Patricia Yarrington's energy fix

patricia_yarrington.top.jpg Interview by Geoff Colvin, senior editor at large


FORTUNE -- Life is more than a little interesting for the CFO of a super-major oil company these days. Chevron's Patricia Yarrington is watching her biggest customers -- the world's developed economies -- claw their way out of recession. Yet some economists worry the recovery could fizzle if booming demand from China raises the price of oil too high. The entire industry is changing deeply as most of the world's largest economies focus on reducing carbon emissions and pushing alternative energy. BP's disaster in the Gulf of Mexico puts every giant producer under closer scrutiny and inevitable new regulations. Amid it all, Yarrington has to manage finances in a vast company (No. 11 on the Fortune Global 500) that invests over $20 billion a year.

In 30 years at Chevron (CVX, Fortune 500), Yarrington, 55, has held operating jobs, such as running Chevron Canada, and has headed the company's strategic planning. She became CFO last year. She's also a director of the Federal Reserve Bank of San Francisco, near company headquarters in San Ramon. She talked recently with Fortune's Geoff Colvin about the long-term effects of the gulf oil spill, why Chevron will shift its focus from oil to natural gas, a mentor who changed her life, and much else. Edited excerpts:

Q: President Obama recently lifted the moratorium on drilling in the gulf. Some analysts believe Chevron was the most exposed of the major oil companies to the moratorium. What was its effect on Chevron and on the U.S.?

A: We were obviously impacted. The whole industry has been impacted from a reputation standpoint. We need to prove to the American people and the American government that we can safely, environmentally, responsibly go back into the gulf.

From an energy standpoint, it's very important to have the moratorium lifted. The gulf produces about 27% of U.S. oil today and about 15% of the gas. Over the next five to seven years, that proportion of production coming from the gulf will be very important for the U.S. So it's important to get the moratorium behind us, to get the bar raised on our standards of performance, and to get people in the gulf back to work.

What will be the longer-term effects in the U.S. and elsewhere? We've already seen greater requirements for safety measures and maybe restricting permission to drill in certain areas.

There will be additional regulatory oversight, and minimum standards of performance will be raised for all operators. At Chevron we believe we were already operating above that minimum standard. But there are new regulatory requirements for well design and drilling, additional expectations for inspections on the blowout preventers, additional training for deep-water-well drillers, additional inspections all along the line, and a permitting process that will require you to have a documented safety program, a documented environmental program, etc.

Video: Regaining the public's trust

So it's going to take longer, perhaps, to get through permitting. But probably a year from now, you will have a resumption of activity in the gulf and in other places. Around the globe, we do expect there to be regulatory collaboration and coordination, so we expect the bar will be raised across the globe.

How significant will the extra costs be?

I mentioned that we believe we were already operating above the bar. Some would say that means we were already a high-cost operator. I don't want to phrase it that way, but I think we're already meeting those significant standards.

Did the industry learn any lessons from all this -- or was it a problem particular to BP (BP)?

Both, frankly. The industry by and large has operated in deep water very safely. There are 14,000 deep-water wells that have been drilled over the past 20 years, and this is one that has had this kind of an experience.

If you have an unfortunate circumstance like this, the next step is intervention and containment. A group of large companies, including Chevron, have created a marine-well containment consortium. The objective is to design, fund, and have ready a whole kit of equipment to step into this kind of circumstance. So we're ready on that front.

There's also been an awful lot of learning about cleanup -- about the effectiveness of dispersants, oil tracking and sensing, skimming technology. The industry is taking those learnings into account, and we will do better. We'll be safer and more environmentally responsible than we were six months ago. But even six months ago, it was already a very safe part of our business activity.

Some say the blowout accident shows that the era of cheap and easy oil is over. Do you agree?

