With a critical conference on climate change in Paris approaching at the end of this month, BP’s CEO Bob Dudley discusses the transition to a lower carbon future and the role that oil and gas companies can play
Why are oil and gas companies calling for more action on climate change? This year many of us have increased our advocacy on this issue. And last month, companies responsible for a fifth of the world’s oil and gas supply in the Oil and Gas Climate Initiative (OGCI) threw their support behind a new global agreement at the forthcoming UN talks in Paris. For oil and gas companies to take such a stance has been described as ‘unusual’ - and even ‘unprecedented’. However, in fact, in BP we have publicly acknowledged the risk and have been working to address it since the 1990s. So why do companies that produce oil and gas want to see more done to tackle climate change? The first reason is simply that we want the planet to be sustainable in the future. We have the same hopes and fears for our children and grandchildren as anyone else. The second reason for our stance is that, being close to the issue, we have views on the realistic and affordable ways to make the transition to a lower carbon economy. And we can see that oil and gas are part of that transition.
A price on carbon
With the UN-led conference on climate change in Paris approaching, it’s important that we explain our view. In BP, as we and several other companies made clear in a letter to the UN in June, we believe the best mechanism to drive a shift to a lower carbon future is to put a price on carbon. That can be done via taxes or by cap-and-trade systems. Either can be effective if well-constructed. There are many ways to reduce carbon emissions: greater energy efficiency, renewable energy, gas displacing coal, carbon capture and storage, nuclear power and many others. Of these, energy efficiency is generally viewed as being ‘good for all seasons’, whereas the rest have their supporters and their detractors. The benefit of a broad-based, well-designed carbon price is that it encourages improvements in energy efficiency as well as shifts in the fuel mix. In terms of the fuel mix, a carbon price makes all of the lower carbon alternatives more competitive – and in each particular situation, the most economical options will emerge. This is vital when the technologies need to be deployed at massive scale and affordability is key.
“In BP, as we and several other companies made clear in a letter to the UN in June, we believe the best mechanism to drive a shift to a lower carbon future is to put a price on carbon.”
Keen to compete
A price that treats all carbon emissions equally, whether from a refinery smokestack or car tailpipe, will make our operations and products more costly in some cases. We accept that. If it has the same impact on everyone, we are keen to compete. A carbon price creates opportunities as well as risks. Others take different views. Some call for the rapid phasing out of fossil fuels now. Some ask shareholders to sell their fossil fuel holdings, arguing that some reserves are effectively ‘unburnable’ or some company assets ‘stranded’ if the world is to limit the global temperature rise to the widely recognised goal of two degrees Celsius on pre-Industrial times. Others ask us to switch investment wholesale from oil and gas to renewable energy. These are passionately held views that deserve a response. To start on common ground, we agree that if all the world’s fossil fuel resources were burned, the temperature rise would exceed the two degrees Celsius threshold. To put the resource issue into perspective, society has so far consumed the equivalent of around two trillion barrels of oil and gas and we estimate that there are still more than 40 trillion barrels’ worth in the world’s reservoirs. So, there is clearly far more oil and gas out there than we can burn if we are to have a sustainable future. As Sheikh Yamani famously observed, the Stone Age did not end because we ran out of stones and it will be the same with fossil fuels. However, this does not mean that we should stop using all fossil fuels now, even if we could.
To devise a workable route forward we need to understand the starting point – and particularly the scale of the world’s reliance on fossil fuels. Today, the world uses the equivalent of around a quarter of a billion barrels of energy every day. 32% of that energy comes from oil, 30% from coal, and 24% from gas – so 86% from fossil fuels in total. 7% comes from hydro-electricity, 4% from nuclear power and 3% from other renewables (including wind and solar power). This global energy system, with its huge reliance on hydrocarbons, has evolved over two centuries as societies have used fossil fuels to support the world’s growing population and raise global living standards. Global energy needs to continue to play that role over the next 50 years, as some of the world’s poorest countries grow and hundreds of millions of people are lifted out of fuel poverty, but it needs to do so in a sustainable and safe manner. This energy system which underpins modern life and human development cannot be dismantled overnight. Fortunately, that’s not only impossible, but unnecessary. Studies such as the widely cited International Energy Agency’s ‘450 scenario’ show that oil and gas can, and will, be part of the journey to a more sustainable future. That scenario envisages a future energy mix where the concentration of greenhouse gases in the atmosphere stabilises at 450 parts per million and the global temperature rise is kept to two degrees Celsius and emissions in 2040 are around 40% down on 2013. However, in that scenario the total consumption of energy still grows, by 12% to 2040, and oil and gas still make up almost half of the energy used.
While we cannot be complacent, the world can make an orderly and affordable transition to a low-carbon economy. And there are several means to that end. The road to sustainability has several lanes. The first is energy efficiency – reducing emissions by using energy more effectively. A carbon price would encourage smart buildings, advanced industrial plant, home insulation, higher fuel economy and the myriad of other ways to use energy more efficiently. There is plenty of potential here. Europe has been a leader in energy efficiency but the US, China and others are catching up. This can account for around half of the emissions reduction required, according to the International Energy Agency. Our industry has an important part to play in this, particularly by providing products that promote fuel economy in vehicles. Second, gas is very much part of the solution because it emits around half the carbon of coal when used to generate power. So, replacing coal with gas in power stations can make a massive difference, given that coal is the largest source of energy-related emissions. Switching just 1% of power generation from coal-fired plants to gas-fired ones would cut global CO₂ emissions as much as increasing renewable energy capacity by 11% - and do so rapidly and economically. A tonne of emissions saved by switching from coal to gas is just as effective as one saved by switching from fossil fuels to renewables. A third route towards lower emissions is, of course, renewable energy. For the future, it is important to build the renewable sector from today’s low level. The issues to overcome are that renewables are starting from a low base and currently cost more than energy from fossil fuels. Renewables are growing fast, but where they have been deployed in large volumes, it has largely been thanks to government subsidy. Again, a carbon price would change the picture – it would narrow the gap between costs of renewables and fossil fuels and stimulate companies to invest in the research and development needed to make renewables more competitive.
“Gas is very much part of the solution because it emits around half the carbon of coal when used to generate power. So, replacing coal with gas in power stations can make a massive difference, given that coal is the largest source of energy-related emissions.”
So, the transition to a more sustainable future is one where the energy usage shifts over time towards a lower carbon blend. It will involve greater energy efficiency, significant growth in use of renewables and gas gaining share from coal in the power sector. Fossil fuels have driven our economies and built prosperity in societies for two centuries in which we have seen life expectancy double, living standards rise and technology change and enhance our lives. They provide the energy that fuels our vehicles, powers our homes and lifts millions out of poverty. Everyday objects from plastics to fabrics are derived from the petroleum chain. While we do need to make the transition to a lower-carbon world, it can be an orderly transition; and many oil and gas companies are keen to work with governments and others to help make that transition happen. It is also worth noting that oil and gas companies’ reserves are typically produced over around 10-15 years, a timeframe within which we can respond to changes in policy to avoid any assets being ‘stranded’.
A solution that will work
In BP, we want to be part of a solution that will work. Already, we are increasing the ratio of gas to oil in our portfolio from 50/50 towards 60/40. We have a large biofuels business in Brazil and enough wind turbines to power a city the size of Munich. We are pursuing greater energy efficiency in operations and providing increasingly energy-efficient products to customers. We want to do more and a carbon price would enable us to do that. We all share a responsibility to solve this problem together – every one of us who drives a car, heats a home or uses a mobile phone. We look forward to the conference in Paris, and to the opportunity to work together as a society to build a sustainable future.