John Browne: Technology Is Redrawing the Global Energy Map

John Browne spent about 40 years at BP, 12 of them as its CEO, before leaving the company in 2007. He is now the managing director of Riverstone Holdings and chairman of Cuadrilla Resources, a gas and oil exploration company that has played a leading role in the drilling and/or hydraulic fracturing of more than 3,000 natural gas and oil wells across the world. He was knighted by Queen Elizabeth in 2001, and is the author of Seven Elements That Have Changed the World.

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Former BP CEO John Browne, MS ’81 | Associated Press/Carlos Osorio

Recently, the Stanford GSB graduate returned to campus and addressed students at Stanford about energy use, climate change and fracking. Below are edited excerpts from his prepared statement, followed by a Q&A with the students.

When it comes to the science, the level of uncertainty about mankind’s influence on the climate is decreasing. Climate science will always be a study of probabilities, but where the IPCC (Intergovernmental Panel on Climate Change) once talked about a discernible human influence on the climate, it now has enough evidence to identify clear human influences as the dominant cause of recent warming.

And as our understanding of man-made climate change has improved, so have the low-carbon technologies which could provide the solutions. As co-head of the world’s largest private equity renewable energy fund, I have seen first-hand the technological improvements which mean that renewable energy is becoming increasingly competitive against fossil fuel alternatives.

The cost of a watt of solar capacity, for example, has fallen by 80% over the past five years. That cost is likely to fall even further. Solar panels in some markets are expected to become 20% cheaper again in just a couple of years. Improvements like those have delivered and will continue to deliver tangible results. Countries in Europe are likely to meet their target of a 20% reduction in emissions by 2020 and have offered to extend that target to 30%.

China’s emissions are rising, but its energy consumption per unit of GDP has fallen by almost 70% in the past two decades and is expected to fall another 10% by 2015. And here in the U.S., carbon dioxide emissions are now at levels last seen in 1994, down more than 10% from their peak.

Perhaps the most important achievement has been to secure a permanent place for climate change on the global agenda. Blizzards in the U.S., floods in the U.K., and chronic smog in China have reignited public interest in the possible consequences of our carbon emissions. The level of interest certainly varies according to the economic climate and, of course, the weather. But it seems to me that oil and gas companies and governments have now fallen behind the public. In the eyes of citizens and voters, concern about climate change is here to stay.

Progress toward decarbonization has not been driven by fossil fuel shortages or price increases. Instead, it has occurred during an era of unparalleled fossil fuel abundance.

The rising oil and gas prices of the past two decades created the economic incentives for engineers and entrepreneurs to pursue major advances in the technology used to extract hydrocarbons. George Mitchell, for example, pioneered the combination of horizontal drilling and hydraulic fracturing, making it commercially viable to extract natural gas from shale rock. That development has revolutionized natural gas markets in North America and could do the same in the rest of the world.

The same technology has also been applied to the extraction of oil, and is redrawing the map of global oil production. North Dakota is now the second-largest oil-producing state, second only to Texas, and the U.S. might overtake Saudi Arabia as the world’s biggest oil producer by the mid-2020s.

It is not just fracking which has created this abundance. By some estimates, the biggest contribution to U.S. oil supplies between now and the end of the decade will come from growth in deepwater conventional production in the Gulf of Mexico. The result is that we now have enough oil and gas reserves to last well into the next century.

As market forces drove this abundance of supply, they have also spurred efficiency in demand. The energy intensity of the world’s GDP has fallen by an average of 1% a year for the past two decades. There is every reason to believe that it will continue to fall, not least because it makes good financial sense.

Looking back at my time in the oil industry, it is striking how bad we have been at making predictions. When I joined BP as an apprentice in the 1960s, King Hubbert’s theory of peak oil was in fashion. He predicted a peak in U.S. oil and gas production around 1970, with one important qualification: “if current trends continue.” Those trends did not continue.

We have an equally poor record when it comes to forecasting demand. In every single year for the past two decades, predictions of U.S. energy consumption for the year 2011 were too high, sometimes by as much as 20%.

Humans are dangerously slow to react to new information, but I think the evidence is now clear: We live in an era of technology-driven energy abundance.

This era of abundance has changed the rules of the game and requires us to make a fundamental change in the way we approach our energy resources.

Living in an age of plenty makes it much harder to win the argument for a low-carbon future. Energy abundance means that we have a range of resources at our disposal, from coal to solar power. We will need to make a conscious choice to preserve the environment efficiently and effectively.

That choice should be framed by a clear and credible economic incentive, like a carbon price, because when the cleaner option is also the cheaper option, it usually wins. But economic incentives alone are not enough. With choice comes the need to win both the rational and emotional arguments.

Take natural gas as an example. As long as wells are designed to keep methane leakage to a minimum, it is the cleanest hydrocarbon, as it emits half the carbon dioxide of coal when burned to generate electricity. The substitution of gas for coal in the power sector has already contributed to a major fall in carbon dioxide emissions in the United States, and it clearly has the potential to do the same in Europe, where coal consumption is rising.

Most important, it could drastically reduce the carbon intensity of future economic growth in China and India.

