Riley Bechtel: Chairman and CEO, Bechtel Group Inc.

Q Bechtel has a reputation for taking on challenging construction projects. Can you tell us a bit about Bechtel’s business?

A Bechtel is a global engineering, construction and project management company. We have more than a century of experience on complex projects, including Hoover Dam, Channel Tunnel, Hong Kong Airport, Jubail Industrial City, Bay Area and Washington, D.C., subway systems, reconstruction of Kuwait’s oil fields and facilities after the Gulf War, and, most recently, rehabilitation of Iraq’s electric, transportation, water/waste-water, school and health clinic infrastructure since April 2003. We have about 40 offices around the world and employ about 40,000 people.

Our work scope can include feasibility studies. We detail-design many facilities. We procure permanent equipment such as turbines, compressors, motors, and the like, as well as construction commodities. We perform construction and we startup finished facilities. We often provide overall coordination and integration of these various scopes as project manager. Depending on customer preferences, we may do unique combinations of these scopes.

The types of projects we work on are quite varied. For customers in energy and natural resources, we build fossil and nuclear power plants, refineries and petrochemical facilities, pipelines, upstream oil and gas field developments and mining and metals facilities.

We manage and operate defense-related U.S. facilities, and, also with the federal government as a client, have become the largest U.S. environmental contractor.

In the transportation segment, we take on all manner of complex roads, rail systems, airports and seaports. We also design, construct and manage procurement for large-scale telecommunications networks.

A Being global, we must keep an eye on all major economies on the planet. About half of our revenues come from projects outside North America. Global growth has been good in recent years and I believe that it will continue to be strong for some time.

The fuller integration of China, India and the former Soviet Union into the world economy has had an enormous impact, changing global patterns of trade in goods and services, energy supply and demand, the utilization of resources such as metals and the supply of qualified vendors, contractors, technologists, engineers and construction craft workers.

The contribution of these countries to world economic growth has led to sharply increased demand for the infrastructure needed to extract, process and transport raw and finished materials. This growing demand has benefited the global engineering and construction business. Our customers have enough confidence that demand will be sustained to hire us to build more capacity, or modernize and upgrade existing facilities. We have not been busier for over 20 years.

So, I’m optimistic about the global economy because it’s getting better integrated and getting less dependent on the United States alone. The growth in domestic demand in many countries outside the United States is a good trend, suggesting that global economic growth will be sustainable.

A I think the U.S. economy will continue to be reasonably strong. Although interest rates have risen and the economy’s rate of growth may be moderating, liquidity is still good and balance sheets are still healthy.

For more than a decade our economy has consistently outperformed other industrial nations. GDP growth has averaged better than three percent since the early ’90s. For most of those years the U.S. was the engine of the global economy, and it was up to the task.

Nonetheless, that achievement is not without complications — a large trade imbalance, a low savings rate and heavy reliance on foreign capital and imported hydrocarbons. With more of a leveling of growth rates around the industrialized world, and more stability in the developing economies, some of these imbalances may begin to unwind. This will take years and changes are likely to be incremental rather than causing tumultuous shocks to the system.

There are some potential bottlenecks to worry about. One key concern for our engineering and construction business is availability of the craft workforce that we need for our projects. The problem is growing throughout the US and particularly acute in some regions, such as the Gulf Coast. We’re supporting aggressive, local recruiting, training and hiring programs such as the Business Roundtable Gulf Coast Workforce Development Initiative.

Another key concern for us today is very tight specialized manufacturing shop capacity both in the U.S. and globally. Our specialized supply markets have not been this busy and slow to expand since the early 1980s.

In summary, although there are concerns, I think the U.S. economy will continue to be reasonably strong and resilient so long as our policy makers continue to see the U.S. as part of a global economy rather than an economic island.

A There’s no doubt that the U.S. engineering and construction business benefits from a strong U.S. economy. Yet it also contributes to a strong economy. A healthy, growing economy means high productivity and robust domestic consumption, which create demand for energy, chemicals, metals and many other resources and services. For our customers, that demand translates into a need for capital projects.

