Don’t squander energy chances

It is an enormous pleasure to be here and to have the chance to come and share some thoughts with you this afternoon. I want to start by saying thank you and by expressing our appreciation for all the help and support we receive from the Government and the business community here in Trinidad and Tobago. It’s a privilege for us to be part of that community and to have been part of this country’s growth and development over the last 35 years. BP has changed a great deal in those years — merging with Amoco and Arco — and moving beyond the base we have in Alaska and the North Sea to become a global company working in more than 100 countries in the world. We’re now the second largest private company in the world in our sector.

It’s been a rapid process of change but I hope and believe that however large we are, the success of our business depends on the relationships we have in each of the different places in which we work. We believe those relationships only succeed if they are founded on long-term mutual advantage, and that is exactly what we aim to achieve here in Trinidad and Tobago. Now I’ve been asked to talk about the international context for our industry and about how that might affect the economic future of Trinidad and Tobago.

I think it is very important to separate what is happening in the energy market in the very short term from the longer-term trends and to share my views of Trinidad and Tobago’s likely position in the market and of the opportunities which that presents. We’re experiencing a period of great volatility. World oil prices are higher now than at any time since 1990, and the gas price in the United States is running $3/mmbtu above the average of the last decade. There are a number of factors contributing to that volatility. First of all, of course events in the Middle East and uncertainty among the future of a region which remains absolutely crucial in the world energy market.

Rising demand for oil and gas 

Rising demand for both oil and oil. Demand for oil in China is rising by around 10 percent a year- which means an extra half a million barrels per day — every year. And China isn’t the only place where economic growth is strong- the Indian economy is growing by around seven percent this year; the Russian economy by six percent; Brazil by perhaps as much as 10 percent. That growth in turn stimulates demand for oil and gas. And on the other side of the equation there has been a sustained period of strong OPEC discipline in relation to oil supply. Those are the factors shaping the short-term market, and there is no immediate sign that any of them will change dramatically. I think we have to expect continued volatility.

It’s the longer-term outlook, however, which will have more impact on this country, and on the process of economic development which you are pursuing. That’s what I’d like to concentrate on today, and I’ll start at the global level because all of us —  individual companies and producing countries —  are part of a single global market. To understand the prospects for the future, and the reasons for the current very active debate around the question of energy security, I think you have to understand each of the various different elements which shape the oil and gas market. At one level, this is a very simple issue. It is about demand and supply. The demand for energy is driven by demography and economic performance. By the number of people who can afford to buy the energy they need.

Today the world’s population is estimated at 6.3 bn. That figure grows by almost 10,000 an hour. In ten years time there will be almost another 1 billion people on earth. 7.2 bn by 2015 according to the most authoritative estimates from the UN. More and more of those people will be able to afford to buy the energy they need. Economic growth continues to extend prosperity to more people every year in China and in other emerging economies. The Chinese economy has quadrupled in size over the last 20 years. China is going through a process of rapid industrialisation and that has made China now the 2nd largest single consumer of energy in the world after the United States.

Today the world will use some 190 million barrels of oil equivalent — that is expressing all the different forms of energy supply — natural gas, coal, nuclear and so on, in terms of a common unit of measurement. That energy is used in homes, in industry, in offices, in power stations and in transportation. Technology is gradually making the use of that energy more efficient. The energy intensity of each extra point of GDP growth has fallen over the last 30 years and continues to fall. But the fall is gradual. The combination of more people and more prosperity will mean that the demand for energy will grow. In many of the major new markets the scope for increased consumption is considerable. In China, for instance, per capita energy consumption is still very low — still only one-fifth of the level in Europe and only a tenth of the level in the US.

And because of the sheer number of people involved, even modest growth in per capita demand in China is going to have a material impact on the global energy balance. The most recent estimates of the International Energy Agency suggest that world energy demand will rise by a third to around 240 mbdoe by 2015. 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 at 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. At the moment, all the renewable and alternative forms of energy supply provide just 2.5 percent of world demand, the bulk of which currently comes from biomass. Solar power provides just 0.001 percent. Research continues. But in every case we are still 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 percent of total demand. What sources then will meet the demand? Some people believe that the key lies in the potential of nuclear power.

