Global Economics

John Browne on the Future of Energy


The former BP chief talks about rising energy prices and other challenges, and recommends a set of principles for the industry in its new era

John Browne, who was chief executive of BP PLC (BP) for 12 years, was the first head of a major oil company to acknowledge that climate change is a serious problem. Browne, who left BP in May, is now European managing partner of Riverstone Holdings, a New York-based private equity firm that focuses on energy. At Riverstone, he will be involved in both alternative and conventional energy investments (BusinessWeek.com, 10/17/07).

Lord Browne's Nov. 21 talk at BusinessWeek's European Leadership Forum in London made very clear that his passion for finding ways to reduce carbon emissions and, indeed, for the whole energy field remains very much alive. He even confessed to reading reports by the International Energy Agency, the consumer countries' watchdog, at night.

Browne said the energy field was entering "probably the most significant moment of change I've seen in my career so far." He talked about sailing into "a maelstrom," but also spoke hopefully about "the sheer number of new actors now appearing on the energy stage." He said fears about short-term supply interruptions and "Peak Oil" are "greatly exaggerated." He was optimistic that it would be possible to persuade people to take the steps necessary to reduce carbon emissions, citing the effectiveness of anti-smoking campaigns in countries such as the U.S. as a possible analogy.

He suggested that despite the uncertainty, business can make progress in the energy arena by following certain principles, or "beacons": flexibility, collaboration, energy efficiency, and what he described as "making carbon mainstream," including "putting in place the kind of aggressive carbon legislation that is needed."

— Stanley Reed

Ladies and gentlemen, good afternoon.

During the 40 years I have spent in the energy business, I have lived through at least three periods of change and uncertainty, when the rules of the game shifted:

First, there was the rise of OPEC in the 1970s, when those of us in the Seven Sisters had no choice but to pack our bags and start exploring back home; then there was the surge of oil from Alaska and the North Sea in the 1980s; and then there is the last few years, when strong demand and lack of investment have contributed to OPEC gaining a more powerful position once more.

And what next?

I believe we are entering another period of energy dislocation today—and it is probably the most significant moment of change I've seen in my career so far.

I am struck by the degree of uncertainty and complexity surrounding us at present. I am also struck by the sheer number of new actors now appearing on the energy stage.

In the business world, energy has become a strategic issue for companies in almost every sector in the past few years. Rising energy prices, changing energy regulations and growing consumer demand for green products and services are matters of concern to us all. It is important to explain what is going on. But I believe we are currently long on analysis and short on recommendations about what business should do in response.

I think a nautical metaphor may be appropriate here. We are sailing into unknown and choppy seas. There is a maelstrom of currents, which of course we must try to understand and anticipate. But we also need beacons—fixed points that help us to navigate.

I believe there are four beacons that business leaders should keep in mind when navigating in today's new energy world.

But first, the currents that are swirling around us.…There are almost as many ways of analysing today's period of energy change as there are analysts. My own preferred approach is to look at four trends that have come together in recent years.

First, there is high fossil fuel prices—caused by the coincidence of strong demand and several factors on the supply side, not least a dramatic increase in oil and gas production costs and disciplined OPEC policymaking. Second, there is growing concern about energy security. Fears about short-term supply disruptions and Peak Oil are greatly exaggerated.

But oil and gas resource concentration is real and is leading to geopolitical friction, as some countries use their energy riches as an instrument of foreign policy.

Tension is being compounded by the rise of petrodollar-based Sovereign Wealth Funds, which are pursuing more proactive investment strategies. Countries in the Persian Gulf alone now control significantly more than $1 trillion. Resource concentration is increasingly leading countries to seek so-called self-sufficiency, or, failing that, to pursue bilateral energy deals.

The third trend is growing social concern about the local and, increasingly, the global environment.

The public response to climate change, described by some commentators as the civil rights movement of today, is motivating governments to act. Policymakers are putting in place targets and—over time—fiscal and regulatory frameworks designed to promote energy efficiency and renewable and alternative energy.

The fourth trend is technology innovation. Because of high prices, energy insecurity and environmental concerns, society is increasingly demanding energy that is sourced and delivered differently. And the brightest and the best—from biology, physics and engineering—are turning their attention to doing just that.

As a result, global investment in renewable and alternative energy now stands at more than $100 billion per year.

Of course, the four factors I have just spoken about are not independent from one another. In fact, they exist in a relationship of complex interdependency. And that means there are tradeoffs.

Take coal, for example, which is economic—and good for energy security in the U.S., China and India—but is also the single biggest source of manmade carbon emissions. Or Britain's "dash for gas," which has helped lower the UK's emissions profile but has also resulted in far greater vulnerability to foreign gas supplies.

Where do the business opportunities lie in a world of energy tradeoffs?

The first thing to say is that I believe all energy sources—high-carbon and low-carbon—will grow, side-by-side, for a long period of time.

That is inevitable given the sheer scale of the increase in future energy demand, fuelled by population growth and improvements in living standards.

However, as always, the smart money will look to those sectors with the greatest rate of growth. And where these opportunities lie will depend on the dynamics of the underlying currents I have spoken about.

The challenge is that how the currents will develop, and how they will combine, remains highly uncertain at present. They will differ between countries and they will differ over time.

For example, climate change is currently a relatively stronger influence in Europe than the United States, where energy security concerns prevail.

That explains why Europe was the first region to adopt a binding carbon policy and why the Bush administration has focused its efforts on promoting biofuels, rather than on power sector initiatives that would offer greater carbon savings.

