigations into Enron's practices have resulted in an unprecedented public hearings and growing concern that our nation's business community is in moral trouble. The integrity of the accounting industry is being questioned. The business practices of business leaders and their boards are now often help up with suspicion. Long-term implications are still unclear, but I think you will agree with me that the way we conduct our business will change, and I think for the better.

Enron is an unfortunate tragedy for the employees and retirees who lost their jobs and their pensions, and for the shareholders who lost significant investments. However, there are a number of bright spots. This highly educated, talented, creative workforce actually has become an attraction not only within Houston, but also for those who are considering relocation to Houston. Immediately after the release of the Enron employees, the Greater Houston Partnership brought together key people -- the Enron human resources personnel, The WorkSource, and the City of Houston -- to assist the displaced employees. The Partnership cosponsored, with Mayor Brown and the City of Houston, a job fair designed specifically for Enron employees. And in fact, the Greater Houston Partnership has hired two of the former Enron employees, and this is very common now throughout the city of Houston. So while the overall impact on Houston employment was in fact minimal, because the job loss of 4,600 Enron jobs is actually less than three-tenths of 1 percent of the Houston employment base, the response was to quickly assist the displaced employees and to keep this quality talent pool available in the Houston region.

I think it's interesting that in the marketplace itself the response was swift and virtually seamless to continue to provided uninterrupted power and gas supply. According to a late November report by the Cambridge Energy Research Associates, or CERA, major market participants had more than a month to unwind their positions, and thus, the overall exposure was greatly reduced. Even with the loss of Enron Online, wholesale gas and power markets continued to function normally. Also, an abundant supply of gas and a downward trend in demand certainly helped during the critical time to cushion the marketplace.

The Enron Online trading business was quickly picked up by competitors. And indeed, it's rather interesting to observe that these many companies stepped in very comfortably into the void created by Enron's departure from the marketplace.

According to the CERA report, although Enron ranked number one on the list of gas and power marketers in the first quarter of 2001, even at that time Enron accounted for less than 15 percent of gas transactions among the top 20 gas marketers, and they accounted for less than 20 percent of the electric transactions of the top 20 electric marketers. CERA continues to report that the wholesale gas and power markets in North America remain strong and functioning with many large, well-capitalized parties in the wholesale gas and power market aggressively moving into the gap left by Enron.

The bottom line really is is that the trading volumes continue to grow -- they grow robustly -- and competitors continue to fill that gap. The power and gas trading industry continues to provide that uninterrupted gas and energy supply so badly needed by our nation.

I should point out that Houston is also home to many of the wholesale gas and power trading companies that stepped in to fill that gap. Four of the top 10 wholesale electric power traders and six of the top 10 wholesale gas traders in the North American market have corporate headquarters in Houston. Some of the major trading operations headquartered in Houston include BP, Calpine, Coral, Duke, Dynegy, El Paso, Entergy-Koch, Reliant, Tractebel and UBS Warburg Energy.

And let me conclude by repeating what I said at the beginning: that Houston remains a healthy and vibrant community with a strong energy-industry presence. However, that Houston region and that Houston set of people are increasingly diverse. Now a few quick snapshots will demonstrate my point. Biotechnology operations are expanding in the Houston region, and now Houston is home to some 105 bioscience firms. Research and development continues to increase its presence in Houston, with NASA, the Texas Medical Center and major universities increasing their activities. The Texas Medical Center has received more than $2 billion in research grants since 1996 to study cardiovascular, cancer, cell biology and genetic research. The University of Houston receives some $53 million annually in research grants, and Rice University receives more than $50 million annually for grant research and training. Rice's Center for Nanoscale Science and Technology and its Center for Biotechnology and Environmental Nanotechnology is helping to drive Houston to the forefront as a center for nanotechnology development.

Houston also continues as a major international city, with some 75 nations having consular offices in the city. The Greater Houston Partnership estimated recently that foreign-owned firms and domestic firms with significant foreign operations now indirectly support some 38 percent of the Houston-area job total.

Now I'd like to ask the honorable Lee P. Brown, the mayor of Houston, to offer a few comments. We will also hear from Steve Trauber, managing director of Morgan Stanley, for some brief comments, and then we will be happy to take your questions. When we do so, Chris Wilmot will also join us to answer questions, and Chris is here in the front row. He is president and CEO of WCW International, which assists companies with negotiation regarding business opportunities in various African countries. Chris also chairs the Greater Houston Partnership's World Trade Division on the Africa committee.

And now I'd like to ask Mayor Brown to come to the podium. Mayor?

MAYOR BROWN: Good morning.

Let me supplement Mr. Miller's comments about our city. He's pointed out that we continue to prosper as a city and also made the point very strongly that the foundation of Houston's economy is our diversity, and that diversity continues to fuel positive growth in our economy. Houston saw positive growth last year while the rest of the nation as a whole was experiencing a negative growth.

