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APPENDIX 4: Additional Material for the Record

Von Gugelberg Memorial Lecture on the Environment


6TH MARCH, 2001

Ladies and Gentlemen, good afternoon.

It's a pleasure to be back in Stanford and a great honour to be invited to deliver a lecture in this very distinguished series.

The title of this lecture is “A progress report” and I think that is very appropriate.

I think it very important to establish the belief that this is an issue on which progress can be made_because there is some quarters, in some parts of the world a kind of fatalism which says that the environmental challenges we all face are intractable.

That makes people either try to deny that there is a problem. : .or to say that the problem is so great that we have to retreat from the process of economic development and abandon the aspiration of improving living standards. I want to try and show that those two alternatives are both wrong. I want to try and show that progress is possible.

But the title has another implication too—this is a report about work in progress-not about something that is finished and done.

There is much to do, and I want to talk about that as well.

And finally the title implies a factual and businesslike approach - which is in my view just what we need.

The environment is an issue which arouses huge emotion.

That is very understandable. People worry and feel angry. : .but if we're ever going to make progress those concerns have to need to be subjected to a rational analysis.

I think the progress report has to start with reality and with some facts. The first reality is the growth of the world's population. Up by 160 percent in my lifetime from 2.5 bn to 6 bn, and rising now by 90 million a year which means that enough people are born every 48 hours to populate a city the size of San Francisco.

And every one of those people needs energy.

To me, the instinct not just to survive, but to strive for a better life and to try to improve your living standards, is fundamental to human nature.

And to do that—to have food, to have a home, to have light and heat and mobility even at the most basic level-requires energy. Energy is what keeps people alive, and what allows them to live with some element of dignity.

That is the second reality. The third is that for the foreseeable future the bulk of the energy the world needs will come from hydrocarbons and particular from oil and gas.

That isn't an assertion on behalf of the oil and gas industry. It's a simple fact.

Oil and gas currently supply 65 percent of the world's daily needs and over the next two decades at least that figure will increase. Nu ear power remains expensive, particularly if you include the full costs of disposing of the waste products. Coal is still important in some areas but it carries enormous environmental costs in terms of emissions. In the main energy using activities-in transportation, industry, domestic supply, and power generation—the most convenient fuels in every sense are oil and gas.

Today we use over 75mb/d of oil and 220 bcf/d of gas.

By the end of this decade on pretty conservative assumptions about economic growth the world will use more than 90 mm bbl of oil and 280 bcf/d of gas. And those figures will still be rising.

What about renewables and hydrogen? Aren't they the answer?

One day they may well be part of the answer, and given the scale of the need for energy we believe it is prudent to start developing them as viable additional

This will require co-ordinated action by governments, consumers and companies in the private sector. We need to achieve the necessary economies of scale to ensure that early investment is worthwhile, and that the resulting energy prices are attractive to consumers.

Currently renewable energy, excluding the large-scale hydro plants, represents only 1 percent of primary energy production worldwide, and 2 percent of global electricity generating capacity.

At the moment renewable energy is dominated by small scale hydro projects and biomass but in the future other sources will play a bigger role in fuelling at least


a small part of the growth in electricity consumption over the next 20 years which some predict to be as much as 80 percent.

We, and others are doing significant work on the technology of photovoltaicssolar

power. We're also developing the use of hydrogen as the ultimate clean source of fuel for vehicles. Hydrogen wouldn't generate any tail pipe emissions—except for water of drinking quality standard.

We have partnerships with Ford and GM and Daimler Chrysler to promote the use of experimental hydrogen powered fuel cell vehicles in London, Sacramento, Sydney and Beijing, and a project with BMW to demonstrate the benefits of using hydrogen in conventional internal combustion vehicles.

Within the next two years we'll begin supplying hydrogen from our refinery at Kwinana in Australia and we aim to have one of the world's first hydrogen retail stations.

Those are very exciting developments, and of course many other companies are also investing and making progress in this area.

But these are experiments with future potential. They shouldn't take our eyes off the current reality which is that the world will continue to rely on oil and gas for a very long time to come.

Supplies are available to meet that demand. On the best estimates the world has found and produced around 800 bn barrels of oil and natural gas liquids. The remaining reserves are around 950 bn barrels much of which is in the Middle East. However we believe that there are another 500 bn barrels of additional supplies which can come from new discoveries and improvements in the recovery rates in existing fields.

