The Energy Summit 2015: interview with Dev Sanyal

You of course refer to the very important, in fact landmark, letter signed by the CEOs of six major oil and gas companies, essentially requesting governments to come up with a carbon pricing framework — a policy framework around carbon pricing. It is a very important landmark because essentially, by pricing carbon, we can actually create market mechanisms to reduce the total carbon content in industry and indeed in our economic development narrative. We've also of course joined, along with nine other companies, the Oil and Gas Climate Initiative, and there's a very important set of announcements that will be forthcoming shortly in the build-up to COP21 in Paris. These ten companies essentially comprise seventeen percent of world production — such an important group with a meaningful presence in the oil and gas complex.

Now, in terms of the natural gas narrative, let's just take a step back. When I started my career 25 years ago, essentially natural gas reserves stood at around 70 trillion cubic meters. In the meanwhile, the 25 years since I joined the company, effectively 110 trillion cubic meters has been consumed, and today reserves stand at 190 trillion cubic meters. So if anyone was worried about the availability of gas, I can assure you there is sufficient quantities of gas available to lubricate development. Gas of course is a 50 percent lower CO2 emissions level than coal, and we believe that gas can play a very important role in the low-carbon economy. The reality of course is that renewables also will play a very important role — in fact we see renewables as the fastest growing part of the energy complex — but gas, given its scale, has a very important role to play. And amongst fossils, we anticipate that over the next two decades gas will grow by two percent faster than any other fossil fuel. The reality is a one-percent displacement of coal with gas has the same effect as an 11 percent growth in renewables. So while renewables is very important, if you will, in the short to medium term and indeed beyond, given intermittency issues with renewables, there is a very important narrative around the gas economy.

So there are essentially five dimensions to this transition to a low-carbon future that you refer to. The first is acknowledging the risks and the science beneath the climate change narrative. We absolutely acknowledge it. We actually believe, in the context of making concrete progress, you do need to have a policy framework that is really around carbon pricing, and that's an important part of the narrative moving forward. We have been supportive of a carbon pricing narrative now for many decades and continue to reinforce the need for governments to implement that framework.

The second area is really around our products and our services, and I would say in, for example, our biofuels business in Brazil, which produces by the way around 650 million litres of biofuels — that's equivalent to around 290,000 cars being taken off the road. So there is an important part of the narrative around the renewables business, and we are of course doing that in the context of a focused biofuels business, but also in the context of the wind business, our North American wind business, where as the tenth largest wind producer in North America, we effectively offset the total amount of CO2 that would have been generated — around 2.5 million tons of CO2. That's equivalent to essentially having one clean city like Dallas being powered by absolutely clean power. So a lot we can do in the respect of the renewables business, and we are investing selectively in that.

The third area really is around natural gas, and I spoke about that earlier. The importance of natural gas is essentially around the total CO2 emissions, which is 50 percent better than coal. By the way, if you look at the entire fossils universe, sixty percent of the emissions comes from coal. And again, we see plentiful supplies of natural gas and a real opportunity as we look forward to create a gas economy. And there is a big advantage in that — often quoted the statistic of a one-percent displacement by gas versus coal is the same as an 11-percent displacement by renewables. So a big opportunity there.

The fourth area really is around research and development. We are producing lubricants that have an extraordinary potential in terms of reducing total fuel consumption by 4.5 percent, and there are other fuels as well that we are producing that can actually reduce the total amount of consumption. And I think that is an important part of the narrative, which is, if you will, efficiencies in terms of the products and services — and that includes by the way also the manufacturing process, where we are seeing energy efficiency across the piece. In other words, lower energy requirements to generate electricity or energy of different kinds.

And the final area really is around partnerships. We are working with Princeton University, we're working with other groups like Imperial College, in really doing some fundamental research and development around carbon mitigation, around climate impacts. And I believe those studies are very important because they give us a deeper understanding of science, they give us a deeper understanding of course as a result thereof of the technology that can be implemented to mitigate the impacts that these studies are generating.

In some respects, our company is a technology company. Oil and gas is obviously a key part of our narrative, but technology is the great enabler. Twenty-five years ago when I joined the industry, what we defined as deep water was 300 meters. Today it is 3,000 meters, and God knows what it will be in the future. The great geologist once said, whenever we thought we were running out of oil, we discovered we were running out of ideas. And so there are many ways in which technology can create new opportunities — not just in terms of production and resources, but also in terms of efficiency and reliability.

I'm responsible for Asia and Europe for BP, and I was recently in Zhuhai, which is in China, where we've commissioned a very large billion-dollar PTA plant expansion. PTA, in layman's terms, is the product that actually results in things that we enjoy in everyday lives like plastic bottles, etc. This particular plant has got essentially 65 percent lower greenhouse gas emissions, it has 75 percent improvements in solid waste disposal, and has 95 percent greater energy efficiency. So this is a good example of technology actually creating a massive opportunity both in terms of the overall quality but also in terms of value as measured by the energy inputs, etc. There are many other examples as well.

