Wall Street History

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Wall Street History

10/01/2004

More on Energy

On September 16-17, OPEC held an international seminar in
Vienna with many of the leading figures in the oil and gas
industry in attendance. Following are excerpts from speeches
given by the leaders of ExxonMobil and British Petroleum.

The presentations are enlightening, focusing on issues such as
energy renewables / alternatives, investment, and the
environment. Bottom line, whether you like it or not, oil and gas
is here to stay, at least for the lifetime of everyone reading this
today, and will continue to impact the health of the global
economy in numerable ways.

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Lee R. Raymond, Chairman and CEO, ExxonMobil Corporation

When discussing the energy future, one is tempted to provide a
large array of numbers, because the numbers are both important
and instructive. It is very illuminating to project, as others and
we have, that total world energy demand could reach more than
330 MBDOE (Million Barrels a Day Oil Equivalent) within three
decades, up from about 220 MBDOE today.

But it is more important to understand some of the fundamentals
that drive these numbers, as well as what these numbers are
telling us about the challenges we face as providers of energy.

For example, it is quite clear that economic growth and increased
wealth largely drive energy demand. It is equally clear that most
of the energy increase we expect will be in the developing world,
where economic growth is likely to be higher, and the natural
and entirely understandable desire is for a better and more
prosperous life.

Furthermore, for a number of decades oil and gas will continue
to supply the large majority of the energy needed globally, as
petroleum possesses enormous advantages in availability, cost,
performance and convenience.

And finally, I would emphasize that our roles as energy-
producing nations and energy companies – publicly-owned and
private alike – is to provide this energy for people worldwide.
We are destined to be the primary participants in this vital
endeavor for many decades.

Issues

First, the outlook sets before us an enormous task of finding and
producing the huge and increasing amounts of energy needed by
the people of the world. Inevitably, most of the energy that will
be used for many decades will continue to be from fossil fuels:
coal, oil and natural gas. For a variety of reasons, we expect
demand for fossil fuels to increase in absolute magnitude by
about 65 to 85 million oil equivalent barrels per day by 2020.

Just how much is 65 to 85 million barrels per day? Well, it is in
the range of eight times Saudi Arabia’s current oil production.
Obviously, this is no small chore .

But this leads to a further point: the investments required for new
supplies will be enormous, and the risks involved with those
investments imply a clear need for rules, tax regimes and revenue
sharing arrangements that provide a balance of risk and reward

[Second major implication of the outlook for energy.] (The)
increasing dependence of major consuming countries on
imported petroleum will inevitably increase their apprehensions
about the adequacy and security of supply

For example, countries in the industrialized and energy-
importing world will naturally look for signs of political stability
in major oil suppliers and for evidence of a cooperative
partnership between themselves and oil-producing nations .

This also means that the political health and the economic well-
being of energy-producing countries will be of increasingly vital
interest to industrialized countries. In addition to having
appropriate legal frameworks, energy-producing countries can
improve social conditions and stabilize political frameworks with
appropriate and wise use of energy income.

A third major implication of the rising use of petroleum and
other fossil fuel energy in the outlook is that increasingly the
public will focus on the environmental impact of petroleum and
hydrocarbon energy use

(We also) need to help address the public concern over
environmental effects and carbon emissions by working with the
consumers of oil and gas to aid in ensuring that energy is used as
efficiently as possible. Much of the investment that the
petroleum industry is conducting has as its aim reducing
emissions by improving the efficiency of energy use. Efficiency
can extend the life of resources, make energy more affordable to
consumers and have a positive impact on the environment

The fourth major implication of the outlook relates to
technology

Technology is key to addressing almost every issue that the
energy industry faces. Looking into the future:

--Resources will be more difficult to find and more difficult to
produce .With significant heavy oil, tar sands, and other
“unconventional” resources, new technology will be critical to
making the “unconventional” energy resources of today the
“conventional” resources of tomorrow. Making development of
these unconventional resources economically attractive will
ensure adequate supplies of fossil fuels are available at
affordable prices for the next 100 years.

--We will need ever-improving technologies to allow us to get
the highest value products out of each barrel. This will mean
ensuring better efficiency in refining, process improvements and
improving energy usage and catalyst activity

--We will need ongoing improvements in the many ways our
products are used. This will require that new technologies be
incorporated into existing engines, fuels and lubricants. It will
mean that significantly more efficient motor vehicles must be
developed and deployed worldwide. It will mean advances in the
efficiency of electrical generation.

Summary

Cooperation by both producing countries and government and
international oil companies is indispensable in successfully
meeting future energy needs.

Such cooperation will promote economic growth around the
globe, will protect the environment, and will allay apprehensions
about energy security and reliability of supply. That such
cooperation must be seen as fair and advantageous to all parties
is only one more reason that it will be a challenge, but not one
that is insurmountable.

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Lord John Browne, CEO / British Petroleum

All around the world, there is a sense of insecurity about supplies
of energy which is greater now than at any time I can remember
in the last 25 years.

That insecurity is reflected in the oil price which has averaged
over $30 bbl for the last 9 months – that is higher, for longer than
at any time in the last 20 years. Prices have stayed high despite
the fact that there has been no serious physical disruption of
supplies over the last year.

Insecurity is also reflected in the growing public debate on the
need for alternatives to oil.

The insecurity is driven by two fundamental concerns.