We were almost the coiners of that phrase. We do believe that. Earlier in this decade, surplus oil production capacity had really been met by growing demand, and we needed to reach farther out on frontiers, go after the harder molecules to meet that growing demand. From 20 years ago to today, energy demand grew by about 40%. For the next 20 years, we see another 40% growth. It's going to be very important for the global economy that the industry be able to meet those energy requirements.

In the U.S., is a price on carbon inevitable?

I'm not so sure. We do assume there could be a price on carbon, but it's not uniform around the globe because there has not been global cohesion around this topic. We've been working a lot to lower our own emissions. Over the past almost 30 years, we've increased our energy efficiency by 30%. We're also moving more into development of natural gas, which is the cleanest-burning fossil fuel.

Will natural gas be, as some predict, a real game-changer?

It is in the U.S. for certain. You need to look at natural gas market-by-market because it doesn't have the fungibility of oil. But the new technology that's being applied broadly for shale gas has changed the amount of supply the U.S. has. It's a tremendous gift to the U.S. economy because it's indigenous supply, very economic, and it should do an awful lot to promote economic growth in the U.S. There could also be basins of shale properties in Canada, Eastern Europe, and China -- other places where you might find this wonderful economic gift.

Enactment of a carbon tax or a cap-and-trade law is probably at least a couple of years away in the U.S. But the EPA today has authority to regulate greenhouse gases. What new rules or regulations do you expect?

I wish I had a crystal ball. But you want to have global engagement so you have something that doesn't put individual industries or states or countries at a competitive disadvantage. There's an awful lot of additional dialogue that needs to go on before the EPA enacts something.

Is there an opportunity for Chevron in all of this?

Our opportunity is energy efficiency. It's good for our shareholders and for the economy. We're more productive, more efficient, and from an emissions standpoint, it's helpful.

But how does Chevron sell energy efficiency? Most of the company's profit comes from the upstream part of the business, producing a whole lot of oil and gas.

Right. But we're in the business for the long term. We believe fossil fuels will be with us for quite some time. The global economy depends on fossil fuels today for about 85% of the energy mix, and we believe 20 years from now it's going to be a little over 80%. Even under very stringent assumptions about regulation or policies that might dampen demand, it's still going to be over 70% of the energy mix.

Video: preparing for the end of cheap oil

So we need fossil fuels. They are integral to our quality of life. There's only about a billion folks who have the prosperity that we have in the U.S., and there's another 6 billion who aspire to what we have. We have an in-house organization that recommends to third parties -- government agencies, post offices, school districts -- ways to lower their energy consumption. We think that's all part of being a good citizen, but it's also making sure energy is affordable for the long term.

What will be the main car and truck fuels in the future?

Over the next 20 years you're still talking about gasoline and diesel as the primary transportation fuels. There may be inroads for natural-gas vehicles in fleets.

How will the sources of Chevron's profitability change over the next 10 years -- change by type of product and by geography?

Our production mix will tilt more toward natural gas over the next 10 years. We have two very significant natural-gas-development projects off the coast of Australia. One is called Gorgon. It's a $37 billion project that will have 40 trillion cubic feet of gas. That's enough to supply New York City with its natural-gas needs for 100 years.

We have another project, Wheatstone, that's a little further back in the development queue. But both will be significant parts of the Chevron portfolio for a long time. They have 30, 40, 50 years of life to them. So we see ourselves becoming more natural gas-based than oil-based.

In terms of geography, we see the U.S. still being a dominant energy province for us. We can see Australia becoming a dominant energy province. We continue to have significant investment opportunities and production in West Africa, and we also have a significant asset base in Kazakhstan.

In recent years we've seen a surprising number of major new discoveries in unexpected places. Natural gas off the coast of Israel. Afghanistan appears to be huge. You mentioned Australia. Something huge off the coast of Brazil. What is the message in this at a time when people are talking about peak oil?

The message is that technology marches on, and technology improvements day by day, year after year, really do unlock resources. It's finding resources you didn't know were there, and then figuring out how you can develop them, even when it seemed impossible.