Two decades ago, when I served as the police chief in Houston, oil and gas accounted for about 86 percent of Houston's economy. Today the energy industry accounts for approximately half of Houston's economy. That's significant when we ask the question, how is Houston faring as a result of Enron?

The point I want to make is that during the '80s, we had an industry problem; with Enron, we have a one-company problem, where some 4,000 people unfortunately lost their lives (sic), and certainly, my heart goes out to those Enron employees who lost their lives -- their livelihood by losing their jobs, who lost their pensions, and certainly the stockholders. But we've worked on that, as Mr. Miller pointed out, by hosting job fairs and being of assistance any way we can.

But the critical point is that Houston's economy is much more diverse right now. We are still the energy capital of the world; the space center, with Johnson Space Center; we are a major transportation center. Our port is number one in foreign tonnage, number two in overall tonnage. Our airport is number four in the nation and number six worldwide, seeing some 44 million passengers per year. We have the world's largest medical center in our city. And in addition to that, as pointed out, we also are a high-tech city, with some 2,000- plus high-tech companies calling Houston home.

While for the first time Houston, at least for the while, will mirror much of the national economy, but by the second half of this year, Houston will again seek positive growth as we predict a growth of about 15,000 jobs. If we look at most cities in America, at best, there'll be a flat job growth. In many instances, there'll be a negative job growth. We predict a 15,000-job growth. In the 12 months ending in January 2002, we posted a net gain of 7,500 jobs, while the nation as a whole lost 1.2 million jobs. Also in January, when the Texas unemployment rate stood at 6 percent and the national rate was 6.3, Houston's rate was at 5.3 -- again, lower than the Texas rate, lower than the national rate.

Houston's the home of 20 Fortune 500 companies. That does not include Enron. And we continue to attract new businesses.

On April of this year, this week -- this Wednesday, in fact -- JP Morgan Chase announced its investment bank was -- had selected Houston as the home for its new North American technology center. That will, in itself, create about 250 new jobs and bring approximately $63 million in annual economic impact to our city.

It's also interesting to note why JP Morgan selected Houston. They pointed out that they chose Houston because the city has a deep pool of technology talent. Houston's a truly international city, rich in diversity, rich in culture, rich in technology expertise. The -- Alan Buckwalter, who's chairman of the Southwest region for JP Morgan Chase, pointed out, and I quote, "Companies go where the highly skilled people are," end quote.

And clearly, because of Houston having a large number of outstanding educational institutions, there is a pool of highly educated people to go into the workforce. Job growth remains strong, and the study at the Texas Medical Center, which is, by the way, the world's largest medical center. Boeing is moving a number of jobs to Houston, working in the space industry. Conoco, Phillips will be headquartered in Houston. And the merger between Devon Energy and Mitchell energy will bring additional jobs to the greater Houston metropolitan area.

Despite the diversification of our economy, Houston's corporate roster reads like a "Who's Who" in the national energy industry, as Mr. Miller pointed out during his presentation. But if we look overall at what makes Houston so strong, it's the diversity of our economy. Transportation, our port being number one in foreign tonnage, number two in overall tonnage, space center, the world's largest medical center, high technology -- all of that combines to make Houston an attractive place in which to be. Also, Houston is an international city. In fact, about one out of every three jobs in Houston is tied to international trade.

We look at the development of our international activities -- we have 75 consulates. We're number three in the country now in foreign countries opening an office in our city. But our economy is continuing to develop positively. In general terms, we have about a $2 billion development at our port, building a new terminal for container ships as well as cruise ships.

The cruise ships will give us a new industry. We have at least $4 billion of development going on in our downtown area. For the first time in two decades, we're now building new high-rise office buildings. We're doing four because our occupancy rate's at about 93 percent.

We're building for the first time a light rail system in our city, a rail down Main Street from downtown out to the Astrodome complex. This, in my estimation, is at the beginning because we have to address our transportation problems as our city continues to grow. But in addition to having the transportation element of the rail, it also provides for economic development. We predict that the rail in itself will generate between $500 million and a billion dollars of economic development along Main Street.

All of that adds up to a very vibrant city where a lot's going on. At our airport we have a $2.8 billion expansion program. Our medical center has about a $2 billion development program. And so you see, our city is continuing to prosper.

We're also very sports-minded in our city. We've built a new baseball stadium with the retractable roof. Our team won yesterday, we expect to win again today, and on and on. We're building a new football stadium for our new football team, the Houston Texans. We expect to be very competitive in our first season. We're also building a new basketball/hockey arena for the Rockets and the Comets and our -- Aeros, our hockey team. We will host the 2004 Super Bowl as well as the 2004 baseball All Star game. And we're very delighted that we were selected to be in the final four in the bid for the 2012 Olympics to become the United States bid city.

