BP CEO Tony Hayward’s speech at the World Petroleum Council, Madrid

2007 was the fifth year in a row that the global demand for energy was above average. Yet OPEC production fell by 350,000 barrels of oil a day. In the market oriented nations of the OECD existing basins are maturing fast. In Britain, for instance, North Sea gas production recorded the world’s largest decline for the 2nd year in a row, falling by 10%, in 2007.

So, the big question? How do we deliver energy for sustainable growth?

I want to settle three myths about this and then make three suggestions about what we should do. I want to say that we face serious, fundamental questions and that the problems are above the ground, not below it.

And I’d like to suggest how companies and governments might respond.

Let’s start with the three myths. The first is that high prices are caused by speculation. I’m afraid there’s more to it than that.

I think we have to be blunt about this: the era of cheap energy is probably over at least for the medium term. The upward trend began in 2004, when surging demand from China coincided with the same in the OECD, especially from the US. This increase in consumption used up any spare capacity that was in the system.

Demand is being driven by exceptional economic growth and an unprecedented level of development. When the EU industrialised, it involved around 50 -100 million people. US industrialisation involved 150 – 200 million. This time we are talking several billion.

Over the next decade, more than half a billion households will cross the $5,000 a year income band. This transition will be underpinned by access to affordable and secure energy.

In addition to that, the world’s population is growing. In my lifetime – still a short span in the scheme of things – the world’s population has doubled to more than 6 billion people. And the current rate, it will exceed 9 billion by the year 2050.

In short, the world’s demand for energy is relentlessly increasing.

The last time oil prices surged to these kinds of levels 30 years ago, new production from the North Sea and Alaska helped bring prices down. This time, new OECD production will have to come from frontier provinces such as the Canadian oil sands, the Arctic and the deep waters of the Gulf of Mexico.

Another big impact on supply is Russia, where production has begun to decline. It is a little known fact that, until now, the growing demand for oil from China and India in recent years has been met almost barrel for barrel by rising supply from Russia. Supply is more concentrated than it was. So, this is not a speculative bubble.

The second myth is that the world is running out of hydrocarbons. It isn’t. The world has more than 40 years of proven oil reserves, 60 years of natural gas and 130 years of coal. Put another way we have produced around 1 trillion barrels of conventional oil, we’re sitting on another 1 trillion barrels of proven reserves and yet another trillion of non-proven resources.

On top of all of that, there are vast quantities of unconventional hydrocarbons including oil sands, heavy oil and unconventional oil and gas. And then there are major hydrocarbon basins as yet unexplored.

It will be more expensive to extract some of these resources. There’s no doubt about that. But the problems in bringing on new production are not really below ground. They are above it.

As a geologist, albeit now well past my sell-by-date, I can say this is not a geological problem. It is a political one.

The third myth is that we can switch quickly to a low carbon economy. While biofuels, wind, and solar energy are growing rapidly, they comprise a tiny share – less than 2% – of global energy production. Any future for humankind is going to depend, for a long time to come, on fossil fuels and coal is the fastest growing fuel type.

So, I think there are some arguments out there that don’t help us. But, as I said at the beginning, the problems we face are serious. So, what do we do?

The first is that we need to get people and resources in the right place. We don’t have enough experienced scientists and engineers. We have too few university graduates with the right qualifications and training, and not enough are joining our industry. To compound the problem, many of the most well qualified people in the industry are close to retirement.

We need to think again about the relationship between NOCs and IOCs. NOCs hold 80% of the resources but IOCs hold some of the most advanced technological skills, know-how and operating experience. We need more partnerships, more joint ventures, and more alliances.

In my opinion, the time has come to develop new forms of contractual relationships that move beyond the historical model that requires ownership of reserves and production.

In years to come, relationships between NOCs and IOCs wont just be about accessing resources in the host country. Rather, I think we’ll see a move into the realm of genuine international co-operation. I think this could mark a new era based on the idea of reciprocity.

The second thing we need to do is to create a stable fiscal and regulatory regime.

