The harsh realities of energy
Speaker: Tony Hayward
Speech date: 29 October 2009
Speech date: 29 October 2009
Good afternoon everyone and thank you for your invitation. I recognise that MIT is one of the great learning centres and also know that last week's speaker on energy was the President of the United States. No pressure, then.
I'm also aware that the Brit's have not always had a great record in offering ideas on technology to America. 120 years ago, the Engineer in Chief of the British Post Office, William Preece, said that telephones were fine for Americans, but the British didn't need them because they had errand boys to carry messages. This was around the same time that the President of the British Royal Society, Lord Kelvin, declared that radio had no future, X-rays were a hoax and heavier-than-air flight machines were impossible -His actual words were 'I have not the slightest molecule of faith in aerial navigation other than ballooning.' So I hope I can do a little better than that!
I'm also aware that the Brit's have not always had a great record in offering ideas on technology to America. 120 years ago, the Engineer in Chief of the British Post Office, William Preece, said that telephones were fine for Americans, but the British didn't need them because they had errand boys to carry messages. This was around the same time that the President of the British Royal Society, Lord Kelvin, declared that radio had no future, X-rays were a hoax and heavier-than-air flight machines were impossible -His actual words were 'I have not the slightest molecule of faith in aerial navigation other than ballooning.' So I hope I can do a little better than that!
It's great to be here today because I attach so much value to BP's involvement in the MIT Energy Initiative. In particular I want to thank MIT's President Dr Susan Hockfield for the leadership shown in creating the Energy Initiative. I also want to thank Professor Ernie Moniz and the team at the EI for everything they have done to establish it so rapidly as a world leader in advances and ideas.
This is a project whose time has come.
Why do I say that? It's because we need to bring the best brains from a range of disciplines to bear on the complex issues of energy and the environment. And we need to do it in a logical, methodical, and realistic way. That's what should happen at the international level. And it's already happening here at MIT. What you're doing provides a great role model.
Let me explain how I see the challenges involved in energy. From my perspective, there are three distinct strands:
This is a project whose time has come.
Why do I say that? It's because we need to bring the best brains from a range of disciplines to bear on the complex issues of energy and the environment. And we need to do it in a logical, methodical, and realistic way. That's what should happen at the international level. And it's already happening here at MIT. What you're doing provides a great role model.
Let me explain how I see the challenges involved in energy. From my perspective, there are three distinct strands:
First, how to meet the world's growing demand for energy - in particular, how to satisfy the aspirations of people in emerging economies to achieve the living standards that we regard as commonplace in the mature economies of the west.
Second, how to meet this demand in a way that is environmentally sustainable;
Third, how to provide energy reliably in a world where there is a mismatch between where energy is produced and where it is consumed, and supplies are increasingly concentrated in a few key regions.
So the three challenges are access for all, sustainability and security. Our future energy needs all three.
This is of course the type of complex problem that world-class researchers thrive on. Many complex questions have been posed here at MIT over the years and you have come up with innovative solutions in a whole range of areas, from computer memory to artificial limbs.
Second, how to meet this demand in a way that is environmentally sustainable;
Third, how to provide energy reliably in a world where there is a mismatch between where energy is produced and where it is consumed, and supplies are increasingly concentrated in a few key regions.
So the three challenges are access for all, sustainability and security. Our future energy needs all three.
This is of course the type of complex problem that world-class researchers thrive on. Many complex questions have been posed here at MIT over the years and you have come up with innovative solutions in a whole range of areas, from computer memory to artificial limbs.
But such advances only come about if the people involved adopt the right approach. Part of that approach is to be completely realistic about the 'givens' that you start with -and the tools you can use. If you are realistic about what can and can't be done, then the possibilities start to emerge.
The energy challenge is just like that. We have to accept the harsh realities of the situation in order to identify workable solutions. And those realities cover three areas:
The energy challenge is just like that. We have to accept the harsh realities of the situation in order to identify workable solutions. And those realities cover three areas:
- the facts of energy demand and supply;
- the opportunities that are provided by technology;
- and the rules that are created by policy-makers.
