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BP CEO: Economic Impact on Energy Industry 'Sudden and Severe'

Long-term growth in energy demand cannot be reversed, but volatility in oil and gas prices could dampen future supplies and presents one of the "main challenges" facing the energy industry, BP plc CEO Tony Hayward said last week.

Don't look for a short-term fix to either demand or prices, Hayward told an audience at the Institute of the Americas in La Jolla, CA. He was there to accept the institute's Energy Innovator of the Year award.

Recovery "will take some time," especially in the United States, said the CEO. BP's industrial customers "are still seeing falling demand," and businesses don't expect to see a bottom until the third quarter. However, he reminded the audience that the energy industry has never been short of challenges.

"One of the most immediate is the extreme volatility in oil prices and its impact on future supply," the CEO told the crowd. "Around the world, the economic outlook has also changed dramatically. Recession has spread across Europe, North America and parts of Asia. And in Latin America too, economic growth has slowed, with some countries hit very hard. The impact on our industry has been sudden and severe. Demand and prices have both fallen sharply. And the issues many of us in the industry have been wrestling with for some time -- the importance of energy security in providing economic security and tackling climate change in a way that is commercially viable -- have shot up the political agenda."

It's difficult to "see beyond the immediate economic downturn," he said, but "it's our responsibility in the energy industry to look through the here-and-now to the longer term. And the long term trend is this: the world economy will recover. The future has not been canceled. My optimism is based on some very significant long term trends that can not be reversed, not even by a deep recession...The demand for energy will continue to grow and we need to be prepared to respond effectively."

"There are nearly 42 years of proved oil reserves left in the ground and 60 years of natural gas. Put another way, as of today, the world has produced around one trillion barrels of oil. We're sitting on another trillion barrels of proven reserves; and there is another trillion barrels which we know to exist but which are not yet commercially viable. Beyond that there are significant quantities of unconventional oil and gas resources which will require new technology and innovation to exploit."

However, BP has not placed all of its fortunes on fossil fuels. It is investing millions every year in alternative fuels, and it is one of the biggest investors in the U.S. wind power industry. That investment won't change, he said. BP also is looking at other types of alternatives, including ethanol, biofuels and solar power.

"Climate change is a reality that we need to face," he said. "In my view, we need to use less energy and use it more efficiently; introduce a cap-and-trade scheme [for carbon dioxide emissions], providing environmental certainty based on an absolute emissions cap; and increase investment into research, development and deployment of new forms of energy, which are more sustainable over the longer term."

For instance, last year BP invested in Brazil's sugar cane ethanol industry. "Our goal is to expand production of sustainable biofuels by integrating Brazilian expertise with new technology being developed at BP's Energy Biosciences Institute based at the University of California, Berkeley." Other biofuels also hold promise, and eventually, he thinks biofuels used in Europe and in the United States could take a 20% share of the fuel market, but that is many years down the road.

Of the alternative fuels that BP has invested in today, solar power is "the most challenged" because he said it's not competitive with traditional sources of power on a cost basis. Wind power "is much closer" to competing with traditional energy sources.

"Our challenge is to find the most innovative and economic ways to turn these assets into long term value for the resource holders," said Hayward. "There are actually few limits to technology and innovation to access available resources. So when it comes to producing more energy to meet demand, the problems are not below ground, they're above it. They are human, not geological."

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