Securing
The Future – An Oil Company Perspective
By
Tony Hayward
What I would like to do is to step back and reflect on the
challenges the world faces in the matter of energy and what
we as an industry might do to meet the challenge.
The 21st
century dawned with a great sense of optimism. The Cold War,
which had dominated the previous half-century, was
over and with its end the spirits of the world were lifted.
The battle of political ideas had apparently been won – free
markets and democracy triumphed over the centrally planned
state. A dynamic new information age offered enhanced freedom
and prosperity. The revolution in the biological sciences promised
health, beauty and longevity. World trade took off and, in
the less developed nations, hundreds of millions of people
were joining the world economy for the first time, seizing
the chance to lift themselves out of poverty. There was even
the hope that the political will of Kyoto could be translated
into actions to mitigate the environmental effects of rapid
population and economic growth.
Today, seven years on, that euphoric mood is in danger of
swinging the other way, towards insecurity. The rise of militant
Islamic fundamentalism represents a new challenge to free markets
and democracy. The economic miracles of China and India are
giving rise to fears of loss of market share and of status
among the older industrialized nations. Climate change has
become a source of anxiety to many.
And, perhaps most relevant to this conference, a new spectre
has been conjured from all these things. This is the fear of
insufficient energy supplies, whether due to the self-interested
nationalism of some resource-rich countries, or to oil supplies
supposedly passing their peak. For those who succumb to these
irrational fears it is all downhill from here and only a sinister
Petro-Apocalypse lies ahead.
Rising To Challenges
I am glad to say that I regard much of this gloom and doom
as vastly overdone. But we should admit that, in the first
decade of the 21st Century, those of us who work in the energy
industry are at the very centre of the challenges which the
world faces. It is not a comfortable position. Yet we should
rise to those challenges wisely, confidently and rationally.
We should
remember what our purpose is, and has always been: to ensure
the efficient development of the world’s oil
and gas resources and, through that, to ensure that the demands
of consumers – the people of the world – are met.
And we have a moral duty to act in sustainable manner. We must
fulfil our purpose in ways that minimize the environmental
impact, not only of our own operations, but of the customers
who use our products.
If what
we do is clear, then how we do it is equally so. Millions
of investors entrust us with their capital, and we combine
those financial resources with human ones and then deploy them
in a world replete with technical, commercial and political
risk. By working in partnership with resource-rich countries
we aim to create wealth for them too by providing the energy
for the basic things of life, such as heat, light and mobility.
I believe that is a noble cause. And yet, today, we should
realise that many of our customers don’t see it that
way. They are sceptical. And they believe, falsely, that the
energy industry cannot be relied upon to do the right thing.
It is worth examining some of the origins of this insecurity.
Only then can we be clear about what actions are required.
I think there are four sources:
1. The Oil Price
As the price has quadrupled in the last seven years, so people
have come to suspect that there is a global shortage of oil
and gas.
In the
industry we tend to dismiss that concern since most of us
believe strongly that there are very large oil and gas
resources remaining in the world. We know, from our own experience
and own observations – and I speak as a geologist as
well as someone who was, for nearly five years, head of exploration
and production at BP - that there are major basins as yet unexplored;
we know that we have, or can develop, the technology to double
the average oil recovery rates from existing fields; we know
that there are enormous resources of so-called unconventional
oil and gas in heavy oil accumulations, in shale oil, in tight
gas, in coal bed methane – the list goes on.
But, for the consumer concerned with high energy bills, the
price of oil is a powerful, everyday symbol.
The reality, of course, is that in the oil market, what goes
on above ground is as important as what goes on underground.
The oil price is an economic function of supply and demand
and, for the most part, it is driven by the current available
production capacity and not complicated projections of future
resources.
Today’s
high price is caused by the inability of the industry to
easily supply rising demand. This is not because
of a lack of available resources, but because of inadequate
investment in both production and complex refining capacity.
That lack of investment happened gradually over many years,
not least during the euphoria of the new Millennium. We just
did not predict how fast demand would take off.
2. Source Of Insecurity Is Political Instability In The Producing
Nations
The absence
of excess capacity in the global supply system stems from
underinvestment forcing more reliance on suppliers
in countries which are frequently politically unstable. Instability
in Iraq, Venezuela and Nigeria, and the apparent use of oil
as a lever of political influence in Russia and the Middle
East all contribute to a feeling of imminent threat. Will the
lights suddenly go out? I don’t believe so.
But the
feeling is there. Many consumer countries have consequently
turned inwards in an attempt to counter these threats by exploiting
internal resources. Others, such as China, have embarked on
a process of buying up resources overseas. The world seems
to be forgetting Churchill’s adage that, in energy, the
best security comes from diversity of supply and a well-functioning,
competitive market, rather than a scramble for unilateral deals
between countries.
3. Energy Industry Has Failed To Live Up To Its Promises.
For many years, we have, as an industry, over-promised and
under-delivered in terms of production. We have made predictions
of production growth from the non-OPEC world that have not
come to fruition as quickly as hoped. We can all list many
reasons for this, such as project complexity, or the extreme
technological challenges of operating in deep water, to name
two. Many of these problems are political, caused by bureaucracy
and corruption, civil strife and war, or changing fiscal and
regulatory regimes creating uncertainty.