That is certainly possible. But it seems a remote possibility on the timescale of a decade. Nuclear currently supplies seven percent of world energy demand. The first generation of nuclear stations are reaching the end of their natural lives. Last year only two new nuclear stations were commissioned anywhere in the world and public doubts, both about safety and about the uncertain long-term costs, continue to constrain new investment. In the US, no new nuclear stations have been commissioned for over two decades, while in Europe the forecasts suggest that on current trends nuclear capacity in Europe will decline rather than increase over the next 10 years. And that leaves hydrocarbons — coal, oil and gas — to meet the balance. The mix will vary from one country to another. Some countries 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.

On the IEA figures, the requirement will rise to well over 90 mbd of oil and 350 bcf of natural gas by 2015. That would represent a 32 percent increase in oil demand from today’s level and a 45 percent increase in the consumption of gas. That is why there is an active debate on energy security. 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 1,000 bn bbl of oil which has been found but not yet produced, and some 5500 tcf 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 800 bn bbl of oil and 4500 tcf of natural gas are yet to be found. So in terms of physical resources, energy security is within reach. But supply and demand are not co-located. One of the key issues of energy security over the next decade will be the growing trade in both oil and gas which will be necessary to match supply to demand. By 2015 there will be at least four major energy importing regions in the world — Europe, Japan, China and the United States. Europe will be importing around an estimated 80 percent of its daily needs of both oil and gas. The US rather less — but still more than 65 percent of its oil and around 20 percent of its gas. By 2015 some 64 mb/d of oil and 100 bcf/day of natural gas will be traded internationally. Is that trade secure?

Can the importing nations rely on trade rather than retreating to a policy of self-sufficiency with all the costs which that could involve in terms of the environment and competitiveness. I think the answer to that is also yes, but no one can take anything for granted. The inescapable fact is that the bulk of world-traded supplies of both oil and gas for the future will almost certainly come from a very limited number of places. Going back to the estimates published by the IEA - which represent a fair consensus of informed opinion - of the 64 mbd of oil likely to be traded in 2015, around 80 percent will come from the Middle East, Russia and Africa. For natural gas, the trading base is slightly wider but the project still shows that by 2015, 65 percent of traded gas will come from just six areas - Russia, the Middle East, Africa, Indonesia, Australia and Trinidad and Tobago. Now, of course, forecasts are only forecasts and the details will change but the underlying trends are pretty clear and are likely to be sustained.

Implications for TT

What are the implications of that for the world in general and for Trinidad and Tobago in particular? First, it seems certain that there will be a much greater focus on energy security — because energy remains fundamental to the operation of a modern economy, because imports are growing, and because such a large proportion of the required supply is set to come from areas, some of which, to put it mildly, have not been noted for their stability. It isn’t clear, for instance, that all the investment which is necessary from now on in order to achieve a sound balance of supply against demand through the next decade and beyond can be made in good time. Increased investment is needed.

Perhaps 25 percent more per year than in the recent past. But a number of the areas I’ve mentioned are effectively closed to international investment including, for different reasons, Iran, Iraq and Saudi Arabia. Future supplies from these areas depend on the investment decisions of the state companies. The second consequence is that there is likely to be a general effort to diversify energy use wherever possible — in particular away from oil. There are limits to that, because of the difficulty of substituting away from oil in the transport sector, but I would imagine that where substitution is possible it will be encouraged and given the limited prospects for nuclear and renewables, that opens up a tremendous opportunity for natural gas. The combination of flexibility, of technical progress both in the way gas is used, in power stations and elsewhere, and in the costs of transportation, will all contribute to a growing role for gas in the world’s energy economy.

So will the gradual development of a more flexible global gas market — with more freely traded gas rather than fixed long-term contracts — because that flexibility in itself enhances security. And the role of natural gas will be enhanced still further if the growing concerns about the risks of climate change are translated into policies which put an enhanced value on fuels which produce fewer emissions of greenhouse gases. That combination of factors gives a major producer such as Trinidad and Tobago potentially an important and positive role in the world energy market for the foreseeable future. That role is enhanced because the encouragement which this country has given to investors to develop resources means that consumers and importers can rely on Trinidad and Tobago as a secure supplier in an uncertain world. That confidence is reinforced when you look at the progress of developments here.

