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Black Sea Energy and Economic Forum 2009
Speakers:
- Fred Kempe, President and CEO, Atlantic Council
- Tom Cwikla, Senior Vice President, Hunt Oil Company
- Selahattin Hakman, President, Sabanci Energy Group
- Helmut Konuk, Deputy Chairman and General Manager, Botas
- Steven Mann, Senior Counselor, International Affairs, ExxonMobil
- Mariana Gheorghe, General Manager, Petrom
- Dinu Patriciu, Chairman, DP Holding SA
- Glen Sansom, General Manager, Continental Europe, Schlumberger
- Kris Sliger, Executive Vice President, Investor Relations, TNK-BP
- Mehmet Uysal, Chairman and President, TPAO
October 1, 2009
FRED KEMPE: Terrific. If you could all take your seats, we’re about to get rolling. We’re running about 15, 20 minutes late so we’ll end at that time and then we’ll catch up a little bit around lunchtime, but we want to give this panel and the other meeting afterwards the right attention.
We aren’t going to give opening statements, if we gave an opening statement from each of these gifted, talented individuals, we wouldn’t have the kind of rich discussion that we’re going to have here. So I’m going to throw out an opening question or two to the panel. I want the panel to discuss a little bit among each other, I’ll direct a little bit, but think of this as a television talk show where you’ll jump in. There are times when I’ll ask a question and you’ll think it is a really dumb question but a nice way to do that is to say what a brilliant question but the real point is – and then just go on and say whatever you want.
Let me just tell you what a rich panel this is, I’ll go through them in the order; I’ll turn to them and I’ll go through them really quickly. Tom Cwikla, senior vice president of Hunt Oil Company in charge of international exploration and production of Hunt Oil. This man knows a lot about exploration, began his career as exploration geophysicist for Texaco. Helmut Konuk, deputy chairman and general manager of Botas. We’ve got two people from Turkey on this panel; it is where we’ll go next year with this initiative. Began career in the – and he is replacing Mr. Duzyol the chairman and general manager of Botas on the panel.
Mr. Selahattin Hakman, the president of Sabanci Energy Group, before Sabanci, had a long career at Siemens in Germany and Turkey. Güler Sabanci of course, the head of this group is on our international advisory board. Steven Mann a senior counselor for international affairs, Exxon-Mobil, one of the leading thinkers on all these issues. For over a decade was U.S. State Department point-man for Eurasian energy.
Mr. Assimakus Papageorgiou, chairman and CEO of DEPA or D-E-P-A, is keen around the whole issue of Greece as a strategic corridor for natural gas to Central and Southern Europe. Dinu Patriciu, a member of our international advisory board; if you look at the membership of this board, these are CEO’s of WPP, Novartis, Deutsche Bank, some of the most important economic leaders in the world, chaired by Gen. Scowcroft, people like Zbig Brzezinski are also on it, President Kaczynski of Poland; former MP and founder of Romania’s National Liberal Party, familiar with both politics and energy sector and crucial to our initiative in Washington for the Eurasia Energy Center.
And then finally, Mariana Gheorghe, forgive me if some of my pronounciations aren’t perfect, working in the Ministry of Finance and EBRD. The reason – Glen Sampson, general manager Continental Europe, Schlemberger, working in Eastern Canada, now and very different working in very different environment in terms of the role of government in the energy sector.
We know how crucial Canada is to this whole picture and then finally Kris Martyn Sliger, executive vice president investor relations TNK-BP. And then finally, finally Mehmet Uysal, chairman and president of TPAO, Turkish Petroleum, starting as a geophysicist in 1979. And the reason I’ve gone through these names is what rich experience, what rich knowledge as these people go through the first time, I’ll introduce their names if they’re intervening before I’ve introduced their names, jump in and say who you are.
We’ll do a very quick round, get ourselves started and I think what I’m going to do is start with Mr. Cwikla. And Tom Cwikla – and I think because of the common interest here in fossil fuels and the common interests of where things are going, and all the talk of peak oil or not peak oil, alternative energy, how it is going to work in natural gas versus petroleum, what is going to happen with the oil sands of Canada, what is going to happen with prices – good heavens, there is so much to talk about.
So I think what I’m interested in is, is the golden age of fossil fuels coming to an end? Or is there a much different future and since you’re not academics who are sucking your thumbs this, you’re actually betting your companies and businesses on this, I’d really love the hear your view on it so Tom, maybe you’ll get us started.
TOM CWIKLA: Okay, well, thank you Fred, I appreciate being lead-off batter here. I guess when I’m always asked the question about whether the age of fossil fuels is coming to an end, I always start off with a question back. And that is at what price – because if you take a look at what has happened in the world over the course of the last let’s just say 10 years, when there was significant investment over the course of the early 2000s, those investments have really paid off in the oil industry over the course of the last year: significant discoveries in Brazil, in Kurdistan, off-shore Ghana, Australia, just to name a few.
So I think that there is still a vast amount of fossil fuels out there but I think we also have to recognize that the world is changing. We’re not going to be relying 100 percent on fossil fuels as we go forward. I think there is a clear shift in the world going towards greener sources of energy. There clearly is a shift; we want to develop new alternative sources of energy and we’ve got to recognize that the world is changing around us as we speak.
So I think we’re going to be relying on fossil fuels for quite a bit of time to go. I think transportation certainly is going to be relying on fossil fuels. I think that we also, though, need to go ahead and make the investments going forward into alternative fuels because that shift is going to come where we do reach peak oil and peak production at some point in time in the future. I just don’t know exactly when it is, but I don’t think we’re there yet.
MR. KEMPE: Tom, there is a little bit of local interest here for you. What is a nice Texas oil company doing in Romania, and how does that fit into your international strategy? You have – seems to have a specific interest in Romania.