So when the question is asked, "How is Houston doing?" my response is Houston's doing well. And all indicators, both local and national economists and international economists, suggest that that will continue to be the case into the foreseeable future. A number of national publications have addressed Houston. Economy.com has analyzed Americans' 40 largest metropolitan areas and predict Houston's gross area product will do better than any other city through the second quarter of 2002. Industry Week named Houston one of 12 world-class cities for manufacturing. The London-based Economist magazine predicts 20 more years of, quote, "dynamic and successful growth for Houston."

Black Enterprise ranked Houston number one, as the top city in America based on income potential, cost of living, proximity to employers, cost of housing and 21 quality-of-life factors. A Carnegie Mellon University study released just last week ranked Houston number seven in the nation out of 200 -- I'm sorry -- 250 cites in potential for economic growth, measured by its development of a creative class -- "creative class" really meaning places that become talent magnets for people who want to relocate or grow their business.

Why is that the case? It's the case because the quality of life in Houston is good. The costs of housing are about 40 percent below the average of the 22 largest cities in the United States. The cost of living is 17 percent below the average of these large metropolitan areas. We have a outstanding theater district, with more theater seats than any other city outside of Broadway in New York, with the four permanent performing arts -- the opera, the symphony, the ballet and -- as well as the theater. We have an outstanding museum district. Our school system is good. In fact, the president tapped our school superintendent to become the secretary of Education, to duplicate what we did in our city.

All in all, We are on our annual trip to New York. We were there yesterday -- here in Washington, D.C., today to brief those of you in the media about where we are in Houston. And I would conclude by saying we are very, very optimistic about our future for the reasons that I've stated and the reasons that Steve Miller stated earlier. Thank you.

MR. TRAUBER: Good morning. I recognize I stand in the way of you in asking questions, Mayor Brown and Steve Miller. So let me be very brief. I'm Steve Trauber, managing director of Morgan Stanley and head of the Southwest region of the firm; also chairman of the Houston Economic Development Advisory Committee for the Greater Houston Partnership.

I might start off by saying: If one just looks at the headlines in the press, in the media these days, one would think Houston was in crisis mode. I think Mr. Miller and Mayor Brown have done an excellent job dispelling that myth. But let me tell you, nothing could be father from the truth. If one comes to Houston and sees the vibrancy of the city, sees the building going on downtown, with four new office buildings going up downtown, as Mayor Brown talked about; the new football arena; the new basketball arena -- it's a very exciting time for Houston.

The energy companies are thriving in Houston. As Mayor Brown talked about, this was a one-company situation, not an energy situation. Commodity prices are strong. Cash is flowing to these energy companies. One only needs to look at he stock market and realize these companies are doing very well. These stocks have all moved substantially since the beginning of the year, since the fall, and that bodes well.

We're in a -- I think we're really in a inflection point for the energy business. I think the supply-demand is in our favor. Supply has slowed, due to drilling being pulled back here in the last six to nine months, and therefore, I think we're going to be in a period over the next year and 18 months, and hopefully for a longer period of time, of sustained, strong commodity prices, which should bode extremely well for the Houston environment and for the energy business overall.

Let me also say, from Morgan Stanley's perspective and the financial services perspective, it's a great time to be in Houston. Energy companies are thriving, as I mentioned, which means they're in need of capital to continue to grow. Technology within the energy business needs capital, and energy companies are looking to drive more technology. That is how the U.S. is going to meet their demand needs going forward, and a lot of money goes into technology and the energy business, and Houston, as previously discussed, is the capital for that. So from a financial services perspective, it's a great time to be in Houston. We, as a firm, are growing and our peers are growing and, therefore, I think we'll continue to see growth in that sector as well.

And finally, from the overall environment's perspective, as Mayor Brown talked about, it's a great town to be in. We have great performing arts, we have world-class performing arts in Houston -- the symphony, the opera, the theater organizations, the museum, world- class organizations down there. And while Enron was clearly a major philanthropic company and its employees were very philanthropic, the city, because of its resiliency, both corporate-wide and individually, have come and stepped up in a way like only Houstonians can. They're meeting the challenge of the needs for funding for these organizations and they're doing it in a big way. So we, as Houstonians, clearly look at this as a period of vibrancy, and we think that if the rest of the U.S. and the world could come to Houston, they'd see the same vibrancy that we get to experience every single day down there.

So with that, I'll let you turn it over to questions. Thank you very much.

MODERATOR: Thank you very much. We're ready for your questions now. I ask that you wait for the microphone and identify yourself before making your question.

Who would like to start?

Yes?