The first harsh reality - the facts of demand and supply
The starting point for any analysis of energy has to be the scale of demand. For the next several decades we are looking at strong, rising demand, driven by the extraordinary economic transformation of China, India and other developing countries.
Demand for energy is projected to rise by around 45% between now and 2030. That is roughly equivalent to adding two more United States to the world's consumption. Meeting that demand growth will require between $25 and $30 trillion of investment - or $1 trillion a year.
In terms of oil supply alone, the current production of around 85 million barrels a day will need to increase to around 100 million a day by 2030.
Over half of that total - nearly 50 million barrels a day - will need to come from new sources as existing fields decline and demand grows. That's equivalent to adding four more Saudi Arabias to the world's production capacity.
Some may question whether so much of the growth needs to come from fossil fuels. But here it is vital that we face up to the harsh reality. These projections assume that current policies to promote emissions reduction are not only continued but tightened. And yet we still foresee up to 80% of energy coming from fossil fuels in 2030. This is because of the sheer scale of the world's energy industry - and the slow turnover in capital stock such as power stations and long lead times required to build assets such as nuclear facilities or renewable power at scale.
If you look at the IEA projections, even their most radical scenarios for emissions reduction still envisage two thirds of energy coming from fossil fuels in the year 2030.
The starting point for any analysis of energy has to be the scale of demand. For the next several decades we are looking at strong, rising demand, driven by the extraordinary economic transformation of China, India and other developing countries.
Demand for energy is projected to rise by around 45% between now and 2030. That is roughly equivalent to adding two more United States to the world's consumption. Meeting that demand growth will require between $25 and $30 trillion of investment - or $1 trillion a year.
In terms of oil supply alone, the current production of around 85 million barrels a day will need to increase to around 100 million a day by 2030.
Over half of that total - nearly 50 million barrels a day - will need to come from new sources as existing fields decline and demand grows. That's equivalent to adding four more Saudi Arabias to the world's production capacity.
Some may question whether so much of the growth needs to come from fossil fuels. But here it is vital that we face up to the harsh reality. These projections assume that current policies to promote emissions reduction are not only continued but tightened. And yet we still foresee up to 80% of energy coming from fossil fuels in 2030. This is because of the sheer scale of the world's energy industry - and the slow turnover in capital stock such as power stations and long lead times required to build assets such as nuclear facilities or renewable power at scale.
If you look at the IEA projections, even their most radical scenarios for emissions reduction still envisage two thirds of energy coming from fossil fuels in the year 2030.
Renewable energy is an essential part of the future energy mix. We support that aim as a company with major investments in wind, solar and biofuels. But the harsh reality is that as of today, all of the world's wind, solar, wave, tide and geothermal energy accounts for only around 1% of total consumption. And looking ahead, on the most radical scenario put forward by the IEA, these forms of energy will only meet 5% of the total demand in 2030.
So these are the parameters within which we need to operate. We cannot pretend that fossil fuels can be switched off - like analogue TV was in the US this summer - or that renewable energy will suddenly snowball like the internet did a decade ago. There are real limitations of physical capacity, engineering and economics which have to be faced.
The second harsh reality - tools and technologies
This takes us to the second set of realities - the tools and technologies which we have at our disposal. As I have said, the answer cannot be the wholesale replacement of hydrocarbons with renewables. But neither can it be nuclear, alone, carbon capture, alone, biofuels, alone, or electric cars, alone. All of these technologies are from time to time promoted in a way that suggests they are 'the future'. But there is no one miracle solution.
The future of energy will not come from a quick fix but a broad mix.
So these are the parameters within which we need to operate. We cannot pretend that fossil fuels can be switched off - like analogue TV was in the US this summer - or that renewable energy will suddenly snowball like the internet did a decade ago. There are real limitations of physical capacity, engineering and economics which have to be faced.
The second harsh reality - tools and technologies
This takes us to the second set of realities - the tools and technologies which we have at our disposal. As I have said, the answer cannot be the wholesale replacement of hydrocarbons with renewables. But neither can it be nuclear, alone, carbon capture, alone, biofuels, alone, or electric cars, alone. All of these technologies are from time to time promoted in a way that suggests they are 'the future'. But there is no one miracle solution.