MR. CWIKLA: Well, we do Fred, and thank you for asking the question. I’ll try not to take too long giving a little bit of Hunt’s story here but Hunt is focused, Hunt is an international oil company. We’ve been in the international arena now for over 25 years. I think a lot of people, you probably know the story of Hunt and its discoveries in Yemen, in the early 1980s. We’ve got a portfolio that is North America dominant, but also expanding in the international arena.
We have focused our efforts into core areas and one core area that we think has got a significant opportunity for us is Europe. And now why Europe? I mean, there is a lot of places to explore in the world. Well, we think that Europe wants to develop indigenous sources of fuel. Okay, we don’t think that Europe wants to be solely reliant on Russia or imports through LNG but if you can develop your own indigenous sources of fuel, then there is an opportunity there to be self sufficient and reliant.
The other thing we think about Romania is, we think that there is a great application of future technologies, technologies that are currently being applied in the United States and Canada that can be brought to Romania and also used to enhance production via currently existing oil fields as well as find new oil fields at maybe greater depths.
MR. KEMPE: Thank you very much. Let me just skip ahead. Mr. Konuk, I’ll come back to you in a second but I think I’d like to go to Mr. Hakman first. What is your view on fossil fuels?
SELAHATTIN HAKMAN: Well, I think when we talking about fossil fuels, we should not only concentrate on oil and gas, but also consider coal, which is and will remain the main source of energy worldwide if you consider the demands, growing demands, in China, in India, and without coal, throughout the next decades and with that, without fossil fuels, it will not be possible to cover the rising demand on energy worldwide.
This has of course also the effects that – on the climate change, where I think, one of the main challenges next to the security of supply, next to peak oil and what is coming next, beyond that time, the climate of change issues will play a major role in the coming discussions. But immediate solutions are not there. Technologies must be developed, both renewable technologies like solar, need to be made competitive. On the other side, where coal is concerned, carbon capture and storage is an issue and I think these will be the main challenges we will be working on in the next years and decades.
MR. KEMPE: Fascinating, I’m so glad you raised coal because particularly if you look at China, I don’t see, with all the nuclear plants coming online, there is going to be a lot of coal for a lot of time. But here’s – you’ve been very critical of the European Union for not backing Nabucco strongly enough, if I’m not mistaken. Why is that? Are you still worried about that?
MR. HAKMAN: Well, I’m not worried about that. We would have seen Nabucco coming earlier and developing faster. But Nabucco is only one contribution which will not solve all the problems of the energy supply, neither in that region nor in the world. But Nabucco is an important part, I think, of this – which brings on the table the interdependencies. We have been talking about interconnection and being self sufficient and so on and so forth. But I think the name of the game is interdependency.
And Nabucco will increase this, the solutions or the answers for this need of interdependencies and which I also do believe beyond its security of supply and economical aspects has also a very large political aspect of setting the cooperation before confrontation.
MR. KEMPE: Thank you for that answer. I would challenge the panelists, we’re going to stay on the initial question, but I would challenge the panelists as they think about this panel, maybe one of the things we could do, in this interesting world of pipeline politics – which I think confuses a lot of people in the world with all the projects going on – if any of you can say, this is my favorite pipeline project, this is from a commercial sense, this is the one I think makes the most sense for business, whether or not it is going to work in terms of politics, I think that would be an interesting thing for the audience to hear, so I welcome you all to sort of you know – what would be favorite project.
BOTAS is clearly at the center of so much that is going on with this, with the idea of what project is going to go where, huge player, and we’re very glad to have BOTAS here. Mr. Konuk, perhaps you can tell us what your view is of fossil fuels, is the golden age coming to an end or are we going to see up tick of prices again, surge of prices again, is peak oil? What is you view of the fossil fuel issue?
MEHMET UYSAL: That is for me?
MR. KEMPE: Oh yes. Well, I think
MR. UYSAL: I am representing the Turkish Petroleum Corporation not Botas. The question was peak oil, and the counter-question was at what price. The counter-question is as reliable as the question. I believe there is no peak oil in the world. In the beginning of the 19th century, the coal was very popular and there were a high demand for the coal. But when we come to the 1950s then the demand was lower and now the most helpful of the coal reserves are underground.
That will happen for the oil also. Most of the oil reserves will be underground in the future. But, at the end, the whole energy sources will be diminished including the sun. You know, we have a certain period of life. But when we consider this small period of it, the oil era will continue at least 100 more years from now on.
And for the pipelines question part of it, well, Turkey is a transit country and now there is seven actual pipelines working in Turkey and some maybe 10 more projects is underway. And, at the end, Turkey will look like a kind of spaghetti plate. (Laughter.) And that will happen within the next 10 or 15 years. And according to the favorite pipeline, my favorite pipeline is Nabucco.
MR. KEMPE: Last night it was very interesting to hear the CEO of ENI, one of the biggest players in the world, say whether or not Turkey is a member of the European Union, it is already a member of the European Union in an energy sense because it is absolutely unavoidable and central to everything the European Union wants to do in terms of energy. I would guess that you would agree with that.
MR. UYSAL: Definitely, well if you take a look geologically, there is a Northern Anatolian fault and the South Anatolian fault, that two faults is squeezed Anatolia, and pushed Anatolia toward the West. So after a 10 million years or 15 million years, the Anatolia will enter the European, definitely. (Laughter.)
But that is a geological sign; we are dreaming on those. In reality, yes, in energy sector, Turkey and Europe has been unified because of those pipeline projects and lately there are some more projects on Black Sea which is very relevant with this congress. The Black Sea has huge reserves so those reserves will be the main supplier of the Europe energy in the future. Maybe within 10 or 15 years, the Black Sea will be the main source of energy of Europe.
MR. KEMPE: So the Atlantic Council is happy to open the chapter right here.
MR. UYSAL: Right.
MR. KEMPE: That was Mr. Mehmet Uysal from – the chairman and vice president – or excuse me, president of TPAO. Let me now turn to Mr. Konuk of BOTAS and how do you view this issue.