BP’s invesment in TT

Gas production is set to rise. We see BP’s production here in Trinidad and Tobago rising from around 400 mboe/day to 550 mbdoe/day by 2008, and all the reserves, contracts and projects are in place to accommodate that growth. Following the completion of Train 4 at the end of 2005, Atlantic LNG will have 15 mmtpa of installed LNG capacity, with the potential for a further fifth train in the future. We’re in the process of establishing the primary markets for that LNG — on the East Coast of the US and in the Dominican Republic. And we believe that there is an even greater potential to come, and that’s why we are planning to resume exploration drilling this summer in the Columbus Basin so that we can establish the basis for a further increase in production capacity beyond Train 4.

We intend to invest some $2.5 bn over the next three years in addition to the $9 bn we’ve invested over the last two decades. That investment will create wealth directly, and bring substantial tax revenue but also, and equally importantly, it will provide a base for the development of supporting businesses here in Trinidad and Tobago. So gas will be a huge source of strength for this country. But it isn’t the only element of strength. You have the enormous benefit of a well-established education system. That is a great strength and a great source of opportunity.

Education = more investment  

As we work around the world we can see very clearly that the countries which are competitive, and which can make best use of the flow of revenue from natural resources are the countries with strong education systems. International business looks for a number of things in choosing where to invest — transparency and good governance, a clear and stable policy environment, open markets which allow free competition, and secure legal and fiscal regimes, and economic stability. I hope Trinidad and Tobago will continue to build on the established track record in all these areas. I believe they are crucial in attracting the next phase of investment which could be so important in building the economy. Most important of all, though, is the potential of a country, and that is embodied in the priority given to education.Education is the key to sustainability, because if any country wants to secure its place in a competitive world, it has to develop its human capital.

That starts with the basics — because high levels of literacy and numeracy establish the quality of the labour force. But the importance of education goes beyond that.An open and meritocratic education system is fundamental to establishing the standards of society — promoting and rewarding individual effort and commitment. It is the key to unleashing creativity, for which this country is famous, and the key to accessing the full potential of your people. A strong system of higher education provides a community with leaders — in all fields, as well as s higher level of skills. Such a system helps to develop a culture of learning, and gives people a lifelong commitment to personal development. It helps to create an open, educated and forward-looking society.

And a research capacity helps to spread knowledge from across the world as well, providing a source of innovation and new business development. You have great strength in your education system here, and I hope that through our work we can contribute to the development of that strength. As a business we believe in the long term. We’re been here for three decades, and I hope we’ll be here for many more. We believe that wherever we operate we should work on the basis of long-term mutual advantage. We believe good business is grounded in the strength of the community — and I hope that in many ways we can contribute to the development of this community. We very much support the efforts being made to develop new enterprises and to protect the natural environment. Both are essential for sustainability.

So too is education

We benefit from your education system and we have an excellent team of people — including 650 Trinidadians, 35 of whom are already working internationally and lead other BP business activities around the world. I expect that number to increase. We have an existing link with the University of the West Indies and I hope we can build on that. I also believe that we should make a leading contribution to support the development of the new University of Trinidad and Tobago, and in particular to support the planned development there of high quality research in science and technology. We believe that such work is fundamental to the economic future of any country and I am delighted to announce that we are ready, as your plans move forward, to donate US$10 million to help establish that University and to support work there on energy-related issues.

In your words, Prime Minister, we believe that Trinidad and Tobago can and will be “a society of creative thinkers, innovators and entrepreneurs . . . a society with its own unique position in the global marketplace . . . a society in which not only basic needs are satisfied but where opportunities are provided for personal growth, self-expression and the enjoyment of life, and where there is a stable, competitive environment for business.” We share that vision and I hope we can help to make it a reality. Prime Minister, Ladies and Gentlemen, you have been very patient. I’ve spoken for long enough but I’d be delighted to answer questions — and even more important to hear your views on what we’re doing here, and what, if anything, we can do to assist the cause of economic development in Trinidad and Tobago.

Thank you very much.