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World Energy: What Will It Take to Attain Sustainability?

by Lord Browne of Madingley
Group Chief Executive
BP p.l.c.

World Energy, v10n1

Ten years ago, most people still derided thepossibility that human activity was having an impact on the climate. When we in BP firstspoke out on the issue in 1997, we were attacked for having left the church – for having dared to questionthe conventional wisdom of the old oil industry.

Now, the reality has been accepted by almost everyone. The debate has moved on, and the question now is not whether global warming is a real risk, but what we can do to mitigate that risk before it is too late.

That is a valid question, and it relates to the question on everyone’s mind today: why sustainability is relevant to business. The answer to that question lies in the definition of the purpose of business.

Many people seem to think that companies exist only to make money. Well, companies do need to make money to reward those who trust us with their capital and also to enable us to invest for the future. No business can exist for long unless it makes money.

But making money really isn’t the purpose of business. Our purpose is to supply the goods and services which people want to buy at a cost they can afford. If a business cannot meet the needs of its customers, it will cease to trade.

Those needs, of course, are not expressed through a single transaction. Business is about meeting customer needs again and again over a long period of time and building a relationship which enables the business to respond as the needs change.

That means that to be a sustainable business you have to look at the challenges facing your customers. You have to examine the things which threaten the sustainability of the relationship. And in a spirit of mutual advantage, you have to examine what you can do as a business to remove those threats, to make the relationship sustainable and to ensure that one transaction leads to another and another.

That’s about relationships with individual customers and with the communities of which we are part. Business is part of society. Business is affected by what is happening in society, and business can and should be an active agent of change and progress. Business should meet challenges and offer new and better choices.

I believe that is what people expect from large and powerful companies: not just big profits, but a willingness to engage, to understand their hopes and fears and to help to bring progress. So sustainability starts from a business perspective. It is not an add-on or something to do with charity or public relations.

How, after all, do we value a business? We look at its future cash flows. We decide how risky it is and apply a discount rate to take account of that risk. And we consider how long the cash flows will go on; in other words, how sustainable they are. If they are not sustainable, we have fewer years of cash flows to discount. And if there is a high risk they might become unsustainable, we use a higher discount rate and get to a lower valuation.

The idea that sustainability is some recent business fad and all to do with wanting to be loved by critics, or wanting to put on a public-relations gloss, is quite wrong. It lies at the heart, and always has, of business decision making.

The Business of Business

The business of business is business, and sustainability is about achieving enduring commercial success.

What, then, are the risks to sustainability now as seen from that business perspective? Every company will give you a slightly different answer to that question based on their own circumstances.

I can speak from the perspective of BP, the largest energy producer, one of the largest suppliers of oil and gas in the United States and a company active in 110 countries around the world. We are among the largest international investors in Russia, Egypt, Angola, Trinidad, Azerbaijan and a couple dozen other major economies. That scale and reach helps define the way we see the world and the risks to sustainability.

From that perspective we see two principal risks. The first and most important is climate change and the potential impact of hydrocarbons – including oil and gas – in increasing the level of carbon in the earth’s atmosphere and potentially creating a fundamental and irreversible shift in the world’s climate.

The science of climate change is not absolute. It is work in progress. But all science is work in progress. As Benjamin Franklin famously said, “In this world nothing can be said to be certain, except death and taxes.” In dealing with science, you have to take the weight of the evidence and make your own judgement.

I believe the judgement on the science of climate change on the basis of the available evidence is now beyond reasonable contradiction. If you read the report published by the national scientific academies of the G8 countries, including the U.S. National Academy of Sciences, the conclusion is very, very clear: There is an overwhelming case for precautionary action.

Such action can be done at a reasonable cost, but the cost rises as time passes. To do nothing, to live in denial, to pass the problem to another generation will increase the cost of the action and will increase the risk that the action comes too late.

In a major report, Sir Nicholas Stern, the former chief economist of the World Bank, estimates that the cost of taking action would represent around 1 per cent of gross domestic product (GDP) per year, while the cost of doing nothing is much higher: The loss could be around 5 per cent of the world’s GDP. On that basis alone, the judgement should be clear. Precautionary action is an investment, an insurance policy that can secure us against a risk which could be absolutely devastating.

To deny the weight of evidence is now an act of ignorance. And the world will never make progress on the basis of ignorance.

Who Will Supply?

The second threat to sustainability is that the energy resources the world needs will cease to be available and that energy shortage, perhaps expressed in very high prices, will hinder economic growth and reduce living standards. This shortage could force us into using whatever resources are available regardless of the environmental consequences.

Within a decade, according to the figures produced by the International Energy Agency, the United States, Europe, Japan and China will all need increased volumes of imported oil and gas. Indeed, some 70 per cent of world oil demand, for example, will be met by imports.

