Meeting the Energy Challenge
Speaker: Tony Hayward
Speech date: 20 October 2009
Venue: Oil and Money Conference, London
Speech date: 20 October 2009
Venue: Oil and Money Conference, London
Ladies and Gentlemen it's a pleasure to be with you here today and a privilege to be asked to address this 30th conference at what is a challenging time for the energy industry.
The last 18 months have been something of a rollercoaster producing one of the most volatile periods our industry has ever seen. In the summer of last year, oil prices were headed towards a record $150 a barrel - Five months later they plummeted to around $35; now they've doubled again.
Some attribute these wild swings to speculation - I think it's simpler than that. The market is driven by the fundamentals of supply and demand. High volatility is the result of extreme surges in both which in turn reflect the forces of economic growth and contraction.
Between 2004 and the summer of 2008 the growth in demand meant almost all the world's spare oil production capacity had been consumed. Supply struggled to keep up with surging demand.
The last 18 months have been something of a rollercoaster producing one of the most volatile periods our industry has ever seen. In the summer of last year, oil prices were headed towards a record $150 a barrel - Five months later they plummeted to around $35; now they've doubled again.
Some attribute these wild swings to speculation - I think it's simpler than that. The market is driven by the fundamentals of supply and demand. High volatility is the result of extreme surges in both which in turn reflect the forces of economic growth and contraction.
Between 2004 and the summer of 2008 the growth in demand meant almost all the world's spare oil production capacity had been consumed. Supply struggled to keep up with surging demand.
With the financial crisis and the onset of the global recession last year, demand for oil fell by over 2 million barrels/day and it took an OPEC production cut of 3 million barrels/day to stabilise the market.
So where does that leave us? I think that what has emerged reflects some pretty deep seated concerns about how the world is going to meet its energy needs in the coming decades - and that's what I'd like to talk to you about today.
Meeting our future energy needs has risen to the top of the global political and economic agenda - Its significance is both fundamental and practical.
In the 20th century, low cost, abundantly available energy enabled global prosperity and development. Now, at the beginning of the 21st century - as living standards rise and urban populations expand - satisfying ever-growing energy demand in a sustainable way has become the world's biggest challenge.
According to BP's projections, we'll need about 45% more energy in 2030 than we consume today. And we mustn't underestimate what it will take to achieve that. We'll need an investment of some $25 to 30 trillion - that's more than $1 trillion a year for the next 20 years.
We also need a more diverse energy mix which will enable energy security and help address the issue of climate change.
Alternative energy - nuclear, wind, solar and biofuels, along with fossil fuels - will all play an important role.
But we need to be realistic - the transition to a lower-carbon economy won't happen overnight.
So where does that leave us? I think that what has emerged reflects some pretty deep seated concerns about how the world is going to meet its energy needs in the coming decades - and that's what I'd like to talk to you about today.
Meeting our future energy needs has risen to the top of the global political and economic agenda - Its significance is both fundamental and practical.
In the 20th century, low cost, abundantly available energy enabled global prosperity and development. Now, at the beginning of the 21st century - as living standards rise and urban populations expand - satisfying ever-growing energy demand in a sustainable way has become the world's biggest challenge.
According to BP's projections, we'll need about 45% more energy in 2030 than we consume today. And we mustn't underestimate what it will take to achieve that. We'll need an investment of some $25 to 30 trillion - that's more than $1 trillion a year for the next 20 years.
We also need a more diverse energy mix which will enable energy security and help address the issue of climate change.
Alternative energy - nuclear, wind, solar and biofuels, along with fossil fuels - will all play an important role.
But we need to be realistic - the transition to a lower-carbon economy won't happen overnight.
The sheer scale of the energy industry makes this impossible. To give you an example, it takes more than 30 years to turn over the capital stock in the power sector and 15 years for cars. Such long lead times mean that like it or not, fossil fuels will continue to play a very significant part in the future energy mix.
At BP we estimate that by 2030 they'll still be satisfying about 80% of our energy needs.
