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"A Low Carbon Future: Is This Achievable In The Oil Patch?"

Lord Truscott,  Former Parliamentary Under Secretary of State for Energy
Offshore Technology Conference (OTC), Houston, Texas, USA,  30 April 2007

I’m really delighted to be here in Houston: the acknowledged global centre of the oil and gas industry.  I’ve heard a lot about OTC, and was determined to make this visit a priority.  And I am already mightily impressed. I knew everything in Texas would be big, but nothing prepares you for the scale of this show! I got here earlier this morning, and have already been walking the floor meeting exhibitors. The excitement is palpable.  And the technologies on display are frequently cutting edge. I’m equally delighted that many of them have been developed by British companies, whether they be software packages or drill bits.

One of the most exciting aspects of this show is that it is truly global. I’m sure that if we did a survey, we would find that we have at least 50 nationalities represented in this room. So I wanted to take this opportunity to address a really cosmopolitan audience to discuss the twin challenges we face: of continuing to produce energy to meet consumer demand and ensuring our security of supply; and tackling the grave problem of global warming.       

This lunchtime in particular I want to focus on the possibilities that a low carbon future offers for companies operating in the energy sector. In doing so:

• I will give you the reasons why we in the British Govt believe that the world needs to move in the direction of a low carbon economy;
• I will explain to you what the UK Govt is actively doing to help steer us in that direction;
• but I will emphasise how governments cannot act alone in addressing this massive endeavour, and how we want to work together in partnership with business – and a primary partner has to be the energy sector - on the challenges and the exciting opportunities thrown up by the quest for a low carbon economy.

First, why at this time should we be talking about a low carbon future? The oil and gas industry is entitled more than most to ask that question. The hydrocarbons sector is in the rudest of health. Last year the largest oil and gas company in the world, Exxon Mobil, made $39.5 billion profit; Shell, another super-major , $22.5 billion. These figures are impressive - indeed staggering - by any standard, and they smack very much of success.

But as Dave O’Reilly, the CEO of the US super-major Chevron, recognised in a speech to the CERA conference earlier this year, the energy challenges of the 21st century are becoming even more serious, and mean that all of us – policy makers, business leaders, even private individuals – need to reinvigorate our thinking and actions. Mr O’Reilly was obviously referring to the continuing need to satisfy our energy demands through access to secure supplies of energy. But he singled out the issue of climate change too, and went on to talk about the consequent need for policy alignment.

And the challenge of meeting our energy needs  - while simultaneously minimising the threat of dangerous climate change - is at the centre of the British Govt’s basis for arguing the case for the low carbon economy.   

Let me take energy security first. The latest World Energy Outlook publication from the International Energy Agency, the recognised authority in this field, projects that global energy demand will rise by just about half by 2030. That’s a lot of new, additional energy! But we shouldn’t be surprised by this figure. If there’s one thing that unites countries around the globe, it’s that we all want economic growth, to meet our hopes for prosperity and a higher standard of life. And I might point out here that we and other countries have shown that you can grow while cutting your carbon emissions.

The Stern Review on the Economics of Climate Change – and I will return to Stern in this talk - acknowledges this increased demand for energy, (including transport), especially as the rates of growth among developing countries continue to be high and may possibly accelerate still further. (Interestingly, in a point that has often been lost amid all the publicity about what the report says on climate change, Stern also notes that hydrocarbons may still be responsible for more than 50% of global energy in 2050. Exxon Mobil’s recent Energy Outlook publication predicts fossil fuels will still represent 80% of supply by 2030.)

The bottom line, from whichever perspective we view it, is that the world is going to need substantial new energy if it is to go forward and progress in this century.

Let me now turn to climate change. I know that the debate about the science rumbles on in parts of the US. People argue over to what extent – and even whether - man is responsible for the global warming that is now taking place. Some still question whether it is. But I want to make three basic points:

• first, the British Government has no doubt that man-made climate change is happening, and that its potential to threaten all those things we hold dear – peace, prosperity, a clean environment, even the planet as we know it – is clear and is growing. In our view, the question has moved on from whether it is happening to how best to tackle it.

In the first–ever debate on climate change in the UN Security Council, earlier this month, our Foreign Secretary Margaret Beckett laid out for the Council the potential consequences brought about by climate change: of flooding, disease and famine and from that migration on an unprecedented scale; of drought and crop-failure - and flowing from that, increased competition among nations for food, water and energy; and she repeated the warning in the Stern Review that climate change might precipitate economic disruption not seen since World War II and the Great Depression.

