Bp PLC Energy Outlook 2030 Presentation

Jan 16, 2013 AM EST
BP.L - BP PLC
Bp PLC Energy Outlook 2030 Presentation
Jan 16, 2013 / 03:00PM GMT 

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Corporate Participants
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   *  Bob Dudley
      BP plc - CEO
   *  Christophe Ruhl
      BP plc - Chief Economist
   *  Dev Sanyal
      BP plc - EVP, Group Chief of Staff

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Conference Call Participants
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   *  Daniel Sullivan
      Energy Intelligence - Analyst
   *  Morton Frisch
      - Analyst
   *  David Howell
      House of Lords - Analyst
   *  Stephen Tindale
      The Centre for European Reform - Analyst
   *  Nick Coleman
      Argus Media - Media
   *  Martijn Rats
      Morgan Stanley - Analyst
   *  Fiona Harvey
      The Guardian - Media

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Presentation
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 Bob Dudley,  BP plc - CEO   [1]
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 Good afternoon, everyone, both here in London and online. Welcome. We've timed this session so that people from different time zones can join us. So, thanks for participating. My name is Bob Dudley. I'm BP's Group Chief Executive, and we're here today to launch our energy outlook 2030.

 Before we do that, you may be aware that a serious security incident has occurred today at the In Amenas gas production facility in eastern central Algeria. This field is operated by a joint venture, which BP is one of the partners. The authorities in Algeria are responding to the incident, and the UK government has been fully briefed and is engaged. We are providing the authorities with all the cooperation we can. Our main concern is for the safety of people at the site.

 This is a time of great anxiety for the families of those involved, as well as their friends and their colleagues. We are doing all we can to support the people involved and to work with the authorities as they resolve the situation. We've also set up our own emergency response procedures in BP. We are monitoring the situation as it develops, contacting relatives of those that may be affected. I appreciate many of you will have questions, but at this time, I can't give you very much more information. If you're from the media, I would say please stay in touch with our press office and they will provide updates as they are available, as today organizations' information is quite sketchy.

 So, if I may turn to the energy outlook 2030, this is a report on future energy trends, which is put together by our economics team under our Chief Economist, Christophe Ruhl. We published these projections so they can be used by people who work in industry, governments, universities, think tanks and other organizations, and they are very well used. Last year's energy outlook was downloaded over 70,000 times from BP.com. For the past three years, we've been updating the data for the 2030 time horizon and next year, we plan to look further ahead. Christophe will take you through the report in some detail in a moment. But first, let me pick out some of the very main, large trends and messages from their work.

 The most fundamental trend in this outlook is the path of future energy demand. We are still projecting that this will grow by around 1.6% per year, or around 36% between 2011 and 2030, with 93% of the growth expected to come from emerging economies. Unconventional oil and gas will play a major role in meeting the demand. Not only oil and gas from shale formations, but tight gas and heavy oil such as that produced in Canada, as well as biofuels.

 This year's outlook includes a detailed investigation of the implications of the growth of unconventional oil and gas. We expect the shale revolution will help make the US just short of self sufficiency in energy by 2030, while China and India become increasingly import-dependent. In fact, I think that the shale revolution will turn out to be the greatest technology development in our industry in the last decade or two. However, it's worth remembering that all of this is part of a broader story of quite phenomenal demographic and economic growth over the last two centuries.

 In 1813, the world population was under 1 billion people. In 1913, it was just under 2 billion people. Today, in 2013, it is over 7 billion. And if you were born around 1960, then the world's population has doubled in your lifetime. This has been accompanied by even faster economic growth and economic terms. The world economy nearly doubled over the past 20 years, and it's expected to double again over the next 20.

 Meanwhile, this outlook shows how other economic forces are at work in response to the high prices of the past decade. In particular, two underlying mechanisms of response are visible. Increasing energy efficiency on the demand side and a more intense search for new resources on the supply side. The impact of increasing efficiency is seen by the fact that while the expected 36% rise in demand in 2030 is high, it is not as high as the growth in demand between 1990 and 2010, which was 48%. So, looking forward, we expect the average annual growth rate of energy demand to slow from around 2.1% per year between now and 2020 to around 1.3% from 2020 to 2030.

 Looked at another way, as energy efficiency improves, we expect a fall of one-third in the world's energy intensity, the amount of energy required for one unit of GDP. Carbon dioxide emissions, we project, to grow by 26% between now and 2030. In other words, slower than energy demand. So, there is a small silver lining here environmentally. But we recognize much more action is needed. And as we always say with this report, this outlook is a projection. It is not a proposition. And in fact, BP supports additional measures being taken, in particular, the widespread pricing of carbon emissions.

 Now, there's a very intriguing process of conversion at work, whereby oil, coal, and gas are each expected to account for around 26% to 28% of total energy consumption by 2030. This happens as coal and gas compete more with each other in power generation and oil continues to act as an essential, but specialized transport fuel. Now, a similar pattern of convergence is taking place among the three types of non-fossil fuels, nuclear, hydro, and renewables, which are each expected to have shares of around 6% to 7% by 2030.

 Looking at the different types of fuel individually, oil is expected to remain by far the dominant fuel for transport, still accounting for more than 90% of liquid fuel in 2030. It is an essential and valuable commodity. It is projected to grow more slowly than any other fossil fuel, at around 0.8% a year. However, that is still an extra 16 million barrels per day that will be needed by 2030, which is far more than the daily production of Russia or Saudi Arabia.

 Unconventional oil is set to play a very big role in growing supply. Tight oil from shale formations is set to account for 9% of global supply by 2030, and that will meet around half of the world's growth in the demand for oil. Most of that tight oil will come from outside OPEC, incidentally, and will inject much more competition into the landscape. We expect gas to be the fastest-growing fossil fuel at around 2% a year and although gas is likely to continue to be traded in regional markets with differing pricing policies.

 In the US, the shale gas revolution has taken shale gas output to 36% of all gas production. It's extraordinary. Shale gas development elsewhere is expected to be material, but much slower. We think that by 2030, around three-quarters of shale gas production will still be in North America. Coal consumption is expected to grow at over 2% in the current decade, but then slow to 0.5% in the decade to follow to 2030, and this is largely due to China using less coal as its economy matures. Now, renewables, other than hydro, are expected to remain the fastest growing form of energy, but constrained by its need for subsidy, so that they still only make up around 6% of all energy in 2030.

 So, what are the key messages we can draw from the projections? There is a fundamental point to be made about risk. We are working in new areas, and there are risks associated with all of these opportunities. So, systematic operations and risk management must remain the bedrock of our operations. Apart from that underlying point, I would pick out three key messages about competition, technology, and investment.

 First, there's a message about the power of competition in driving innovation and efficiency. This process has helped to unlock new supplies, drive the growth of natural gas as an alternative to coal, and encourage greater fuel economy in vehicles. Second, there's a message about technology. Technology is absolutely central to all these trends, so there's a clear message to us in industry to keep up the pace of innovation. For BP, for example, this reinforces our drive to invest in seismic imaging that will allow us to see, if you will, what is under miles of rock. We will also continue to work on advanced water flooding and reservoirs to increase recoveries and of course, on the technologies required to produce unconventional oil and gas.

 Third, there's a message about the way that resources are opening up and the far-reaching implications this can have, not only in terms of energy, but economic and strategic influence. This is very relevant for the US. The fall in import dependence could have a major impact on trade balances, given that energy accounts for around half of the US trade deficit today. This gives the US a real boost at a time when the conventional wisdom is that the OECD world, including the US, is declining in influence. The energy industry has provided a transfusion of resources, income, jobs, and tax revenues for the US, and it will be interesting to see how that is put to use in years to come.

 Other countries clearly have a desire to follow suit. China, for example, is expanding shale exploration and liberalizing its gas policies. I was also encouraged to see the Indian prime minister last week supporting a market price for gas. With unconventional resources becoming available at scale, companies now have many more options for investment. I think the -- one of the lessons of this outlook is that it is a highly competitive sector and the investment will flow to the places which not only possess the right resources below the ground, but have the right conditions in the markets above the ground.

 Companies also face the choice of investment options across the oil and gas sector itself. Clearly, there are many exciting opportunities in natural gas, as demand grows so rapidly. Meanwhile, demand for oil, while growing more slowly, is set to remain robust, as it continues to dominate transport. And this is why companies are working all the options here as well, from enhanced oil recovery, to deep water projects, to heavy oil and tight oil.

 And finally, we are seeing the impact of competition on carbon emissions. High oil prices have encouraged greater fuel economies in vehicles. Emissions are now falling in the US and Europe. This is why we believe it makes sense to bring market forces to bear even more powerfully by bringing and pricing emissions across as much of the economy as possible.

 So, to conclude, this report shows the degree to which was once accepted wisdom has been turned on its head. Fears over oil running out, to which we never subscribed, appear increasingly groundless. The US will not be increasingly dependent on energy imports. Indeed, energy is set to reinvigorate its economy. And meanwhile, China and India will need a lot more import to keep growing.

 The projections demonstrate that we inhabited a very, very diverse and dynamic energy market in which there is everything to play for. The future is full of opportunities for job-creating businesses with world-leading technology and capability and for countries that want to work with them. From BP's perspective, this outlook encourages us to continue to play to our Company strengths, such as expiration, giant fields, deep water projects, gas value chains, and select world class downstream businesses.