HELMUT KONUK: Thank you very much, Mr. Chairman. Good morning ladies and gentlemen. First of all, I want to give some brief information about Nabucco project and then we’ll go on some topics about price and Turkey’s position between East and West bridge.
As you know, Nabucco project is also another strategically important project that will enable Turkey to become the main export route for natural gas. It will connect Turkey with the Central and Northern European markets. The project estimates to carry 41 this year to European markets, and will be accomplished by a collaboration of the energy corporations from Turkey, Bulgaria, Romania, Hungary and Austria. A FEED process had been started and owners in general have been starting with LFE.
On the other hand IJ (ph) and SK (ph) is planned to be signed soon, an initiative of – (inaudible) – Ankara, Baumgarten with the initial capacity will be 2014. The Nabucco project is not interpreted as a competitor to the South European gas range, but on the contrary, seen as a complementary project that will ensure European energy security.
The incoming and outgoing projects clearly demonstrate the importance of Turkey as a transit way for Caspian natural gas producer states, as well as all the European states. Turkey is on the way of becoming the – (inaudible) – for the European energy security and the main country that links landlocked Caspian states with the world market.
MR. KEMPE: Thank you, Mr. Uysal. Let me turn to Steven Mann of ExxonMobil, who has a little bit more of a global perspective, let’s say; played a key role in realizing the famed Baku-Tbilisi-Ceyhan pipeline, if I’m not mistaken. In your answer about the future of fossil fuels, maybe you can give us the first answer on what’s your favorite project in the region?
STEVEN MANN: (Chuckles.) I’ll give you the same answer that I give with ExxonMobil that I would have given when I was with the U.S. government which is all market-oriented commercially sustainable pipelines are my favorite pipelines.
And in taking it back to global energy issues or even European security and supply, let me make an observation, which is that the focus last night, the focus in these discussions is a pipeline focus. And this is understandable. Pipelines are eye-catching. There was a good amount of spotlight and drama associated with the first phase of Caspian energy.
But I’ll turn a question back at you, and then I’ll answer the question, what are the lessons learned from the first phase of Caspian energy development?
So you look at the BTC pipeline; you look at CPC, another major, major pipeline; there are several other pipelines in the same area, in the same timeframe. The major lesson that I think we draw from that is not that you adopt a pipeline and boost it politically to success. The lesson learned is that each of these pipelines was preceded by successful development of the upstream volumes: CPC with Tengiz; the large ACG deposits in Azerbaijan for the Early Oil, Western Oil and BTC pipelines. And as we enter into these discussions through the conferences today, I think that is a lesson that should not be forgotten.
The investment in the next phase of upstream is going to be enormous; the technical challenges are going to be more difficult. So an important question is what are the investment conditions that all of us need to be looking at to allow that next phase of development to take place?
So just to sum up, much of the discussion is about pipeline projects but I would like to refocus that also on investment principles to get those upstream volumes in place.
MR. KEMPE: And with that in place, do you have – as you’re looking at projects in the region, is there one that would be your poster child?
MR. MANN: Well, in Romania, it would be our partnership with Petrom and the Neptune deep-water exploration. So I’ll leave it at that.
MR. KEMPE: Now, the question – we definitely have to turn to the CEO of Petrom at this point, Mariana Gheorghe, and I want to – is he just talking your own book or is that really the most interesting project? And what is your response to some of the questions you’ve heard raised thus far?
MARIANA GHEORGHE: (Inaudible) – and the minister of finance, however, guaranteed for the last 3 years and three months have been the oil Petrom. Petrom is – for some of you probably may not know, but it is the largest producer of oil and gas in Southeastern Europe, so it is, indeed, small by scale in the big world of Exxons and others, but definitely it is on the map of the energy.
And what I’d like just to answer with a brief statement, I think, to your first question, I definitely believe that oil and gas and fossil energy supplies will still be the backbone of the energy sector despite, even in the green world scenarios which we definitely all look at. And that is not necessarily because we want to – and everybody wants to be in a world that will put efforts in renewable, alternative use – but as has been mentioned before, this will take time, technologies, infrastructure; have long lead time to the markets; technologies have to be still tested; they’re not mature, they’re not competitive.
So all these makes that, for example, in the EU, if you look at the forecast that the EU-27 has made with 1,800 million (sic) tons of oil equivalent by 2030, still, oil and gas will represent something like 1,000 million tons of oil equivalent. So the relevance and the importance of oil and gas, it’s going to stay at least for a long transition period.
On the other hand, I think the industry that’s been tapped just briefly now is facing challenges. And that will not be possible to continue the way it used to be, and the energy landscape for this industry is going to change.
I mean, we’ll be talking more about price volatility, which we’ve been seeing. We’re talking about demand, which will combine with high-cost production costs because of high investment costs; that that will definitely lead to higher price. We talk about CO2 and obviously we talk about energy security. I mean, only these four is enough to show that the challenges of the sector are definitely big, and we collectively have a duty to meet them as successfully as possible because it is, indeed, an economic objective of the countries, of the continent and of the whole world.
And just to answer the last question because we’re talking about Exxon Corporation, we do have, indeed, mainly onshore activities, but since 1997, we have started our offshore Black Sea exploration and production. And we do have currently a, you know, a shallow waters-type of production.
However, the potential of the Black Sea is definitely much bigger. And we do hope together with our friends from Turkey, from the U.S. and other – (inaudible) – countries that will put the Black Sea on the energy supply map because it does have the potential. However, the costs are very high and we welcome very much the cooperation with ExxonMobil; the partnership we’re having in the Black Sea in deep waters because, indeed, there is, indeed, a lot of money; investments are very high, but also, a lot of expertise and definitely we’ll be happy to operate and cooperate with ExxonMobil in the Black Sea.
MR. KEMPE: Of all the priorities you have – and just a very quick answer on this before we move on; Mr. Scaroni was very interesting when asked this question last night. CEOs of companies that are your size have so much coming at them every day, and not everything can be a priority. When you wake up in the morning – or when you wake up in the middle of the night – what is your highest number one priority?