The challenge and the risk behind that figure is that by 2020, almost 67 per cent of the traded supplies, two barrels in every three, will come from just four regions: North and West Africa, Russia, the Caspian and the five states around the Persian Gulf (Abu Dhabi, Kuwait, Saudi Arabia, Iran and Iraq).

By that timescale, 15 years from now, assuming nothing changes, Saudi Arabia will be required to supply at least 15 million barrels per day (or 18 million barrels per day in 25 years). And that could be higher still if either Iran or Iraq produces below capacity for any reason. That is an uncomfortable degree of concentration in the supply of a crucial commodity.

The associated problem is that more than 80 per cent of the world’s remaining oil and gas reserves and the resources yet to be found lie in areas where investment is strictly controlled by national governments and where investment by international companies is restricted, if it is permitted at all. Even some countries which rely on the West, and in particular the United States, for their security do not permit U.S. companies to invest in development.

That means that decisions on the development of the resources needed to meet growing demand will not be taken on the basis of rational market economics but on the grounds of narrow national interest. It may well be that from a national perspective it will be more lucrative to limit development and allow prices to rise.

There is no physical shortage of either oil or gas, but if the market is unable to operate, real shortages are possible. So there is the risk of climate change and the risk of dependence.

There is no single response to those challenges which can deliver a new sustainability. There is no single silver (or green) bullet. But there is, within reach, a range of solutions which can and should be pursued. Taken together, I believe they can restore energy security and restore sustainability.

First, we have to invest in the development of resources and infrastructure in ways which create a diversity of supply. By doing that we can reduce for as long as possible the risk that the United States, the United Kingdomand other importers become dependent for crucial supplies on a narrowing set of suppliers, some of whom may be prepared to use energy as a political weapon in times of conflict.

Investing in Sustainability

There are extensive supplies of oil and gas still to be developed in the United States: natural gas in Alaska and in the Rockies, and reserves of more than 4 billion barrels of oil and 19 trillion cubic feet of natural gas in the deep waters of the Gulf of Mexico. The industry is investing in all those developments. BP alone has plans to invest around $19 billion in those areas over the next three years.

There are also extensive supplies to be developed around the world. Many companies – U.S. and international, including BP – are investing in developing supplies of both oil and natural gas in areas such as the Caspian, Trinidad, Indonesia, Angola, Egypt and Russia.

We and others in the industry are investing in those projects and in the infrastructure – the pipelines and terminals necessary to bring the supplies to the customer. In some cases those developments need approvals, and we hope those approvals will soon be forthcoming. In some cases we need the support of governments to ensure that areas remain open to investment and to ensure that infrastructure can be built. That sort of support, led by the U.S. government, was crucial in opening up the Caspian, which is starting to provide important new supplies to the world market. Similar support will be important elsewhere.

This is not in any way to suggest that there is going to be a process of privatisation. I don’t believe that is going to happen. Natural resources are crucial to national economies in many countries, and in one way or another, states and state companies are going to be involved in their development.

The challenge for those of us working in the private sector is to work together with states, combining skills and resources with the state companies and doing it in a way which is mutually advantageous. That will need political support, because business can only thrive in an environment where long-term investments can be made with confidence. Those investment projects will also need the sustained development of a new generation of individuals with the skills required to bring the resources on stream.

Advancing Technology

Many skills are important to sustainability, but themost important skill is engineering in all its many forms. That is true in the United States and around the world. The investments I mentioned will extend the diversityof supply and put off the day when supplies are so concentrated that we are at the mercy of those who might want to use energy for political ends.

Those investments are important, but they are not sufficient. For long-term, enduring sustainability, we need to look beyond oil and gas to fuels which can be produced locally and do not threaten the sustainability of the world’s climate. That is why BP is investing in biofuels. We already supply more than 500 million gallons of ethanol to the United States.

Now we are preparing to undertake an extensive research programme costing a half-billion dollars to harness the latest science to develop crops which can supplement the contribution ethanol already makes to the energy supply.

I believe advances in biology can make a crucial contribution to energy security. If you can find ways of developing crops which do not displace food crops, and new ways of processing those crops which make use of the whole plant, the potential could be enormous.

But getting to that point requires a significant programme of new scientific research. It requires the involvement of the industry and of the scientific and engineering communities, working together. And transferring the products of that co-operation into real products and real choices for the consumer will require a secure, sustainable regulatory framework. Science, engineering, commerce and public policy have to come together.

Energy Takes Many Forms

The notion of using crops is not as new as some people think. Henry Ford designed the original Model T to run on ethanol. Our hope is that the next generation of biofuels can make a cost-effective, local and environmentally positive contribution to the protection of energy

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