This debate was the best attended in UN history, and the vast majority of countries, including China, agreed that climate change threatens our security, (Incidentally, a report by 11 retired US Generals and Admirals released the day before the debate raised the same alarm);

• second, I am not a scientist by training. Nor is Tony Blair. But when the Inter-Governmental Panel on Climate Change (IPCC), another universally recognised authority, speaks, we listen. For those who don’t know, this panel is composed of several hundred scientific experts drawn from academia, research and business in more than 100 countries. The panel’s members are nominated by their own governments.

Their reports, to ensure they are objective, transparent and credible, are subjected to a highly rigorous peer-review process, including several hundred more experts. I quote from the IPCC report on the scientific basis for climate change issued in February: “Most of the observed increase in global average temperatures since the mid-20th century is very likely due to the observed increase in man-made greenhouse gas concentrations” The report defines very likely as a more than 90% probability; and

• last, it is striking how much the business community and others are accepting the reality of climate change. As evidence, I would give you some recent developments in this country: the formation of the Climate Action Partnership by ten major US companies, including Dupont and General Electric; the very recent call by Conoco Phillips, one of Houston’s own, echoing similar calls already made by BP and Shell, for a mandatory regime in the US to reduce greenhouse gas emissions; the initiatives in California and the North-Eastern states of the US to set targets to cut carbon emissions; and the announcement just last week by Mayor Bloomberg to introduce a congestion charge on cars as a means of tackling climate change.

My clear conclusion from all this is that we are causing climate change and that it threatens our security and prosperity. This point about prosperity is crucial. Those who disagree with us often point to a conflict between economic growth and strong action on climate change. We would reject this by saying that the best thing to do from an economic viewpoint is to move towards a low carbon economy, both because it reduces the threat from climate change and because of the huge business opportunities it opens up – and I will come back to opportunities.

So if I now bring these arguments on energy security and climate change together, my government believes that the only way we can ensure our security and prosperity while meeting the world’s ever-growing energy demands is through a rapid transition to a low carbon global economy. And it follows from that we should be considering now how enterprise and technology – and business will always be better than government at picking winners – can take us there. 

The British Consulate-General here in Houston recently hosted a conference to look at Carbon Emissions Trading.  Over 200 business people attended, and the main message which came across loud and clear was that constraints on carbon emissions would be mandated sooner or later, and that most businesses would prefer the certainty of a regime sooner. The other key message was that the opportunities which carbon controls would bring were immense.      

This was another in a series of events focused on climate change change that the Consulate has organised, starting in February 2005 with an event addressing how Houston and London would address the future sea level rise that will threaten their infrastructure as coastal cities. The latter will be of interest to the energy and petrochemical industries, with large facilities on and offshore the Gulf Coast, which are crucial to the refining capacity of the US.

In our view, governments can never supplant business in providing technology solutions. But later on I will want to return to how we can most effectively work together to tackle and contain the energy and climate challenge that I have laid before you. And I will want to highlight the technologies that businesses themselves see as possible answers: energy efficiency, carbon capture and storage, renewable energy.

Before that, and while you reflect on the arguments I have presented so far, what are the British Government’s credentials? Why should you listen to what we say? Are we putting our money where our mouth is, figuratively and literally? As the great British philosopher and politician Edmund Burke said: “Hypocrisy costs nothing.”

I will give you three concrete examples that demonstrate we mean what we say, and that we are putting resources and effort into what is an absolutely top priority for us.

In 2005 Prime Minister Tony Blair made climate change, along with Africa, his priority international issue for the year that the UK assumed the Chairmanship of the Group of G8 Nations. He worked tirelessly to secure G8 agreement to a political statement on the importance of climate change. He succeeded. The communiqué declared that the G8 should act with resolve and urgency now – the first time that leaders have reached an agreement on the role of human activity in global warming and the need for urgent action. Tony Blair was responsible for moving climate change right up the international agenda, and there it has remained; which is why we are delighted to see the German Govt pick up the baton and make climate change a key theme of this, their G8 year.

