WHAT THE INDUSTRY EXPECTS IN 2008

Energy security and America

Tony Hayward, Group Chief Executive, BP, London

Energy security is a front-of-mind issue for the people of the world. We face the difficult fact that the current market environment is a tough one, and the energy industry is working hard to keep the energy flowing. The oil price is close to the real-term record set in 1979. Every geopolitical event causes a spike in the price, but these spikes only happen because the underlying market is itself tight. Strong demand is coming mostly from the developing world, led by China, and it is a lesser known fact that rising demand is also coming from oil and gas producing nations themselves, many of which are using their booming oil revenues to invest in their own economies.

Oil supplies have not already peaked. There are, at the very least, 40 years of proved oil reserves left, at current rates of production, and over 60 years of natural gas. Unfortunately, political and technical obstacles hinder bringing these reserves to market, and become more challenging all the time. For the medium term, the era of cheap energy is behind us.

To the consumer, energy security means access to reliable sources of energy, at an affordable price, produced in an environmentally responsible and safe manner. However, energy security cannot be examined in isolation, as it is linked to other issues, such as economic efficiency, competitiveness and growing concerns about climate change.

Anxieties about energy security arise when high prices alert consumers to the tensions in the energy market. Across the world, geopolitical events, rising investment costs, prolonged project delay and high decline rates of major fields are together creating a drag on worldwide production capacity, particularly in oil.

These trends are global, because the world energy market is interlinked and interdependent. US imports account for 60% of domestic consumption last year, up from 33% only 20 years ago.

Energy independence. Energy security should not be confused with the idea that a major importer such as the US can somehow cut itself off and become self-sufficient in energy supplies. Rather than creating a reliable and affordable supply of energy for consumers, cutting off the US from the global market would create a new form of dependence on political structures, as opposed to market ones, to deliver America’s energy. It would cause a misallocation of capital toward uncompetitive investments and an increasing reliance on domestic fossil fuels, such as coal, which could actually drive up prices for consumers.

The four pillars of energy security. Diversity reduces reliance on any one source, and is the founding principle of energy security. The following four principles must be applied to enhance energy security in importing countries such as the US.

1. Making markets work is essential, therefore the domestic market must be well integrated into the global energy market. An integrated global energy market means if one source of supply dries up, another can come on-stream to replace it. And the more sources there are, the less reliant we are on any particular one.

In the US, benefits from being integrated into the global energy market were realized after Hurricane Katrina, when 29% of US refining capacity idled, and oil production from the GOM was curtailed for months. A drawdown from the Strategic Reserve, and imports brought in from overseas meant the markets were back in balance within days.In fact, despite disruptions like two major wars in the Middle East, 9/11 and several natural disasters, there have been no major physical shortage of supplies in the last 25 years.

2. Developing the domestic resource base, whether oil, gas, coal or nuclear, is essential to energy security. The US has the world’s eleventh largest oil reserves, sixth largest natural gas reserves and largest coal reserves. The US production record is exemplary, and the new technology is enhancing recovery rates and making even the most remote resources accessible. Investing in domestic oil and gas plays boosts the American economy. BP has invested $30 billion in the US over the last five years, making us American’s biggest energy investor, and BP plans to invest an average of $6 billion a year for the next decade to continue supporting domestic resources.

3. Investing in domestic infrastructure is obviously necessary to energy security. Bringing production to market once reserves have been extracted is as important as actually producing reserves, and involves developing an integrated supply chain right through to refining, logistics and retail. Building pipelines from, for example, Alaska to the lower 48 states will boost domestic infrastructure, and investing in upgrades to US refineries will allow new technology to enhance energy security.

4. Investing in alternatives to oil that are clean and local is necessary in order to address both diversity of supply and climate change. Home-grown biofuels represent one of the most important alternative initiatives. However, today’s ethanol and bio-diesel need to be supplemented by advanced biofuels drawn from non-food crops with higher energy yields and grown in a less energy intensive manner.

Solar, wind, natural gas and hydrogen power must be harnessed in addition to alternative transport fuels, and BP is investing $8 billion in these important energy sources in an effort to enhance energy security. A low-carbon future isn’t only about zero-carbon, renewable energy. Using hydrocarbons in cleaner ways is also necessary, which includes developing power plants and other industrial plants where carbon dioxide is captured and stored underground. This is a highly significant technology because it holds the promise of helping America to use vast supplies of coal with greater efficiency, and at a lower environmental cost.

The role of IOCs. The role of large International Oil Companies (IOC) is to provide safe, reliable and affordable energy by building the pillars of energy security. This is done by deploying capabilities in managing risk, people and technology.

The true energy giants are found not only in America or the old G-7 countries, but also among the state-backed national oil companies of the Middle East, Russia and Asia, who control most of the world’s resources. IOCs, by contrast, have moved to the technological and geographical frontiers of the industry, and must listen to, and respond to, the concerns of customers, and be responsible members of communities in which they operate.

Conservation. The world stands at a crossroads as it is clear that the wave of globalization unleashed by the end of the Cold War has improved the life and prospects of billions of people who were, until 15-20 years ago, excluded from international markets. However, this prosperity is putting great strain on the environment and the natural resources of the earth.

A long-term, sustainable approach needs to be taken in order to enhance energy security. A comprehensive energy policy should start by enabling energy companies to strengthen the four pillars of energy security previously discussed. Fuel efficiency is already a very live issue for the transport sector. Carbon dioxide emissions must be reduced by IOCs leading the way by establishing an internal market, and reducing energy intensity of their own operations.

Conclusion. Energy security should be seen as a new frontier where there are challenges, but also great opportunities. We are used to frontiers in this industry. We have seen them before, many times. At this moment, for instance, we are exploring for oil and gas in the ultra-deep water of the GOM and beneath the Canadian and Russian Arctic, and in so doing we are expanding the limits of what is technically possible. Together, we are making energy supply secure. With the right approach, we will continue to do so for many years ahead.

THE AUTHOR
	Tony Hayward is Group Chief Executive at BP in London. Dr. Hayward joined BP in 1982 with the exploration department and worked in various technical and commercial roles. In 1992, he moved to Colombia as an exploration manager, and in 1995 he became president of the BP Venezuela group. He was appointed an executive vice president in 2002, becoming chief executive officer for exploration and production later that year, and he became group chief executive in 2007. Dr. Hayward earned his PhD in geology from the University of Edinburgh in 1982.