MS. GHEORGHE: Production, its source and CO2. I mean, that definitely puts a lot of pressure on us.
MR. KEMPE: Thank you very much. Mr. Papageorgiou – is one of you Mr. Papageorgiou? (Off-side conversation). No? Did we lose someone on the panel? (Off-side conversation.) We did? All right.
Let me turn to Dinu Patriciu and see if you can tell me what is your faith in the future of fossil fuels, your investment in this area, you know this world extremely well. You seem to be making something of a move more into real estate than fossil fuels, or still fossil fuels these days. How do you see the future in this area?
DINU PATRICIU: That’s in appearance – with the real estate. I am still an entrepreneur very much – (inaudible) – about energy and the future of fossil fuels because I think that hydrocarbon civilization, as Daniel Yergin said, it’s still young, very young. We are only at the beginning. There is nothing to replace hydrocarbons yet.
Nuclear is the most expensive form of energy if you add all the costs; wind, solar, in the future – these are evolving technologies which are changing their price and their capacity of covering great, great quantities in the future, maybe. But for the moment, we are in the civilization of hydrocarbons. Maybe other hydrocarbons, not coal, oil or gas. Maybe gas hydrates. It’s a matter of price, as we said from the beginning here.
I bring you a more entrepreneurial view on this than a corporate view. I think research and the development, it’s very important in our industry – energy research, in the conventional sense, but starting to get away from inertia of conventional methods. For instance, I think a handicap in exploiting gas hydrates are the big oil companies, which are thinking that if they drill, they can take out gas hydrates. And all of them, they are trying to do it. A solid through a pipe is not the best way of exploiting this.
Probably you have to think outside the box. And not the oil industry is most qualified to go into the era of gas hydrates. Reserves of gas hydrates, as you know, are much bigger than all the reserves of coal, oil, gas consumed until now by the humanity and everything what we know it exists.
To pass with gas hydrates means to change the traditional oil industry into something else. Big corporations are not capable, with all due respect, to pass the wall to unconventional. Probably from entrepreneurs, from people thinking outside the box, the future will come, and it will be the future of fossil fuels still.
I’m not a big fan, being an entrepreneur, but I’m not a big fan of pipelines, I have to tell you. I hate pipelines. These are long-term projects with low returns and in which politics are involved every time. There is no pipeline without a political background. From the wooden pipeline in Pennsylvania or in – (inaudible) – 260 years ago to Nabucco, there is no pipeline which is not manufactured politically.
I think the future of energy, fossil fuels, gas hydrates; it’s in the transportation technology. And transportation technology doesn’t mean pipelines. It means maybe not LNG, but even gas hydrates – why not to transform the gas into a solid?
There were researchers 20 years ago, and somebody in a big company, probably in a management meeting, decided that LNG is better than gas hydrates to transport. At that time, it was cheaper. Who knows if it will be cheaper in 10 years from now? And if will not transform gasses into gas hydrates, and create a global market of the gas and not rely on pipelines, which are creating conflicts and even worse.
I think that research – research is coming from outside our industry. It’s the answer for the energy in the future. And by “future” I don’t understand 20, 30 years from now. But the months to come – the years to come.
Coming back to the Black Sea, reserves of energy in this region are very, very big. I heard somebody saying it a few moments ago, and I have to tell you that I fully agree. I think that the Black Sea region, and the Black Sea, itself, can replace the supply from Russia. Maybe it sounds crazy today – it will not sound crazy in one or 2 years from now.
We’ll not need these pipelines, connecting us to the Yamal Peninsula. I don’t believe in them. I don’t believe in them because I think that the internal consume of Russia it’s – it’s increasing so quickly that they will consume their gas there. And they will not have anything to export to Europe.
If you look at certain forecasts without the Yamal Peninsula, the production of Russia will be less than the internal consumed in two years from now. Still, today, they are exporting the Central Asia gas – not their gas. And to rely our future, European future, on these sources of energy, it’s a little bit unsane, I would say.
Research – and I mean geological research for the deep reserves in this region, and researches in the Black Sea – a dead sea. And that’s very important – a dead sea. Because after 300 meters with hydrogen sulfide present, and you have anoxic basin. Probably there are ways to transform the deaths into energy because everything is dying there. And dying doesn’t mean destroying the biomass – it exists. And, probably, it’s a source of energy. It’s sufficient to make some very, very rough calculations. And you can arrive to many, many billions of oil equivalent in these waters.
That’s the future of the region. I don’t see it as a transportation region – a bridge only between the East and the West – but a production region, in which there are many sources yet undiscovered. Thank you.
MR. KEMPE: Dinu, thank you. That was, first of all, given your entrepreneurial success of the past, I think there are a couple of things people should listen to in what you just said. We had a meeting in Long Island, New York, where Dinu Patriciu was one of the speakers. And George Soros was another one of the speakers. And George Soros doesn’t get interested in a new idea all that often, because most of the new ideas he thinks he’s already thought of. And when you started talking about gas hydrates – and their future, and their economic future – I saw him taking notes. And I don’t know whether he walked away –
MR. PATRICIU: I was scared of this. (Laughter.)
MR. KEMPE: Yes. He might get there first. But, I mean, you are there first, but he certainly took some great interest in this. And I like your idea – I mean, quote of the day: I hate pipelines. You know, long-term project – low return; politics involved; et cetera, et cetera.
So we’re going to get to our last two panelists. I’ll get to questions – we’ll try to do that quickly – get to questions from the audience. At this point, I would ask the last panelists to just pick up on anything you’ve heard, that others have said, that you’re just burned up about; or something you think is totally different; or what you want to add to the conversation at this point.
I’m still fascinated with the future of fossil fuels, because you’re all trying to decide, short-term, how you do your business – but, also, medium-term, longer-term, how you have to think about this and develop your business.
