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| Title | 11th Annual National Power New Zealand 2009 Conference Opening Address to the Oil & Gas Stream | 2009.02.28 |
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FROM: Revised 090218 Opening Address to the Oil & Gas Stream Younghoon David Kim Vice Chair, Asia Pacific-East Asia, World Energy Council 11:00-11:30 a.m., Thursday, February 26, 2009 11th Annual National Power New Zealand 2009 Conference Sky City Convention Centre Auckland, New Zealand I congratulate the organizers and sponsors for bringing industry and government leaders together in an informative dialogue about our energy future. Indeed we have had a very productive exchange of ideas and information over the past two days. According to the International Energy Agency, the world will need 45 percent more energy by 2030 – energy to fuel vehicles, electrify homes, prepare food, power factories and perform countless other functions that lift living standards in developed and developing countries alike. As it is likely that fossil fuels such as oil and gas will remain the dominant global energy source in the next 30 to 40 years, it is appropriate that we focus on some of the action steps we in industry and government must take together to secure our energy future. The future energy challenge is as much geopolitical as it is scientific. There is little question that abundant energy resources exist – according to the U.S. Geological Survey, the Earth was endowed with more than three trillion barrels of conventional recoverable oil resources. Conservative estimates of heavy oil and shale oil push the total resource to over four trillion barrels. To put those quantities in perspective, since the dawn of human history, we have consumed just over one trillion barrels of oil. Gas resources are equal to that of oil while coal resources are 2.5 times more on an oil equivalent basis. In terms of reserves to current production levels, it is estimated that the world has 41.5 years of oil production, 60.3 years of gas and over 130 years of coal. Thus, it is not for lack of physical fossil reserves but a lack of investment from industry and a lack of political will from some governments of major oil and gas producing regions that are stymieing the ability to bring these reserves to market. What remains in question is the political leadership and industry innovation working hand in hand to develop this energy -- effectively, efficiently and economically. Public policy decisions made by government leaders about how to access, tax and regulate these resources will play a pivotal role in shaping the world’s energy and economic future. It is therefore crucial that these decisions benefit from the most reliable and realistic information. Unfortunately, the current information environment in which many policymakers operate is often not conducive to effective government action. That is partly due to a failing of those of us in industry. We in industry have a duty to share information about the fundamental workings of our business and the realities we face, and to do so in a way that is coherent. We must start by developing a better understanding of the essential nature and enormous scale of energy markets. By its nature, oil is a commodity. It is a primary resource and freely traded in markets around the globe. The price of oil in general reflects the market's overall perception of the relative balance between the world’s supply and demand at any given moment. Like all commodity markets, the global market for oil is fluid and sensitive to supply disruptions, demand surges, inventory levels, and other economic, environmental and political factors. What differentiates oil from many other commodities, however, is its scale. As the primary source of transportation fuel and, in some regions, a leading feedstock for heating and power generation, oil is ubiquitous in the world economy. As a result, the scale of our industry is enormous. Currently, the world’s consumers use over 85 million barrels of oil a day, or over 41,000 gallons per second. In dollar terms, the bill for the world’s petroleum consumption is more than $1.6 trillion a year at current market prices (using a US$50/barrel benchmark). If the oil market is an economy, it is ranked the fifth largest after China. The reality, therefore, is that the economics of oil is similar to that of other commodities in many respects, but different in terms of the enormous scale. Public perceptions and expectations of oil’s economics often diverge from these realities. First, prices. Citizens of most countries perceive petroleum prices as being disproportionately high. Public perception of fuel prices, however, is tied more to price volatility than to absolute increases. Price fluctuations are a fact of life for all commodities, including oil. However, unlike other commodities, consumers see and feel fluctuations in the price of oil quickly and directly. Prices change frequently, and are displayed on service station signboards at street corners everywhere, day and night. And, because the cost of the underlying commodity – crude oil – is the primary factor in the final product price, consumers feel the “pain”. Second, earnings: The misperception is the belief that oil and gas industry earnings are disproportionately high. Undeniably, many energy companies posted high earnings. For example, in 2007, the top five international oil majors posted record profits totaling 115 billion US dollars. The profit margins, however, remain in line with the national average for other major industries. For every dollar of sales recorded in 2007, the oil and gas industry on average earned about 10 cents, not much higher than the national average. Many industries had higher margins – some as high as 18 to 20 percent in the pharmaceutical and software sectors. The disconnect arises from the difference in the volumes and costs involved in the petroleum business. Producing and delivering energy is an expensive and risky enterprise. Billions of risk capital is often expended with no certainty of a commercial discovery. Drilling of wildcats in deep water and frontier region can cost more than $50 million per well. Also overlooked is the reality that energy companies use today’s earnings to make the investments needed for future energy needs. The International Energy Agency estimates that industry needs to invest an average of over $200 billion each year between now and 2030 to produce and deliver the oil and natural gas required to meet the world's needs. Third, energy independence: The misperception is the belief that any nation can achieve full energy independence in the short term. Realistically, it is simply not feasible to achieve this objective. In the United States, for example, demand for energy exceeds domestic production by approximately 14 million barrels of oil equivalent per day. Americans depend upon imports to fill the gap. No combination of conservation measures, alternative energy sources, and technological advances could realistically and economically replace those imports in the short term. The notion of full, short-term energy independence arises from a misunderstanding of the global commodity market for oil. Because we are currently all contributing to and drawing from the same pool of oil, all nations – exporting and importing – are inextricably bound to one another in the energy marketplace. In this context, the more effective means of securing supply is promoting energy interdependence, not independence. If importing nations diversify their sources of energy, strengthen their partnerships with exporting nations, and develop and use their resources more efficiently, they will become less dependent on any one country or region for energy. And by removing barriers to trade, reducing taxes, and opening markets, we can all better adapt to disruptions that do occur. These realities about the energy industry – its commodity nature, its enormous scale, i |
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