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Securing the future - An oil company perspective

Speaker: Tony Hayward
Speech date: 11 June 2007
Venue: EAGE Annual Conference - London EXCEL Centre
Title: Group Chief Executive

Ladies and gentlemen. Good afternoon. It's a great pleasure to be here today - in some senses returning to my roots. 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 industrialised 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.

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 minimise 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:

First - 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.

The second 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.

Thirdly - and I think we should be honest about this - the 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.

And fourthly there is a 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 1960's. 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.

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 USA 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 a barrel, but which can be done at $60 a barrel.

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.

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 co-operation between producers and consumers, we are making enormous contributions to human progress. I believe that is something to be proud of.

Thank you very much for listening.

Editorial Notes: A brilliant piece of persuasive communication. As usual, one cannot expect spokespersons for large economic entities to proselytize for disagreeable truths, as we in the blogosphere can. Instead they must triangulate among:
  • Economic self-interest
  • The political environment (e.g., public anger at high gasoline prices; need to work with OPEC)
  • Reality (one can't get too far away from it).
This speech by BP chief executive Tony Hayward seems to articulate the current public relations strategy towards peak oil. Apparently peak oil is too well known to ignore, so the phenomenon is directly addressed. The first step is to ridicule peak oil:
For those who succumb to these irrational fears it is all downhill from here and only a sinister Petro-Apocalypse lies ahead.
Although there are peak oil people who predict an apocalypse, they are only a fraction of the movement. But it is easier to erect cartoon opponents, than address the concerns of the well-scrubbed professionals at ASPO, conservative Republican representative Roscoe Bartlett, or the worries being obliquely expressed by the military and intelligence communities. Mr. Hayward wisely avoids discussing the specific arguments of peak oil, since that would bring up uncomfortable questions like the unreliability of oil reserve statistics. Instead, it is better to talk about his personal feelings as a geologist that there are many unexplored basins. Other former oil geologists such as Colin Campbell disagee. These geologists form the technical backbone of the peak oil movement. Word of mouth has it that peak oil is alive in the technical departments of oil companies. In the long-term, the campaign against peak oil may backfire on the oil companies.
  • If they make unwise decisions believing in their own PR campaigns, their bottom lines will suffer. (Probably no danger of this. As TIME reports, spending on exploration is not very high - just what one what expect if one saw supply constraints ahead)
  • As oil prices continue skywards, the oil companies may need peak oil to explain themselves to an angry public.
  • As peak oil becomes widely known and its effects evident, the oil companies will have made themselves a target - "Why did they hide the truth?"
Related: BP website BP's Statistical Review of World Energy 2007 (just released) BP: World has enough oil for forty years (FinFacts) -BA
UPDATE: Another petroleum engineer in disagreement with Mr. Hayward. Jeffrey J. Brown (westexas) writes: Based on our simple mathematical Hubbert Linearization (HL) model, the US Lower 48 and the North Sea both peaked when they were about 50% depleted (see Texas and the Lower 48 as a Model for Saudi Arabia and the World for an explanation of the HL method). Both regions were developed by private companies. Both regions are in long term decline. Why haven't private oil companies been able to reverse the long term declines in the Lower 48 and the North Sea? As Deffeyes predicted, using the HL method, world crude oil production started declining at about the same stage of depletion as the Lower 48 and the North Sea (EIA data). In any case, this BP article is yet another example of the "Iron Triangle" at work: the auto/housing/finance group want to keep selling and financing large homes and autos; the mainstream media group wants to keep selling advertising to the auto/housing/finance group and the major oil company/major oil exporter group (and the energy analysts that work for them) assure us that we have vast supplies of oil--which is all dutifully reported by the mainstream media. In my opinion, the major oil companies are afraid of punitive taxation and the major oil exporters are afraid of military takeovers, if they admit to the reality of Peak Oil. The energy analysts just work for them. This cast of characters is--in effect--encouraging consumers, at the worst possible time, to continue buying and financing large homes and SUV's. A formerly well off suburbanite who just saw his prized SUV repossessed and this McMansion foreclosed upon is not going to be a happy camper. At least this petroleum geologist tried to warn him.

What do you think? Leave a comment below.

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