This is a little-known fact, but BP owns the largest private supercomputing center in the world. And this supercomputing center in Houston, by the way, basically processes teraflops of data. I don't quite know the petabytes, but it's a lot — actually it is a billion million transactions per second. So effectively what it does is it allows us to be more precise in the way we read our seismic data, to deploy that at scale. We also have a well advisor program that actually in the drilling business allows us, through the sensors, to get more accurate in terms of what we're doing. And actually that not only creates the accuracy which is important for stuck pipes and things like that, but it also actually creates real economic value.

So technology, I think, has two dimensions in our business. One is around effectively the value creation, and the other is around the overall resource productivity as well as the divining management of the energy complex. And both of these come together and converge, and create, if you get it right, extraordinary value.

Well, our industry can be accused sometimes of being bombastic, but I really do believe what we've seen in the United States has been a revolution. It is extraordinary when you look at the productivity and how prolific the U.S. resource play has been over the course of the last decade or so. Here are some statistics that kind of illuminate that point. Last year we saw the largest half increase in United States production. America actually became the world's largest oil and gas producer, overtaking Saudi Arabia. And over the last three years we've seen a million barrels a day increase year-on-year for three consecutive years. I mean this has been extraordinary because it has absolutely transformed the energy landscape and has actually transformed, if you will, the pricing landscape as well, given the amount of production that you've seen from that part of the world.

The total reserves in the 1990s were around 4.8 trillion cubic meters, and today they stand at around, in excess of, 9.8 trillion cubic meters. And in places like the Marcellus, we believe the reserve potential is around 14 trillion cubic meters. The Bakken, by the way, which is of course one of the most celebrated formations, was producing 200,000 barrels a day in 2007, and today is producing 1.18 million barrels a day. So this has been a massive increase in every dimension.

What we've been seeing, of course, with the course of the prices, is they have recalibrated — have come down significantly. Recalibrated is a rather philosophy of putting it. We are seeing a change in the activity. I was looking at the rig count data — it's now at 614 in America. The high-water mark was in 2010; it was around 1,640. So there's been a big recalibration down, and one is seeing production levels sort of recalibrating, but not as dramatically as somewhat forecast earlier this year. So there is a lot of resilience that we are seeing in that business. Operating costs have been tamed, we are seeing efficiency improvements month-on-month, and of course we are seeing a big focus on the most prolific basins rather than, if you will, the jam being spread very thinly across the United States.

So I think, you know, for now our own thesis of lower for longer seems, I think, well founded, because essentially there is a great degree of resilience that we are seeing in the United States. Overall production levels — we are seeing a slight dip down in this month, but there is probably more room to travel before you see a big shift. And certainly the shift that was forecast around the United States has proven to be somewhat inaccurate, because there has been this great resilience, because there's been this focus on the key formations, as well as very importantly a real move towards energy efficiency and productivity in that business. And that is creating, if you will, a relatively more stable position than what was forecast, as I said, only in the summer.

From a macro perspective, the Middle East essentially holds half the world's reserves and produces around a third of production on an annual basis in broad terms. The total production levels in the world are around 90 million barrels a day, and the Middle East comprises around 30 million barrels a day. And within that, Saudi Arabia is very important because it essentially produces currently slightly below 11 million barrels a day, having produced on a relatively consistent basis 10 million barrels a day in the past. So when you take a step back, that is so important.

And the reality of course is that the market today is pricing into things — you know, I often get asked the question, why is the price of oil where it is? And I would say the market today is pricing in fundamentals: there are plentiful supplies available, and currently the Middle East is actually producing, especially Saudi Arabia, a lot more than it has traditionally produced. And you also have of course world peace priced into the price of oil, and therein lies, if you will, the current situation. But therein lies the narrative that if it changes, will inevitably impact price levels.

What we are seeing today is essentially a very robust OPEC supply position led by the GCC-3, by which I mean Kuwait, Saudi Arabia, and the UAE. We also have potentially more production coming on stream should there be the consummation of the moves between the P5-plus-1, the so-called P5-plus-1, with Iran. Iran of course is producing lower levels than it produced prior to the sanctions being ramped up, and clearly as sanctions ramp down we can expect to see more production come onto the market. But of course there's been disruptions elsewhere — Libya was producing a lot more, actually; it went down dramatically to around 25,000 barrels a day from 1.4 million, then went up again last autumn, and it's come down again. So there's a fair degree of disruptions, but overall there are plentiful supplies coming from the region.

So the question really is: is this a secure supply? I think it is. I mean, there is no doubt about that. That question of course is what are the calibrations regarding the price narrative. And what we have seen so far is that the Middle East remains actually a secure supplier led by the GCC-3. There is a potential of new suppliers coming from Iran in the context of the sanctions being lifted, and then of course you have this resilience in the North American narrative. All of those point to the issue not being one of security of supply, but in some respects an extra amount of supply resulting in a price narrative that looks like it's going to be lower for longer. The question of course is for how much longer — hard to say, but we believe there hasn't been a secular shift. It is a cyclical cycle that we are seeing in terms of the price narrative.