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the outlook for the world oil market, by Lord Browne, CEO of BP

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  • Taylor, John (JH) (Solvents)
    The Outlook for the World Oil Market Speaker: Lord Browne Speech date: 10 December 2004 Venue: The Empire Club of Canada, Toronto Title: Group Chief Executive
    Message 1 of 2 , Dec 14, 2004
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      The Outlook for the World Oil Market

      Speaker: Lord Browne
      Speech date: 10 December 2004
      Venue: The Empire Club of Canada, Toronto
      Title: Group Chief Executive

      President Mindszenthy, Ladies and Gentlemen.

      It is a great pleasure to be back in Canada, which is a country that is
      very important to us in BP and to the whole of the world energy market.
      We very much appreciate the links that we have here. We already invest
      some $8bn Canadian dollars here, and I hope we soon will be able to
      invest a little more.

      You asked me to talk about the outlook for the world oil market.

      I think it is appropriate to start with the immediate events which are
      shaping people's thinking about the market, and raising new concerns
      about the question of energy security.

      The price of Brent on the international market has fluctuated over the
      last 12 months from around $25/bbl a year ago to over $45 for a period
      in the autumn to just below $40 today.

      To understand the reasons for those shifts, you have to look back at the
      events of the last five years. What's changed and what are the
      consequences of those changes?

      Back at the end of the 1990s, we all were accustomed to an oil price
      which averaged a reasonably stable $18/bbl, with only very occasional
      excursions into the low $20s, and one brief fall at the end of the 1990s
      to $10.

      That was the picture for a decade, from the end of the first Gulf war

      Throughout the 1990s, technological advances had opened the range of
      what was possible. Advances in seismic technology reduced the risks and
      costs of exploration. Advances in deep water technology opened up new
      areas for exploration and development. Advances in reservoir management
      technology pushed up recovery factors.

      And political change also had opened new doors. International companies
      were able to invest in areas previously closed to them - including
      Russia, Central Asia, the Caspian, and China.

      So there had been a series of developments which had created a situation
      in which costs were falling, and in which prices were moderate and
      seemed liable to decline rather than increase.

      The factor which changed the outcome was the decision in April 2000 by
      the OPEC member states to use their market power to set a price
      framework for oil at around $25/bbl - varying up or down from that level
      by no more than $3/bbl.

      That was a major step, and OPEC's successful management of their
      production set prices at those levels throughout the period, from 2000
      to the end of 2003.

      The next fundamental change came on the demand side.

      The growth in demand for oil in 2003 and 2004 has been so strong that
      for the first time in 30 years, the rate of oil demand growth worldwide
      almost matches the growth of GDP.

      That is the context in which the rise in prices we've seen over the last
      twelve months has developed.

      That rise is driven by demand, particularly the dramatic growth in
      demand in China, which has increased its imports of oil by 400 per cent
      in just 4 years, and is reinforced by concern about supply security.

      For most of the last two decades, the market has operated with around 3
      million barrels per day of spare capacity. This year, that spare
      capacity has fallen 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 shortage, but there has been a fear that a shortage
      would develop.

      Fortunately, the market operates in a very effective way.

      Partly in response to this increased price, and in response to the
      confidence inspired by OPEC's effective management of the market, the
      private sector part of the industry began to increase its spending on
      exploration and production.

      The top 30 quoted companies have increased their investment in
      exploration and production by more than 15 per cent a year during the
      last five years. They now invest almost $100bn a year between them.

      That already is producing increased supplies.

      A whole series of major new fields are coming on stream over the next
      three years - in the Caspian, in Angola, and in the deep water of the
      Gulf of Mexico.

      Those new developments should help to restore stability to the market.
      So will the growth in OPEC capacity. If, as can be reasonably expected,
      the growth in demand resumes its normal growth path of around 1.5 per
      cent per annum, surplus capacity should build over the next three years
      back to a more comfortable level of around 3 million barrels per day.

      In the absence of any further major disruption, prices might then revert
      to a level set by the decisions of the OPEC member states on production.

      Given the revenue needs of many of those states, which have large,
      youthful populations and which have not yet succeeded in diversifying
      their economic development away from oil, it seems realistic to expect
      that with the insecurity premium removed, prices might stand at around

      That is a reasonable level which will reward investment by the private
      sector and generate sufficient revenue for the producing states, but
      which will not do major damage to the global economy or to those who
      depend on oil imports.

      Such an outcome, however, is not the end of the story. None of the
      developments I've described should be taken to mean that the issue of
      energy security has been resolved.

      There are two substantive issues, each of which poses challenges for
      energy security over the medium and longer term.

      The first is about supply and demand.

      The demand for energy continues to grow, with the growth underpinned by
      the increase in population numbers and by the gradual spread of

      The world's population grows by almost 10,000 an hour - almost a quarter
      of a million every day. In ten years time the world will have an
      additional one billion citizens - making 7.3bn in total. All those
      people need food, housing and all the other basic products and services
      which require energy.

      More and more of the world's population can afford the energy they want
      to buy. The spread of prosperity, especially in China, India, and parts
      of Latin America, adds to effective demand on a daily basis. The result
      is that there are tens of millions of new consumers of commercial energy
      every year.