I believe that in the realm of alternatives, it's dangerous to promise too much too soon.
It risks rendering the entire global effort both politically and economically unsustainable.
And the world can't afford this.
So we're talking about an evolution - not a revolution in the energy mix.
We urgently need a road-map to take us towards this transition. We need a road-map based on a clear and realistic understanding of the existing infrastructure, changing technology, economic incentives and the inevitable policy trade offs we'll face along the way.
And to realise this, we need governments to commit themselves to a more active and pragmatic role.
You're probably wondering why a businessman is standing here suggesting greater government intervention - and please don't misunderstand me! I'm a great believer in free markets but the scale and complexity of this particular challenge is different from the usual workings of a market economy. Mitigating climate change and ensuring energy security are of such magnitude that the free market alone cannot provide them without assistance.
First let's consider the challenge of fossil fuels. In oil alone, declining production from existing fields coupled with new demand mean we'll have to find ways of bringing nearly 50 million barrels/day of new capacity onstream between now and 2030 - that's almost double the level of production in the Middle East today.
At BP we estimate that by 2030 they'll still be satisfying about 80% of our energy needs.
I believe that in the realm of alternatives, it's dangerous to promise too much too soon.
It risks rendering the entire global effort both politically and economically unsustainable.
And the world can't afford this.
So we're talking about an evolution - not a revolution in the energy mix.
We urgently need a road-map to take us towards this transition. We need a road-map based on a clear and realistic understanding of the existing infrastructure, changing technology, economic incentives and the inevitable policy trade offs we'll face along the way.
And to realise this, we need governments to commit themselves to a more active and pragmatic role.
You're probably wondering why a businessman is standing here suggesting greater government intervention - and please don't misunderstand me! I'm a great believer in free markets but the scale and complexity of this particular challenge is different from the usual workings of a market economy. Mitigating climate change and ensuring energy security are of such magnitude that the free market alone cannot provide them without assistance.
First let's consider the challenge of fossil fuels. In oil alone, declining production from existing fields coupled with new demand mean we'll have to find ways of bringing nearly 50 million barrels/day of new capacity onstream between now and 2030 - that's almost double the level of production in the Middle East today.
The problem in meeting that goal isn't geological, it's political.
We have the natural, human and financial resources.
We have enough reserves of hydrocarbons to last for decades and reserve estimates are rising as we develop ways of unlocking unconventional resources.
But getting it out of the ground is another matter. And that's where governments come in.
Industry needs to be able to invest with confidence. To do that, we need secure and reliable access to those resources.
If the conditions are right, industry will invest.
If they're not, the resources will remain untapped.
Recent experience has been mixed, although there have been some encouraging signs with new oil finds in the deep waters of the Gulf of Mexico, Brazil and West Africa.
But the fact is supply response to the recent growth in demand has been weak.
And it remains the case that access to a lot of the world's most attractive resources is restricted: today almost 80% of the world's oil resources are off limits to the technology and expertise that international oil companies can provide.
Now let's consider the politics of climate change and carbon. BP has long been an advocate of concerted international action on climate change. And I very much welcome the high-level attention being devoted to this issue in the run up to Copenhagen. But we must bear in mind this is just one step on what will be a long journey to a lower carbon world.
We have the natural, human and financial resources.
We have enough reserves of hydrocarbons to last for decades and reserve estimates are rising as we develop ways of unlocking unconventional resources.
But getting it out of the ground is another matter. And that's where governments come in.
Industry needs to be able to invest with confidence. To do that, we need secure and reliable access to those resources.
If the conditions are right, industry will invest.
If they're not, the resources will remain untapped.
Recent experience has been mixed, although there have been some encouraging signs with new oil finds in the deep waters of the Gulf of Mexico, Brazil and West Africa.
But the fact is supply response to the recent growth in demand has been weak.
And it remains the case that access to a lot of the world's most attractive resources is restricted: today almost 80% of the world's oil resources are off limits to the technology and expertise that international oil companies can provide.