Video: Natural gas is 'gift' to U.S.

A good example is deep water. A few decades ago, deep water was 100 feet, and the well drilling below that was about a mile and a half. Today we're talking about drilling in 10,000 to 12,000 feet of water and drilling down 30,000 to 35,000 feet.

Chevron is the defendant in a famous lawsuit in Ecuador. It was in the news recently because the plaintiffs increased their demand to more than $100 billion, and the judge was replaced -- the seventh judge to have overseen the case. Chevron has said it's simply impossible to estimate what this could end up costing. But with these huge numbers being thrown around, how should investors think about it?

We've tried very hard to put the history of the case on our website. The data is all out there. New court activity in the U.S. suggests that what has been perpetrated here is really a fraud. Increasing evidence is coming forward from a movie called Crude and the outtakes we've been able to secure from that.

From an investor's standpoint, to the extent we can progress this case and have it shown that in fact it was a fraud, we've tried to say to investors that there shouldn't be a concern here. We still have a long way to go. We still have arbitration under way in the Hague. So I can't say it's over. But we certainly believe the evidence is on our side, and now, with all of this ancillary information coming forward on the fraud, that the end will be that Chevron is vindicated.

As a director of the Federal Reserve Bank of San Francisco, part of your job is to report how business conditions look. What are you telling the Fed now?

If I had to recap the past several months, it has been a slow improvement. We don't feel we're at the edge of the abyss. We're on the right path, but it is very, very slow.

What are the chances of a double dip in the U.S.?

I am reasonably heartened by the indicators we've seen. I do think we have to lower our expectations for how quickly job growth will come back, but I don't see the evidence of a double dip. In our business we're seeing slightly higher gasoline sales, slightly higher diesel sales. Natural-gas demand year over year is higher. But it's hard-fought successes.

There aren't a lot of women at the top of the global oil industry. What were the most important factors in bringing you there?

It's a whole series of things. In my life I had a number of people who were important and who set certain expectations. You start with your parents -- they always said, "You can do anything you want to, just put your mind to it." I married an individual who's very supportive of having a wife with a career. I have three great kids, and at various points when the decision came -- should mom take this job if we have to move? -- they basically said yes. If they had said no, I wouldn't be sitting in the chair today. I also had two or three people that I can very discreetly point to, who gave me chances when they didn't have to. I will also say I performed when those chances were given. So it's that whole complexion that has gotten me to sitting in the chair today.

I'm struck by how many top executives say something similar about having had a few figures in their work lives who helped them, mentored them.

There was one individual very early in my career. I was probably two or three years into my time with Chevron. I was working on a project for the CFO, and it involved representing the company with some outside lawyers, and it was a very important topic. He must have picked up on my thinking at the time, which was, "My gosh, I've only been in the company two or three years -- why are you sending me off to do this project?" He looked me in the eye and said, "Look, Pat, let me just tell you. Anytime I ask you to go into a room and represent me, I have complete confidence in you, and I expect you to take your full seat at the table. You are just as bright, just as capable, as anybody else you will meet. Never forget that, and always make sure your voice is known."

That was 27 or 28 years ago. I think about that almost daily. It was a superb piece of advice that I try to share.

--Editor's note: During our interview, Patricia Yarrington misspoke and said Chevron had reduced its energy consumption by 30% over the past 30 years. Chevron had increased its energy efficiency by 30% over the past 30 years. The correction has been made above. To top of page

The C-Suite Series: This is the latest interview with top executives by Fortune senior editor-at-large Geoff Colvin. See video excerpts of this interview at fortune.com/csuite -- plus find other Colvin interviews, including those with Charles Schwab, the team of Jeff Immelt (General Electric) and A.G. Lafley (Procter & Gamble), Newark mayor Cory Booker, former New York City school chancellor Joel Klein, Pimco's Mohamed El-Erian, and many more.