      The current projection from the International Energy Agency is that
      global demand for all forms of commercial energy will rise from the
      current level of around 190 mbd oil equivalents to some 240 mbdoe by
      2015. A rise of almost 30 per cent.

      That forecast is made on quite cautious assumptions about economic
      growth rates. The numbers could turn out to be significantly higher.

      How can that demand be met?

      Some place their faith in renewable and alternative forms of energy
      supply. Power from the wind and the waves. Power from solar panels.

      We believe those are important sources of future supply. We in BP are
      investing in research and development work in photovoltaics - the
      technology which supports solar power - and in various other forms of
      alternative energy supply.

      One day, one or more of those new sources will provide a significant
      proportion of global energy demand.

      But the evidence is that day is still a long time off.

      Today, all the renewable and alternative forms of energy supply provide
      just 2.5 per cent of world demand, the bulk of which currently comes
      from biomass.

      Research continues in many other countries around the world. But in
      every case, we still are at the stage of research and experimentation.

      We believe renewables will provide material supplies of energy in the
      long term. But the long term could be 20 or 30 or more years away.

      The estimate from the International Energy Agency is that in 2015 they
      will provide only 3.3 per cent of total demand.

      What sources then will meet the demand?

      Some people believe that the key lies in the potential of nuclear power.

      That certainly is possible. But it seems a remote possibility on the
      timescale of a decade. Nuclear currently supplies 7 per cent of world
      energy demand. The first generation of nuclear stations are reaching the
      end of their natural lives.

      Last year, only 2 new nuclear stations were commissioned and public
      doubts both about safety and about the uncertain long term costs
      continue to constrain new investment. In the US, no new stations have
      been commissioned for over two decades, while in Europe the forecasts
      suggest that on current trends nuclear capacity will decline rather than
      increase over the next ten years.

      And that leaves hydrocarbons - coal, oil and gas - to meet the balance.

      The mix will vary from one country to another. China, for instance, will
      no doubt continue to use large volumes of coal, but in terms of
      convenience, oil and gas seem set to remain the fuels of choice.

      In reality, energy security is about the supply of oil and gas to meet
      demand which could grow, again taking the IEA figures, to around 93mbd
      of oil and 64mbdoe of natural gas by 2015. That would represent a 20 per
      cent increase in oil demand from today's level and a 45 per cent
      increase in the consumption of gas.

      Can the oil and gas industry meet that demand?

      In physical terms the answer is clearly yes.

      The resources are there.

      The world holds some 1,000bn bbls of oil which have been found but not
      yet produced, and some 5,500tcf of natural gas - also found but not yet
      produced. At current consumption rates, that is 40 years of oil supply
      and 60 years of gas.

      In addition, the US Geological Service estimates that some 800bn bbls of
      oil and 4,500 tcf of natural gas are yet to be found.

      And that does not include the very substantial heavy oil resources here
      in Canada and in Venezuela, which also are beginning to appear to have
      real potential as a source of future supply.

      In terms of physical resources, then, energy security is within reach.
      There is no fundamental physical reason why there should be a shortage
      in the next ten years, or indeed for many decades beyond that.

      The challenge for energy security is that supply is not co-located with

      The fundamental fact is that now, and for the foreseeable future, four
      regions will account for the bulk of trade on the import side of the
      equation - the US, Europe, Japan and China. Even assuming that all four
      develop their own indigenous resources to the limit of what is
      economically rational, and diversify their energy supply sources where
      practicable, they still will need substantial and growing volumes of
      imported oil and gas.

      Over a ten year period, the trade in oil, in particular, will grow as a
      proportion of total demand, because production from the mature provinces
      in the developed world is plateauing and beginning to decline.

      Oil trade is likely to rise as a proportion of consumption, from 50 per
      cent today to almost 70 per cent by 2015. Gas trade will also rise over
      the same period.

      As I have discussed, there is no shortage of resources.

      But the export side of the trade equation displays an even more powerful
      concentration of activity.

      By 2015, three areas will account for almost 80 per cent of all the oil
      traded in the world each day. The three are Russia, West Africa and the
      Gulf States of the Middle East. By 2015, on the IEA estimates, Saudi
      Arabia alone will be required to export some 15 to 16 million barrels of
      oil every day to balance the world market - and that assumes that both
      Iran and Iraq are by then producing and exporting at something close to
      their full capacity.

      That is a manageable situation, of course, but it does emphasise the
      need for the development of a wide variety of sources of supply, and of
      the infrastructure necessary to bring those supplies to market.

      Canada is very important in that process. The energy produced and traded
      from this country - potentially including heavy oil - is a crucial
      element in the overall picture, and so is the infrastructure which can
      take those resources to the markets where they are needed, in North
      America and internationally.

      That is one element of concern about energy security. The other concern
      is the environmental challenge associated with the growth in hydrocarbon

      In part, that is about the level of pollution caused, particularly in
      the cities as hydrocarbons are burnt.

      In part, and potentially more seriously, it is about the impact of
      increasing emissions of greenhouse gases on earth's atmosphere - the
      issue of climate change or global warming.