Now let's consider the politics of climate change and carbon. BP has long been an advocate of concerted international action on climate change. And I very much welcome the high-level attention being devoted to this issue in the run up to Copenhagen. But we must bear in mind this is just one step on what will be a long journey to a lower carbon world.
And that journey will be hard and long since the aim is nothing short of re-engineering the entire global economy.
Which brings me back to the road-map. We need to be absolutely clear about where we're going, and that will involve unprecedented co-operation between governments and the private sector.
In fact, we'll need a series of road-maps as the transition won't be a 'one size fits all'. Each government will have to assess their natural advantages - and deficiencies - in energy, so that they can set a workable framework within which the market can deliver.
We find it helpful to think about this in terms of a range of 'energy pathways' for different countries and industries - for example the pathway for US transport, or for US power.
By breaking it down, you can get an idea of the most effective and efficient ways of reducing carbon emissions while also planning ways of meeting the ever-growing demand for energy.
In thinking about those pathways, we can draw a number of conclusions:
The first is that they all start with energy efficiency.
The prize here is huge. By far the most effective pathway to a lower-carbon transport industry is through changing car engines to make them more efficient. Better engine technology combined with the increasing use of hybrids offers potential efficiency gains of as much as 50% by 2030.
Similar benefits can be achieved through better standards in building construction and in everyday electrical appliances.
Some believe that greater use of mass transit, high mileage cars and 'green' building standards could save enough energy to offset projected growth in US energy demand for the next 10 years.
And every BTU and every dollar saved contribute to global energy security and are investments in the health of our economy and our planet.
Which brings me back to the road-map. We need to be absolutely clear about where we're going, and that will involve unprecedented co-operation between governments and the private sector.
In fact, we'll need a series of road-maps as the transition won't be a 'one size fits all'. Each government will have to assess their natural advantages - and deficiencies - in energy, so that they can set a workable framework within which the market can deliver.
We find it helpful to think about this in terms of a range of 'energy pathways' for different countries and industries - for example the pathway for US transport, or for US power.
By breaking it down, you can get an idea of the most effective and efficient ways of reducing carbon emissions while also planning ways of meeting the ever-growing demand for energy.
In thinking about those pathways, we can draw a number of conclusions:
The first is that they all start with energy efficiency.
The prize here is huge. By far the most effective pathway to a lower-carbon transport industry is through changing car engines to make them more efficient. Better engine technology combined with the increasing use of hybrids offers potential efficiency gains of as much as 50% by 2030.
Similar benefits can be achieved through better standards in building construction and in everyday electrical appliances.
Some believe that greater use of mass transit, high mileage cars and 'green' building standards could save enough energy to offset projected growth in US energy demand for the next 10 years.
And every BTU and every dollar saved contribute to global energy security and are investments in the health of our economy and our planet.
Secondly: We should do everything possible and cost-effective to diversify the energy mix in transport.
Biofuels can and should play a significant role in meeting the demand for transport fuel in the coming years. Depending on the type of biofuel and how it's made, recent studies suggest using them can reduce greenhouse gas emissions by up to 80% compared with only using gasoline.
At BP we are investing significantly in second-generation biofuels that don't endanger food production or biodiversity.
We believe that biofuels have the potential to make up almost 10% of global transport fuel by 2030.
That's a major step towards making the energy mix more sustainable and in BP's view, is more significant for example than electric cars. The reality is that even if we were all driving around in electric cars tomorrow, we'd still have to work out how to generate the vast amounts of 'carbon-free' electricity that would be needed to power them.
The third conclusion is that we need to look at the role natural gas can play in our lower-carbon future, especially in power generation.
Right now the world depends on four main fuels to generate power: coal, gas and then nuclear and hydro. Going forward, renewables such as wind and solar will play an increasingly important role. The use of nuclear is expected to increase too.
But the technology, infrastructure and regulatory framework for those alternative energies are expected to take decades to be deployed at scale. In the meantime, the choice for utilities boils down to two hydrocarbons: coal and gas.