 Our focus is well aligned with the trends we see at work here. And looking ahead, these projections reinforce the case for our investment in Russia as the world's leading producer and exporter of oil and gas and a region with great potential for tomorrow in areas such as enhanced oil recovery, tight oil, and natural gas. That's why we are optimistic all of these factors, that the world can have the energy it needs to fuel continued economic growth, and it can do it affordably. So, Christophe and his team I think have done a great job unlocking the story from the enormous amount of global data. So, thank you very much, and let me hand over to you Christophe, and he'll take you through the report and then after that, Dev and Christophe, you'll take some questions from people. Thank you, Christophe.

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 Christophe Ruhl,  BP plc - Chief Economist   [2]
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 Thank you very much, and welcome to all of you. Good afternoon, and thanks to all of you for coming. As you have heard before, this is the third time that we produced this 2030 outlook in public, and it is going to be the last time that we restrict the timeframe to 2030. Next time, it will be a little bit longer. As always, we have a focus area. This time, we will concentrate a little bit on the implications Bob mentioned on rapid supply growth, in particular of shale gas and of tight oil and what that mean -- may mean for the rest of the world.

 Let me also make the usual caveat at the beginning. Different from what many other people produce, this is a point forecast to the best of our knowledge. It's based on our reading and assumptions on policy changes, technology and of course, population growth, GDP growth, all the rest of it. As such, the only thing we know with certainty is that we will be wrong, and the goal is never to get it right to the second digit behind the comma. The goal is, and the reason why these outlooks are still useful is that it gives us a possibility to point at long-term trends and in particular, to see where these trends may be on a collision course, where today's decision may impact tomorrow's outcome. What I would like to call the fault lines in this complicated global energy system are. And I hope by the story I'm telling you, it will become clearer once some of these fault lines are, given recent developments.

 Let me start with giving you the big picture. The development of energy markets as we see them, then we'll guide you through it fuel by fuel, and then we draw out some of the implications of these big general trends.

 You all know the world out of which we are coming and you have heard before, it is a world which will continue to grow. Population growth is expected to rise 1.3 billion between now, baseline 2011 and 2030. GDP growth is expected to double, and energy demand growth is also expected to grow 1.6% per annum, or 36% in total until 2030. That is, many people don't realize, a bit less than the previous two decades, but it is still a lot.

 Let's zero in a little bit on energy demand growth, where it comes from, and where it goes to. The bulk of that growth is driven by continued economic development in the non-OECD countries, the so-called developing part of the world, the emerging markets, if you want, which account for 93% of total energy demand growth. By use, most of the energy, which we are going to see being produced the next 20 years, is going into electricity.

 Industrialization and electrification are inextricably linked, and so we have the biggest growth here in electricity, and about 57% of all the primary energy growth will go into feeding improved power production. Most of that, again, for the non-OECD economies. Industry follows on the heels of electricity, direct energy and puts into industry, and then we have transport, which will continue to grow exclusively in the non-OECD and will command about 17% of the increase in primary energy.

 By fuel, this is still a world to which to 80% will be comprised of fossil fuels. The fastest growing single fuel is renewables, almost 8% if you add up renewables for power generation and biofuels. But since they start from a relatively low base, they will only come to about 6% of the total energy mix by 2030.

 Among the fossil fuels, we have the fastest growing fuel continuing to be natural gas. Give you a sense of the numbers, will grow at about 2% per annum over the forecasting period. The slowest growth in oil, which is specializing in transport, and about 0.8% and coal is in the middle, first growing fast, then decelerating a little bit.

 Let me zero in a little bit more on the increment between now and 2030 and where these fuels are going to. You have your division in the slide between growth by sector and growth by region. If you look at the sector aside first, you see the big junk absorbed by power and you see transport fuel growth being actually the smallest of all the increments, with a decline in the demand for transport fuels in the OECD. In other words, the entire demand growth for transport is driven by the developing world.

 Very similar picture for industry. There is some marginal growth coming out of the OECD countries, but the bulk of that growth will be concentrated in the so-called developing world. If we then ask ourselves, what is the fuel composition which fuels that growth, you see the transport sector again, this time on the right-hand side, still heavily, almost 90%, dominated by oil. We have more to say on that a little bit later.

 The bulk of power generation unsurprisingly goes into industry. And if you then look at the composition of fuels which make up power, we see the most colorful of all the bars, indicating the wide variety of primary energy fuels, which go into power generation. Why is that? Because fuels compete for power generation. You can't generate power using all the fuels, and that becomes visible. The composition changes. This increment over the next 18, 19 years, more than half of it will come from non-fossil fuels. And the single biggest contributor to power generation over the forecasting period actually will be renewables, followed closely by gas and by coal. So, there is progress in some sense on the decarbonisation of power generation. And again, I'll come back to that in somewhat more detail later on.

 We should also -- sorry. Should also have a quick look on the production side, not only on the demand side. Almost 80% of the increase in fossil fuel supplies will also be generated in the developing world. So, it's not only the consumption which grows there. It's also dominating production growth and surprisingly, at first sight, the biggest jump of production growth and the biggest share of fossil fuel -- of fuel production will be in Asia-Pacific. Surprisingly, only at first sight because this is the result, of course, of the large availability of coal and the usage in demand for coal in that particular area.

 And finally, let me conclude this big pic overview with a more detailed look at something Bob has just indicated. We do see into the future an interesting process of convergence. Coal -- oil currently is -- on the left-hand side, you see market share. This is not the growth of fuels, that's their share in total consumption.

 Currently, we live in a world dominated by oil, still having the largest share of all the fossil fuels. But we do see a process where the shares in fossil fuel consumption between coal, gas and oil seem to converge to somewhere in a range of 26% to 28%. It is not an accidental process, but is different for different fuels. In oil, what it reflects is the increasing specialization in transport and then subsequent efficiency improvements as we come out of a period of high prices. In coal and gas, what it reflects is the opposite. A broadening in the range of applications and to some extent, the competition they are already under when it comes to power generation.

 Incidentally, and I think this is probably just an accident passing, we see also convergence among non-fossil fuels, somewhere in the range of 6% and 7% market share. If that happens, roughly along the lines we projected, this would be the first time in human history that fuel consumption is not dominated by one dominant fuel. If you think back, we come out of a world dominated by the consumption of wood, then coal, then we enter the age of oil. If that happens, then we are living in a world which is more balanced in that sense.

 Now, I, or other people, can tell you lots of numbers and make up stories and make sure that they add up. But there's very little proof that these trends have any substance behind them, except I do think that we have two principles at work here because energy is still mediated by markets which will be with us for the foreseeable future and which allow us to determine at least the direction of some of these main trends, if not always with complete accuracy, the actual outcome.

 These trends are, of course, related, because it's a market to price developments and when you come out of a period of very high energy demand, then it's almost equivalent to the statement that you also come out of a period of very high prices. And one of these trends hits the demand side. This is the improvement of energy efficiency, which I will talk about in a second. The other one is the supply side and the improvement in available energy supplies, both triggered and reinforced by the price mechanism.

 On the right-hand side, you see energy prices as they have developed over the last 50 years or so. By any measure, we are coming out of a period of very high of record prices for all fossil fuels. If you take the past five years, 2007 to 2011, and you compare it with the five-year period 10 years earlier, 1997 to 2001, then oil prices have increased by 220%, coal prices by 141%, and gas prices by 95%. You can slice and dice this in different ways, and there's no denial that we have come out of a 10-year period of rising and record high energy prices. And these prices, of course, trigger and reinforce exactly the two types of responses I mentioned on the demand side towards the more efficient use of available resources and on the supply side, towards an expansion of available resources.

 Let's have a quick look on the demand side first. We have actually two mechanisms here at work. One, we discussed at length in previous outlooks. You see on the left-hand side, that it's the tendency of energy intensity to improve. What is energy intensity? It's very simple, the amount of energy necessary to produce one unit of GDP. And we see a mechanism at work which looks the same in country after country, in region after region, and for the world as a whole.

 What we see is that energy intensity first rises as countries start to industrialize, as people and production moves from less energy efficient agriculture into more energy -- less energy intensive agriculture into more energy intensive industry and then peaks and slowly starts to decline as people and production move on from a very high share of industry towards more services from heavy manufacturing, towards light manufacturing. This trend is present everywhere over time, and it has greatly accelerated since the end of the cold war, simply as a by-product of globalization. We are now living in a world where almost any fuel is tradable across almost any border. We are living in a world with great standardization, both in the consumption of energy and the production of energy. And we are living in a world where technology spreads around the globe much faster than before. And what we are seeing as a result is an acceleration in the global improvement of energy intensity, the broadest possible measure for energy efficiency, and an increasing process in convergence that countries become more and more similar in their use of energy.

 In fact, the energy intensity of the world -- energy efficiency in the world is now the best for the last about 130 years, almost since the beginning of industrialization, and the differences between countries in their energy efficiency are the smallest we have on record since the beginning of industrialization. That mechanism, of course, is greatly reinforced when you come out of a period of high prices and all the consumer choices and regulations point towards saving energy. And the right-hand side translates the somewhat involved story in a very similar diagram in a very simple relationship, namely the relationship between economic growth and energy use. And you can see how that gap opens very nicely and increasingly so, and that's good news for all involved. It basically means that we are increasingly capable of producing more and more economic well-being with less and less energy inputs. We see that accelerating over the forecasting period and between 2011 and 2030, we have projected here energy efficiency improvements of 31%. This, of course, is based on the assumption that we continue to live in a world which has cross-border trade, standardization and all of the possibilities which come with this.