So let me turn to Mr. Sansom and then, after that, Mr. Sliger.
GLEN SANSOM: Yes, thank you. So it’s an interesting question, peak oil and golden age. And if we reflect, Schlumberger was in Romania in its very early days, back in the 1920s, exploiting oil and gas. And Romania still has the highest reserves, proven reserves, in Europe for oil. So you know, when we talk about golden age and peak oil, I think what the industry’s really talking about is conventional oil.
And following on from the last speaker, the future, if we look at reserves in unconventional – whether it be tight gas, shell gas, methane hydrates, cobed methane – we have many, many times more reserves left in the world than we’ve already used to date in humanity. So for sure, hydrocarbons – or hydrogen, let’s say, from a hydrocarbon source – is going to go on for at least the next 50 to a hundred years as a reliable source of energy.
Now, if you consider the advances in technology in the last hundred years, it’s very conceivable we’ll be able to extract hydrogen out of seawater before the next hundred years. But, in the meantime, hydrocarbons is going to play a major theme.
Now, the challenges for the industry are threefold, I’d say. One is sustained investment – because, going forward, these unconventional plays are going to be far more expensive to get to. We’re looking at Arctic, cold-water, deep-water, shale gas – which is enormously complex to actually extract from. They all take investment, and the investment Is in technology.
And the third point, which we need, is people – because the industry hasn’t had a great rap in the last 10 years. Particularly as we put on the environmental spin onto what we actually do. But getting smart, intelligent, young people into the industry to fuel that technological advance is going to be critical to get to those unconventional sources of mostly gas.
MR. KEMPE: Where are your best people coming from? Where is the people resource?
MR. SANSOM: I mean, we’re recruiting– I’d say I represent the service industry here – the oil and gas industry – and a lot of the people that come into the industry come through the service industry. So we’re recruiting, you know, at the universities. But it’s getting tougher and tougher to recruit these days, because of the environmental awareness of the younger generation, and sometimes what our industry represents.
That’s a challenge the industry has – to present itself as the technological industry that it is. Because it is very exciting. So the golden age of conventional oil is probably coming to an end in the next 20 or 30 years. But the golden age of technology in the oil industry I think is just starting, and it’s going to be very interesting.
MR. KEMPE: I think that’s very much what we’re hearing from Dinu’s work. Mr. Sliger, TNK-BP – certainly in a very interesting part of the world. You bring a unique perspective to this. Tell us what you’ve heard here that you want to add to, and what is it – on top of that, as a second part – that keeps your company up late at night?
KRIS SLIGER: Thank you very much. My name is Kris Sliger, representing KBP. Probably one of the best quotes, that maybe could help stimulate this discussion a little bit. If you remember back to the 1970s, there was an OPEC oil minister by the name of Yamani. He had a very famous quote: “Man did not leave the Stone Age because he ran out of stones. We will not leave the Oil Age because we’ve run out of oil and gas. It will be because we find better solutions to provide energy, at the price we want, with the overall environmental impact that the world is willing to tolerate.”
Probably one of the most important parts of thinking about energy in the context of the Black Sea – it’s a bit of a simplification, but you have two-thirds of the world’s hydrocarbons, oil, sitting in the Middle East. Take the Middle East natural-gas supplies – Qatar, Iran – combine it with Russia natural-gas, and you have two-thirds of the world’s natural-gas supply. And, yet, if you look at where the markets are, historically, it was always a conversation about taking energy from the nondeveloped part of the world to what we historically have called the OECD.
And 2008 was actually a watershed year, in the sense that 2008 was the first time that non-OECD energy demand actually surpassed OECD energy demand. We have probably already seen peak demand in the OECD countries. But how we learn to further reduce the carbon footprint of the energy that we consume – at the same time that we move energy that, historically, otherwise would have gone to the OECD world – it is now going to be about supplying energy to the non-OECD growth that is occurring. Very classic: Brazil, India, China – the parts of the world that, historically, they’re energy intensity are still material ways down the curve of where the rest of the world has been.
With all respect, I do take a bit of an issue to the concept of whether or not Russia may or may not have enough energy to supply Europe. Russia today is the single-largest producer of crude oil in the world. It’s larger than Saudi Arabia. Not that many people recognize that.
In August of this year, 9.93 million barrels a day of oil production coming out of Russia – about a one-half of 1 percent increase over 2008. At the same time that we’ve seen the world completely turned upside down, in the sense that we went from almost $150 per barrel in July 2008 to $40 per barrel in 2008. Now we’re back in a 60-70-dollar world, and the world’s trying to figure out: What really is the cost of energy, and what is the impact of that?
As Russia looks forward, we’ve talked a bit about stable fiscal policy. And it’s recognizing that the decisions we make today in energy cannot be enacted instantaneously. So as we think about energy supplies looking forward, we need to think five, 10, 20 years forward – because the decisions that are made today will determine where capital is allocated. Which will determine where energy supplies come from for decades to come.
MR. KEMPE: Thank you very much. I think we’ve got a lot already. I’m going to turn to questions from the audience now.
We’ve got a lot of very interesting ideas. At the end, I’ll throw some of those out with things I’ve learned here. But a lot of interesting ideas – some potential conflicts here. There’s some big companies on the panel, and we’ve heard that big companies can’t figure things out. We’ve heard that Russia is going to be the wave of the future in energy – we’ve heard that Russia is not going to be a player in the future. We’ve heard the future is technology. You know, there’s just so many things that we’ve heard already.
I want to turn to the first question, to the vice president of Upetrom, Bruno Siefken. Mr. Siefken, where are you sitting? Please. And if you could start us off with the first question.
Q: Yes. Let me ask the first question.
MR. KEMPE: And please say to whom you’d like to direct the question, as well.
Q: I’d like to address it to Mobil-Exxon and Petrol – and TPIO, the countries working around the Black Sea. The development of the Black Sea, it was already mentioned, is very expensive; to drill one well will cost us roughly $1 million a day, and you probably drill about 180 days on such a well. So this is a lot of money.