Biofuels can and should play a significant role in meeting the demand for transport fuel in the coming years. Depending on the type of biofuel and how it's made, recent studies suggest using them can reduce greenhouse gas emissions by up to 80% compared with only using gasoline.
At BP we are investing significantly in second-generation biofuels that don't endanger food production or biodiversity.
We believe that biofuels have the potential to make up almost 10% of global transport fuel by 2030.
That's a major step towards making the energy mix more sustainable and in BP's view, is more significant for example than electric cars. The reality is that even if we were all driving around in electric cars tomorrow, we'd still have to work out how to generate the vast amounts of 'carbon-free' electricity that would be needed to power them.
The third conclusion is that we need to look at the role natural gas can play in our lower-carbon future, especially in power generation.
Right now the world depends on four main fuels to generate power: coal, gas and then nuclear and hydro. Going forward, renewables such as wind and solar will play an increasingly important role. The use of nuclear is expected to increase too.
But the technology, infrastructure and regulatory framework for those alternative energies are expected to take decades to be deployed at scale. In the meantime, the choice for utilities boils down to two hydrocarbons: coal and gas.
Coal of course produces more carbon than any other fossil fuel. To give you an example: it accounts for around 50% of America's power generation but accounts for 80% of the resulting carbon emissions.
Although Carbon Capture and Storage is often trumpeted as the path to cleaner coal, it still faces a number of challenges which will take time and effort to resolve.
I don't believe we'll see the commercial use of CCS at scale for at least another decade or more and it won't come without a price.
If and when it is established, there will be substantial costs associated with its use.
We can't afford to wait. We need to begin taking carbon out of the energy mix today.
Until renewables gain a sizeable share of the power sector and cleaner coal is available through Carbon Capture and Storage, I can see only one way of doing it - by increasing the use of natural gas.
Gas is the fuel that offers the greatest potential to provide the largest reductions at the lowest cost - and all that by using technology that's available today.
Although Carbon Capture and Storage is often trumpeted as the path to cleaner coal, it still faces a number of challenges which will take time and effort to resolve.
I don't believe we'll see the commercial use of CCS at scale for at least another decade or more and it won't come without a price.
If and when it is established, there will be substantial costs associated with its use.
We can't afford to wait. We need to begin taking carbon out of the energy mix today.
Until renewables gain a sizeable share of the power sector and cleaner coal is available through Carbon Capture and Storage, I can see only one way of doing it - by increasing the use of natural gas.
Gas is the fuel that offers the greatest potential to provide the largest reductions at the lowest cost - and all that by using technology that's available today.
It's easily the cleanest burning fossil fuel. Compared to coal it generates less than half as much carbon per kilowatt hour and a fraction of coal's nitrogen and sulphur dioxide emissions. It's efficient, versatile and abundantly available.
There are reserves in place equivalent to 60 years worth of consumption at current rates - and they're rising rapidly as technology unlocks vast new unconventional gas resources
The fourth and final point concerns the role of governments.
For the market to meet the world's growing demand for energy in a sustainable way, governments need to set a stable and enduring framework. Most importantly, they can and should establish a price for carbon.
Carbon pricing will make energy conservation more attractive and alternative energy more cost competitive. It will allow informed investment in fossil fuels and will encourage investment in the technology necessary to reduce the carbon they produce.
At BP we favour a Cap and Trade system because it gives environmental certainty based on an absolute emissions cap.
Such a system needs to treat all carbon as equal and push for the best possible outcome in terms of both the carbon and economic impact across all industrial sectors.
But I'd go further. I don't believe setting up carbon trading schemes and letting the market do its work is going to be enough.
Politically, the carbon price could never be set high enough to change some aspects of consumer behaviour.
There are reserves in place equivalent to 60 years worth of consumption at current rates - and they're rising rapidly as technology unlocks vast new unconventional gas resources
The fourth and final point concerns the role of governments.
For the market to meet the world's growing demand for energy in a sustainable way, governments need to set a stable and enduring framework. Most importantly, they can and should establish a price for carbon.