Engineering and construction work creates thousands of good jobs in the U.S. Also, the facilities we build for our U.S. customers improve America’s petroleum refining and processing capacity, add to its natural gas resources and increase electrical generation capability, helping the United States by making energy and other resources more plentiful and economical. Similarly, the infrastructure projects we deliver make transportation and materials handling more efficient. And, continued upgrading of the U.S. telecom systems improves the nation’s ability to communicate and do business.

All of these capital improvements benefit the productive capacity of

the U.S. economy. Also, we consistently export substantial U.S. equipment and services, making us one of the larger U.S. exporters.

A We all know that the global oil and gas market is booming. We believe 2.5 million to 3 million barrels a day of global oil extraction capacity will be constructed every year for the next five years. With energy demand running at such a fast clip, there is a huge requirement for new facilities both in upstream and downstream oil and gas sectors.

A number of very large processing facilities are being built, designed or planned in the U.S., Middle East, Canada, West Africa, the Former Soviet Union, China and India. Some of these developments include additions and upgrades to existing refineries making them new world leaders in size.

The global liquefied natural gas market is also booming. There are roughly 25 world-scale LNG facilities in the various stages of development or construction. Outside the United States, spending has been on LNG liquefaction facilities where the gas reserves are located, as well as receiving terminals in Europe and Asia.

The U.S. LNG industry is now planning and building terminals that will receive and re-gasify imported LNG from overseas locations. Currently, there are only four LNG receiving terminals in the U.S. but another four terminals are in various stages of development. There are over 40 applications to build new terminals, but most people think the economics and environmental/political permitting issues will not ultimately support that many. We will see.

Finally, we expect to soon see major new, world-scale, natural gas pipeline projects to transport Alaskan and Canadian natural gas down into the lower 48 states.

A The basics of supply and demand are driving oil and gas prices, as well as some financial speculation and concerns over political risks in some of the major hydrocarbon-producing regions. The realities of supply and demand play out on a global basis and are not just driven by U.S. requirements.

The rapid economic growth in countries like China and India has raised demand relative to supply of oil, which recently helped to drive oil prices to about $80 per barrel before beginning to recede. Increased global demand for refined product has been acutely felt in the U.S. with gasoline prices rising above $3 per gallon this summer.

On the upstream supply side, the 1980s and ’90s saw minimal investment in developing reserves around the globe. Similarly, refiners did not invest in downstream capacity increases. In addition, hurricanes Katrina and Rita along the Gulf Coast knocked out several oil producing platforms and refineries for long periods, further restricting supplies.

So, increased demand for oil and gas, coupled with stretched capacity on the supply side — in both upstream and downstream sectors — have led to price volatility. But increases in oil and gas production, along with facilities to process and transport it, and helpful recent weather on the Gulf Coast, are helping to moderate these imbalances.

Finally, despite notable exceptions from time to time, reasonably stable geopolitics in the hydrocarbon-producing parts of the world have helped as well.

A The future for refining presently looks fairly robust. U.S. projects now getting the go-ahead will add nearly a million barrels a day of crude refining capacity when completed. In addition, refiners are installing the capabilities to refine heavier crudes, mainly coming from the tar sands region of Canada. These new downstream capabilities will allow the U.S. refiners to diversify their sources of crude supply.

Refiners have been investing in cleaner fuels programs over the last couple of years to meet the new requirements for low sulfur gasoline and low sulfur diesel. With world demand for oil and its products at exceptionally high levels, refiners are starting to look at new grass-roots refineries outside the United States as well. We are working on an expansion in India that is expected to again make that refinery the world’s largest.

However, the refining industry has a long history of cyclical expansion coming online just in time for demand growth slowdowns. We’ll just have to see how many refining projects being considered actually get built.

