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BP's North American Chief Makes Case for Gas

September 28, 2009
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To create more electricity in the future while emitting less carbon will require a combination of energy sources, "but we believe that increasing the use of natural gas provides the most affordable, most efficient, most immediate and longer-term step in solving this conundrum," BP America Inc.'s Lamar McKay said Thursday.

McKay, who chairs the North American arm of the London major, spoke at an event in New York City sponsored by the Financial Times. His remarks followed by two days The Copenhagen Communique, a statement published last Tuesday by business leaders of more than 500 global companies, including parent BP plc, that urged world leaders to pursue "an ambitious, robust and equitable global deal on climate change" (see related story).

"For more than a decade, it has been BP's position that America and the world must start moving toward a lower-carbon energy future," said McKay. "Long ago, BP voiced its support for precautionary action with regard to climate change. And a more diverse energy supply -- one consisting of fossil fuels, as well as, biofuels, wind, solar and nuclear -- is simply a good idea on energy security as well as environmental grounds. But, a sensible road map -- how society gets from here to there -- has always been a bit vague. Especially when you factor in the desire to maintain and enhance the standard of living Americans have come to expect."

Alternative energy sources "have a role to play," he said, "but care must be taken not to oversell what we can expect from them." McKay reminded the audience is that "except for the 8% of U.S. energy that is generated by nuclear power and the 7% that comes from hydro and renewables, the entire U.S. economy runs on fossil-based fuels."

BP, as a member of the environmental-business coalition U.S. Climate Action Partnership, played a role in shaping the climate bill awaiting action in Congress and the company continues to support its passage.

"If not done equitably, massive misallocation of capital and insulated consumption will occur," McKay said of climate change legislation. "That would seriously impede -- or make much more costly -- the very carbon reductions that we intend. Bottom-line: a ton of carbon is a ton of carbon, whether it comes out of tailpipes or smokestacks. Please keep that in mind as you view any contemplated legislation on climate change."

Higher commodity prices aren't sufficient to catalyze the changes that are required, he said. "In other words, sometimes regulations are required to move things in a positive direction."

BP is involved in three carbon capture and sequestration (CCS) projects, one in California and two overseas. With the "appropriate" regulatory regime and an "adequate" carbon price, "we believe CCS could be commercial by 2020 plus...But deployment will take time and, again, there will be substantial costs."

BP also is building wind and solar energy projects, and the producer has more than 1 GW of gross wind capacity in the United States. However, alternative energy projects require subsidies for some time, said McKay.

"So where does that leave us? Natural gas. And it's not a bad place to be," he said, giving a nod to BP's position as the largest North American gas marketer and one of the top gas producers. "The United States is experiencing a renaissance in natural gas development."

The new gas reserves, "coupled with the recession, have driven natural gas prices to a seven-and-a-half year low, a fact with which I am more familiar than I'd like to be," McKay said. "And those lower prices are having an effect. In only the last year, between 3% and 4% of U.S. electricity generation has switched from coal to gas. It is too early to say that the price spikes that have characterized commodities such as the coal and natural gas markets in earlier years are a thing of the past. But I can say that I have confidence in the U.S. resource base.

However, even with its advantages, federal officials estimate that gas use will "stagnate over the next 20 years" not only because of the growth in renewable fuels, but also because of the growth in coal-fired power generation, McKay noted.

"As of June 2009, 36 new coal plants are permitted, under construction or near construction in the U.S., with 47 more announced," he told the audience. "Inefficient coal plants, which some call 'clunkers,' are still out there, with an average age of around 45 years. And that's an average. One plant in Minnesota is -- hang on -- 95 years old. In fact, coal is projected to be providing 47% of America's electric power in 2030, a level almost unchanged from today. What's wrong with this picture?

"At a time when we are looking to make the American energy portfolio greener, we are doubling down on the most carbon-intensive form of energy known to exist. Even without a carbon price, new-build gas-fired plants are cheaper in cost to new-build coal-fired plants, and feature fewer emissions. And they are only slightly more expensive than just retiring old coal plants. If we could ramp up natural gas use by 1 Tcf per year, we could retire 150 GWh of the oldest and dirtiest coal-fired plants."

BP has calculated that as much as 30% of the near-term CO2 reduction volume target in the current House climate change legislation "could be delivered through expanded gas use," McKay said.

There are "signs" that gas is "beginning to turn some heads inside the Beltway," he said. :I believe there is a growing consensus that any bill in Congress that aims to control carbon simply must do more to discourage the highest polluting coal-fired plants and increase the use of natural gas...Natural gas has been described before as a 'bridge fuel' to a lower-carbon future. It is that, certainly. But I believe it can be much more.

"Rather than merely a bridge fuel, it can be a destination fuel for a lower-carbon future. The potential of natural gas is not a vision founded on conjecture or hope. It is founded on existing reality."

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