At the end of the story, we have to bring all of this equipment into the Black Sea; there are certain constraints to bring it into the Black Sea. You just mentioned the bridge over the Bosporus in Istanbul. To bring in a deep-water rig will cost us about 50 to $60 million, just to mop and de-mop.
A hundred and fifty million people are living around the Black Sea, and I would like to say that, in one way or the other, they have to pay for this. They have to pay it either in resources or in taxes, depending on whether you’re a national oil company or an international oil company.
I would like to ask you, what is the efforts of the governments, industry and ENP operators of the region to develop the local deep-water industry for oil and gas and to diversify – as we spoke about yesterday – to diversify the stream of oil outside the Black Sea? How do you want to diversify the influence of the handful of deep-water operators and constructors?
MR. KEMPE: Terrific, and we’ll try to answer as quickly as possible so we can get in as many questions as possible. But I think I was hearing, that’s for ExxonMobil, for Petrom and for TNK-BP? Yes? Please.
MR. MANN: It’s – I’ll just make a few quick points. It points out, I think, first of all, that in a capital-intensive industry, it’s getting more expensive. And the next round of development is going to go to those corporations that really can mobilize –
MR. KEMPE: And maybe, let’s keep this microphone up here and we’ll pass it around as people come up, so we don’t –
MR. MANN: Just, I mean, to highlight the capital-intensive nature of the next generation of petroleum extraction. And I think the way that this is going to move forward is partnership between very large IOCs with capital and technology and national partners, is the model that’s going to work. In terms of developing the local capabilities, I think every IOC, and certainly ExxonMobil, wants to do this.
For smoothness of operation, for cost saving, it’s what makes sense as a business model. In Sakhalin, where we operate, we now have 90 percent of our employees are Russian employees, operating a highly challenging project. It is, again I think worldwide and in the Black Sea, we know what works. We know the models that work. And the question is how smoothly the IOCs the NOCs and the governments are going to be able to move towards these effective models.
MR. KEMPE: Thank you.
MS. GHEORGHE: Yes, if I may, we are the local partners. If I – for ExxonMobil, so definitely, we do provide the local resources in that. As for the ocean activities which we’ve developed because we’ve been producing for quite a while now, more than 90 percent of these are being done with equipment and services provided by Romanian service suppliers. Definitely, some of the equipment is imported by those as well, but there is a definitive economic interest to use, to the extent possible and viable from a technical and commercial point of view, the local contractors.
MR. KEMPE: Thank you.
MR. SLIGER: Maybe the only thing to add that hasn’t been mentioned so far – when companies – when private capital looks at any investment opportunity, it’s always looking at the quality of the return, or the marginal opportunity. We don’t pick geographies based up on which geography seems more appealing for esoteric reasons. It always has to come back to a financial reason.
When we do that, we do run into host-country tradeoff issues sometimes, as far as balancing local content demands and yet, at the same time, trying to use the appropriate technology to generate the kind of return that’s necessary. That requires dialogue, both with the host country and with the source of capital. If you can provide a better solution, provide a greater economic return, ultimately, it benefits everybody. But at the same time, we understand there are host-country development desires as well.
MR. KEMPE: I thank you very much.
MR. UYSAL (?): Can I have some comments?
MR. KEMPE: Yes, please.
MR. UYSAL: I believe the question is directed towards the – for the Turkish Petroleum Corporation. We are the biggest player on the Black Sea and we are going to start the drilling operation in next January. Our partners are Petrobras and ExxonMobil, and those are our licenses.
Petrobras has made an agreement for the 5 years for the Leiv Eiriksson drill semisub so that their ship will work in the Black Sea, and maybe 5 years in period. And during those times, we will be able to test all of our prospects in the Black Sea, which we believe they may have huge reserves – including the Russians and the Romanians. They will test their products with that semisub also.
Therefore, we have about 5 years and we have about – within these 5 years, we have to make our plans for the production, also. So when it comes to the production, we definitely need to build our own FPSOs and our drill ships in the Black Sea. I completely agree with you, and the circumference of the Black Sea has to come together with our international oil company partners and we have to solve that problem for the future. You’re right. Thank you.
MR. KEMPE: Thank you, thank you very much. I see a question from Lady Judge, please. And if you could wait for a microphone –
Q: Thank you very much. As you know, I’m chairman of the U.K. Atomic Energy Authority, so I would ask a nuclear question. From what I understand, Romania has 13 percent of its energy delivered from nuclear sources, which is up from 9 percent in 2006.
We were told by a number of the panelists that Romania is a very resource-rich country and that the area is very resource-rich. We know Russia is very resource-rich and we know the Middle East is. So my question is, why are all of these countries, which have no doubt a great amount of resources – whether it’s peak oil for now or peak oil for later; there is plenty for the next 30 or 40 years, as this gentleman said. Why are they all beginning to invest in nuclear, especially when it has been pointed out that it is expensive energy? It is expensive from an infrastructure point of view.
We also know that renewables are expensive from a technological proving point of view. Bu the question is, are they investing in nuclear because they want to be self-sufficient, because they want to have energy independence, because it’s clean and it doesn’t emit carbon or just because they think they need to increase the energy mix? And where are renewables, which are often thought of as the other side of the nuclear coin, in this area?
MR. KEMPE: I think these are great questions because most of the companies up here are dealing in more the fossil-fuel area. And so how are you viewing nuclear and renewables? Anyone in particular or should we just see who picks it up? Who would like to jump in? Please.
MS. GHEORGHE: Do I need to use the microphone? Okay.
MR. KEMPE: This is the nuclear mike.
MS. GHEORGHE: (Chuckles.) I hope not. I think Romania has indeed a vocation to have more independence from an energy point of view. It does have a very diverse, a resourceful base of energy sources. I am talking about coal, oil and gas, as we discussed, hydro and nuclear and obviously – and also a great potential of renewables. But you have to remember that, on the one hand, the oil and gas is quite mature.