A Not so much as people might think. Oil and natural gas fuel only 20 percent of the generation of electricity here in the United States. Coal and nuclear provide the lion’s share of our electricity. Renewables (wind, hydro, solar and biomass) are not yet material in size but are nevertheless becoming more important as applied technologies improve and consumers increasingly value being “green.”

All these factors together have meant that, over the last few years, electricity prices have not been much impacted by the increase in oil and gas prices. Since 2002, residential electric prices have increased about 15 percent, roughly in line with the rate of consumer inflation.

There have been regional exceptions. Parts of the U.S. that depend more heavily on oil or gas for electric generation — for example New England and the West Coast — have seen electricity prices rise more rapidly. And some regions that deregulated electricity have been under rate caps during their transition from regulation to full deregulation. Some regions have seen rates jump dramatically as the transition period ended after having rates frozen for a number of years.

A Natural gas remains an important part of the U.S. generation portfolio with over 10,000 megawatts coming on line in 2006. And in 2007 we will have the first new nuclear generation constructed in this country since 1996 as the Tennessee Valley Authority’s Browns Ferry Unit 1 restart project is completed. As I mentioned earlier, renewables are an increasingly important part of the mix, but not yet proportionally significant.

We believe the resurgence of interest in coal-fueled power plants is especially noteworthy. We

haven’t seen this much interest since the 1970s when most of our existing coal-fueled plants were built. Almost 60,000 megawatts of new coal-fired generation have been announced in the United States and about 10,000 megawatts are currently in construction.

Recent increases in the price of natural gas have made coal generation economics favorable. Also, coal is abundant in the United States, its cost is stable and advances in technology are making coal-fired generation more efficient and cleaner than ever before. Obviously, policy and political issues, and further technological improvements, will affect the future of coal generation.

A Recent events have highlighted the need for generation diversification. In the early 2000s, most new power plants used natural gas because it provided relatively clean, efficient power generation and their development was fast.

However, increasing demand for natural gas, partially driven by new gas-fired facilities, and decreasing reserves of natural gas drove up fuel costs, which became a very big part of the cost of generation.

The link to global oil prices also made natural gas prices volatile. The fragility of our natural gas supply chain was highlighted by the 2005 Gulf Coast hurricane season’s disruption of gas production in the Gulf.

Future generation must, in my view, include a thoughtful, robust mix of technologies including coal, natural gas, nuclear and renewables. Initiatives are continuing to improve the efficiency of pulverized coal fired plants and make their emissions ever cleaner.

Also, we soon expect to see integrated gasification combined cycle power generation become commercially viable. It converts coal to a synthetic gas which then produces electric power. This technology produces significantly fewer emissions than pulverized coal generation.

Finally, technological progress will continue to lower capital costs and improve operating efficiencies for wind, solar, and biomass generation, along with the potential for other alternative sources. Effective marketing and changing consumer preferences for more sustainable energy will, assuming a strong economy, also increase demand for these alternatives. Over the much longer term, the hydrogen economy will arrive but we don’t foresee its material impact for at least 30 years.

A I sure believe so. To achieve and maintain a robust energy system, all energy options must be kept open and nuclear power has distinct advantages. Diversification of fuel supply is one of the keys to America’s energy strategy for the 21st century.

With U.S. electricity demand projected to increase by 35 percent by the year 2025, and with nuclear energy today contributing 20 percent of the nation’s electrical supply, with no emissions, it must be a component of our nation’s energy mix.

Nuclear energy won significant U. S. political support with the signing of the Energy Policy Act of 2005, the first comprehensive energy legislation in 13 years. It concluded a four-year, bipartisan congressional effort that included broad-based initiatives to diversify the nation’s supply of oil, gas, coal, nuclear and renewable energy.

The nuclear provisions of the act contain an impressive array of programs, including loan guarantees, risk insurance and tax credits. They are structured to bridge what has been called the economic feasibility gap that currently prevents the United States from building new nuclear plants.

Nuclear power generation is safe, clean, reliable and efficient. Waste handling and disposal is more of a political than technical issue, although any radioactive material presents unique technical challenges.