However, the picture is changing. Climate change appears to be becoming more important in the United States over time, led by growing public concern and NGO activism. And energy security is rising up the political agenda in Europe, as Russia tightens its grip on regional gas supplies.

With so many swirling currents, how should the growing number of business leaders concerned about energy issues plan for the future? At this stage in the development of the energy sector, I believe it is not possible to predict with confidence the specific outcomes that will prevail. And guesswork is never a sound basis for business.

But even if the destination is uncertain, I believe business can make progress by following certain fixed principles—or beacons. The first beacon is flexibility: the ability to adapt and to respond quickly to change.

Flexibility is about maintaining a portfolio of options and knowing which to scale up and which to shut down—and when.

Take the recent history of the telecoms industry, which has gone through its own period of discontinuity and change. The companies that have prospered were not those that bet on one option—3G, fibre-optic infrastructure or dot-coms—but those that have maintained a portfolio of options.

There is an analogy here with the current market for renewable and alternative energy, where a broad suite of options exist.

Today, some of those technologies have a clear advantage. Wind, for example, is competitive in several markets where there is favourable weather, strong demand and good transmission systems.

Solar is currently less advantaged. But that could change quickly if there are technological breakthroughs in cell manufacture or thin-film technology, or if high consumer demand for distributed energy leads to greater economies of scale.

Flexibility in energy, as well as in other industries, means understanding future options and investing judiciously. Methodical and dispassionate analysis is required, avoiding premature conclusions. This is how we start to assemble an accurate vision of the future—rather than one that is based on the past.

The second beacon I want to talk about is the ability to work in collaborative networks. Companies do not exist in a hermetically sealed bubble. Their work is connected in multiple ways to that of other actors including governments, NGOs, consumers and the public.

As businesses become ever larger and more international, they are increasingly coming into contact with some of the world's most challenging issues. Climate change, poverty, human-rights abuses, the depletion of natural resources.

The smart companies have realized two things. First, they cannot ignore such issues. And second, they cannot respond alone. They do not have the expertise, the contacts or the credentials. And so over the last two decades, we have seen a remarkable growth in cooperation between businesses, governments, scientists and NGOs to confront some of these issues. The Equator Principles and the Forestry Stewardship Council are two good examples of such collaboration.

A similar collaborative approach is urgently called for in the energy sector. Collaboration with:

governments—to help design the fiscal and regulatory policies that will drive new energy investments;

with scientists—to research and develop new energy solutions and to better understand the impacts of climate change;

and with NGOs and the public—to educate people about what business is doing differently and to allay concerns about new technologies.

The third beacon I'd like to talk about is energy efficiency. I believe efficiency's starring role in our energy future is the only really certain bet we can make.

It is certain because energy efficiency sits at the intersection of all the currents I've talked about. It reduces costs. It allays insecurity. It addresses climate change. And it flows from technology innovation.

I believe every business needs to put in place an energy efficiency plan covering all its activities: operations, supply chains and workforce behaviours.

Airlines provide a good example of such an approach. The airline industry estimates it has improved its fuel efficiency by 70% over the past 40 years via more direct routings, more efficient taxiing on the ground and less idle time queuing for takeoff slots.

The delivery of electrical power is another business where there can be major benefits from a holistic approach to energy efficiency. Critical components of such an approach include micro-renewables on the supply side; smart metering on the demand side; and smart grids to manage electricity distribution.

The fourth and final beacon I'd like to talk about today is what I call "making carbon mainstream." I believe it is now virtually certain that carbon will become a mainstream economic cost for business in the coming years and, increasingly, a basis on which management performance—across all sectors—will be judged.

In my view, businesses need to start planning for carbon now—just as any sensible business factors assumptions about future exchange rates into their plans.

The reason for my confidence is the global momentum building behind carbon pricing policies. Such policies already exist in Europe and in key U.S. states. And carbon legislation is likely to be enacted soon in Australia, New Zealand and at the federal level in the United States.

There is now the prospect of a global agreement to succeed the Kyoto Treaty, with strengthened carbon measures likely to take centre stage.

Of course, the journey will not be linear. Both the timings and the means by which carbon pricing develops will remain highly uncertain, leading to business risks that must be managed.

The critical path—and the source of greatest uncertainty—will be political. That's because, without compensatory measures, the costs of pricing carbon will hit some groups disproportionately, such as poorer people or energy-intensive sectors of the economy.

While other groups—such as investors in low-carbon technologies—will benefit. This leads to the thorny political-economic question of "Who pays?"

The current energy bill debate in the United States provides a good analogy. A stalemate appears to have set in as various interest groups fight over how the burden of providing a public good—in this case, reducing dependence on fossil fuels—should be shared between them.

Putting in place the kind of aggressive carbon legislation that is needed will require acts of real political leadership: putting society as a whole above sectional politics. Of course, this is especially difficult in strongly representative democracies, where institutions are deliberately designed to create checks and balances. It will be even more difficult in the international arena—where the same political dynamics are likely occur, but between countries—because the international system is even more fragmented and anarchic.

To conclude, we are living through a period of energy dislocation.

The challenge is that there are so many different ways to look at what is happening. And each analytical framework seems to urge a different course of action. I believe the answer is not to fixate on the causes and character of today's energy maelstrom. Nor is it to try to pick winners. I believe the best approach is to look to principles—beacons that will help business to navigate.

I'd like to finish with one of my favourite quotations. Speaking at the end of 1862, Abraham Lincoln said the following: "The dogmas of the quiet past are inadequate to the stormy present. We must think anew and act anew. We must dis-enthral ourselves."

Thank you very much.


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