The concern that supply will not be sufficient to meet demand.

And secondly the concern the environmental challenges posed by
the increasing consumption of hydrocarbons are unresolved.

But those concerns have to be answered if the world is to
continue to rely on this industry as the main provider of energy
supplies.

What are those concerns so strong?

Firstly because demand keeps growing.

Total energy demand has risen by 20 percent over the last ten
years. Oil demand by 18 percent. And demand continues to
grow.

The International Energy Agency forecast is that demand for
energy will rise by a third by 2015 and that oil demand will rise
by another 15 percent to well over 90 million barrels per day.

While demand has grown, supply has begun to seem less secure.

That raises immediate concerns. When spare capacity is in short
supply people begin to worry that even small incidents could
disrupt the market.

It also raises the longer term question of whether the industry
will be able to invest to match the projected growth in demand.

The IEA estimate is that investment of some $200 billion over
the next decade will be needed – that is an increase of over 20
percent.

The growth in demand is also at the heart of the environment
challenge.

It is clear that for the next several decades the world is going to
rely on hydrocarbons.

One day some forms of alternative or renewable energy are
likely to be important sources of supply.

But that day is a long way off.

Today, beyond hydro, all the renewables and alternative forms of
energy supply provide just 2.5 percent of world demand .

We believe renewables will provide material supplies of energy
in the long term. But the long term could be 20, 50 or more
years away.

The estimate from the IEA is that ten years from now they will
provide just 3.3 percent of total demand.

So hydrocarbons will remain the predominant source of energy
supply, and that means, unless we take action, that emissions of
the so-called greenhouse gases will rise.

The science of climate change is not complete. But the serious
work which has been done constitutes a powerful precautionary
argument for keeping atmospheric concentrations of greenhouse
gases below the level at which sustainability is threatened.

The best estimate is that the safe level is around 500-550 parts
per million. We are now at around 373 ppm and that figure is
rising steadily.

This is a long-term challenge – but the risk if we do nothing is
that we’ll come to a point where drastic and potentially
damaging action will be required to avert the danger.

[While there is much talk of different solutions ]

A change of energy policy away from the use of fuels such as
oil and gas supplied through open trade in a competitive market
economy would be seriously damaging not just to this industry
but to the world economy as a whole imposing extra costs on
consumers, damaging competitiveness and reducing
employment, and reversing the momentum of trade liberalization
which has sustained the global economy over the last 50 years.

The question is can we demonstrate that the energy economy we
have is sustainable?

Can we show that the world can rely on oil and gas until safe and
viable substitutes really are available?

I believe we can – if we work together.

[Re: Global warming challenge]

The possibilities include a more active program to develop power
generation on the basis of natural gas rather than coal. At
sufficient scale such a program could contribute materially to the
reduction in emissions necessary to achieve stability at 550 ppm.

So too would the development of vehicles which could run at 60
mpg rather than 30 .

I believe this industry – the whole industry – has a direct interest
in removing the sense of fear associated with the environmental
risks.

If we try to live in denial we could do irreparable damage. We
have to demonstrate that we take the problem seriously, and that
we are using our skills and resources to do something about it.
That will help to restore trust in oil and gas .

The second issue – the concern that supply will not match
demand – can also be addressed by joint action – in this case
action on the part of both the international private sector and the
national state owned oil companies.

First, we all have to make clear that there is no shortage of oil or
gas.

Supply has been maintained at steadily increasing levels and
there is no physical reason why that should not continue. The
world holds some 1,100 billion barrels of oil and some 6,200 tcf
of natural gas which have been found but not yet produced.

At current consumption rates that is 40 years of oil supply and 60
years of gas.

In addition the U.S. Geological Service estimates that some 800
billion bbl of oil and some 4,500 tcf of natural gas are yet to be
found.

And that does not involve the heavy oil resources of Canada and
Venezuela.

In terms of physical supplies energy security is eminently
achievable for decades to come. There is no shortage of oil and
gas.

But we have to recognize that the patterns of supply and demand
are changing. Chinese demand alone has more than doubled
over the last decade. More than half of the incremental oil
demand to 2015 will be in the East – in China and India in
particular.

The pattern of supply is also changing.

Trade is becoming important. Ten years ago traded oil accounted
for just 52 percent of total supply. In ten years time that
percentage will rise to almost 70 percent.

That oil will come from many different areas but it is clear that
over the next ten years three regions will dominate the global
picture.

The Persian Gulf, West Africa, and Russia.

The IEA estimates almost 80 percent of all traded oil in 2015
will come from those three regions.

The need therefore is to convince consumers that all the
necessary elements can be brought together – the resources, the
investment, the infrastructure, and the knowledge of the
changing global market .

Energy insecurity is a threat to the industry as a whole – and we
have to respond as one.

The resources exist and there need be no shortage of investment.

Environmental challenges are not insurmountable. We believe
energy security is achievable. Prices can be stabilized – at a
level which reflects the fundamentals.

Oil and gas have been crucial elements in the success of the
global economy over the last century. Some people think that
period is rapidly coming to an end.

Our common challenge as leaders of the industry is to
demonstrate that the world can continue to rely on oil and gas
and that far from being finished our industry will play an even
more important role in this century than it did in the last.

Our future rests in our own hands.

Sources: ExxonMobil.com, BP.com

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Wall Street History will return October 8.

Brian Trumbore

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