 The second impact generally in the high prices, lies in additional supplies of resources. The left-hand side of that slide would be considerably higher if it weren't for these efficiency improvements, but even though we still have to think about where 36% of more energy will come from over the forecasting period. On the right-hand side, you see the mix and you see an interesting division here, because more energy supplies that tend to take two different forms. One is just more of the same, as in more coal, more conventional oil, more natural gas.

 The second is the development of new technologies which make it possible to unlock other new resources. The prime example on which we will focus on in a second is, of course, the recent developments which we had in North America, specifically in the US, with the shale gas revolution and hard on the heels of that so-called revolution, now the increasing role of tight oil supplies. We think that about 25% of the growth in energy supplies which we project over the period will come from shale gas and tight oil. About 17% will come from renewables, another example for energy resource, which is comparatively new.

 And it is hard to sort of over estimate what has happened when we talk about shale gas or shale oil. Just give you a little footnote example, in 2007 -- 2005, the US reached a low point in its domestic oil production. US needed to import 12.5 million barrels per day of crude oil. Over the period until last year, that went down to 7.5 million barrels of crude oil imports, roughly half of that reduction is a reduction of 5 million barrels, almost half -- almost cut into half. Half of that reduction was due to the first mechanism it outlined, namely, a decline in oil consumption, higher efficiency because of high prices.

 The other half is due to an increase in US liquids supply. These are tight oil. This is other unconventional sources. It also includes things like biofuels. So, a reduction of inputs from 12.5 million to 7.5 million barrels per day accomplished by a reduction in demand driven by efficiency improvements, plus this increase in supplies, including these new supplies in this case, mostly tight oil.

 Before we go to the fuel to fuel percentage, let me have a bit closer look to what the -- how this actually looks like this production profile and what we expect on shale gas and tight oil. What you see here is the resource distribution as we currently have it. These are the technically recoverable resources which are estimated for both shale gas and tight oil. And on the other side of it, you have the production increase, which we predict by 2030. And what immediately stands out here is that the resource is not concentrated in the US or in North America; it is a globally available resource.

 The US has about 24% of this resource estimate. But its production is supposed to increase by about 72%, so there is a mismatch. We have seen this in the past, and we and others continue to project that the bulk of the growth in both shale gas and tight oil will take place, broadly speaking, in North America. Why is that? That is because it takes more than just resources in the ground to turn them into production. There is a whole host of above-ground factors which is important and perhaps at least as important as having the resources below ground. In fact, we see this year after year, that resource availability is an extremely poor predictor of future production. And what we see here is the US being in the position where they can access some of these supplies because of these above-ground factors being in place.

 What are these above-ground factors? I think the most important one is the stable investment regime and free access. It is free access which has given us the shale gas revolution. The fact that everybody could come to the US and invest, and everybody did. And as this ruthless competition which resulted out of that, not always pleasant, lots of investors probably lost their shirt in that, which creates and breeds the technologies which gave us shale gas and which now are giving us tight oil. That is a very, very important consequence.

 But there's, of course, more necessary than that. You need stable regulation. You need financial systems which allow investors to hedge. And most importantly for this type of resource, you also have huge infrastructure requirements. And again, these kind of infrastructure requirements will emerge only in countries where the above-ground factors are in place to allow people to build up these competitive systems.

 Here's an example. We have -- this is not working very well. We have compared here the number of oil and gas rigs across different countries, of which the US has a considerable feed, they have about 1,800 rigs, many of which can drill vertically, as well as horizontally. And some countries with huge production need comparatively few of these rigs.

 On the right-hand side, you see the consequences -- you see some of the requirements in the case of tight oil. The Bakken field in North Dakota is a field which produced about 100,000 barrels of oil five years ago and by now produces about 1 million barrels of oil per day. This is a roughly equivalent to the entire production of a country such as Colombia. But in order to get there, the number of wells which had to be drilled in the Bakken field had to increase beyond the number of wells drilled in a country like Canada, with much bigger production. These are enormous infrastructure requirements and again, they will not be built overnight, and they will come first in those countries where the competitive environment is in place to generate these infrastructure environments.

 So, the upshot of what I am saying about the importance of above-ground factors, you can already discuss by looking in the rear view mirror. It is out of 10 years of high prices that we have seen tight oil and shale gas emerging in North America and it's not, as one might intuitively think, because that's where the resources are. People are largely agreeable that there is at least as much oil sands in Venezuela as there is in Canada or that there is maybe as many shale resources in China as there are in the US. But nothing, nothing has come out of Venezuela or China in response to these 10 years of high prices. It is these above ground factors which matter and is largely the above-ground factors which will determine the production profile in the immediate future.

 With that, let me turn to the fuel by fuel section and walk you quickly through that part before we can then talk about the implications and put the picture back together again. Starting with oil, still the most valuable and central fuel in our energy markets. I talked about the declining share of oil in the global energy mix. Oil peaked in 1973 after the first oil price shock. And then engaged in this very sharp structural break, really a trajectory where its share diminished from 48% of total energy consumption in 1973 all the way down to 33% today. We projected to decline to 28% by 2030.

 In the first instance, that was driven by oil being crowded out from those uses where it had competition, lower price competition, in particular power, to some extent industry, and getting specialized in transport. You can see the effects of that on the right-hand side. But that's not all. Oil is also becoming used much more efficiently in the sector which it dominates, which is the transport sector.

 We see continued growth and transport demand of 1.2% per annum. This is much less than what you would expect if you take the normal projections about the increase in vehicle ownership around the world. It is much less, of course, because of the high price of oil, drives sufficiency gains in transport around the world. And typically, this happens by consumers choosing more efficient vehicles, but also by government regulation. And also, typical government regulation tends to kick in after periods of high oil prices, reinforcing it rather than anticipating more efficient use of the resource. So, we see oil shares decline on the demand side because of that structural break in the concentration and specialization of transport, plus efficiency gains in the transport sector driven by higher prices.

 Many wonder, and indeed, oil is coming a little bit under attack, even in its main domain, the transport sector. We think that by 2030, about 5% of the demand for transport fuels will be for natural gas. Another 5%, maybe for biofuels. Interestingly, in oil projections, the two cross around 2030 and biofuel growth slows down and gas will become more and more important there. 2% by electricity. That still leaves 88% in oil, but it is probably a harbinger of things to come in the very long-term, should other fuels become competitive in transport as it has happened in things like power generation.

 On the supply side, we have a total number of liquid demand and liquid supply by 2030 of 104 million barrels per day. Bob has mentioned it already; that implies an increase of global liquids production of 16 million barrels per day. Where does it come from? It comes from two main sources. One is the increasing supply from OPEC countries, many of which are concentrated in Middle East. That will account for less than half of the total increase. And the other is an increase in non-OPEC sources, including shale gas -- sorry, tight oil, which will be concentrated in North America.

 You see on the left-hand side how we have declined in the non-OPEC countries, the dark green spot in many of the convention -- of the fields in the North Sea -- such as in the North Sea or Alaska and how this decline is compensated for, but what today is called unconventional oil. In particular, oil sands from Canada, also biofuels, and the biggest chunk of it then, the tight oil development coming out of North America. We project tight oil growth of 10% per annum. That's an increase of 7.5 million barrels per day between now and 2030. The bulk of which -- half of that is -- more than half -- 75% of which will be in the US.

 Now, what is interesting here is that we see this growth accelerating over the next decade very strongly, but then there will be a sharp deceleration of the period between 2020 and 2030. This is just how we translate the current resource profile into future production. Growth of about 4%, the next 10 years of slightly below 1% in the period 2020 to 2030. Some of that -- in the US, and some of that will be taken up by production elsewhere, in particular, the two countries with next in line are Russia, which we'll see over the forecasting period its production from tight oil increase by about 1.5 million barrels per day and then China with an increase of 0.5 million. When you put this in context, still dominated by the US, high growth in the US over the next 10 years, then a deceleration, and not all of that deceleration picked up by other countries, but other countries moving into that space. I'm pointing this out in detail because when we talk about the implications of tight oil over time, it will become very important what kind of production profile over time one assumes.

 We can zero in a little bit more on this and ask for the global consequences on global production profiles. The first consequence, of course, is that we will have the North America being the central player over the forecasting period in increasing liquids supply. 65% of output growth will be coming from North America, and that means that North America over the next 20 years replaces the Middle East as the traditional source of largest supplies, which will have an impact on production in the Middle East, which I will discuss in a second. The US in that picture will approach a new record of its own oil production. The last high point was in 1970, and there are some interesting factors emerging from that, one of which is that it is possible that the US surpasses Saudi Arabia within this year, or by 2014 as the world's largest liquid producer. Russia will also this year or next year move into the second spot.

 These are quite drastic developments, and I'm cautious about them because it does not -- whether this happens or not does not only depend on how fast tight oil grows in the US, it also depends on the extent to which Saudi Arabia curtails production in response. But by and large, we are entering a world where about 9% of total liquids will be tight oil by 2030 and where Russia, the US and Saudi Arabia together are producing more than one-third of global liquids supply. Very different from the past.

 Let's put these developments together and into perspective on the oil market. On the demand side, we start with the proposition that demand increases by 60 million, but in a very uneven way. We see demand continuing to decline. We think OECD demand has peaked in 2005 and will continue to decline over the forecasting period by almost 6 million barrels per day. This is simply saying that in the OECD, oil is really heavily concentrated in transport, and the number of new vehicles will no longer be capable of outperforming efficiency improvements, so demand goes down. In other words, all of the demand in global oil supply comes from the developing world, with a big role, of course, for Asia, but also with a sizable jump from the Middle East.

