20 March 2015
Thank you, Jon, for your kind introduction, and good evening everyone. It's a real pleasure to be here. It’s good to be home.
When I was invited to speak at this event, the price of Brent crude was over US$100 per barrel. Today it’s under US$60. But despite the real challenges faced by the sector, there is cause to be optimistic about the future of our industry and British energy companies in particular.
As I reflect on my career over the past three decades, it has struck me how my perspective on movements in the oil price has changed.
When I began my career with BP in 1982, I joined the research department. Having just stepped out of academic life, I was so focused on my research that I didn’t think too much about price until a budget discussion with my supervisor left me in no doubt of its importance!
By the time prices drifted down in the early 90s, I was working in BP’s chemicals business where low oil prices were welcomed as they dropped the cost of our feedstock.
In the late 90s, when the price dropped yet again, I was head of BP’s Technology business. And while we were considering large transactions at the bottom of the cycle, low prices also meant significant challenges.
In fact, over my thirty year career, there have been three occasions when the oil price has fallen more than 50 per cent in less than six months – a ‘crisis’, on average, once every ten years.
Those of us who have been in oil and gas for some time know that it has always been a volatile industry. Today’s low prices are nothing new but we all recognise that many in the industry face extreme difficulty, and North Sea operators are no different.
But let’s not forget that, as an industry, we have a strong basis to work from. We have successfully tackled geo-political instability, challenging geology and uncertain markets. Over decades, we have adapted, evolved and thrived. And we will continue to do so as we build resilience and prepare for the future.
The oil market will rebalance over the medium term
So what does that future look like? One of the advantages of working for a diversified resources company like BHP Billiton is that our portfolio gives us a unique insight. Our commodities are used throughout the economic cycle, which provides visibility into how different economies around the world are developing.
At the end of last year, a number of world leaders attended the G20 in Australia and provided views on their respective economies. Their report card was encouraging.
The Chinese Government’s long-term economic plan is on track, with reforms beginning to rebalance the economy as it settles into a period of slower, but still solid, growth. There is optimism in India after the election of Prime Minister Modi. And over the last six months, the US economy has seen strong growth while Japan’s economic recovery has resumed with President Abe’s re-election providing new momentum to reform.
Despite this, the challenges faced by the oil and gas industry cannot be denied. Shale has disrupted the global energy market and balance is only likely to return in the medium term, through free market mechanisms, with an adjustment to both supply and demand. Efficiency will moderate demand, and supply will cut its costs, so prices will be lower than we’ve become used to in recent years.
There has been much debate within industry and government about how to respond to lower prices. The proposals in this week’s budget will support the industry and make the UK’s tax framework more competitive. Over the longer term, the recommendations in the Wood Review provide a path forward to improve regulation of the UK Continental Shelf.
But in recent weeks, we have also heard calls for government to go even further and establish a national oil company or invest in field development. Policies like these won’t make the industry financially sustainable or solve the problems of more challenging geology. While it’s important that taxes and regulation are competitive, it just isn’t enough.
Industry can boost its competitiveness
For our industry to be successful, we must take matters into our own hands. Better productivity is the biggest opportunity we have to improve profitability. There’s much we can do by ourselves to weather the short-term challenges and prepare for recovery.
Some suggest the UK industry must cut costs by 40 per cent to regain its competitiveness and this may seem an impossible target. But it is achievable.
In BHP Billiton, we have all but done this in our minerals business in recent times and we expect to do more. We began to focus on productivity some years ago and are seeing huge potential across our organisation.
Since 2012, our productivity initiatives have delivered almost US$10 billion of annual savings, increasing the cost efficiency of our operations and capital investments by over 30 per cent. We have found that many small, incremental steps add up to a major increase in efficiency. It’s all about doing the simple things better.
An example outside of our industry comes from one of my favourite sports – Formula One. Over the past few years, pit crews have cut the time of pit stops in half by concentrating on each incremental component, resulting in significant improvements to their performance.
At BHP Billiton, we have been doing exactly that – applying productivity safely in everything we do. We have challenged our teams to look across all of our operations to find the best way of doing things and make that the benchmark for every part of our business at a granular level. Our people have embraced this challenge and have been the driving force behind improvements to make sure we remain competitive.
Take maintenance – a major component of costs in both mining and oil and gas. By applying a benchmark to common activities across our assets, we have identified and shared best practice which has led to more uptime, lower costs and an energised workforce.
Maintenance is just one very important example. When we integrate all that we have done, our focus on productivity has supported significant change. In our Iron Ore business, we reduced unit costs by 29 per cent over the last six months, and in our Onshore US shale business, by 17 per cent.
We are always looking for ideas to improve productivity from outside of our sector, from industries like manufacturing and aviation, which often have even tighter margins than ours. And we have found that by focusing on productivity we have also improved our health and safety performance, which is the most important achievement to us. Like many, we use productivity as a tool to control what is within our power as we adjust to lower prices which are outside our control.
Long-term fundamentals are strong
There are some in our industry who have only known the higher oil prices of the last decade, and when they ask me if I now worry about our industry’s long-term prospects, my answer is “no”. And if any one of our children was to ask “should I join the industry?” My answer would be a resounding yes. Let me explain why.
