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BP’s views on energy security

Posted: 23 April 2005

On 20 April 2005, John Manzoni, BP's Chief Executive, Refining & Marketing, gave a speech on the subject of "BP's views on options to build energy security" to an audience in Delhi, India.

This is an edit version of his speech

Ladies and Gentlemen it is a great to be here and to have the chance to talk to you today.

I’d like to start by expressing my thanks for the warm and generous hospitality which we’ve received here. In particular I want to thank Dr. Pachauri and TERI for kindly hosting this evening, and Mr. Ahmad & Dr. Kelkar for joining in for the deliberations.

BP has been a significant investor here for more than 50 years – with a business led by the Castrol brand which supplies several million customers every day, but also with significant activities in solar, digital business, shipping and accounting services. We’re delighted to be part of the Indian economy.

The topic I thought I might address briefly today is energy security.

Why has that become such an important issue over the last few years, not just here in India but right around the world ?

The primary reason must be the shift in the oil price which has occurred over the last two years – but I think the concern also extends to worries about import dependence and the reliability of supplies, to the efficiency of energy use and its impact on competitiveness, and to the environmental effects of increased energy consumption.

I’d like to address each of those points and to talk about the things which we in BP believe can be done to enhance energy security.

Let me start with prices.

Why is the oil price so high and will it stay high ?

The price of oil on the international market has risen from $ 25 a barrel two years ago to $ 33 a barrel in April 2004 ... to over $50/bbl today.

To understand the reasons for that shift you have to look back over the events of the last five years.

Until the end of the 1990s we were all accustomed to an oil price which averaged a reasonably stable $18 a barrel.

During the 1990s technological advances, for instance in seismic imaging and reservoir management, opened the range of what was possible.

Political change had also opened new doors. International companies were able to invest for the first time in areas such as Russia and the Caspian.

So supplies were growing and prices were moderate.

The factor which changed the outcome was the decision in April 2000 by the OPEC member states to set a price framework for oil at around $25 a barrel.

That was driven by the need for revenue in countries which had seen their populations rise by over 75 per cent in less than 20 years.

OPEC’s successful management of their production kept prices at around $25 for the next three years. The next fundamental change came on the demand side.

In the last two years world oil demand has grown by almost 5 mbd. Chinese imports alone grew by 1.4 mbd and demand here has risen by 7 per cent thanks to economic growth and increased prosperity.

As well as growing demand, the last two years have seen an increasing concern about the security of energy supplies.

For most of the last two decades the market has operated with around 3 million barrels per day of spare capacity. Last year that spare capacity fell to around 1 million barrels per day – an amount less than is produced in a number of areas where continuity of supply has been threatened by disruptions – including Iraq, Nigeria and Venezuela.

There has been no physical shortage, but there has been a fear that a shortage could develop.

It was this reduction in spare capacity which precipitated the increase in the price during last year – and has held it there since.

Supply is still growing – but so too is demand. China will need at least another half a million barrels of oil per day this year and India perhaps an additional 100,000 b/d or more.

So although it is impossible to predict what will happen to prices the tension of supply and demand will remain in the short to medium term and there is very little immediate prospect of a return to the calm of the 1990s.

So short term – the high prices are one cause of insecurity.

But there are other longer term factors at work.

If you look ahead over the next decade it is clear that the demand for oil will increase further. On the most recent forecast from the International Energy Agency oil demand is set to grow by almost 150 per cent between the year 2000 and 2020. Natural gas demand could grow by 300 per cent.

In the transport sector in particular there are as yet no obvious, commercial viable substitutes for oil. Vehicle numbers are increasing – estimates start at 250 mn over the next ten years.

There is no shortage of oil. The best estimates say that there are at least 40 years of supply remaining at current rates of consumption – and that is just conventional oil. There are also heavy oil supplies in places such as Canada and Venezuela and at least 65 years of natural gas supplies.

We believe that non-OPEC supplies of oil will continue to grow as industry continues to explore existing and new basins, and applies new technology to existing fields and new exploration. Over time, and depending of course on other factors including demand and OPEC production policy – this should lead to a more comfortable level of spare capacity and moderation of today’s very high prices.

The challenge is that the supplies are not in the same places as the demand. America, Japan, Europe, China and increasingly India will be importing oil in significant volumes. The most recent study by the International Energy Agency suggests that on quite modest forecasts of economic growth India will be importing over 80 per cent of its needs by 2020.

The same independent study says that almost 80 per cent of all the traded oil will come from just three areas – West Africa, the Middle East and Russia.

And I think it is that concentration of supply which is an additional factor in concerns about security.

Then there is a concern about the efficiency of energy use. That concern affects energy users everywhere around the world. Developed, industrialised countries still have a lot to learn. But energy efficiency has a particular importance for countries such as India and China where the development of the economy will draw in increased volumes of both oil and natural gas at a rapid pace.