We mentioned here, we have 150 years of reduction in Romania of oil and 100 years of gas. So these mature fields have a very rapid decline rate, which definitely means that, probably, with huge effort, we might reach the 50 years which have been mentioned here for the future of oil and gas – but definitely not as long as in other parts of the world like Russia or the other places.
As regards the nuclear, I think it was a government decision which has been put in place some 10 years ago more, actually. And it is indeed a way to diversify further and secure cleaner and more efficient supply source for Romania. And, at the same time, I think in view of consultation with the Romanian population, this has been accepted as a way to produce and secure more independence from an energy point of view to Romania.
MR. HAKMAN: So we have been discussing about fossil fuels, mainly oil and gas rather than other sources of fuels like coal. But we need to I think bear one thing in mind, that all this use of fossil fuels in the light of the climate change issues is a necessary evil.
If it would be replaceable for the same cost without harming the economy, mankind should immediately stop using fossil fuels. But this is not possible. And this will not be possible in the next decade or 100 years. But, still, alternatives to that need to be developed and need also to make economic sense. And nuclear, as of today, makes economic sense. And I think this is also one of the reasons why countries like Turkey also try to go into that direction.
MR. PATRICIU: As you know, 20 years ago, we were a socialist country. Socialist means feudalism. The feudal, in his castle on the hill, wanted the country to be independent and decided that we need nuclear. After 20 years, we have no more socialist country; we are socialist in mentalities, unfortunately. That is why the project was continued, due to this kind of nationalism which encouraged us to think that we have to be independent. Independent of what? Nobody knows.
But we are still following this path of producing nuclear energy which, in my opinion, being only a few hundred kilometers from Koslodoi (ph) is not making us Romanians big fans of nuclear energy. But still politicians are insisting and going on with this project, which, in my opinion, is unfortunate.
MR. KEMPE: And let me take one more answer.
MR. SLIGER: Thank you. I’m not a nuclear expert. I don’t profess to be. But I do think if you take the comments that have been shared around the table this morning, they all add up to the summary answer, and that is, A, I think we all want to be energy sufficient in our own way and not have to rely on foreign sources of energy. Number two is, to extract the hydrocarbons that we all feel still remain in this region, it’s going to take technology and it’s going to take investment. And it’s going to take a price of oil and a price of gas that supports that investment.
And so, when you add those in combination, it’s not only nuclear; it’s not only solar; it’s not only wind or other sources of energy – biodiesels and biofuels – but it’s all coming to the same conclusion. And that is we all want to have multiple sources of energy so that we have various ways to go ahead and have a solution in case there is a shortage in one field or another.
MR. KEMPE: Thank you very much. Question in the back.
Q: Alan Riley (sp), professor, City University, London. I am going to talk about the issue Mr. Patriciu raised about the ability of Russia to deliver energy to Europe. I think the discussion about whether or not Russia has enough energy can be divided like this; that probably in relation to oil that’s entirely correct. There is a lot of oil coming out of Russia. And that’s partly due to the liberalization of the Russian oil sector in the 1990s.
The problem, however, is our friends at Gazprom and the Russian gas market. And there we do have a very significant problem, partly because of the dysfunctional nature of the Russian gas market, its inability to actually deliver because of the dominant position of Gazprom. It’s also to do with the decline of the Nyagan Patans (sp) fields and I would suggest also the problem of low regulated prices in Russia has a massive disincentive to investment.
My point is simply this: Is that I think – I think Mr. Patriciu may be actually more right than he thinks because I think there is a very serious supply problem which Mr. Putin has recognized – and that the issue about getting gas from sources within Europe, looking at gas hydrates I think is a very interesting possibility. One of the more near-term possibilities, I think, is unconventional gas. This is gas in rock shale and coal bed.
Now, it’s very interesting; in the United States, this is already a tremendous reality; 50 percent of U.S. gas production in 2008 was unconventional gas. My point is that all of the existing surveys suggest that in Western Europe alone, there is the equivalent of two-thirds of the entire Russian gas reserve in unconventional gas resources and there may be substantial amounts in Eastern Europe as well.
So yes, I think you’re very right; unconventional gas is one possibility; hydrates are another, but we may not actually need all of these pipelines. Thank you.
MR. KEMPE: Is a question from –
Q: Well, I wanted to – I was trying to solve this problem between – the issue about whether Russia actually has gas; Russia has problems in the energy sector. My argument is, there is not so much a problem in oil, but Mr. Patriciu is correct about Russia.
So it’s an observation really. But if the two gentlemen would like to comment, I would be interested. Thank you.
MR. KEMPE: The two being TNK-BP and Dinu Patriciu.
Q: Yes.
MR. SLIGER: Let me start very simply: There is no question that Russia has enough gas to supply Europe for as long as Europe chooses to use natural gas. The question is at what price and under what terms and conditions? I would agree with you that there are certainly problems with Gazprom as a natural monopoly. And you talked about domestic gas prices and the subsidies. We need to keep in context that Russia has been at this game called market economy and democracy for plus or minus 18 years now.
They have made great strides; they are generally going in the right direction. They also make mistakes like any other country does. They have almost achieved – and by 2010 they should achieve – what is called export-net-backed parity on their gas prices; in other words, when they no longer subsidize domestic natural gas prices.
There is a huge political issue – and we could probably spend forever discussing it – around what is the appropriate cost of transit for Russian natural gas to go across countries like Ukraine or for oil to go across countries like Poland. In a pure economic sense, it’s as simple as, what is the cost of the next-best alternative? When Russia tries to pursue, in her own self-interest, which is oftentimes the second part of Churchill’s quote that is forgotten, as Russia being a paradox inside – an enigma inside a paradox inside a riddle – or I can’t really remember what it is.