 Second, we see on the supply side this next picture, there is some decline in non-OPEC countries, but it's more than compensated for by this massive growth from unconventional fuels. Biofuels, oil sands, also deep water growth from Brazil, all in the range of 2 million to 3 million barrels per day increase. And on top of that, then, tight oil with a much, much bigger increase of 7.5 million barrels per day.

 And the second big block in the supply increases here is OPEC production, especially big increase in Iraq and a big increase in NGLs, natural gas liquids, which are associated with oil production and which are interesting because they are not subject to OPEC quarters. Keep in mind the time profile I have outlined. The implication here is that much of the non-OPEC growth dominates the next 10 years and the OPEC growth will become back into its own in the period 2020 to 2030.

 Now, when something like this happens, you have massive supplier increases from one part of the world in the market, then you get reactions from other parts of the world. The oil market is a particular market because we have something like OPEC in there, and what we think will happen is that OPEC in response to that supply increase will manage production and will curtail production in order to keep supply and demand balanced and to avoid inventory builds which could not absorb all this additional oil.

 The first thing of note is that if you take together not only tight oil, but also other unconventional sources for liquids, biofuels, and oil sands in particular, 100% of the increase in global production over the next 10 years will come from these unconventional sources outside OPEC. And in the second half of the forecasting period, that will still be 75%. This means that the requirement for OPEC oil declines.

 Over the next 10 years, on average, it will be about 30 million barrels per day, which is roughly today's production level. And only then, between 2020 and 2030, it is set to rise again as demand continues to grow and as the production -- as the growth from tight oil starts to decelerate. This kind, produced call it OPEC oil means that spare capacity has to be built up and in the case of -- which we are projecting here, it means that OPEC will have to manage spare capacity of roughly around 6 million barrels per day. That is high by historical standards. Currently, it's about 2.5 million barrels per day, and it's the highest since we had about -- since the 1980s. It will have to be managed for a number of years, and I come back to the risks which I [will give in] such a forecast in a second.

 Let me switch -- let me go on and go to natural gas. I told you already natural gas is assumed to be the fastest growing of the fossil fuels. That growth is heavily concentrated in the non-OECD. And consumption, as we'll see in a second will also be heavily concentrated in the OECD. 37% of that gas growth is accounted for by shale gas. And similar, not that extreme, but similar to the tight oil story, we continue to project that the bulk of that shale gas growth will be in North America.

 The next country in line will be China in accounting for that growth. You see on the right-hand side also the production profile. However, we continue to assume that production will improve very rapidly in the US, but then again, will decelerate between 2020 and 2030. The rationale for that is the same as before. This is the profile which we get taking together all the knowledge that is available about this resource base. But different from tight oil, a larger part of the slack will be taken up by countries outside the US, although a big part of that in turn is Canada and Mexico. So, it remains settled in North America and of course, the background of above-ground factors in all of that applies to shale gas just as much as it does through tight oil.

 Now, gas markets have probably become the most vibrant and most interesting markets for analysts over the last few years for two reasons. One is the obvious one. The question, where does this shale gas resources and production spread outside North America and what are the implications? And the second is that natural gas, we still don't have a global natural gas market. They are still segmented; a market in America, one in Europe, one in Asia, simply because for historical reasons, there was no pipeline connection. And what we are starting to see is increasing integration of these markets by LNG. Let me look at these two developments in turn.

 The first one returning to shale gas and where it will occur next, where will it happen next? We do think that in North America, shale gas growth is here to stay and will continue so that by the end of the forecasting period, two things will have happened. It will be about half of North American production and will more than compensate for the decline here in conventional gas production. And the second item which will happen is that North America in our time series will become a net exporter by about 2017. Big change from becoming a large importer to a net exporter; an example, again, of how this will change global markets.

 Shale gas resources, you have seen it, are also widely available everywhere, including in Europe and including in Asia. We do not think that developments, at least until 2030 in Europe will be anything other than what we have seen in the US. There is a zillion of obstacles from lack of infrastructure to environmental concerns to political concerns; fracking has been made illegal in a number of European union countries, so that we only have a little bit of shale gas production factored in for Europe by the very end of that forecasting period. Now, natural gas consumption is set to grow in Europe quite rapidly and that means, of course, that the import requirements, both by pipeline and by LNG will have to grow accordingly to keep pace with these aspirations.

 China is a bit of a different story. China has started to concentrate resources on the production and development of shale gas resources, but gas in China at the moment plays a very small role. Only about 4.5% of the Chinese energy mix is natural gas. They have very ambitious plans to increase that share. We do think to some extent they will be successful, and that will require an increase in shale gas production in China, which is far ahead of that of Europe. But it will not be enough. It also will mean that China will need -- continues increase in the gas imports, both by pipeline and by LNG, in order to reach about 9% -- a share of 9% in its energy mix in natural gas, up from today's 4.5%. To give perspective on this, this would mean that China by 2030 consumes about as much gas as the European union today.

 The second development I point out which makes gas markets interesting is the increasing share of trade and of global integration. LNG growth has been very rapid, much more than twice as fast as gas consumption over the last few years, and that is a trend which will continue. I told you gas consumption growth, about 2%. We think LNG growth about 4.5%, so more than twice as fast. LNG, of course almost by definition, is traded and LNG is also the fuel the gas which provides a bridge between these segmented markets because these huge ships full of frozen gas can cross oceans and therefore, connect continents in a way pipelines will never be able to do. So, there is an increase in trade in LNG production, which will push for more trade. At the end of this, we are likely to see a share of LNG in global gas consumption above 15% by 2030.

 Now, translated, that means 15% of gas production finds its way in this complicated fashion of being frozen, transported, thawed again; that's quite something, I think, and it's not all. We also observe that trade generally becomes more integrated. Traditionally, LNG trade functions a little bit like pipeline trade, was based on long-term contracts, 25, 30 years. Then you saw these ships going from A to B, from A to B, and that is all there is to it. We have witnessed an enormous growth in the physical infrastructure necessary to trade LNG, so that's regasification and liquefaction terminals. We have seen the number of exporters and importers of LNG triple over the last 20 years. And on the right-hand side, you see a general integration measure. This shows you the average number of suppliers any LNG importer has, 20 years ago and today, compared with the average number of customers for any exporter.

 The numbers are still small, but the average number of suppliers per importer has gone up from two to six and the average number of customers per export has gone up from two to eight. Sizable increase, and this is a general sort of increase in the network, the nodes for which we see in this rising number of terminals. It also means that the pressure on long-term contracts and so will be maintained, because in order to switch your supplier and your customers you need price signals, and that you get from [spud] markets. It is, I should say, a market still far from being globally integrated as all markets, and it will not be a globally integrated market by 2030, but that's the direction in which the trend is going, and it's hard to get a genie like this back in the bottle, once people have recognized the advantages of trade.

 Summing that up, very quickly, just three observations. When we look at demand and supply composition, the first observation is the large part the non-OECD countries play in increasing gas supply. This is where of course the demand coming from, so it becomes nicely matched in a way. The second observation is the extent to which shale gas production will still be concentrated in the OECD countries. In this case, it's just a translation of most of it being in North America. Still, in the final observation perhaps is that everybody talks about shale gas as the big, big story. But the really big story here is the sizable increase in conventional gas production in the developing world, which is still much, much bigger than what we see in shale gas over the next few years.

 Let's have a word on coal, quick one. Coal consumption has given rise to a lot of concerns, not only environmental concerns, but also in part of those who will, we say, run out of energy. When you look at the consumption profile by coal, one thing I want to point out is this big hump there. It is actually only the last 10 years that we have seen this massive increase in the demand for coal which has dominated the headlines so much. It comes, of course, with industrialization in the developing world, in particular driven by China, but it is not that old, and we do expect that coal demand and coal consumption will decelerate.

 So, we had less than 1% growth in the period 1990 to 2000, and we think by the period 2020 to 2030, we are back at that level of 1%. Why? Not because we think that China or other developing countries are suddenly collapsing and have no more economic growth, but this is under the assumption that they manage their economic growth to remain high, that would require that countries like China go less into industrial sectors, have less of massive infrastructure build and produce more for domestic consumption, more services-oriented economies. By all comparisons and all standards, the share of the industrial sector which is powered by coal is extremely high historically as well as compared with other countries in China. And if China continues to grow, it will be growth more directed toward light manufacturing, less driven by heavy infrastructure projects and therefore, with less demand for power and less demand for coal. And that's what we also see here when we look at the coal use by sector. A significant deceleration in the demand for coal, driven by continued structural change in the very non-OECD economies which caused the big increase in the first place.

 And then the final primary fuel -- group of primary fuels, we should have a quick look at, sorry, are the non-fossil fuels, on a very high level. Starting with -- we have nuclear, we have hydro electricity and we have renewables. On a very high level it, seems fair to say that nuclear growth, to the extent that it exists, may be driven by the non-OECD, whereas growth in renewables will be concentrated in the OECD.

 For -- starting with nuclear, it's pretty much flat. We do not expect that by 20 -- taking into account what happens in Germany and Japan, we do not expect that nuclear will come back to pre-Fukushima levels before 2030. Very different pictures in the developing world where this growth in nuclear is driven in the main by three countries, which are very ambitious nuclear programs, which is China, Russia and India. Hydro electricity is sort of maxed out, given the available resources, and more or less flat, some growth in China and in Brazil. And renewables will, I've told you before, be the fastest growing fuel, almost 8% per annum, but that will only get us to a share of 6% by 2030. Why? Because currently, the share of renewables for power generation plus biofuels in the global energy mix is only 2% globally. We see this growth continue to be concentrated in the OECD economies, because the base there is larger, even though the growth rate is a bit higher in the non-OECD.