But we feel strongly that you can’t walk the walk internationally without being prepared to behave in the same consistent way domestically. Last month our Environment Secretary David Miliband published a draft climate change bill, the first of its kind in any country. The bill envisages a series of clear targets for reducing carbon dioxide emissions, including making the UK’s targets for a 60% reduction by 2050 and a 26-32% reduction by 2020 legally binding. This we believe will provide a framework for moving the UK to a low carbon economy. As David Miliband put it: “That is why the government is proposing the UK become the first economy in the world with a legislative framework to reduce carbon dioxide”

A third way in which we are showing our support for the transition to low carbon relates to the key technology of carbon capture and storage (CCS) – or carbon sequestration, as it’s often known. There will be no silver bullet that can solve the international energy and climate change challenge.  But commentators from Sir Nicholas Stern to the European Commission have singled-out CCS as the technology that would allow the continued use of fossil fuels without damage to the atmosphere - and thereby meeting squarely the definition of a low carbon energy source. CCS has the potential to reduce CO2 emissions from fossil fuel power stations by up to 90%, and can contribute 28% of global CO2 mitigation by 2050. The technologies involved in CCS are well known, but system integration and commercial demonstration are needed if CCS is to play a significant role in the coming decades. 

My government believes that CCS has a crucial part to play, particularly if we want to address the emissions from China’s rapidly expanding coal-fired power generation sector – our latest analysis indicates that China is building the equivalent of a large coal-fired power station every four days. That is why last month the Chancellor, Gordon Brown, announced in the Budget that the UK would hold a competition for CCS demonstration on a commercial scale power plant, to be operational early in the next decade. Europe is making progress on CCS development, having set an aspiration to work toward CCS being fitted to all new fossil-fuelled power plants by 2020.  Having mentioned China, of such interest to your industry and the US of course, I want to highlight our aspiration for an international agreement looking beyond Kyoto that brings China, the US and others (such as India) behind a common goal to stablise emissions.  

Reverting to CCS, I should mention here that the US has its own such competition going on here, FutureGen, with 2 possible sites in Texas in the final 4.  And Texas is a good place for CCS. After all, the basic idea of injecting CO2 into the ground is old-hat to the oil industry: you’ve been using it for Enhanced Oil Recovery since the 1970s. Clearly the experience that you bring to the CCS process will play an enormous role in realizing this technology on a global scale. Enhanced oil and gas recovery by injecting CO2 into depleted oil and gas reservoirs is one of the major processes needed in ensuring the safe and permanent storage of CO2 from power plants.

A recent study by the Lyndon Johnson School at the University of Texas said “Two characteristics make the Gulf Coast a prime site for geologic sequestration: sources for CO2 emissions and a substantial capacity to store CO2 in underground oil reservoirs and geological formations.” It concluded that “with a developed CCS industry in position, Texas can remain a source of innovation in the oil industry while creating 1000s of jobs.”
 
There is a further separate but related point here to make, about  the British Govt’s approach towards an integrated policy on energy security and climate change – and in the European context. I mentioned earlier the need to align policy in energy and climate. We regard this as essential if government is to play its proper part in setting the policy frameworks within which energy markets can operate. In March, European leaders, in a landmark agreement, announced an ambitious, integrated European climate and energy policy, including an independent target to cut greenhouse gas emissions across Europe by 20% by 2020 in relation to 1990 levels; also to introduce efficiency measures to cut by 20% total European energy consumption predicted for 2020. The objective that lay at the heart of these decisions was to set Europe on the fast-track to becoming the world’s first competitive, energy-secure low-carbon economy.

Tony Blair had for two years been campaigning for a coherent European energy policy, and we were active in shaping this significant agreement. Next month the British Government will publish its own White Paper setting out a course for domestic energy policy in the future. It will have at its heart the same integrated approach towards energy and climate change.  

I could say more, but I hope this bears sufficient testament to my Government’s commitment to a low carbon economy. 

I hope the picture I have painted so far has depicted a compelling case for the switch to low carbon. Put simply, we don’t think there is a choice. Many of you will already be working to exploit the huge opportunities it presents for the energy industry. For those who are not, perhaps these numbers might incentivise you:

• the IEA predicts that, to meet the world’s growing thirst for energy, between now and 2030, something like $21 trillion will need to be invested in the energy sector; and
• recent studies have shown that responding to climate change could be a £30 billion business opportunity for British companies alone over the next ten years and could be a $500 billion world market by 2020.