But it’s also Russia pursues her own self-interest. When they’re trying to work through transit gas issues and come up with alternatives, be it the Blue Stream pipeline that is already transiting the Black Sea today and operational, whether it’s South Stream, that is trying to come off the ground now, or North Stream, you also start running into large political problems.
And Dinu hit the nail on the head; the problem with pipelines is not economics; they are economically more efficient than any other mode of transportation for the products that we’re moving through them. The problem is political. And, as we know from the people and the experts that are in this room, political problems are oftentimes incredibly, incredibly difficult.
MR. KEMPE: Very quicky, Dinu.
MR. PATRICIU: Yes, I understood that the question was – or the remark was that in what the oil is concerned, Russia has enough reserves to go on and on.
MR. SLIGER: And gas reserves.
MR. PATRICIU: But for gas, the gentleman from England sustained my point of view that they have problems. My only point was that I hope that alternative sources of gas will be cheaper than import from Russia and let them develop their future industry based on their reserves, us being independent from these services.
MR. KEMPE: Thank you. Gen. Wald, please.
Q: I’m Chuck Wald, the Atlantic Council from Washington. And my question is for Mr. Sansom and Mr. Sliger with regard to Mr. Hunt’s comment. And excellent panel, by the way, very diverse. And I guess that’s the point. And my question specifically is Schlumberger must do actuaries. And really what I’d like to know is your estimate of, say, 2015 of what the demand globally will be because, from what I’ve heard, first of all, I think all the fossil fuel available will still be needed. All the alternatives will be needed; all the renewables will be needed including nuclear.
And the real issue is global demand based on emerging markets, particularly Brazil, Russia and India – Africa, for that matter, as well. So can you kind of put into perspective what the real demand might be, either one of you? Thank you.
MR. SANSOM: Yes, we are looking at that quite regularly on demand. So I mean, in the last year, obviously, we’ve had a blip and there is a downward demand. But the overall demand going forward is a continual increase. And what is interesting is we talk a lot about wind and tidal energy and alternative solar; one estimate I personally heard is that even if you doubled that every single year, you could only just keep up with the increase in the demand. The bottom pillar of what we use today is still going to have to come from hydrocarbon base until there is an alternative way of finding hydrocarbon – sorry, hydrogen to burn.
The challenge going forward we certainly see to the industry is how to burn that in a sustainable, environmental manner. And the technology is there; it’s called carbon sequestration. There is a lot of debate about it, but that’s something certainly Schlumberger is looking at to help whoever wants to start that off – because getting the carbon back down under the ground is actually just as easy as taking it out, but it costs.
Now, one thing you talked about, costs, a point I would like to raise is that a bottle of water – not out of the tap – but a bottle of water is more expensive than a bottle of oil. So we think it’s expensive, but it’s got a long way to go.
MR. KEMPE: Steve, do you want to deal with this at all, this question?
MR. MANN: Just, I was looking through this morning, the IAEA projections of global energy demand and investment capital needed for that, between now and 2030 the IAEA projects that there will be $380 billion in investment needed to develop the new energy sources. And we’re not talking alternatives, which is – or things like biofuels, which are a separate part of this.
It strikes me that given the enormous capital needs and given what people have referred to in terms of the additional complications in an age of resource nationalism that it’s only going to be more complicated to develop this energy in the future. Will it be done? I don’t doubt it. But I think the process is going to be much less linear than it was in previous decades.
MR. SLIGER: Maybe the only thing I could add is, in the total energy mix, to put it in perspective, if we decide that we’d like economic growth – and I think everybody in the room would agree we do – picture whatever economic growth trajectory you want to envision, whether it’s 1 percent or 4 percent and then take energy growth as a relative fraction of that and you won’t be far off the mark on how much energy demand is going to be required.
What fundamentally I think all experts will agree as you look out over the next five, 20, 30 years is that it is actually going to take every energy solution we can identify and even those that have not been identified yet to be able to kind of traditionally square the circle given the amount of energy demand growth that is going to be required from the non-OECD world.
Even if we can find ways to actually drive total primary energy consumption down in the OECD world, it’s still going to take all of that demand reduction in the OECD world plus every other solution we can come up with to try to be able to meet the non-OECD’s needs.
MR. KEMPE: Let me – does anyone want to jump in with the last one-minute comment on this because, otherwise, we’re going to close the panel? But I don’t want to leave anyone just burning to say one 60-second thing. Yes? No?
Let me close by saying one thing and then we’ll take a half-hour break and come back here promptly at 11:30. We really don’t want to start later than 11:30, just to keep ourselves on time. Let me just first of all say how thrilled I am to have had a panel with such rich expertise, such a diversity of views, such enormously broad experience. And there will be continued conversations in the hallways that people will pick up from this.
But let me say something very important about this forum: We are not a one-off conference. We are not something you come to one time and then forget about because this is going to be not just a yearly forum, but, in many ways, like the World Economic Forum in Davos, what we’re really trying to create is an ongoing conversation of players in the region – in the public sector, in the private sector – and get them talking to each other in an informal way.
There are a lot of business conferences; there are a lot of political conferences on an official level. There are very few ways to bring together the – both sides in an ongoing way. And then we have a platform in Washington which will be ongoing, a platform here that will be ongoing.
We invite government to let us know what your issues are. Come to us, tell us what you want us to work on, what you think is being missed. Is it gas hydrates? Is it, you know, the future of pipelines? Is it – what is the issue you think we need to raise to people’s attention the most, that politicians are missing? And then we’ll have the ministerial roundtable tomorrow that’s going to pick up a lot of these issues. So this, for me, is a great beginning, but it’s a great beginning of an ongoing, very exciting initiative.
My favorite quote of the panel is, “We didn’t leave the Stone Age because we ran out of stones.” So we’re going to be looking for the next stone, the next big thing, and we’re also going to be looking for what we’re going to do with our old stones as well. So thank you to the panelists; thank you to the audience; we’re off to a very good start. (Applause.)
Transcript by Federal News Service, Washington, D.C.