Outside the Middle East, quite a large proportion of the oil still to be found and developed in the deep water beyond the continental shelf, but technology is making the deep water accessible in ways that seemed impossible only ten or fifteen years ago.

In terms of natural gas the figures are much larger-only some 20 percent of estimated world total natural gas supplies have so far been found and produced and huge supplies remain in many different parts of the world.

So leaving aside politics, there need be no shortage of oil and gas.

But the fourth reality is that the growing consumption of oil and gas poses an environmental challenge.

At one level there is the challenge of low level pollution, and poor air quality particularly in the cities.

And longer term there is the risk of climate change through global warming.

Of course the science of climate change remains unproven, but no one reading the latest scientific reports published by the IPCC over the last few weeks could ignore the mounting evidence of a link between human activity and the world's climate or the implications.

The latest report concentrates on the likely consequences.

Rising water levels which put particular communities at risk and floods in some areas matched by drought and a decline in long term water levels which risks disrupting agricultural syster and adding to the problems of some of the world's poorest areas.

To put that in another perspective—a recent report by the insurance industry has estimated that the damage could cost the global economy over $300 bn a year.

And those four points represent the reality: Of course that isn't a comfortable analysis, for the world or for the industry of which I'm part because it implies that the status quo won't continue as it is, and that some change is necessary.

If that is the reality, what can we do about it-how can we make progress? And what can business do?

Well the purpose of business is to do business. To make profitable investments, and to deliver competitive returns on behalf of our shareholders.

That is a very simple purpose-clear and limited. We don't exist to run the world, and we have no legitimacy to do so. We can't take decisions for people because we have no authority. No one elected Clearly, companies are part of society. We fulfill a specific role on behalf of society—creating wealth and meeting needs. But we're not responsible for society. We have a single simple purpose.

But, of course that purpose can't be fulfilled in isolation. No company, however big, is sufficient unto itself.

A company's ability to fulfill its purpose depends on the decisions and choices made every day by all the people with whom they do business—Governments, other


companies, staff and, in our case, the ten million or so people who buy things from us around the world every day.

Our ability to do business is determined by our capacity to meet the needs of those people, and those needs in turn are being set by the reality I've described.

I believe the challenge—the business challenge-is to transcend the sharp trade off implied by what I've said.

Put in the simplest terms the trade off is that the world has a choice-economic growth, fueled by increasing energy consumption. .or a clean environment. We can have one or the other, but not both.

If that is the trade off, it is unacceptable. People want both.

And I believe there is a huge commercial prize for those who can offer better choice which transcend the trade-off.

And that was the objective we set ourselves four years ago, when I gave a speech here at Stanford which said that some action, of a precautionary nature, particularly on climate change, was essential.

If no precautionary steps were taken then drastic action might become necessary, which could be extremely disruptive to the world's economy.

That was quite an occasion-a speech given outside in the Frost auditorium on a beautiful sunny day. A speech which expressed a change of policy for the first time in public, and which was the culmination of an enormous amount of internal thought and preparation.

Four years on, this seems the right moment and the right place to review what we aimed to against the reality of the track record. A good moment to see if the aspiration is justified.

I'll talk about BP, but I think its important to make clear that there are many people looking for ways to transcend the trade off, and this isn't an isolated story.

Many of things we've achieved couldn't have been done without the help of our partners and contractors and suppliers. So the focus simply reflects the fact that this is the only story I'm really qualified to tell.

We set ourselves a number of goals.

First, the objective of reducing our own emissions of carbon dioxide by an absolute amount of 10 percent from a 1990 base, while growing the company.

We've made good progress. By the end of last year we had delivered a reduction of 5 percent and we can identify at least another 5 percent which is deliverable over the next three years.

The progress we've made hasn't come from the use of a single magic bullet-just dozens and dozens of initiatives—most of them undertaken at local level by our business unit leaders and their teams.

Reducing flaring; tightening the control of emissions from our refineries; reducing our own energy use. They all count. Let me quote just two examples.

In our acetic acid production unit in the UK we found that we were producing less acetic acid for the volume of carbon monoxide being used than should have been the case.

We traced the problem to a leak from the compressors.