Q Justin Cole (sp) from AFX News. Mr. Miller, you gave a very upbeat presentation on the resiliency of the energy sector in Houston and how it's thriving. I wonder, could you just sort of go into more detail on how you see Shell's future in this city and what your commitment is to the local and regional energy markets and what opportunities you see there in the gas markets, please.

MR. MILLER: I think Shell is going to continue to very much participate in the energy markets in the United States. We have a very strong capital program -- we have had it over the last couple of years. We're going to continue to invest in that program. We'll probably be spending something a bit over a billion dollars this year on the E&P side of the business.

We were able earlier -- actually not earlier this year, it was in December of last year, had a very successful participation in the lease sale in the Gulf of Mexico. As you're probably aware, we are leaders in the deep-water technology development; hold a number of (plays ?) there. And I think that offers nothing but upside opportunity for the company as we go ahead.

You'll probably also be aware, of course, that we've continued to expand our downstream activity. We've been able to conclude the negotiations with Texaco. And so now we have a significantly enhanced downstream operation. And we're very -- looking forward to being able to go through all the necessary approvals so that we can consummate the Pennzoil-Quaker State acquisition that we announced about a week ago.

So I think it's an area of very significant investment in this country by Shell; it always has been, since our inception in 1912, and it will continue to be so. If you think about it in terms of the total Royal Dutch Group, by the time we complete the Pennzoil activity, we will be accounting for nearly 40 percent of the revenues of the Royal Dutch/Shell Group will come from the United States, and something on the order of 25 to 30 percent of the net income will come here. So Shell has a very strong commitment to this country.

MODERATOR: Next question? Yes.

Q Yes, my name is -- (inaudible) -- from CMT Channel 51 of Venezuela. The most oil-producing countries are now in the middle of a political crisis, not only in the Middle East, also in Latin America and this is the case of Venezuela. The National Venezuelan oil company is now on strike. I want to know which incidents will we have in the American energy policy?

MR. MILLER: Well, you pick up another topic that is very much, you know, on the front pages, and today it's the issue about where are crude prices going. If I knew were crude prices were going, I probably wouldn't be with you this morning -- (laughter) -- I'd probably be doing some other things. But I can talk about the forces that will drive those crude prices, whichever direction.

The markets don't like uncertainty, and that's what we have today in the Middle East, and as you referenced in Venezuela, the uncertainty. Whenever you've got uncertainty, you'll see increased volatility in those marketplaces. And in the case that we have today, those scenarios are all concerns about the down side in terms of the supply portion of the equation.

And so if the events continue to evolve, if there remains that uncertainty, I think you'll see increased volatility and probably continued upside on the -- on crude prices.

On the other hand, if we begin to see some resolution of those issues -- and I think yesterday is a good example, the crude market fell a bit yesterday -- I think that was really in reaction to the positive intervention of the president to become more involved in the Middle East crisis. And so good news in terms of resolving some of these conflicts, whether they be in the Middle East or they be in Venezuela or anyplace else, will result in a reduced volatility of those markets, and prices will begin to pull back.

There is also the concern that the increase in crude prices will have a dampening effect on the very fragile recovery that we're seeing in this country on the economy. If you look back in history, a number of the last boom periods ended with high energy prices. But the late 1990s showed us that in fact the U.S. economy can have a very strong growth rate while still having crude prices in the $25-a-barrel level. But at the point of a recovery, which is where we are today, I think there has to be some concern that the increase in crude prices could be a dampener on that recovery. So I think it's to everyone's benefit that hopefully there will be some resolution to some of these issues that we're currently seeing.

MODERATOR: Thank you. Was there another question?

Q My question is also to Mr. Miller.

MODERATOR: Please identify yourself.

Q Yeah. Russia News Agency, TASS. I'd like to take an opportunity of this briefing and ask you, what sort of projects do you intend to develop in Russia and in former Soviet Republic, including projects in Sakhalin 2 and Kachagan in Kazakhstan? Thank you.

MR. MILLER: I appreciate the question. I'm not really an expert on that area. Obviously, we are very active. But what I will do is -- Dennis Winkler, raise your hand. He's right there by you. If you'll give your questions on that to Dennis, we will have the London office get back to you with the answers. Be happy to do that.

MODERATOR: Is there another question? (No response.)

With that, then I want to thank the panel and thank all of you for being here. Thank you. 

Copyright (c)2002 by Federal News Service, Inc., 620 National Press Building, Washington, DC 20045 USA. Federal News Service is a private firm not affiliated with the federal government. No portion of this transcript may be copied, sold or retransmitted without the written authority of Federal News Service, Inc. Copyright is not claimed as to any part of the original work prepared by a United States government officer or employee as a part of that person's official duties. For information on subscribing to the FNS Internet Service, please email Jack Graeme at info@fnsg.com or call (202)824-0520.