We also told our customers not to worry about future supply
and in so doing inadvertently discouraged OPEC to invest in
new capacity by predicting strong growth outside of OPEC.
4. Growing Concern For The Environment
Fears about
climate change and its consequences are, in my view both
well-founded and are contributing to perhaps the
fastest growing international political movements in my lifetime
on a par with the civil rights movement in the US in the 1960s.
Many people throughout the world fear that there is an insoluble
conflict between the need for energy for the basic things of
life – such as heat, light and mobility – and the
threat of climate change. They believe they are faced with
the choice between two equally unpalatable outcomes – limiting
economic growth and prosperity, or ruining the planet. This
is a daunting list of issues and concerns. It is particularly
daunting for the energy industry because we find ourselves
caught in the eye of the storm.
Yet I am cautiously optimistic and I urge you to be too. History
firmly suggests that all these problems are susceptible to
action and innovation. This process can be aided or hindered
by the way in which governments perform their role of policy
making and the enactment of law, but the reasonable position
to take is that most problems can be solved by the actions
we take now.
So what should we do?
Ours is a business built on technology and human ingenuity.
A large part of the solution to the problems of securing the
future of oil and gas supply lies, as it always has, with technology.
We can all recite the examples from the last 150 years of how
technology has created new oil and gas resources, by making
what was once impossible into the ordinary, everyday work of
our industry.
For instance, we produce on average only one third of the
oil in known fields. And we know equally well that it is conceivable
to push average recovery rates to 65% or even 80% with the
right technology. Indeed, it has already risen by about 10%
in the last 30 years.
Another example. We are aware of discovered resources that
lie undeveloped because of our inability to access those resources
economically. Most of us would predict that there are very
large volumes of oil and gas to be found beneath the floating
ice of the Arctic and, one day, we will have the technology
to exploit those volumes.
And another example. The known mature basins contain large
volumes of oil and gas in both discovered and undiscovered
small pools. Using new technology we can exploit those pools.
Indeed, they are already doing so in North America.
New And Existing Technology
Many of these things need new technology but we should not
forget the technology that already exists. I always find it
fascinating to look at the US oil and gas business where, largely
because of a fiscal environment that for a very long time has
favoured and promoted risk taking, small pools are exploited
through new technology.
The US is not geologically unique and it does not, as a nation,
have a monopoly on unconventional sources, such as tight gas
or coal bed methane or extra heavy oil or shale oil or salt
covered deepwater basins. And yet it is there that the industry
is pushing the frontier and exploiting such resources. It is
clear that fiscal and regulatory policy has an enormous effect
on the actions of the industry. But we cannot sit back and
blame governments for poor policy. For the fact is that the
market, through the high oil price, is already providing a
powerful incentive for us to go the extra mile, and push ever
further the frontier of our abilities. Do not underestimate
the signal the high oil price is sending the industry. There
are literally thousands of projects which are not economic
at $30/B, but which can be done at $60/B.
Of course,
it is not just about operational capabilities, but our philosophical
approach. It is the industry’s
responsibility to advocate the right policies and to encourage
responsible resource exploitation. Co-operation between the
industry and both producer and consumer governments is vital
if the threat of energy security is to be extinguished. And
it is up to the industry, as the operational link between the
nations which control resources and the consumers of the world,
to lead that dialogue.
But as well as taking clear actions in the short and medium
term, we should prepare for the day when production will go
into decline. The precise timing of what people call Peak Oil
will really be governed by the actions that all parties, producers,
consumers and the industry, choose to take over the coming
years. As an industry we must also take action to both limit
climate change and to mitigate its effects. We can, for instance,
expand technology and investment in decarbonising the products
we bring to market, particularly through carbon capture and
storage. That will require appropriate incentives, such as
carbon trading, to create a suitably level playing field so
that investment is directed to the most effective solutions.
Promoting Energy Efficiency
We must also lead the way towards the gradual substitution
of oil-based fuels in an orderly and planned fashion. We must
work closely with the great emerging economies, by allowing
them to make the most of their indigenous resources, building
their confidence that the global market can fulfil their needs
and encouraging the adoption of new technology. And we must
continue to lead by example in promoting energy efficiency
and the transition to reduced carbon emissions throughout the
world.
In summary, when it comes to dealing in a timely and practical
manner with the great insecurities of the early 21st century,
the energy industry is not just part of the solution, it is
the solution. In that respect, we are providing a great service
to the world. Through the development of technology, through
long term investment and risk taking, through the application
of knowledge and by acting as a catalyst for cooperation between
producers and consumers, we are making enormous contributions
to human progress. I believe that is something to be proud
of.
Tony
Hayward is BP
Group Chief Executive. This
is the text of his speech at the EAGE Annual Conference in
London on
11 June. Petroleumworld
not necessarily share these views.
Editor's Note: This article was first published by Middle
East Economic Survey, VOL.
XLIX, No
26, 25-June-2007. Petroleumworld
reprint this article in the interest of our readers. Petroleumworld
reprint this article in the interest of our readers.
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