 And it is worth to have a quick look at the prospectus for renewals. In particular, one question which bugs a lot of people. We know that most renewables are still dependent on subsidies, so they are not exposed exactly to the same kind of inno -- competition which gave us all this innovation in fossil fuels. And moreover, if you have a subsidized fuel, as the share increases to the extent that efficiency improvements don't keep pace with the increasing share of this fuel, you need to increase your subsidies. And so the big question is, is there a limit until these subsidies are becoming unaffordable? And we have seen the beginning of this discussion in those countries where renewables are the largest in the European union over the last two years. Where subsidies have been cut, including in this country simply, again, because of too much success. Renewables were growing much faster than their efficiency improved, therefore the need for subsidization grew with it; and at some point, there is a limit.

 We have actually an example of some similar mechanism in nuclear power. Nuclear power also grew very rapidly and in fact, when you look at our outlook, the growth rate of nuclear power in the '70s and '80s looks almost one to one the same as what we project for renewable growth now to 2030. Then nuclear power run into a ceiling for many reasons. Political reasons, security reasons, but also because the costs did not come down to the extent promised and expected. And of course, if you look at the potential cost for an accident from economic viewpoint, nuclear is just as highly subsidized as our renewables.

 So, the big question is, will renewables hit the same kind of ceiling in its growth? We think the prospects for renewables to break that ceiling and continue growing are better than they have been for nuclear for two reasons. The learning curve seems to be steep. Wherever we have data, we see costs for renewables coming down quite decently despite the fact there is little competition in the sector, so I imagine it would be competitive, might be even faster.

 And the second reason, these are simple and sturdy technologies and they are much more widespread than nuclear ever was. Nuclear, when the share of nuclear energy in the global energy mix reach 2%, nuclear energy was present in 14 countries. When the share of wind power in power generation reached 2%, wind power was present in 92 countries. So, the spread is much, much wider. The technology is more sturdy. The barriers to trade are much lower, all indications that it may face a different data. Interestingly enough, it was to the year, 40 years after nuclear hit 2%, that renewables from wind hit 2% in power generation as well.

 Nevertheless, the world we are in right now is a world where renewables will grow slower in those countries where the share is highest, that's especially Europe, and will grow faster and easier in those countries where its shares are still relatively low, that's the non- [obsidian].

 To wrap this up, it is important, I think, to come back to the overarching importance of power generation in that system. Power demand growth in all sectors, and I told you why, it's inexorably linked to the process of economic development and industrialization which we're seeing. But power, I said it before, it's also that fuel where we can best observe competition and fuel substitution because you can generate it with actually any fuel, and the right-hand side provides an illustration of this.

 The share of oil in the global economy starts to come down in 1973, largely because it was crowded out from uses other than transport, and you see how it has been crowded out from power generation. Part of that was taken up by a larger road for nuclear, but for reasons we just discussed, nuclear also couldn't keep up its growth path. Part of that was probably thought to be replaced by hydro, but hydro is pretty much maxed out, couldn't do the job properly. And then international -- natural gas in the '90s and 2000s was a combined gas turbine technology becoming an increasingly larger share in power generation, and coal increased its share in particular in the developing world. What we are seeing now is that gas, until 2030, will slightly increase its share. Coal will likely decrease, and we see the entrance of a new player, which is renewable and power generation growing from a very low base, steadily, if this growth can be maintained out to 2030, but still small in the big scheme of things.

 With this, let me come back to the area which we focused on, the growth of tight oil and shale gas, and what some of the implications might be. Now, this is an example for what an outlook can do and cannot do. I'm not going to give you two digits behind the comma percentage numbers, what will happen, but we can point the finger on some of the impacts without knowing how they play out.

 The first point to make is to come back to the initial statement of the importance of above-ground factors. What you have here in the background is a map of the world. The belt, the blue belt which runs through it, these are energy exporting regions. The green shades, these are energy importing regions. Then the two bars, the dark bar, these are now actually proved reserves. These are not shale resource, anything like that. These are proved reserves, the most narrow measure we have. These are reserves which can be brought to the market given today's technology and economic economy, so at today's prices, taken from last year's stats review. And the light brown bar is likely production of oil and gas by 2030.

 The first observation is very straightforward, what I said earlier. Indeed, proved reserves would be a very, very poor predictor of production growth. And the second observation follows on its heels. There is a systematic bias in the sense that importing energy -- importing countries are much more efficient in dealing with oil and gas reserves than exporting countries. 16% of today's reserves are located in importing countries, but in our projection and similar in other people's projections, they will account for almost 40% of production by 2030. Just reinforces the importance of factors other than just the distribution of reserves or resources.

 The second point I want to make is to point out honestly how huge the range of uncertainty still is. This slide puts into context our estimate of tight oil and of shale gas production growth compared with various estimates of various other forecasts. You see, the range is amazingly, although shale gas is a bit older than tight oil, even bigger for gas than it is for oil, and you also see that with respect to tight oil, remember this production profile which I sketched to you, where we said rapid acceleration for 10 years and then decelerating growth, we are on the very conservative end of the range. That's important if one wants to discuss some of the implications. I'm coming back to the likely reaction of OPEC.

 To the extent that we are wrong, which would imply faster growth in North America, or later on, faster changes in other countries so that they can produce that, the pressure on OPEC, the call on OPEC supplies would be reduced, the pressure on spare capacity would be increased. And this is one of the areas where we have to say we did our best guess, but this is a fault line in the system where other things are possible. Vice versa, of course, if all these forecasts are too optimistic, then we are back into more of a world similar to the one we came out the last 10 years.

 With respect to gas, let me see the production profile again, just as a reminder in the middle here. Let me just point out that also here are implications of a different nature. When we think, for example, about carbon emission. If the world would be faster in producing some of these gas reserves and the optimists in this range would be right, then more coal could be replaced in more countries outside the US and carbon emissions would improve so much faster.

 So, the big point here is that whatever consequence you can dream up of, and now there is a lot of exuberance, of course. Two years ago, everybody was crying, we are running out of oil, we're running out of gas. Now we are in a completely different world. One has to be cautious, I think, which is why I'm quite confident of being at the lower range. But to the extent there is this kind of general uncertainty, the consequences of it, be it in oil markets or gas markets, will be amplified.

 The third point I want to make in terms of implications is something which we pointed out before. I do think that we were the first ones a year ago who said that a likely consequence of these developments is that North America becomes energy self-sufficient. A lot of people have picked up on this. That statement still stands. And with our latest reassessment I would go a step further and say that even the US by 2030 will produce 99% of its energy requirements domestically. That is because of coal exports and natural gas exports. It still means there is a need for oil imports, but much, much lower, 70% lower than it is today. So, we have these energy imbalances developing, which you see on the left-hand side.

 The US becoming almost self-sufficient, but import needs growing greatly, both for China and for the European union. China by 2030 will have to import about 76% of its oil, the European union will have to import about 81% of its gas and more than 90% of its oil. This has huge implications potentially of a geopolitical nature, the politics of energy. I'm not going to speculate about them, but everybody can make up his own guesses here. We know the sources of supply are concentrated in the Middle East, to some extent in Africa. If one player disappears because it doesn't need them anymore and other players are coming with force because they need them so much more, that will shift the ground of the kind of geopolitics of energy we have been used to over the last 20, 30 years and may create all sorts of unpredictable things.

 There is not only an impact on politics involved here. There is also an impact on economics. And to illustrate that, we have combined these energy deficits and surpluses with the expected growth of the respective economies. If you do that, the first conclusion is an obvious one. If the US doesn't need to import anything anymore, then the share of an energy deficit measured by its GDP goes to zero. That's certainly good news for the US, needs to spend less on imports, creates a lot of domestic demand for jobs and potentially cheap energy at home. But as it turns out, it's also good news potentially for the rest of the world.

 Let's have a quick look first at what happens in Europe and China. We see despite their energy needs, their energy import needs being roughly similar by 2030, there is a very different impact when you take into account the size of their GDP. That is simply because China is a fast-growing economy. So, this need for additional energy impacts will have less -- imports will have less impact on its GDP than in Europe, which is growing very slowly. But overall, again, it is good news not only for the US, because of the huge part energy imports and exports play in global trade balances.

 If you think back to all these economic and newspaper discussions before the crisis, what was the single biggest item everyone was afraid of for the global economy? It was this huge economic trade imbalances. Huge deficit in the US, large surplus in China, to some extent in the Middle East and Europe and the question that this is unsustainable and where should it all end? What these developments point to tentatively is that they will correct these imbalances in the right direction. Today still, 60% of the deficit of goods and services in the US trade balance is by energy, and that will disappear to the extent imports disappear. Why some of the large surplus countries like China will see their energy bill relative to GDP increase, and that is an economic impact, which is beneficial for all and goes way beyond just the immediate benefit for the US.

 We have done quickly the same exercise for the exporting regions and countries. We see exports, especially in oil from Saudi Arabia increase, or the surplus of oil in Saudi Arabia increase, although as a share, it is not that strong an effect. We see Africa becoming a much more important player internationally if we take the whole group together. And then in particular, there is an improved role also for Russia. Russia is the biggest producer of oil and gas combined, but it is also the biggest exporter of energy and will remain so through the forecasting period.

