Speech date: 14 October 2008
Venue: Rice University
Title: The Changing of the Guard
Office: Exploration and Production
In our industry, these strategic challenges come and go and we usually conquer them in the end. For that is what we do. We manage risks, whether they be technical, geological, commercial or political. And today, near the top of that list is capability.
The really big strategic issue for all oil and gas companies is matching the earth’s resource endowment on the one hand, with the capability – technology, skills and know-how – required to bring those resources to market on the other.
I think it is true to say that we may have reached a period of ‘Peak Capability’, at least in the short term. As far as I am concerned, Peak Capability bears a far closer relation to the facts than so-called “Peak Oil”.
Today I want to start by briefly discussing the global industry context. I’ll then go on to look at the capability challenge as it confronts the whole industry. I then want to finish by talking a little bit about how we in BP are specifically addressing that challenge.
The global context
Recent developments in financial and commodity markets are just the latest reminder that we are definitely living in interesting and changing times.
In the current chaos it is easy to focus on the short term, literally the last hour of trading, but today I want to maintain a longer term perspective. Despite recent falls, the oil price remains high and volatile by historical standards, as the chart shows. I contend that prices are not being driven by a lack of resource, because there is plenty of oil and gas around.
In fact prices are being driven by a confluence of factors. The first of these is the recent period of exceptional worldwide economic growth. Although the short term outlook for worldwide economic growth is evidently deteriorating, the fundamental drivers of long term growth in demand for energy remain in place. We have entered a new phase in global industrialization, led by China and India.
When Europe industrialised, it involved 50 to a 100 million people moving from a rural to an urban way of life. The US industrialisation involved 150 to 200 million people. And those changes took centuries. But in the next decade, in China and India alone, over 1 billion people will be moving from a rural to an urban way of life. This will result in a dramatic increase in energy consumption – to provide light, heat and mobility.
According to the IEA, by 2030, world energy demand will be 50% higher than today and non-OECD countries are expected to contribute 85% of the total world energy demand growth between 2005 and 2030.
Contrary to what you may hear from some quarters, there are more than enough resources to meet that demand.
At the end of 2007 total remaining proved oil reserves stood at around 2.3 trillion barrels of oil equivalent.
And let us not forget that enhanced capability would improve that resource-to-production ratio further. For instance, the worldwide average 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 task facing the industry is to ensure supply rises adequately to meet demand by bringing this oil and gas endowment to market. These resources are found in increasingly challenging environments – in the deserts of the Middle East and North Africa; in the deepest waters of the Gulf of Mexico, West Africa and Brazil; and in the Alaskan and Russian Arctic. Furthermore, many of these resources are controlled by NOCs which do not always have the same capability at their disposal as IOCs.