Are economies which are in the process of transition equipped to use the energy they need effectively – in vehicles, in power stations, in the cities and in the rural areas ? Can they improve on the mixed track record of the industrialised world ?

To use huge additional amounts of new energy in old plant could be very inefficient and costly. It could be very damaging to the competitiveness of the businesses for which energy is a major input. It could be very damaging to the fragile infrastructure of cities which have not been designed for use by millions of vehicles every day.

And that brings us to the fourth concern which is about the environmental impact.

In part that is about the long terms effect on the world’s climate of using hydrocarbons and increasing the concentration of carbon in the earth’s atmosphere.

But also and more immediately – especially in rapidly developing countries, it is about the effect of increasing energy consumption on low level pollution – on air quality in the cities in particular and therefore on the health of everyone who lives and works in those cities. It would be ironic if the process of development which is doing so much to improve health standards in places such as India were to bring with it new and perhaps even more serious health problems.

So those are the reasons why there is such a sense of insecurity about energy at the moment. Price volatility, efficiency, the environmental and health impact and trade dependence.

What can be done

Well there is no single, magical solution. We’re not about to move to a hydrogen economy, or to find a way of securing economic development without using energy. One day alternative and renewable fuels will play a significant role in the world’s energy balance – but that day is a long way off.

We have to be realistic and to find practical solutions to each of the challenges I’ve mentioned.

And I believe those practical solutions are available.

Let me quote just a few of the things we’re doing around the world. Not because BP has all the answers – we don’t. But because by virtue of being a global business you do pick up experience and ideas from different places and you can apply those ideas in other places very quickly.

The first part of the answer to energy insecurity is to diversify the available sources of supply and the infrastructure linking that supply to the customer. There is no need, in a global market, to be dependent on any single source.

That’s why we’ve invested in Russia - a major $ 8 bn long term investment in partnership with the Russian company TNK to redevelop existing fields and to find new ones.

Let me tell you just one story.

Historically the largest single oil field in Russia is called Samatlor. It’s in West Siberia. That is part of the company of which we are now the joint owners.

That field has been producing for decades and production has been falling.

When we went in we applied some of the technology we use in the North Sea and Alaska. We found that below the field … there’s another field – previously completely undiscovered. That is an example of what transfer of knowledge and technology can achieve.

Russia is very important for the world’s energy future. But it isn’t the only place. We’re also investing in Angola, Algeria and Egypt – in each case in partnership with local companies.

Then we’re investing in Indonesia in the development of one of the world’s largest natural gas fields – Tannguh - which holds an estimated 14 tcf of recoverable gas.

We’re developing that as LNG – taking it to China, Japan and Korea.

One interesting element of that is the direct investment in the development by the Japanese and Chinese buyers of the gas. They will hold a direct share in the resources.

We’re also investing in the development of a major terminal to receive the LNG in China and to distribute it to local business users. That investment is undertaken jointly with CNOOC, the China National Offshore Oil Corporation - one of the major Chinese state companies.

So diversity, and the development of infrastructure which bring consumers and suppliers together. That’s a very effective way of protecting energy security and I think we’ll see much more of that in different places around the world.

Diversity is also a way of limiting price volatility. If you are reliant on a single fuel and a single supplier you’re trapped if that supplier increases the price for whatever reason.

But if you have some flexibility, supply sources can be switched. That’s why natural gas is so important. I agree with the comment of Dr Vijay Kelkar which was quoted in a recent speech by Mr Mani Shankar Aiyar, “ What petroleum was to the 20th century, natural gas will be to the 21st”.

The technological advances of the last twenty years have made natural gas an ideal source of energy for power generation. The natural gas we supply worldwide goes increasingly into the power sector. That means that countries such as Japan and the UK and the United States can limit their reliance on oil, or coal, and can retain the ability to move some of their consumption between one fuel and another.

The other element of flexibility comes from trading – the ability to buy and sell on the world market which allows importing countries to manage their purchases as effectively as possible on a day to day basis.

The global trading market, for both oil and natural gas - is now huge – and it is very efficient. Over the last three years despite the conflict in Iraq and numerous other incidents the market has worked remarkably effectively and has been instrumental in ensuring that there has been no physical shortage of supply.

Although prices have increased, the trading market has been one of the restraining factors. Trading helps to keep prices down.

As a major participant in that market we’ve begun to create partnerships so that those who need secure and reliable sources of supply can use the trading market to enhance that security.

Those markets operate on a global basis but I believe they have a particular potential in Asia – linking the resources of West Asia – Saudi Arabia, Iran and other Persian Gulf States; North Asia – Russia and South East Asia – in particular Indonesia with the consumers of India and China.

