BP plc CEO Tony Hayward told shareholders on Thursday that in the short term, the global downturn reduced energy demand, but as industrialization picks up, he thinks energy consumption will begin to grow this year.

“Of course a number of big challenges lie ahead, especially in the realm of policy, where the question of how to meet rising energy demand in an affordable and sustainable way has risen to the top of the global political agenda,” Hayward said at the company’s annual shareholder meeting in London.

“For a long time now, BP has advocated a proactive approach to climate change and supported action to curb carbon emissions,” he said. “And we continue to believe that the world needs a diverse energy mix that incorporates all available sources — from oilsands to solar — and leverages investment in technology.”

The BP CEO also believes that “encouraging free and open energy markets is the best way to induce change. A carbon price, preferably created by capping emissions, would provide a strong incentive to encourage energy efficiency and investment in alternatives to fossil fuels.”

To support the transition to a low-carbon economy, the oil major wants to improve energy efficiency within its operations. In addition, BP will use “an internal cost of carbon when making investment decisions about fossil fuel projects. This encourages investment in technology to reduce carbon emissions.”

As he has before, Hayward also stressed that natural gas is a “good example” of a low-cost energy pathway to reduce emissions when generating power. Since 2005 BP has invested more than $4 billion in its Alternative Energy division, which is focused in four key areas, including wind energy.

BP already has more than 1.2 GW of gross wind capacity spinning in the United States, and the business is expected to become cash flow positive this year. Other alternative energy projects include biofuels, solar, and carbon capture and sequestration.

Operational performance is a dual priority, noted the CEO.

“Over the last two years we have closed the competitive gap that we identified in 2007 and restored momentum in our core businesses,” Hayward told shareholders. “In 2009 we grew production by 4%, building on the track record of momentum relative to our peers since 2000…” In the upstream BP’s unit costs in 2009 were 12% lower than in 2008, he noted.

“We will maintain this momentum through activity choice and in the way we manage the supply chain. In the downstream our efficiency initiatives have reduced cash costs by more than 15% in 2009, and our goal over the next two to three years is to return costs to 2004 levels…”

Like its peers, BP was impacted last year by weak commodity prices and low refining margins. “But the operational momentum in our business and our steadfast focus on efficiency has clearly improved our performance relative to our peers.”

In spite of the weak environment, BP in 2009 recorded its 17th consecutive year of reserve replacement above 100%. Year-on-year production growth was 4%. The producer started up seven major projects and its discoveries last year included the giant Tiber field in the Gulf of Mexico, which is the deepest well drilled to date in the industry. BP also expanded its U.S. shale gas portfolio by securing a new position in South Texas’ Eagle Ford Shale.

“And we have continued to add resources in 2010, most notably through the acquisition of $7 billion worth of assets from Devon Energy that we announced last month” (see Daily GPI, March 12).”Last year I said that we expected to grow production between 1% and 2% a year to 2013,” said Hayward. “We are now confident that at a $60/bbl oil price we can sustain average production growth from 2008 at 1-2% a year out to 2015.”

Although its portfolio is globally stout, BP’s financial performance has yet to reflect the company’s progress.

“Whichever way you look at it, there are significant opportunities for improvement and in every case firm plans are in place to close those gaps. Our goal over the next few years is to realize the latent potential of our asset base by improving the efficiency and effectiveness of everything we do.”

BP’s strategy remains unchanged, said Hayward, “but we are now embarking on a new phase in which we intend to realize the full potential of the portfolio we’ve built up over the past decade.”

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