 Again, the economic implications of that are quite different wherever you look. In Saudi Arabia, we have to take into account the time profile, which I will outline first. One sees the export surplus compared to GDP declining and then stabilizing as exports pick up again in this period 2020, 2030, this huge range of uncertainty. For Russia and Africa, the impact is not that large of these increased exports, simply because, again, these are economies where GDP also grows very rapidly.

 When you compare energy export growth and GDP growth and they both go up fast, the impact is marginal. Now, one could say they have little benefits compared to the GDP, but that would be the wrong conclusion. The right conclusion for these economies is that they will actually not become more energy dependent. These are countries which have sizable sectors of industrial and other production, and they will have more breathing space, so to speak. And in particular in the case of Russia, that is a very important fact because you cannot feed a country of 140 million people just by energy exports.

 And finally, the last of the general impacts concerns carbon emissions. I think we were also the first -- when the very first public outlook went out and said unfortunately it looks like as if the world will not be able to reach this target recommended to us by scientists of limiting carbon accumulation in the atmosphere to what they call 450 parts per million, which they said were important to keep climate change at controllable levels. That has become, unfortunately again, common wisdom. Everybody now agrees that we will miss that target, but there is a silver lining in the horizon here.

 We have already -- Bob has pointed out, we live already in a world where carbon emissions are in decline in Europe and also now in the US. We see that continuing accelerating over the forecasting period. They will continue to grow in China, but then growth will decelerate. Why is all this? In Europe it is driven by a decline in energy demand generally plus all these efforts towards renewables. In the US, it is driven by a decline in oil demand and plus renewables and power generation, plus the big substitution of power by natural gas. In China, that deceleration in growth is the result of a smaller growth for coal in the economy.

 This translates into some progress. Remember the first graph had you with GDP growth and energy consumption growth, how it opened very nicely, showing more and more efficiency improvements? What we have here is now energy demand growth and then carbon emissions only from the use of energy, very, very little progress over the long-term and now a [scissor] which opens, but very tentatively.

 There is also an obvious conclusion from an economist's point of view. Where do all the efficiency improvements come from in the relationship of GDP and energy consumption? From competition, from innovation triggered by competition ultimately from markets. Why is there very little progress here? Because there is no market mechanism, no price of carbon, nothing of that sort.

 Let me then -- I'll be surprised if the last slide would be on time. Let me then try to sum this up, and let me go back to the very beginning to try to make sense out of it. We are continuing to live in a world where we have both population growth and hopefully, per capita income growth, where people get more wealthy and richer. Inevitably, that would drive an increase in energy demand; but as we have said, that increase in energy demand will not map economic growth and population growth one to one. It will be lower because of these efficiency improvements which we have partially for structure reasons but then greatly accelerated by the role of prices and by the expenses which we had for energy consumption globally over the last 10 years.

 And the second effect which we see is that there will be continued supply growth in two ways. More of the same and more innovation, and the more pressure prices exert and the more competition is allowed to, the more obvious role will be allocated to technological change. These are not pearls of wisdom. This is how any market in the world works from sport shoes, for suit jackets; the only difference in energy is, A, it takes time. It's a very slow-moving beast, that sector. And B, sometimes this wisdom hasn't filtered through because we have large areas in that system where markets and competitions are not allowed to play their role.

 So, I said it's a sector which is moving slowly. I hope we can see when we take a longer term perspective, that it is moving indeed. And just as that sector changes only slowly, I think since the first outlook, our message is also very slow in changing, and it looks like that stays that way for a while. And so it is really what I would like to emphasize, the role of markets, which are guaranteeing the kind of energy security which is really meant when it comes to will we have available and affordable energy to sustain economic growth. And in my personal view, it is the lack of such markets and market mechanisms which makes the corollary to energy security, which is carbon emissions and climate change much less of a success story. Thank you very much.



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Questions and Answers
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 Dev Sanyal,  BP plc - EVP, Group Chief of Staff   [1]
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 Good afternoon to everybody here, and good morning to colleagues in the US who have joined us on the webcast and a whole bunch of questions actually flashing before us on the screen. I am Dev Sanyal, I'm an Executive Vice President of BP and the Group Chief of Staff. Christophe, thank you for your presentation on both the below the ground data as well as above the ground perspectives. As Bob said up front, what we will not talk about today, Algeria and the security situation there. Should there be any questions, I'll direct to you our press office. Without further ado, I would like to hand it over to you to ask questions of Christophe and myself. And the first person there, sir, in the gray suit.

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 Daniel Sullivan,  Energy Intelligence - Analyst   [2]
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 Thanks, I'm Daniel Sullivan from Energy Intelligence. Two quick questions, if I may. Firstly, your projection for Russian tight oil supplies, is that all from shale formations like the Bazhenov, or does it include some kind of unconventional fracking-type operations in existing Siberian brown fields and stuff? If it doesn't include that, is that a wild card on top of your projections, or is it already parked elsewhere in your conventional projections as an enhanced oil recovery kick or something? And beyond that, second point, if I may, your US LNG figures for 2030, are they capped by government dictat by permitting, or are they capped by the kind of price evolution getting to a point where you're exporting so much, okay, it doesn't make sense anymore because domestic prices are going up? Thanks.

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 Christophe Ruhl,  BP plc - Chief Economist   [3]
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 First question, we haven't factored in a large role for you on Russia, but it will play a role. This is -- to take that into a more general context, it is of course one of the great prospects of that technology that it could enhance recovery from existing fields, by simply going deeper and then exiting layers which are not -- entering layers which were not available -- accessible before. On the case of LNG, it is not capped by any kind of government intervention. It is just what the production profile suggests. Together with this huge record price differential between oil and gas which drove that development, which will normalize to some degree, in particular when LNG becomes an export commodity in the US. There is, however, the assumption in the background that the US will not cut itself out so that in gas markets, just as in today's oil markets, the domestic price in the US is tied to the international price, and it's not an island.

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 Dev Sanyal,  BP plc - EVP, Group Chief of Staff   [4]
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 Thank you. Sir?

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 Morton Frisch,  - Analyst   [5]
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 Good afternoon. It's [Morton Frisch]. One quick question and a comment. The question, most of the shale gas producers in North America are today losing money, Christophe. Have you made any calculations, any assumptions in your projections, at what price level these people will balance their books? A number of these companies are currently going to [the wall], that was the first question.

 The second one, you may remember two years ago when you had this presentation, I made questions about the reliance on the Middle East. We are now seeing tremendous upheavals in the region. Unfortunately, I think more could be coming. On top of that, there is a population explosion and rapidly growing energy demand, which is highly subsidized. But you are saying that OPEC can balance the books, Saudi Arabia, Kuwait, UAE. The possibility exists that there will be no need to balance the books because they might actually be consuming all those hydrocarbons themselves, if they produce at those levels in the future at all.

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 Christophe Ruhl,  BP plc - Chief Economist   [6]
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 Both good questions. The first one goes to illustrate why I don't think we need government caps for LNG in the US to decelerate. It is correct that a large extent of currently produced shale gas -- sorry, shale gas from the US that currently produced shale gas is in place because of license requirements and in particular, as associated gas as people chase liquids as a result of this large split between oil and gas prices. These are developments which will sort of disappear over time as competitive forces work their way through that system. But they are a part of the reason why we see decelerating growth. What the cutoff point will be in terms of prices for shale gas from the US, I don't know, and the reason is very simple, it is a moving target. And you can see probably a harbinger of things to come when ask you that same question generally for markets where it is never the case that prices determines the cost, it's always the case that costs follow prices over the long-term. We have many projects sanctioned at an oil price of 20, which economically then and now, which are non-economically then and now.

 And the second question on the Middle East, I think is an even more interesting one. We have actually spent a large section of last year's outlook investigating precisely that. The issue here is the increase in population living standards and power requirements in the Middle East are increasingly satisfied by burning crude oil. On a good, hot summer day, you see oil consumption in Saudi Arabia going up by 1 million barrels per day, just to generate the power necessary for cooling. And if that continues at current speed, then sooner or later, it would of course eat into the export capacity of these countries. It is something which the region becomes gradually aware of, but something also which is hard to fix. Because as you said, the prime reason for it is an incredible degree of subsidization of energy consumption in these countries; not only people driving around in big cars with cheap gasoline, but mostly prices for things like power generation.

 In fact, the Middle East is the only region of the world which so far has bucked this trend of improving energy intensity. It has become more and more energy intensive or less and less energy efficient all the time. Where we came out in this investigation last year was to say that there is a big role for natural gas here and that it is possible to find enough, produce enough gas over the forecasting period to reduce the demand for oil, in particular for power generation accordingly so that there will be no other fault line emerging here. But it would require, of course, huge steps, one of which, the most crucial one would be the elimination of a large part of that subsidies. And in that sense, I have to agree with you. This is a big uncertainty. May not happen. But note, human nature has a way to cope with it, if not more becomes available elsewhere, the consequences become less pressing for the rest of the world.

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 David Howell,  House of Lords - Analyst   [7]
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 David Howell, House of Lords. Presumably with your projections for a big decline in American oil imports, the bulk of Middle Eastern oil exports are going to go eastwards. In fact, they are doing so already. I think it's about 78% already go eastwards. Well, geopolitical consequences and other consequences do draw from that. And second question, on the nuclear side, what credence do you give to the talk around the industry that huge reductions in costs and technological advance are just on the way, either with Hitachi's ideas of boiling water reactors or all the talk of rarely breaking through on the thorium side and faster reducing the waste dangers and therefore the political problems, and therefore the costs of the whole scene. Might that not slightly change your nuclear projections in a more positive direction?