The ability to trade, with confidence, in an open and fungible market provides a real effective alternative and complement to direct equity ownership of resources.

Then on efficiency and the environmental impact of energy. Both are crucially dependent on the quality of products used and the ways in which they are used.

Let’s just focus on vehicles.

We’ve begun to improve fuel quality. Cleaning up the fuels so that the emissions produced are minimised. We’ve eliminated lead – we produce no leaded petrol anywhere in the world. And we’re supplying both gasoline and diesel to ever higher specifications by improving our refinery operations. Clean fuel is now becoming the norm in the industrialised world – we see no reason why it shouldn’t be the norm in the rest of world as well.

But efficiency and environmental impact also depend on the quality of the equipment which uses the energy.

That’s why we’ve been working in partnership with the car manufacturers to produce a new generation of engines which combine the very best technology in their field with clean fuels and crucially with the best technology in lubricants.

That is work in progress, but our hope is that it will produce vehicles which can match the needs of countries such as India – not following the old path – but designing something which suits the circumstances you face.

I think it would be tremendous to produce a vehicle – at a very low cost – which could provide millions of people in India and other countries access to mobility for the first time.

But vehicles don’t just mean cars – or motorcycles. Buses are important as well. We’ve been experimenting in many European cities – using the latest technology to produce buses which are economically and environmentally efficient.

Those buses can work in an urban environment but they can be just as valuable in rural environments.

As I look at the Indian economy, I don’t believe all the development will take place in the cities. The rural economy is crucial, and effective transport systems – affordable, clean and accessible to all – could be very important in ensuring a balanced process of development which doesn’t force everyone to migrate into the towns and cities.

And there are other things which can be done.

I said a few minutes ago that alternative and renewable fuels were not going to make a big difference for some time to come.

At the macro level that’s true, but in particular areas they can make an enormous difference.

We are developing in partnership with Tata a business in solar power – using photovoltaics. That business is beginning to have an impact in a segment of the energy market largely untouched by conventional business. Solar can provide power in the forms of lamps and generators to small communities who live well away from the normal supply lines.

Our solar power business supplies communities in the Australian desert, farming villages in Angola, a series of schools in rural Zambia and, of course, through the Tata joint venture we supply 30,000 villagers here in India – in Rajasthan and Uttar Pradesh. It’s an excellent business.

Solar isn’t going to provide the energy on the scale needed to power great cities such as Delhi and Bombay for some time to come but it can provide energy for villages and small towns – and can provide a local power source to sustain their development and improve the living standards of the people who live there.

We’re also looking at ways to create cleaner, more efficient household energy sources. We’re hoping to develop an alternative so that those who currently rely on wood burning stoves can switch to something that is safer and cleaner. Something which doesn’t damage people’s health or pollute their homes. LPG – Liquefied Petroleum Gas seems to be one very interesting possibility. We have a team working out how to make this possible in rural India – along with the distribution systems to get it to the villages.

And then looking further ahead we can begin to see the possibilities for developing new sources for the fuels which are so central to the energy equation.

No analysis of energy security can be complete if it neglects the large coal resources which are in place and which could, with the benefit of advances in technology, begin to provide significant volumes of clean energy in usable forms.

We’re experimenting with the technology of converting coal into other forms of energy in an efficient and an environmentally positive way.

It’s a long term process but worth pursuing not least because, if the technology could be developed commercially, it would enable indigenous resources to be used to meet local needs – with all the economic benefits that could offer.

I’ve talked about a range of possible answers to the challenge of energy insecurity. They are very different and their application varies in detail from one country to another because the needs of each country are so different.

The striking common feature is that they are all about partnership.

The old concept of privatisation – the concept of publicly owned assets being sold off to private interests – is outdated.

There is a public interest in energy because energy is so central to a modern integrated economy. The challenge for private companies is to work with that public interest and to develop ideas and solutions in partnership with state enterprises and nationally owned companies.

The examples I’ve mentioned show that partnerships are proving to be very successful. We strongly believe that partnership, based on alignment and mutual advantage, is the way forward.

Ladies and Gentlemen, energy security is a very important topic.

Countries such as India and China are entering a new phase in the process of economic growth and development. It’s very exciting to be part of that process, not least because growth is the way in which poverty will be removed, and living standards for everyone raised to a decent level.

Energy is crucial to that development process, and the absence of energy or extreme volatility in prices could halt the progress that’s being made.

There are good reasons why so many people are concerned about energy security. But there’s no reason to be fatalistic. There are things which can be done to maintain energy security. And we believe our role is to be part of that process – working with each country, in partnership with local companies.

So it’s a pleasure to be here, and I hope this is just another step in the development of a long and mutually advantageous relationship.

Thank you very much.

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