Carbon pricing will make energy conservation more attractive and alternative energy more cost competitive. It will allow informed investment in fossil fuels and will encourage investment in the technology necessary to reduce the carbon they produce.
At BP we favour a Cap and Trade system because it gives environmental certainty based on an absolute emissions cap.
Such a system needs to treat all carbon as equal and push for the best possible outcome in terms of both the carbon and economic impact across all industrial sectors.
But I'd go further. I don't believe setting up carbon trading schemes and letting the market do its work is going to be enough.
Politically, the carbon price could never be set high enough to change some aspects of consumer behaviour.
The reality is that to make the kind of difference we're talking about , Cap and Trade will need to be supplemented both by economic incentives and by regulation.
Recent experience in the US shows where regulation can help. Here fuel standards have helped improve energy efficiency in vehicles.
Thanks to federal CAFÉ requirements and technological breakthroughs by car manufacturers, America's transport fleet is much more fuel efficient than it used to be. And the Obama administration is going further by demanding even tougher CAFÉ standards.
Similar policies can and are being applied to energy efficiency in buildings. Here too, a combination of government regulation and incentives is in my view, the way to go.
History tells us that real change in energy markets can only occur when public policy and private enterprise work hand in hand.
Remember Britain's shift from coal to natural gas in the 1970's. It wouldn't have happened if the government - keen to make the maximum use of newly discovered resources in the North Sea - hadn't created huge incentives and a regulatory framework which allowed industry and consumers to switch.
I'd like to end on something of a cautionary note.
Recent experience in the US shows where regulation can help. Here fuel standards have helped improve energy efficiency in vehicles.
Thanks to federal CAFÉ requirements and technological breakthroughs by car manufacturers, America's transport fleet is much more fuel efficient than it used to be. And the Obama administration is going further by demanding even tougher CAFÉ standards.
Similar policies can and are being applied to energy efficiency in buildings. Here too, a combination of government regulation and incentives is in my view, the way to go.
History tells us that real change in energy markets can only occur when public policy and private enterprise work hand in hand.
Remember Britain's shift from coal to natural gas in the 1970's. It wouldn't have happened if the government - keen to make the maximum use of newly discovered resources in the North Sea - hadn't created huge incentives and a regulatory framework which allowed industry and consumers to switch.
I'd like to end on something of a cautionary note.
I've tried to describe the scale of our global energy challenge and outlined some of the steps I believe are necessary to meet it.
But we also need to understand what could happen if we don't take those steps - if we don't establish a realistic road-map to diversify our energy supply and if we don't match resources to our needs.
The consequences would be serious. Without a credible and enduring framework, it would be impossible for industry to invest in maintaining and enhancing our energy supply.
Anyone who lived through the 1970's here in the UK or the early part of this century in California will have some idea of what that means.
We need to focus on being able to deliver a secure and sustainable energy supply in the coming years because energy is fundamental to today's way of life.
We need to determine that we don't leave future generations with the prospect of rising sea levels and ensure that we keep the lights on in the next decade.
The stakes couldn't be higher. We have a big challenge here but we can - and must - rise to it.
In my opinion, there's only one thing riskier than doing something - and that's doing nothing.
But we also need to understand what could happen if we don't take those steps - if we don't establish a realistic road-map to diversify our energy supply and if we don't match resources to our needs.
The consequences would be serious. Without a credible and enduring framework, it would be impossible for industry to invest in maintaining and enhancing our energy supply.
Anyone who lived through the 1970's here in the UK or the early part of this century in California will have some idea of what that means.
We need to focus on being able to deliver a secure and sustainable energy supply in the coming years because energy is fundamental to today's way of life.
We need to determine that we don't leave future generations with the prospect of rising sea levels and ensure that we keep the lights on in the next decade.
The stakes couldn't be higher. We have a big challenge here but we can - and must - rise to it.
In my opinion, there's only one thing riskier than doing something - and that's doing nothing.
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