The future of energy will not come from a quick fix but a broad mix.
It will contain a range of energy types, for fuel, power and heat. At the moment the spotlight tends to lurch from one new technology to another and we risk overlooking some basic, commonsense solutions.
First, in almost any analysis of greenhouse gas mitigation, the greatest source of emissions cuts is energy efficiency. It is the least glamorous answer, but the down-to-earth solutions are frequently the best ones.
The McKinsey Global Institute suggests that energy use could be cut by more than a fifth by 2020 and 8 billion tonnes of greenhouse gases avoided through energy efficiency investments that would more than pay for themselves.
This is borne out by bp's own analysis. In transport, for example, increasing the efficiency of the internal combustion engine can remove some 25% of CO2 emissions. Using full hybrid cars can remove a further 25%. So this is a potential road-map and it's good to see the US Administration travelling along the first stage of that road with measures to improve fuel efficiency.
We need to look at each type of vehicle and fuel on a well-to-wheels basis because emissions occur at different stages of the life-cycle.
Biofuels create tailpipe emissions, but avoid them upstream because their feedstock absorbs carbon.
First, in almost any analysis of greenhouse gas mitigation, the greatest source of emissions cuts is energy efficiency. It is the least glamorous answer, but the down-to-earth solutions are frequently the best ones.
The McKinsey Global Institute suggests that energy use could be cut by more than a fifth by 2020 and 8 billion tonnes of greenhouse gases avoided through energy efficiency investments that would more than pay for themselves.
This is borne out by bp's own analysis. In transport, for example, increasing the efficiency of the internal combustion engine can remove some 25% of CO2 emissions. Using full hybrid cars can remove a further 25%. So this is a potential road-map and it's good to see the US Administration travelling along the first stage of that road with measures to improve fuel efficiency.
We need to look at each type of vehicle and fuel on a well-to-wheels basis because emissions occur at different stages of the life-cycle.
Biofuels create tailpipe emissions, but avoid them upstream because their feedstock absorbs carbon.
Electric cars avoid tailpipe emissions but create them upstream because they depend on power stations. Electric vehicles have promise but they will only reduce the carbon footprint of transport significantly if the source of power itself is decarbonised.
Biofuels present another instance where public debate is in danger of becoming derailed. There is naturally concern over the sustainability of biofuels. Do they compete with food? Are they produced in ways that damage eco-systems? The answer is 'it depends on the biofuel'.
There is a vast range of biofuels, some good, some bad. In BP we are investing in biofuels that provide high energy and real environmental benefits without damaging nutrition or biodiversity. These are Brazilian ethanol made from sugar cane, the most efficient biofuel available today; biobutanol, which is a more advanced molecule than ethanol; and ligno-cellulosic fuels such as ethanol from energy grasses.
Biofuels present another instance where public debate is in danger of becoming derailed. There is naturally concern over the sustainability of biofuels. Do they compete with food? Are they produced in ways that damage eco-systems? The answer is 'it depends on the biofuel'.
There is a vast range of biofuels, some good, some bad. In BP we are investing in biofuels that provide high energy and real environmental benefits without damaging nutrition or biodiversity. These are Brazilian ethanol made from sugar cane, the most efficient biofuel available today; biobutanol, which is a more advanced molecule than ethanol; and ligno-cellulosic fuels such as ethanol from energy grasses.
Ethanol from energy grasses is potentially a very good answer to the challenges of access, sustainability and security. It offers high energy yields. It does not compete with food. It provides a literally homegrown substitute for imported oil. And it has the potential not simply to cut emissions but to be a net absorber of carbon. Such a strategic fuel should not be lumped together with much less beneficial ones.
We believe that biofuels will become very significant businesses in the coming years and that they could make up almost 10% of global transport fuel by 2030 and potentially as much as 20% of the US gasoline pool.