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 Christophe Ruhl,  BP plc - Chief Economist   [8]
------------------------------
 On the first question, I have to retreat into the position of saying I'm just an economist, not because I don't want to answer it, but because it is really too early to speculate about the potential geopolitical consequences of this development. What we know is that the import requirements for Middle Eastern oil, as you said, in the US are already changing and are likely to change further into a direction where less of it would be required. What we also know is that the import requirements in particular of China, India to some extent, and Europe for Middle Eastern oil are already increasing and will increasingly become bigger and bigger over time.

 What should I say? When you now think about these discussions which we had the last year or so about what may or may not happen in Iran and what may or may not happen in the Strait of Hormuz is being close, they always end with the same party line. They also end that at the end of the day, the 6th Fleet will, one way or another, take care of possible disruptions of the system in that way.

 I don't want to speculate of how that will change, but I know that nature doesn't really like a vacuum. And I have no problems imagining a Mr. or Mr. US president by the year 2030 looking at some big flare-up of problem in this very important Middle Eastern region, or for that matter in Africa and saying well, no skin off my nose. I only need very little oil and the little I need, I can get from Mexico and from Canada. All I can say genuinely is that it will change the terms of the debate. But I think no one would be in a position to really make a profound statement of what will happen next.

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 Dev Sanyal,  BP plc - EVP, Group Chief of Staff   [9]
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 If I could add one comment to that, if I may, David, to your question. From our vantage point, I think the above-ground factors that Christophe referred to is very important. And so when you look at the sort of world, yes, American energy security will have profound implications, presumably for American business, for manufacturing, et cetera. But I think there's so many other factors out there that have to be considered. Don't forget that India, which is a very large importer, does have a price regime that does not encourage currently new investment at the scale that we believe that the resource base should. So, I think there are other factors that have to be considered and be deductive -- avoid being deterministic in this respect.

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 Christophe Ruhl,  BP plc - Chief Economist   [10]
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 I think this is genuinely, honestly all we can say. It's likely to change the terms of the debate. It's up to politicians what they make out of it.

 The second question, nuclear, I think there's promise that costs will come down has been made for a long time. I don't think it has materialized. And what is important from an economic perspective is to clearly state that in fact, nuclear always has been more expensive than it has been sold for, and the reason for that is very simple. You will not be able to find private insurance against the potential consequences of an accident. And that means that these costs are being socialized, not only for security, but also in case something happens.

 So, the true cost from an economic sense of nuclear was always high and therefore, was always subsidized. In addition to this, the technical advances for a variety of reasons haven't materialized to bring the immediate visible costs down sufficiently, and that explains to some extent why nuclear growth is now taking place mostly in those countries. We genuinely need either diversification away from fossil fuels or where economic growth generates so much energy demand that you need everything to cover it.

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 Dev Sanyal,  BP plc - EVP, Group Chief of Staff   [11]
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 Sir, back there.

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 Stephen Tindale,  The Centre for European Reform - Analyst   [12]
------------------------------
 Thank you. I'm Stephen Tindale from The Centre for European Reform. I also have two quick questions. Firstly, on shale gas, your forecast is that there won't be much in Europe or Eurasia. Could you say about which countries, what there is will be in? And secondly, on electric vehicles, rather low forecast for the percentage of vehicles that will be electric. China is putting massive effort into electric vehicles because they don't have much access to oil and they have got a lot coal. Do you think there might be a possibility that electric vehicles will be a greater proportion?

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 Christophe Ruhl,  BP plc - Chief Economist   [13]
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 On the first question, keep in mind that the increase in shale gas production in Europe, we project is really, really very marginal. I think it's about 2.5 billion cubic feet per day. You can think about yourself, there is exploration efforts with probably some prospects of success going on, especially at the eastern side of the European union, in particular we mentioned Poland. If you think further, probably also the Ukraine. And there is an attempt in this country to unlock some of these resources. This, however, contrasts with an outright ban on fracking in countries such as France and Bulgaria at the moment, and with a great deal of reluctance to engage in this enterprise in other large countries, potential resources such as Germany.

 On the second question, that is true, indeed, that we don't see much of an impact on electricity on the car fleet. But this doesn't mean that electric use in transportation is unimportant. And this sounds convoluted, and I had to learn it myself, we see basically what we and a large part of the current industry would agree with that project is that the internal combustion engine has huge potential for efficiency growth, in particular if over time hybridization of the car fleet increases. So, there is, if you want an indirect role for electricity, but this is electricity generated by the vehicles themselves and then expended in driving. The primary input into that is petroleum and that we measure here the primary input.

 So, to a large extent, both the efficiency improvements and the relatively low share of electricity are based on the idea that it is not only conventional more efficient cars, but also hybridization of the car fleet, which gradually takes hold and which therefore drives efficiency and makes it unnecessary to use electricity as a primary input. The basis for that projection is, again, something we investigated at length last year, is when you look around carefully, also talk to people from the car industry, it seems the common opinion that pending some unforeseen technological breakthrough, reliance on batteries will still be far inferior in terms of reach and speeds and all the other amenities of car driving so that prospects are more for hybridization, rather than for electricity as a primary fuel.

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 Dev Sanyal,  BP plc - EVP, Group Chief of Staff   [14]
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 We'll take a question now from the web, and the question is from [Vladislav Miljarski], I hope I've got the pronunciation right, from the Technical University of Lotz in Poland. And the question is, what will be the long-term impact of low gas prices in the US on the European and in particular, German economy, and will it lock up long-term gas contracts with Russia?

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 Christophe Ruhl,  BP plc - Chief Economist   [15]
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 Well, I don't want to speculate about future gas prices, but we have seen an example of the potential impact of the increased gas supplies in Europe over the last few years. When we had an increasing erosion of long-term contracts and the are quite massive increase in the share of spot price gas, due to two factors. One is -- it was a coincidence of these two factors. Many -- often, many people ask, why is it that we have seen this erosion of long-term contracts in Europe, but not in Asia? The first reason is from outside the gas markets. It coincided with liberalization of the European power sector, which meant that all of a sudden utilities were free to source their [feedstock] wherever they wanted and to pass on the price advantage.

 And it was actually those utilities who bought into available relatively cheap LNG and then took away market share from the established players, the Exxons, E.ONs, the Gazproms of this world, who are locked in with these long-term delivery contracts with Russia. And that caused the established players to go to Russia, throw up their arms and say we can't even take many more contract values anymore because we are losing market share compared with these cheaper utilities. And that in turn caused Gazprom to make this very famous public announcement in early 2010 where they said, okay, we give you spot price gas for the next three years at least. This coexist liberalization of the electricity sector coincided with one of these phases where LNG was available, plentiful and relative -- spot price LNG relatively cheap because we had a wave of supplies coming on from the Middle East, in particular Qatar, and we had an economic crisis limiting the supply.

 Going forward, when you want to know whether these developments are continue, it's not that easy because what we have is relatively steady demand growth for gas and for LNG, but very lumpy supply growth. So, we saw this first wave of projects coming on from the Middle East, we're likely to see another wave coming on from Australia starting around 2015 and into 2020, a third wave coming on from Africa. In between, there will be periods like the current year where there's almost no new project coming on. So, you are likely to see not continuous development towards more spot pricing in Europe, but periods in which, depending on what happens to the oil price, spot prices may even occasionally become, again, more expensive than oil prices.

 It's a long-term development and as I said earlier, just as with the general integration of markets, if you have this genie out of the bottle of producers and consumers at different points in time discovering that they are better off with flexibility as spot price trading, then it will not disappear again. But this doesn't mean that the world is changing very rapidly now over the next few years. It's still a very normal slot until we have more integrated market, which would be the corollary to saying a higher share of spot price LNG.

------------------------------
 Dev Sanyal,  BP plc - EVP, Group Chief of Staff   [16]
------------------------------
 Sir?

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 Nick Coleman,  Argus Media - Media   [17]
------------------------------
 Thank you, Nick Coleman from Argus. You talked about US self sufficiency having a competitive impact on oil markets. Do you factor into your predictions US exports? Talking of crude, or will the exports be in the form of products or will at some point the US be exporting crude? And just another question, if I may, on LNG in Europe, I've heard some people in the industry saying that Europe may struggle to obtain LNG supplies at a reasonable price as Asian demand will just tie up all of the new supply from places like Australia, or basically the demand will be so concentrated that there will be insufficient supply for Europe at reasonable prices. What do you think about that?

------------------------------
 Christophe Ruhl,  BP plc - Chief Economist   [18]
------------------------------
 I'll try to be short. On the first question, we do not assume that the US becomes a net importer -- sorry, a net exporter of oil before 2030. In fact, we assume that US will still have to import about 20% of its oil requirements by 2030. Now, we haven't talked about the refining system, but it is correct that the US has become a product exporter, but this is for reasons which have to do with the configuration of global refining and with seasonal demand and supply patterns. This is not because the US all of a sudden produces more liquids than it actually consumes. So, in that sense, the US will remain integrated into the global system. And this, I think, is actually much more important than the question whether it will import X percent or maybe export Y percent.

