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BP's Hayward: World Energy Demand 'Relentlessly Increasing'

BP plc CEO Tony Hayward recalls a time when energy policy was not front page news. Not any more, he said. Speaking to the World Petroleum Council in Madrid, Spain, Hayward attempted to dispel what he called "three myths" about energy.

"The first is that high prices are caused by speculation," he said. "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 [Organization for Economic Cooperation and Development countries], especially from the U.S. 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 [European Union] industrialized, it involved around 50-100 million people. U.S. industrialization 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 short, the world's demand for energy is relentlessly increasing."

New OECD production "will have to come from frontier provinces such as the Canadian oilsands, the Arctic and the deep waters of the Gulf of Mexico," said the CEO.

The second myth, said Hayward, is that the world is running out of hydrocarbons -- but 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 nonproven resources. On top of all of that, there are vast quantities of unconventional hydrocarbons including oilsands, heavy oil and unconventional oil and gas. And then there are major hydrocarbon basins as yet unexplored."

More money will have to be spent to extract some of the resources, he noted. "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."

Switching "quickly" to a low-carbon economy is the third myth that Hayward explained to his audience.

"While biofuels, wind and solar energy are growing rapidly, they comprise a tiny share -- less than 2% -- of global energy production," he said. "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.

Mythology aside, Hayward said the top of the agenda should be 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."

One suggestion: form more partnerships and joint ventures between national oil companies (NOC) and international oil companies (IOC). "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."

More stable fiscal and regulatory regimes also need to be created to improve the world's energy resources, said Hayward.

"I think we need governments to remember that the best guarantee of energy supplies is to keep markets liquid, open and accessible," he said. "Almost two-thirds of the world's oil is currently traded across international boundaries. That's why it would be helpful if governments cooperated to lower trade barriers and tariffs."

Another item for the agenda is to "create an economy-wide carbon price," he said. In his opinion, "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."

The question is whether this will work on a global level, he said. "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 already is happening, he said. "It may well start with regional blocs in the U.S., 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 Gov. [Arnold] Schwarzenegger, has already announced its desire to link its forthcoming emissions trading system with the EU's."

The energy industry, said Hayward, "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."

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