But of course transport is only part of the picture. Whereas transport has millions of small, moving units with lives of a decade or two, power involves relatively few large, static assets with lifetimes of 40 or 50 years.
The average coal fired power station in the US was built in 1964, under President Johnson, when the Beatles topped the charts, before the PC, the internet, or the mobile phone.
And coal remains by far the biggest source of American electricity.
Yet the harsh reality is that coal is the most carbon-intensive form of energy in widespread use. Coal generates 50% of America's power, but 80% of the resulting CO2 emissions. If we are to have any chance of transitioning to a lower-carbon world, coal will either have to be cleaned up or phased out.
So what are the alternatives?
We believe that biofuels will become very significant businesses in the coming years and that they could make up almost 10% of global transport fuel by 2030 and potentially as much as 20% of the US gasoline pool.
But of course transport is only part of the picture. Whereas transport has millions of small, moving units with lives of a decade or two, power involves relatively few large, static assets with lifetimes of 40 or 50 years.
The average coal fired power station in the US was built in 1964, under President Johnson, when the Beatles topped the charts, before the PC, the internet, or the mobile phone.
And coal remains by far the biggest source of American electricity.
Yet the harsh reality is that coal is the most carbon-intensive form of energy in widespread use. Coal generates 50% of America's power, but 80% of the resulting CO2 emissions. If we are to have any chance of transitioning to a lower-carbon world, coal will either have to be cleaned up or phased out.
So what are the alternatives?
Renewables will play an important role. Wind power for example can be cost-competitive in certain locations. In the US it's been the fastest growing of all energy sources over the last couple of years. But the technology, infrastructure and regulatory framework for such alternative energies are expected to take decades to be deployed at scale.
Nuclear power supplies about 5% of global energy and it will take at least 10 years for its share to start rising. Even then it is debatable how far it will go, given issues of permitting, cost and security.
Coal plants can be fitted with carbon capture and storage, but the operative word is 'can'. There is still no commercial scale power plant with CCS in the world and its deployment is mainly limited to upstream energy projects. BP operates one of the world's largest existing CCS projects in Algeria and we are developing a CCS gas-fired plant in Abu Dhabi and a major coal fired project in California.
But the challenges of CCS are such that I don't believe we'll see it used at commercial scale for at least another decade or more - and if and when it is established, it will give rise to very substantial costs.
There is of course another option - the cleanest burning fossil fuel and a source of energy that is plentiful in the US. And that's natural gas.
Combined-cycle turbines powered by natural gas are quick and relatively inexpensive to build and can generate power at 60% efficiency.
They emit less than half the greenhouse gases of a conventional coal plant per unit of power generated. Gas plants can be quickly switched on and off and therefore act as an ideal flexible back-up for renewables, such as wind and solar power which by their nature are intermittent.
Nuclear power supplies about 5% of global energy and it will take at least 10 years for its share to start rising. Even then it is debatable how far it will go, given issues of permitting, cost and security.
Coal plants can be fitted with carbon capture and storage, but the operative word is 'can'. There is still no commercial scale power plant with CCS in the world and its deployment is mainly limited to upstream energy projects. BP operates one of the world's largest existing CCS projects in Algeria and we are developing a CCS gas-fired plant in Abu Dhabi and a major coal fired project in California.
But the challenges of CCS are such that I don't believe we'll see it used at commercial scale for at least another decade or more - and if and when it is established, it will give rise to very substantial costs.
There is of course another option - the cleanest burning fossil fuel and a source of energy that is plentiful in the US. And that's natural gas.
Combined-cycle turbines powered by natural gas are quick and relatively inexpensive to build and can generate power at 60% efficiency.
They emit less than half the greenhouse gases of a conventional coal plant per unit of power generated. Gas plants can be quickly switched on and off and therefore act as an ideal flexible back-up for renewables, such as wind and solar power which by their nature are intermittent.
But is there enough gas available? Absolutely yes. America has seen a quiet revolution in its gasfields in the last few years as new technologies have been introduced. These including hydraulic fracturing, horizontal drilling and multiple completions to extract gas from complex formations. US gas production increased 7.5% last year, a major step up compared to previous years. By our estimates, the US is now sitting on between 50 and 100 years of gas resources at current rates of consumption.