A From the perspective of the engineering and construction business, there are interesting opportunities in virtually every part of the world. Our current world-scale projects range from aluminum smelters in Iceland and Oman to LNG plants in Australia, Equatorial Guinea and Trinidad. Of course, with their vast proven reserves, the Middle East and the Caspian regions will continue to have large hydrocarbon projects.

But many parts of Africa can also benefit from developing energy and raw material resources. That’s also true for Latin America. Also, we see some major project opportunities in Russia as that market matures.

The effects of the economic “Asian flu” seem to be well behind us. China’s steady, well managed growth is helping most of Asia, and Japan’s economy seems to be firming. Proximity to China has been good for Australia, which is expanding its energy exports, mining capacity and associated infrastructure.

A We can and we do. And let me add, we bring a consistently strong reputation for integrity, fair dealing and construction safety to our projects across the globe. That’s why customers select us. If it’s a level playing field, we can compete against international competitors from anywhere and win work on our reputation for delivering large, complex projects as promised, whether in Texas or in Thailand.

A In my view, the answer centers on the key trends that will impact all business models of the future. One such trend has to be the unprecedented pace of integration of the world economy. This integration creates opportunities for international trade and collaboration, but also increases the competition for resources. It tends to set an effective world price for a good or service, intensifying competition among both manufacturers and service providers.

Global competition can also cause protectionist responses, which are particularly unfortunate because free trade can, and usually does, benefit all countries in the long run. Developing countries do need some assistance as they transition away from relative isolation and into more open trade with the rest of the world.

Ultimately, countries that are well integrated into the world economy have a much better chance to grow and diversify their economies. Also, they generally respect their neighbors and have a demonstrable stake in a peaceful world.

A I’m convinced that global businesses will have to face a shortage of talent. Despite the concerns over outsourcing jobs, I think that America can continue to provide enough good jobs for our citizens who want to work if we invest in training, trim unnecessary bureaucracy, harness private sector innovation and demonstrate our unity of purpose across political and other divergent lines.

Bechtel’s business provides many good jobs in the United States and we need qualified people to fill them. For example, we provide program management and operating services at U.S government facilities that employ more than 11,000 people across the country.

In the Gulf Coast region alone, we and other contractors have upcoming refinery and LNG work that will need thousands of workers. You can see why we’re concerned about finding the talent that will be required.

For global projects we have to draw on global resources. As an example, for our present aluminum smelter project in Iceland, we designed the plant in Montreal and New Delhi, procured its structural steel in China, purchased its casting pots in Bahrain, and imported most of its construction labor from Poland because of the very small Icelandic population.

At Bechtel, our greatest success factor is our ability to field project teams of highly skilled, highly committed, globally-sourced people to do what others don’t seem to be able to do as consistently well as we do. We absolutely depend on talent and I am concerned about its supply for the foreseeable future.

A Yes, if we collectively anticipate the unrelenting changes that are coming and proactively embrace and harness them. They will include serious challenges. We can’t ignore the competitive and difficult aspects of the more integrated or “flattened” global economy that analysts like Thomas Friedman so eloquently articulate. We have to address the necessity for global sustainable development models including fundamental human and environmental protection and the implications of global warming.

We need to maintain our top-notch education system if we want to stay competitive. In this regard, I am particularly concerned about deteriorating math and science skills in our middle school and early high school years. Too many, and even some of the brightest, of our children end up arriving at university unable to pursue degrees in technical fields because they are inadequately prepared.

That’s generally because of lack of interest by students and/or lack of teacher competence and confidence in the science, math and technology subject matters. We need to nurture our young people’s fundamental curiosity about how the world works and help their teachers develop their teaching skills and confidence.

Our country has prospered because our free-market democracy has nurtured and attracted talented people. We need to promote our American culture of innovating, understanding risks, and being willing to take them.

Let’s continue to welcome diverse backgrounds and perspectives, reward achievers from wherever they come, and not act as if we are an island in a world whose inevitable trends we can somehow resist.