Hydraulic fracturing is the key which could unlock a cost-effective, lower-carbon global energy mix. But misplaced fear and dread threaten to prevent this. Some European countries have followed New York, New Jersey, and Vermont in banning hydraulic fracturing for fear of the environmental consequences.

Operators, regulators, and credible third parties must therefore remind people of the technology’s proven safety and positive impact. But mankind has a tendency to focus on the perceived potential for catastrophe rather than on the evidence. Fears of water contamination, for example, are a prime reason for opposition to hydraulic fracturing. But there are in fact no known cases of groundwater contamination as a direct result of the hydraulic fracturing process.

Energy is also about transparency and trust. I am chairman of Cuadrilla Resources, a firm at the forefront of shale gas exploration in the United Kingdom. We recognize that people are understandably afraid of the unknown, so as part of a program of community engagement, the company publishes full details of the chemicals it uses in the hydraulic fracturing process.

The benefits are twofold. Local residents are able to see for themselves that we use only water, sand, salt, and one nontoxic chemical which is also found in children’s toys. But they also see that we recognize the importance of a productive and transparent working relationship with local communities. Regulation can force companies to disclose information, but it cannot build a culture of transparency and cooperation.

That requires great leadership. It seems to me that there has been a palpable shift in the criteria used to evaluate corporate leaders. Today, collective challenges like climate change require collective solutions, and so the single-minded, Friedmanite pursuit of shareholder value is no longer enough.

If corporate activity is not in line with the wider interests of society, then it simply cannot be sustained.

That was the motivation behind our decision to re-examine BP’s corporate purpose and the way it did business. We continued to develop and extract hydrocarbons, but we did so differently. We implemented an internal market for carbon, and made changes to our processes which reduced our own greenhouse gas emissions. We also invested billions of dollars in renewable energy, because we believed it could provide our customers with energy and our investors with attractive rates of return.

Businesses are designed to deliver change and to solve society’s problems. They are the engines of human progress, but they require leaders to guide them in the right direction. That will be your biggest challenge as leaders of the future.

You spoke at length about the abundance of natural resources, and it seems to me that they are more difficult to get to than the oil that was produced in the 1970s, and therefore more energy-intensive to get at. So I was wondering whether you could talk a little about the concept of energy return on energy invested, and what you think that means for that trend.

There are certainly some resources that probably are inefficient to get and should probably stay in the ground. But there is a vast amount which is now open at a lower cost, lower energy cost, and higher financial cost, because of the technology improvements.

What do you think about the technology of carbon capture and storage?

I think it’s not something that we should rely on. This is like attaching to a star and hoping for the best, and it’s not likely to work in a very big scale. It’s very expensive, and there are also very few places to put the carbon, very few places.

You mentioned hydraulic fracturing, the ability to extract natural gas and how the industry kind of needs to win both the technical and emotional arguments. But on the flip side, I think that industry has kind of set itself up to lose that debate. I mean, there have been a number of significant disasters, and don’t you think the industry needs to prove itself?

I think the industry has to prove itself every day and reprove itself. In Europe, Ukraine’s future is being discussed, and through the Ukraine, quite a lot of the gas that keeps the lights on in Germany and other places flows from Russia. And it’s flowed in a noninterrupted way for a very long time. But that was then, this is now.

If there’s gas in Europe to be found through hydraulic fracturing, which there is, then the [debate now] has a heightened sense of issue about security, of supply versus security. It’s a matter of trade-offs. I think we have to improve the processes and then find Plan A, C, and D to do something else at the same time. I think the industry, the oil industry, the hydrocarbon industry, is not a good industry in terms of bringing [solutions] along with it. It tends to be, like many corporations, very secretive.

Can you talk to us about some of the investments at Riverstone that you’re the most excited about in delivering renewable energy, and why?

I think with renewable energy, it’s very important to think about renewable energy as having an input, much as you would conventional energy. So before you build a wind farm, you really need to understand how many hours a day the wind blows. It may sound absurd to you, but it’s actually true.

It’s not the fact that there’s wind that you can build a [plant]. That’d be like saying “We’ll drill because we can find one barrel of oil in a million acres.” So I think first is to really assess the resource much as you would be assessing the resource when you [drill another gas line]. And I think a lot of people haven’t done that. So I still very much like wind energy, because I think turbine prices are coming down. An issue here is visual pollution in certain parts of the world and you have to be careful where to put the wind farms. But actually in places with really high-capacity wind, there aren’t that many people.

I remember an article in January in which you were quoted saying that ministers in the U.K., and I think [that] applies more broadly, are hindered in their decision-making capabilities because they fear a public [beating]. BP has also had its fair share of public beatings. And I just wondered how you could advise us as aspiring, hopeful, potential leaders to deal with that going forward? You know, how can we take risks without fear of repercussions?

So, the context of the quote is that I think I said that no institution’s a good institution unless it can learn from its mistakes. And if you have to convert everything into a success, you can’t learn, and therefore you can’t be a good institution. So I think, yeah, I think my solution for that — but it’s a concrete one — is to actually get hold of all the people who are beating you and say, “We want an allowance, in effect, for failure.”