Globally the world is estimated to have around 60 years of gas. But new technologies could add many decades to that number. In 2008, gas was the only fossil fuel which saw its consumption increase in both OECD and non-OECD countries.
If we could ramp up natural gas use we could retire the oldest and dirtiest coal plants. In fact BP has calculated that for a fraction of the costs of other options as much as 30% of the Waxman-Markey reduction target could be rapidly achieved through expanded use of natural gas.
The third harsh reality - policies
That takes me to the final set of realities I want to mention. These are the ones that relate to policy. The Chief policy maker was here last week.
Let me be clear. The transition to a lower-carbon world will not take place without significant government intervention.
Globally the world is estimated to have around 60 years of gas. But new technologies could add many decades to that number. In 2008, gas was the only fossil fuel which saw its consumption increase in both OECD and non-OECD countries.
If we could ramp up natural gas use we could retire the oldest and dirtiest coal plants. In fact BP has calculated that for a fraction of the costs of other options as much as 30% of the Waxman-Markey reduction target could be rapidly achieved through expanded use of natural gas.
The third harsh reality - policies
That takes me to the final set of realities I want to mention. These are the ones that relate to policy. The Chief policy maker was here last week.
Let me be clear. The transition to a lower-carbon world will not take place without significant government intervention.
By far the most powerful policy intervention on energy would be establishing a price for carbon. 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 - starting with a uniform price for carbon. A price that treats all carbon as equal - whether it comes out of a smoke stack or a tail pipe.
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.
This is already starting to happen in Europe where we have the EU's emissions trading system, and I believe it will happen in the US.
But of course we work in a global industry. Ideally we should be working towards establishing a global price. I would suggest a critical test for the talks in Copenhagen in December should be: to what extent have they made progress towards establishing mechanisms that will set a global price for carbon?
Once we can agree on a clear goal, then we need to face a further reality, which is that a carbon price alone will not be enough to reach the goal. 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, carbon pricing will need to be supported both by economic incentives and by regulation.
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.
This is already starting to happen in Europe where we have the EU's emissions trading system, and I believe it will happen in the US.
But of course we work in a global industry. Ideally we should be working towards establishing a global price. I would suggest a critical test for the talks in Copenhagen in December should be: to what extent have they made progress towards establishing mechanisms that will set a global price for carbon?
Once we can agree on a clear goal, then we need to face a further reality, which is that a carbon price alone will not be enough to reach the goal. 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, carbon pricing will need to be supported 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 now 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.
You may be wondering why a businessman is standing here advocating greater government intervention. But I don't think there's a contradiction. Adam Smith himself taught that the market works best when it is properly regulated by government.
And the scale and complexity of this particular challenge is different from the usual workings of a market economy. To mitigate climate change and secure reliable energy supplies, we need governments to create a road-map and set the framework within which markets can deliver.
I would like to make one further point. These are not issues on which we have endless time to deliberate. It matters what we do over the next 25 years. There is real benefit to deciding on the most cost-effective remedies now - such as promoting energy efficiency, using gas in power and biofuels in transport. These options make economic sense today and will not cost the world more than it can afford.
As I indicated when I began, the problem is a complex one and the solution will have many elements. An international agreement. National policies. Mechanisms for transfer of technology and funds. A carbon price. New regulations. A mix of technologies. Changes in behaviours. And ongoing research into new possibilities.
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 now 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.
You may be wondering why a businessman is standing here advocating greater government intervention. But I don't think there's a contradiction. Adam Smith himself taught that the market works best when it is properly regulated by government.
And the scale and complexity of this particular challenge is different from the usual workings of a market economy. To mitigate climate change and secure reliable energy supplies, we need governments to create a road-map and set the framework within which markets can deliver.
I would like to make one further point. These are not issues on which we have endless time to deliberate. It matters what we do over the next 25 years. There is real benefit to deciding on the most cost-effective remedies now - such as promoting energy efficiency, using gas in power and biofuels in transport. These options make economic sense today and will not cost the world more than it can afford.