I think we need governments to remember that the best guarantee of energy supplies is to keep markets liquid, open and accessible.

Almost two thirds of the world’s oil is currently traded across international boundaries.

That’s why it would be helpful if governments co-operated to lower trade barriers and tariffs.

I also think taxation is getting dangerously high. Government take from the oil and gas industry has continued to increase across the world. When prices are rising – in any industry – this is counter-productive. Higher taxes mean businesses have less money to invest in new production.

And increased investment is not just an optional extra. It is vital. According to the International Energy Agency, the extraordinary figure of more than $22 trillion will be needed between now and 2030 in order to meet future energy demand.

We are all raising our capital expenditure in response. BP, for instance, is going to spend $22 billion this year, an increase of 15% on 2007, to bring on new production, to upgrade our refineries and to invest into alternative forms of energy.

We need to develop access to the new frontiers, whether they be the Arctic, ultra deep-water of the Atlantic, heavy oil, tight gas, advanced conversion or alternative forms of energy.

We need to keep improving oil recovery. The worldwide recovery factor for conventional oil reservoirs is around 35% of oil in place. If, as an industry, we can raise that by just 5%, it would add around 170 billion barrels to world reserves, enough for five years supply.

The third thing we need to do is to create an economy wide carbon price.

There are a number of options for dealing with carbon emissions: energy efficiency both at a business and consumer level, the use of renewables, including wind and solar; the development of biofuels that do not compete with food crops; the use of nuclear; extending the deployment of cleaner coal technology to China and India and beginning to use carbon capture and storage in the major coal consuming nations.

In my view, the best way of creating the conditions for reducing carbon emissions is through a Cap and Trade system. That’s the only way we can ensure the cost of carbon is priced into every aspect of our daily life.

A Cap and Trade system is already running with some success in the EU’s Emissions Trading System. The price of carbon in the EU is now trading at over 27 euros a tonne for the Kyoto commitment period of 2008-2012.

The question now is: how can this work at a global level? Can we seriously expect around 180 sovereign governments of the world to agree? We’ve seen how hard it is recently to get all 27 members of the EU to sign up to something. So isn’t this a utopian dream?

Well, no . Just because the destination seems far away, it shouldn’t stop us from taking small steps right now.

Carbon trading is happening. It may well start with regional blocs in the US, Europe and Asia. But I think the market would soon do its work. A global price for carbon would soon emerge. Indeed, California under the leadership of Governor Schwarzenegger, has already announced its desire to link its forthcoming emissions trading system with the EU’s.

But I don’t, on this issue, think the market will work on its own. I think there is a case for transition incentives, to bring forward the development and deployment of low carbon technology.

I’m generally opposed to subsidies, for two reasons. First, it is very hard to see why taxpayers should support high cost emission reductions from new technology when lower cost reductions in emissions are offered via a Cap & Trade system. And, second, I don’t want BP to be hooked on subsidies. When the subsidies dry up, as they inevitably do, companies often perish with them.

But I do think there is a case for making an exception at the moment. We urgently need new technology and this may initially require a higher carbon price than that provided by a Cap and Trade system. We need to support development, deployment and diffusion of new technologies as they start to compete with fossil fuels.

The purpose of any incentive should be to kick start the introduction of technologies – for example, demonstrating carbon capture and storage. We need more industrial-scale projects and scaling-up of 20-50 times is needed. We have the know-how . But if we are serious about breaking the link between fossil fuels and carbon dioxide emissions, we will need additional fiscal support from policy makers.

This industry is now 150 years old . It has faced periods of turmoil before. And claims of a crisis have always been premature. I believe in the ingenuity of people to solve the problems the world throws in our way.

This industry has, to a large extent, created the world we live in. We are used to living on the frontier and taking on the big challenges. Now demand for oil is greater than we have ever known. And I am confident – and optimistic – that by confronting the challenges together – IOCs, NOCs, independent producers and governments – we can provide the energy the world is going to need to sustain it for the next hundred years.

Thank you for listening.