      The detailed science of climate change is still provisional. There are
      many things we don't know. But science is always provisional and in
      business we are used to working in circumstances where we don't know all
      the facts for certain.

      That means we have to make judgments in conditions of uncertainty,
      weighing all the risks. On the basis of the available evidence about
      climate change, the clear judgment must be that there is a powerful case
      for precautionary action.

      It would be too great a risk to stand by, do nothing and to wait so long
      that when the impact on the climate really does begin to be felt, the
      action which has to be taken will be so fundamental as to cause serious
      damage to the world's economy.

      There is a very strong case for precautionary action designed to limit
      any increase in the world's temperature to around 2 degrees Celsius.

      That translates into a stabilisation of greenhouse gases in the
      atmosphere at around 500 to 550 parts per million.

      That is the best current estimate of the level of safety and, of course,
      as knowledge advances that estimate could be adjusted and refined.

      Can that stabilisation be achieved?

      The answer is yes. It would mean putting ourselves on a trajectory to
      the point where in 2050, 50% of global needs for energy would be met by
      conventional fossil fuels and the other 50% would come from fuels with
      lower carbon emissions - in some cases with zero emissions. Each of
      those two halves would be about the size of today's energy industry.

      I believe that is achievable.

      A great deal of work and experimentation has been undertaken over the
      last few years - by governments, by academics and by the business world.
      We may not have a full international agreement, but we have a great deal
      more knowledge and experience than we did seven years ago.

      People have demonstrated that emissions can be reduced - and at a very
      low cost - simply by reducing waste and inefficiencies. We did that in
      BP, and we found that we actually made money in the process.

      Cutting out waste is a first step, but beyond that people have also
      begun to demonstrate that there are practical ways of managing the

      Some of the possible steps involve advances in efficiency - such as
      raising the mileage per gallon of vehicles from 30 to 60 or eliminating
      waste, for instance, by ending the process of flaring the natural gas
      which is produced in association with oil.

      Some of the steps involve changing the product mix - using, for
      instance, natural gas to fuel power stations rather than coal, or
      looking further ahead, taking action to encourage the growth of solar
      power or some other form of energy supply which does not generate carbon
      emissions. There also is the possibility of developing coal gasification

      And some of the steps involve the development of new techniques which
      are just emerging, to capture and store the carbon so that it never
      reaches the atmosphere. We in BP are developing a project in Algeria
      which takes carbon out of gas which is bound for Europe and reinjecting
      it into storage. That is a large scale test of what is possible. If it
      works, it will reduce emissions by the same amount as would be achieved
      if we took 200,000 cars off the road.

      Of course, there are many uncertainties. The decisions that require
      changes in life style may be unacceptable. The technology of carbon
      sequestration may be unattainable. There are uncertainties, but they are
      not all on the negative side. Technology is moving very quickly and will
      almost certainly offer new opportunities over the next half century -
      possibilities we can't even envisage at the moment.

      What we need above all is an agreed target - set for the long term and
      supported by a trading system which allocates resources effectively and
      efficiently. The European Trading System is an important step in that
      direction, and could set a global standard which leads the way forward.

      So two major challenges for the world oil market which will remain, even
      if prices subside from their current levels.

      What conclusions can we draw?

      First, that the world needs a secure supply of oil to provide heat,
      light and mobility - and that it needs an effective market mechanism to
      ensure that the supply is available when and where it is required.

      Second, that there need be no shortage of oil and there need be no
      damage done to the world's natural environment. We can work our way
      through all the challenges.

      The third point is that this is a common problem. Energy security in one
      country is impossible. So is environmental security. There is one market
      and one global climate.

      That means that we all have to accept the reality of the challenges and
      the fact that their solution will require the combined actions of all
      those involved in the industry - Governments and companies, public
      sector and private alike. We can't live in denial.

      That need for a collective cooperative response is true in respect of
      energy security and in respect of the environmental issues. The private
      sector can do a great deal, but it can't operate effectively unless
      there is an effective framework which enables infrastructure and
      investment to proceed, and which incentivises innovation and the
      development and application of new technology.

      I've spent more than 35 years in the oil industry now, including some
      very happy years here in Canada, and I've seen the market move through
      many different phases.

      The market will never be placid and calm. No one who wants a quiet life
      should ever work in the oil industry. But it is a fascinating and very
      exciting place to be.

      And I've always found from my experience that the market is a very
      dynamic phenomenon. It produces answers, often unexpected answers,
      precisely because it stimulates innovation and creativity.

      And that experience gives me the greatest confidence that however great
      the challenges answers will be found, and that the oil market, and the
      industry as a whole, will be as important to the economy of this century
      as it was in the last.

      Thank you very much.

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    • norsk5
      So, the rear view mirror is a good reflection of what is to come. Besides the various agencies, as quoted, say all is well. mmmmmmm Objective viewpoint! NOT!
      Message 2 of 2 , Dec 14, 2004
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        So, the rear view mirror is a good reflection of what is to come.
        Besides the various agencies, as quoted, say all is well.


        Objective viewpoint! NOT!

        doug in utah
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