 What is crucial for this kind of forecast and for the impact this forecast has on the rest of the world is that the US remains integrated into the global system even if, as in the case of gas, it becomes an exporter. And I do -- there is this discussion that lobby groups will say the US shouldn't export its gas. I'll take a gas example because oil will not be an export commodity. I do think that the public discussion and politics in the US are at a level where people would realize that if you would close the borders and you would say, yes, we use our own resources and price them much cheaper, that in fact what you would be doing is subsidizing an economy which would become unduly energy inefficient and would concentrate into a heavy energy using industrial developments and so on, that would be detrimental to the long-term interests, economic interests of the US. And so the forecast is predicated in the US remaining a part of the global system, just as now they are price takers in the international markets, that that will be true also for gas markets.

 Now, in LNG in Europe, part of the answer is what I said earlier, it's lumpy supplies coming on and meeting steady demand growth. And it is true that you always have to expect the unexpected such as Fukushima and the consequence is much higher LNG requirements in Japan. And so there will be periods where there is excess supply of LNG. As we head into the last few years, there will be periods where there is competition and excess demand for LNG as is currently probably the case.

 Let me use the occasion to point out another consequence. We know that the consequences of Fukushima were largely covered with LNG, and this is an implication here for energy security. Imagine Japan would have been completely self-sufficient with either nuclear or anything else and would have been hit by a disaster like that. It could not have coped that easily. So, the point I'm trying to make is coming from your question to something else or just to say is maintaining integrated and global markets is not only long-term beneficial for everyone and for economic progress, it's also essential for energy security. Countries which dream -- which equate, or politicians for that matter, which equates self sufficiency with energy security, that's short-sighted. And we just had one of these examples, which was the disaster which hit Japan, which could not have been dealt with so well if Japan wouldn't have been integrated in a global world and could switch its supplies from different fuels.

------------------------------
 Dev Sanyal,  BP plc - EVP, Group Chief of Staff   [19]
------------------------------
 So, the point of energy interdependence is as important as energy independence. The next question is actually from the web from the US, and it's from [Kelly Pearl] from the US Energy Information Administration. And the question is, on the energy and balance slide, it looks as if China will be importing most or all of its coal. Is this a result of its domestic resources being depleted or expected environmental regulations?

------------------------------
 Christophe Ruhl,  BP plc - Chief Economist   [20]
------------------------------
 China accounts for way more than half of the world's coal consumption, and it would be impossible for it to import most of its coal. But it is true that there are some coal imports. This is not because China is running out of coal. It is simply the result of yet another wave of liberalization, this time in the Chinese coal sector, which allowed utilities and industrial enterprises to source their coal not only from within China, but from outside China. And they quickly discovered that certain high grade coals were actually cheaper in Australia or Indonesia than they were in China, and that's why they started import part of that coal.

 It's probably a development which will continue in the spirit of increasing energy independence. It's a good development, give some countries something to sell and makes the imports for China cheaper than if they would produce it themselves. But again, China's core resources would be large enough to be self-sufficient, but it would be uneconomic, and the Chinese have recognized that, and what we are seeing is high grade coal coming from elsewhere, where it's cheaper.

------------------------------
 Dev Sanyal,  BP plc - EVP, Group Chief of Staff   [21]
------------------------------
 I'm conscious we're in overtime, so we'll take two more questions and then Christophe and the team will be available for questions outside after this. So, sir? I was going to say the blue shirt and glasses, but there are lots of people with blue shirts and glasses. You know who you are.

------------------------------
 Martijn Rats,  Morgan Stanley - Analyst   [22]
------------------------------
 Hello. My name is Martijn Rats, I'm with Morgan Stanley. Over the last 10 years, the level of capital expenditure in the oil industry has roughly gone up fourfold. I guess this is also part of the reason why we're now -- it is a much more comfortable supply situation. There is an element whereby forecasts like this also influence future behaviors. And how do you -- part of the reason why we are in such a comfortable position was we have been so nervous about it over the last 10 years and now we are all so very comfortable. How do you rate the probability that the forecast itself changes the outlook? Because frankly, looking at 6 million barrels of spare capacity, OPEC saying we have 116 projects for $270 billion of CapEx over the next five years, maybe one of the ways to manage the supply side is to slow down investment, which feels like that can't be the end solution.

------------------------------
 Christophe Ruhl,  BP plc - Chief Economist   [23]
------------------------------
 Well, it's true that in energy, probably more than other sectors, you have the cyclicality because of the herd behavior that has to do with this very long response times. As I said, energy markets are like any other markets, except it takes so much longer for a variety of reasons. And so what you see is two years ago, everybody predicting $200 oil, running out of oil, peak oil being all the rage, and now you are moving into the other direction. This kind of herd behavior in public reflects, to some extent, or is reflected to some extent also in the investment behavior of the industry. Then again, if you are in the industry very often, there is very little choice. There's the money, there's the demand, so you try to be the first. Everybody does it and it creates individually rational behavior, it creates the sometimes socially not rational outcomes.

 Now, I don't have an low opinion of our work, but I wouldn't overestimate it. I don't think that the publication of this outlook is going to change the course of events. Then again, you should never underestimate the power of ideas. The very reason we are doing this outlook is to help create and inform debate about energy. Because one thing in my mind is for sure. I don't know any other field where the importance is so large as global energy and where the level of discussion very often is so low. It's amazing, and you go through the academic world, through the world of institutes, and you have a lot more academics, economists, for example, doing research on the reasons of happiness or on pension systems or in all sorts of small and esoteric fields than you have energy economists. And when you go in the newspaper, then you see that reflected.

 The level of the debate, the degree of information of the debate, for many reasons, because of political -- there's so much at stake here, is not really up to the importance of the subject, and that is what we and others are trying sort of to address. That will not change the world tomorrow, but you never know where pearls of wisdom grow and create victories.

------------------------------
 Dev Sanyal,  BP plc - EVP, Group Chief of Staff   [24]
------------------------------
 And the last question is from the lady there.

------------------------------
 Fiona Harvey,  The Guardian - Media   [25]
------------------------------
 Thank you. Fiona Harvey from the Guardian, where I hope that we do give the subject a decent level of debate. Just a quick question on carbon, you have predicted that carbon dioxide emissions will rise by more than a quarter by 2030. We've got the IPCC saying that emissions have to peak in the next five years. We've had a new study just a few days ago suggesting that emissions have to peak by 2016 if we're to have any hope of holding to only a 2-degree increase in warming. How does your report reflect on that, then? Are you basically saying that 2 degrees is out the window? And what are the implications of this massive increase in carbon dioxide for climate change? Thanks.

------------------------------
 Christophe Ruhl,  BP plc - Chief Economist   [26]
------------------------------
 Let me say two things which I think are both extremely important if one is concerned about climate change. One is, again, this is a projection. It's not necessarily what we like to see happening. It's to the best of our knowledge. It's not a proposal, it's what we see coming, whether we like it or not. The other is, you are right. Targets will not be reached, and there's a lot of disappointment currently among those worried about climate change, and I would count myself in that camp explicitly. When I was going around doing these kind of presentations until a few years ago, always the first three to five questions were on climate and carbon emissions. Now, hardly anybody asks.

 It is a trend, and I try to address it and bring it up to create some of that discussion. Why do people stop asking these questions? It is not because they are not concerned anymore. It is because they have been disappointed, because they are disillusioned and because there is a degree of cynicism now which has taken hold. Where does that come from? I think it comes from many people in the political spectrum, perhaps even in the energy industry, overpromising on two fronts, saying this is a problem which is easy to solve.

 Remember when people said renewables would solve, that CCS will take care of it, and the second overpromise was that this is a problem which is going to be cheap to be resolved? I remember the Stern Report, 1% of GDP and we could take care of it. Both of these things were not correct. It's not easy to solve. It's a complicated thing and it's not going to be cheap to solve it.

 And when you overpromise to people, then they withdraw. That doesn't mean that the general worry goes away. And it's in that respect that I want you and others to understand the things we are saying. We are trying to point the finger at these developments, good ones and bad ones, and we do it because we are concerned about this. And especially the point which falls out very clearly when you step back a little bit and you see the enormous power of innovation and efficiency improvements in the production of fossil fuel and you compare that with the slightly more hazardous growth of renewables which don't have this competitive pressures. And you compare that with the very, very small progress in which the world is decarbonising, then you know that we probably have the means and incentives which we would need to deploy, but it takes some actual, factual reporting to get there. And by these means, I mean simple things, there's nothing new here. Simple things like carbon prices, which we at BP have supported for quite a while and which we continue to support.

------------------------------
 Dev Sanyal,  BP plc - EVP, Group Chief of Staff   [27]
------------------------------
 I think Christophe, you make a very important point. What we have here is a projection, not a proposition. And the above ground factors that Christophe referred to and Bob referred to are vitally important, because they could change the trajectory. And those, of course, are subject of further debate amongst policy makers, amongst business and amongst government.

 Christophe and the team, thank you very much for another very, very important presentation. I can tell you the executive team of BP uses this as very much the platform as we think about the future, and I know policy makers and others also use this piece of work to think about the potential variables that, of course, all of us have to navigate as we look to the future.

 I would sort of reiterate four key messages. The first is the above ground factors, the importance of markets. That is something that clearly one can't model, but that is very, very important in terms of setting, if you will, the scene. The second is around technology, which has been a true enabler in our industry. The third is actually around not just energy independence, which is a very seductive idea, but also, as Christophe demonstrated in the context of Japan, energy interdependence and the role of created markets.

 And finally, the points in efficiency and common density are well made. As I said, this is a projection. There is a lot of work to be done in generating further and further efficiency. A lot of it will come through innovation technology and the above ground factors. Ladies and gentlemen, thank you very much for your time here and the team will be available for Q&A afterwards as well. And thank you, Christophe.






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