As I indicated when I began, the problem is a complex one and the solution will have many elements. An international agreement. National policies. Mechanisms for transfer of technology and funds. A carbon price. New regulations. A mix of technologies. Changes in behaviours. And ongoing research into new possibilities.
It requires a co-ordinated, integrated, multi-disciplinary approach - both in the deployment of solutions available now - like natural gas and energy efficiency - and in the development of solutions for tomorrow.
The MIT Energy Initiative is playing a dual role - first at the macro level in studying the science and politics; and second at the micro level in researching specific technologies, from gasification to biofuels.
I want to end by drawing a few conclusions based both on the work you're doing and the observations I have made.
Number one - we need to be absolutely honest with ourselves about the harsh realities of energy. We must not put our faith in unrealistic solutions and overlook real possibilities for progress.
Number two - the overall problem may be complex but there are some simple things that can be done right now to help solve it. Exploiting natural gas and promoting energy efficiency are two that stand out. We have not yet picked all the low-hanging fruit.
Number three - looking at innovation for the future, the really interesting things happen at the borders where different disciplines meet - as you are showing. In particular there is real scope to apply some of the enabling technologies that have made such dramatic progress over the past decade - such as nanotechnology, superconducting and IT to the energy challenge. Biotechnology is another at BP we're supporting the Energy Biosciences Institute at Berkeley and Illinois. This not only provides the chance to develop advances in biofuels, but also to explore how biotech might open up new possibilities from exploration to carbon sequestration.
The MIT Energy Initiative is playing a dual role - first at the macro level in studying the science and politics; and second at the micro level in researching specific technologies, from gasification to biofuels.
I want to end by drawing a few conclusions based both on the work you're doing and the observations I have made.
Number one - we need to be absolutely honest with ourselves about the harsh realities of energy. We must not put our faith in unrealistic solutions and overlook real possibilities for progress.
Number two - the overall problem may be complex but there are some simple things that can be done right now to help solve it. Exploiting natural gas and promoting energy efficiency are two that stand out. We have not yet picked all the low-hanging fruit.
Number three - looking at innovation for the future, the really interesting things happen at the borders where different disciplines meet - as you are showing. In particular there is real scope to apply some of the enabling technologies that have made such dramatic progress over the past decade - such as nanotechnology, superconducting and IT to the energy challenge. Biotechnology is another at BP we're supporting the Energy Biosciences Institute at Berkeley and Illinois. This not only provides the chance to develop advances in biofuels, but also to explore how biotech might open up new possibilities from exploration to carbon sequestration.
My fourth and final conclusion is that all of this depends on people. I’ll wait a long time for an oil rig or a wind turbine to walk into my office with a bright idea. Human capabilities are needed to create the technological, commercial and political solutions to the energy challenge.
That is why we need to invest in people and to focus on investing in the most important skills.
Our industry and its people are central to the way that civilization develops. This is not a sunset industry. This is a growth industry, one that has to provide continued access to energy at the same time as sustainable energy and secure energy.
That's a big challenge, as I've tried to illustrate and we need great people to meet it. So I'll end with a message to students which is to ask you take a good look at energy as a career. Personally I can think of no sector in which an individual has more chance to make a real difference and a real contribution - as well as having a great time.
Energy presents one of the greatest challenges of the 21st century. But with the best people on our side, we will meet it. And I look forward to continuing to work with MIT to do just that. Thank you.
That is why we need to invest in people and to focus on investing in the most important skills.
Our industry and its people are central to the way that civilization develops. This is not a sunset industry. This is a growth industry, one that has to provide continued access to energy at the same time as sustainable energy and secure energy.
That's a big challenge, as I've tried to illustrate and we need great people to meet it. So I'll end with a message to students which is to ask you take a good look at energy as a career. Personally I can think of no sector in which an individual has more chance to make a real difference and a real contribution - as well as having a great time.
Energy presents one of the greatest challenges of the 21st century. But with the best people on our side, we will meet it. And I look forward to continuing to work with MIT to do just that. Thank you.