The long-term fundamentals that support global economic growth and the demand for energy are strong. In time, we will see more countries urbanise and industrialise and more people escape poverty. With 1.7 billion people expected to gain access to reliable electricity by 2030, and the number of cars forecast to increase by more than 50 per cent in that time, living standards will improve and the demand for energy will continue to grow.
While greater efficiency, renewables, and nuclear will help meet growing energy demand, our industry will play a significant role in every plausible scenario. For example, the IEA has projected that conventional energy sources will still provide about three quarters of the world’s energy mix in 2040. This signals an increase in demand for our products over current levels and also the long-term opportunity before us.
UK companies are well placed to respond
UK companies are well placed to respond. We have the expertise to compete with the best and can draw from our country’s strengths to succeed in oil and gas and beyond.
I’m perhaps more confident about the outlook for the Scottish oil industry than many people here. My confidence comes from the calibre of people in this room – as I believe your knowledge and skills are as valuable as the North Sea Reserves themselves.
The opportunities are not limited to domestic production. Your know-how means our companies can extend their reach internationally, supporting innovation that creates new markets and broader benefits for the UK.
Scotland has a proud history of innovation which stems from the origins of the industrial revolution. This spirit of creativity and ingenuity, and our engineers, scientists and research institutions, can help support both the future of oil and gas as well as other energy sources such as renewables.
An alumni from my old school here in Scotland, Tom Johnson, who was the Secretary of State for Scotland in Churchill’s war cabinet, left an even greater legacy by creating the Hydro-electric Board after the war. The innovative electricity generation in the Highlands and extensive distribution networks brought vast economic and social benefits to Scotland for decades after the war.
Today, the UK ranks second in the Global Innovation Index, ahead of the United States and Germany. The UK is a world leader in developing new technology – something we don’t recognise enough.
Aberdeen is a major global centre for oil and gas technology and the North Sea can be a proving ground for both technology and people. In oil and gas, our advanced sub-sea technology is world-renowned and there are many examples of innovative work being used to develop the industry.
Research by the Institute of Petroleum Engineering at Heriot-Watt University on low salinity water injection has the potential to significantly improve recovery and production in the North Sea and beyond. And we expect to use this technology to unlock the full potential of the Mad Dog field in the Gulf of Mexico where we are partners with BP and Chevron.
Carbon capture and storage could form a significant industry
The UK is also playing a major role in developing the technology the industry needs to effectively address the challenge of climate change. To achieve this, there must be a significant focus to develop and deploy low-emission technologies. I see no trade-off between the pursuit of efficiency, innovation and sustainability.
The UK is the only country in the European Union that is seriously investing in Carbon Capture and Storage (CCS) with the Peterhead project in Scotland and White Rose in England. The UK has some of the foremost research institutions seeking to deepen our fundamental understanding of CCS with the skills required, very similar to those Scotland used to build the North Sea oil industry. Importantly, the UK is also creating a regulatory environment that supports the growth of a CCS industry. And when government works collaboratively with industry, a cost-effective step change can be made.
CCS is an investment in the future of our industry and an example of how we can use our understanding of geology and technology to address environmental priorities. To give you some perspective, should CCS become commercially proven, it could become a significant industry for the UK on a scale to rival other parts of the energy industry.
If fossil fuels continue to supply most of the world’s energy CCS could be as large as the oil and gas business, as the volume we store in the earth would match what we take from the earth. Investment in CCS is critical and should occur on the same scale as investment in renewables.
Talent must be cultivated for the UK industry
Innovation is nurtured through our schools and universities. It is vital that the industry’s pipeline of talent continues to be well stocked for the future. Government and business can work together to cultivate the talent we need and encourage the next generation in science, technology, engineering and mathematics.
So if we do ask for investment in the future of our industry, the focus should be on education and those subjects in particular. The plan announced in this week’s budget, to strengthen support for postgraduate research and build partnerships between academia and business, will support our industry over the medium to long term.
Technical skills have always been highly valued in Scotland. We have some of the world’s best universities and a history of cultivating brilliant scientists and engineers. This is most apparent in Aberdeen, which has built up a knowledge economy to provide expertise to the world.
So today, at a time of uncertainty and volatility, with prices below US$60 a barrel, my perspective on price movements is informed by: the research scientist, fresh out of university; the manufacturer who welcomes lower input costs; and the executive who seeks to find safer and more efficient ways to supply the commodities the world needs to grow.
As I stop and reflect on what our industry has achieved, I recognise what a significant contribution we have made to Scotland, the UK and the world. We have promoted innovation in science, technology and engineering and grown this country’s skill base.
Through innovation, our industry has helped make the once-inaccessible North Sea, accessible, and we have shared our innovation and expertise across the world. Our technology that once unlocked the 100 metre deepwater of yesterday, now unlocks the kilometre depths of today.
While the current market environment tests our industry, we can overcome these challenges as we have done before. We should be optimistic. The demand for energy will continue to grow and our industry will play a vital role in meeting the world’s needs. We have a bright future ahead of us.