For anyone in business, competitiveness weighs heavily on their minds when examining a business proposition. I thought you might be interested to hear about a recent paper published by the Harvard Business School: “Competitive Advantage on a Warming Planet”. The authors examine the risks, but also the opportunities for business, as a result of climate change. They study businesses, such as the auto industry, whose competitiveness may have been stymied by their failure to develop new low-carbon technologies. On the other hand, they cite cases, for example General Electric, examine companies who have actively pursued competitive advantage through their climate policies. The paper makes a persuasive case.

Obviously, for reasons I have documented earlier, much of the investment estimated by the IEA will come in the hydrocarbons sector. And there is an increasing sense that those companies who move early to invest in and develop clean energy technologies will be those which reap the most long-term competitive benefit.

So we believe the low carbon proposition makes business sense. But I also have a firm personal view that companies such as yourselves are the best placed to take practical advantage. The oil and gas industry has over the last 100 years shown itself consistently able to stay one step ahead and pioneer new engineering techniques for extracting hydrocarbons, an example is in the deep water of the Gulf of Mexico, where numerous records have been set.  You have the entrepreneurial spirit, you have the capability, and the technologies are already out there for you to develop.          

How then can we in the UK government work with you? I believe it is our responsibility to promote policies that provide citizens access to secure and sustainable energy supplies - but also a stable and secure climate, without which their lives will be vastly different. We believe the low carbon future will ultimately be the best way to achieve this. But governments cannot act alone and we cannot fulfil our responsibilities without the co-operation and active help of the business sector.

As Shell CEO, Jeroen Van der Veer said recently, “Industry can make the technological break-throughs that will lead us to a cleaner energy future. But governments must establish the rules and incentives that help societies get there more quickly.”   

We like to see this as a partnership – one that our Foreign Secretary has called the greatest public-private partnership of all – where we set the essential frameworks which you need to operate and flourish within. This means that:

• we will continue to encourage the development of a market and price for carbon, promoting trading schemes that ensure energy prices reflect the true cost, including environmental costs, of their production and consumption. By this means, the market will send the right price signals to incentivise the adoption of climate friendly energy policies;
  
• we will encourage  business to develop technological solutions, be it through energy efficiency – potentially the most lucrative pathway of all – carbon capture, renewable energy or other alternative clean energy sources. In the EU we are looking at how we can work with partners – especially China – to help develop the technology standards to build low carbon economies;
  
• on energy efficiency,  the UK is taking steps to encourage energy efficient innovation and technology development. We see Government’s role as stimulating investment in a broad range of R&D activities. This will not only include the use of carbon pricing, but also Government funding aimed at accelerating the development and market penetration of new lower carbon technologies, and supportive regulatory frameworks - for example by raising building and product standards and using public procurement to create market pull for the most efficient technologies.

We also sponsor the Carbon Trust, who work with UK businesses of all sizes to encourage energy efficiency. They provide vital investment in the development of low carbon technologies in the UK, including both energy efficiency and renewables and across all sectors, this includes research and development funding to encourage innovation in the low carbon sector, Technology Acceleration Projects, and direct help for pre-commercial and commercial organisations with low carbon technologies.

I have talked at some length about carbon capture. But I should also highlight renewables, where the EU has set a target for 20% of its energy by 2020 to be generated by renewables. The continued high demand for onshore wind turbines and the increasingly rapid growth of offshore wind continues to fuel the demand for technological solutions to the challenges of developing larger turbines, longer blades, taller towers, and deeper water foundations.

I am pleased to note that the United States is working collaboratively with other countries through the International Energy Agency's Executive Wind Committee to develop solutions that will underpin further growth in the wind sector

As I near my conclusion, I should emphasise that we and those who think like us have no interest in is a clash with fossil fuel producers, be they national oil companies or the IOCs. As I have explained earlier, we know that fossil fuels will continue to be vital sources of energy for the world well into the future. That is not the issue. The question for us – and I believe for you working in your industry – is how you can adapt and broaden your business. So that in 50 years time your industry will show that it has been able to survive and succeed through your skills and your invention, as it has done on many occasions in the past.

In summary, the goal of a low carbon economy is one that I feel we can and will all share.  Procrastination is not an option, for any of us. I would continue to encourage the oil and gas industry to develop real solutions to take up this challenge, to ensure that over the next few years there is an increasing range of competitive and alternative technologies across the globe, to help us all rise to the challenges of climate change and energy security that our planet faces right now.

Thank you for your time and indulgence.