A new advanced sealing process was created by the engineers and the result was an increase in production of acetic acid of 20,000 tonnes a year, and reduction of 15,000 tonnes year in the emissions of Carbon Dioxide-a reduction of 98 percent with all the benefits that brings both in terms of atmospheric pollution and health and safety in the plant.

Or another example.

In the U.S. venting accounts for almost 60 percent of all the methane which is emitted by our gas business in the Western states. To reduce that, we have a project underway to control emissions from all wells in the areas of the Greater Green River and the San Juan basin.

This is not an easy project, but we've now found that with an investment of $1.4 million we can save more than 20,000 tonnes of methane a year, which has the greenhouse effect of nearly half a million tonnes of Carbon Dioxide.

And of course the methane can now be sold—turning what began as an environmental project into something that is also good profitable business.

Reducing emissions was the first goal. The second was to demonstrate that we could create an internal trading system which would allow us to meet our target at the lowest possible cost by allocating the resources to the places where they would have most effect.

Meeting the target not by requiring everyone to cut emissions by 10 percent, but by putting a monetary value on each unit and encouraging the whole internal team to cooperate in delivering the target at the lowest cost.

Our emissions trading system began in 1999, and has been working across the whole company since January 2000. In the first year 2.7 million tonnes carbon dioxide were traded at an average price of $7.6 per tonne.

The system now covers every single operation we have around the world.

We've learnt a lot, and now we're ready to develop the system and perhaps to bring in third parties which will allow us both to have a greater impact and to reduce unit costs.

This approach has encouraged our business units to look for innovative, cost effective ways of meeting the target.

The third goal was to make a positive contribution to the problem of air quality. We have developed a series of clean fuels-gasoline and diesel without lead, sulfur or benzene. That programme was launched in January 1999.

By the end of last year it had reached 59 cities worldwide. By the end of this year those products will be available in 90 cities, including many where there are series and persistent air quality problems.

We'll continue to extend the reach of that programme and to work on the technology so that we can provide even cleaner fuels. And we'll work with the car companies and others who share our view that the wonderful achievement of individual mobility-one of the great advances of the last hundred years—doesn't have to be compromised and tarnished by pollution.

And the fourth goal was to make a contribution to the shift in the energy mix. That mix is always changing.

There has been a shift, worldwide over the last fifty years, from coal to oil, and now there is a further shift going on in favour of natural gas. We are part of that process.

Five years ago natural gas represented no more than 15 percent of our production. Now its 40 percent and still rising. Not just in the developed world—where we're the largest producer in the United States—but in areas where energy demand is growing most rapidly and where the choice of supply to meet that demand will have ħuge environmental consequences.

In China, for instance, we intend to be a major supplier of natural gas-helping the country to escape from a dependence on coal. All the things I've mentioned are work in progress. It is far too early to celebrate victory.

But I believe that we've demonstrated that it is possible to combine economic growth with a progressive improvement in the environmental impact of that growth.

There is much more to do, but on the basis of the track record so far there is room for cautious optimism-which is an all too rare commodity in the environmental debate which is still, too often reduced to slogans and denial.

But, of course, just as no company stands alone; so no single company on its own can do everything that is necessary around the world.

Progress depends on the cooperation of different elements of society if there is to be a material change.

This is where pessimism seems to have taken over the debate.

There is a sense that the limited progress made since Kyoto indicates that cooperation is impossible.

I don't agree. Here again I think there are grounds for cautious optimism.

First because Kyoto was just one stage in the process of discussion-not an end point.

I think we can usefully compare the debate on the long-term issue of climate change to the debates on free trade from the initial establishment of GATT or the debate on disarmament which has been running since the early treaties of the post war period.

Both took half a century, and both are still incomplete—but through successive steps they both made great progress. And that I think is how this debate will proceed. Not through one-step to a perfect solution, but through one step to another step.

Linked to that, the second reason for optimism is the technical progress that has been made in the academic world, and in the business community. Progress in understanding the problems in detail and in offering answers.

An important part of that is the success of the trading efforts that have been initiated by us, and by others, and the potential which trading offers to remove the fear that the cost of dealing with this problem was unmanageable and that any action would cost enormous numbers of jobs.

One of the most interesting studies published in the last few months was the report from the Pew Centre which showed that the cost of reducing emissions to the Kyoto target levels could be cut from an estimated $57 bn a year to less than $9 bn if a global trading system were used to allocate resources, and by $20 bn to $37

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