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Good morning Ladies and Gentlemen.

It is good to be back in Brussels. The last time I spoke here in December 2006 I said we were approaching a critical moment in framing a long term energy policy for Europe.

At that time I was a member of the Commission's High Level Group on Energy, Competitiveness and the Environment, which in a modest way showed how business could work with government on a very complex set of issues. I am pleased that we were able to contribute to the development of the EU's Climate Change and Energy package, the framework for which was announced in January 2007 as part of the first Strategic Energy Review.

Well, now it is decision time. The Climate Change and Energy package is moving through the legislative process and the question is: do we go ahead and put in place the architecture of a long term energy policy for Europe - or do we hold back in the face of the difficulties of the task and the distractions of the current economic situation?

This is the subject I would like to address this morning. I intend to cover four things; first, the major drivers which are shaping the energy landscape; second, the criticality of getting policy right and the need to be able to make adjustments as we go; thirdly the need to enable those solutions which will have a material impact; and finally the importance of European leadership at this time. I am a strong advocate of the principles of the Climate Change and Energy package and believe it should be implemented.

So, let me start with the energy landscape.

As illustrated by this chart of US energy sources over the last 150 years, the truth is that the world of energy is always changing. At the time of the US Civil War almost all of the country's energy came from wood, with only about 10% from coal. These days it comes from oil and gas, nuclear and even in small amounts from renewable sources.

Two things are important from this chart. First, energy change is slow, driven by changes in technology and politics, but moderated by the forces of incumbency and political risk aversion to sudden policy shifts. Second, the realities of the gradual shifts in energy mean that the world's dependence on carbon-based energy will continue for many years to come. If we wish to make another significant change by 2050, as I believe we do, we must start the process now.

So what are the key drivers of change in energy?

• First, the growth in demand
• Second, the operational challenge to provide energy supplies to fulfil that demand efficiently and competitively
• Third, the need for secure sources of energy
• And finally, the concerns for the environment and the recent emergence of climate change as a major issue.

Today they have all reached a new level of intensity - and we have to tackle these long term problems amidst the pressing short term priorities of perhaps the worst financial crisis for years.

Let me start with growth in demand

I am sure you are familiar with the basic facts but they are always worth restating. The demand for primary energy is expected to grow at least by a third by 2030. Relative to a 1990 baseline and looking forward to 2050, demand is expected to have increased by fifty percent. The majority of this increase - at least for the next decades - will be met by fossil fuels.

Furthermore demand growth is shifting from the OECD to the major emerging economies. Energy use in China and India is still relatively low on a per capita basis but this will change as these societies transform from a rural to an urban way of life. The resulting need for electrical power will be a key driver of future energy demand growth - and most of this demand will be met through more hydrocarbon-based power generation.

The second driver is supply.

The bottom line is that global energy supply has failed to respond adequately to rising demand. This is due to a range of factors mainly 'above the ground' rather than below and including OPEC production constraints, political risks, operational challenges, supply-chain bottle-necks and in the case of refining capacity, tough environmental specifications.
The world is not running out of hydrocarbons but the global oil market, for example, is a lot tighter than it was 15 to 20 years ago. This chart shows the world's spare oil production capacity as indicated by the difference between production capacity available and the call on it from the world's markets. As you can see, the lines have once again moved very close together. This tightness will continue to drive volatile and potentially high prices. There is an urgent requirement for investment into new capacity and the IEA estimates $22 trillion of new investment in energy is required by 2030.

It should also be clear that the fall in oil prices since the summer of 2008 happened primarily not because the supply situation has improved, but because demand has slackened significantly. Consumers, notably in the US and Europe, have first responded to high prices by reducing consumption, and declines in the rate of global economic growth have then had a further impact.

The third driver is energy security.

There is a significant geographic mismatch between consumption of hydrocarbons on the one hand, and resources on the other. For example North America, Europe and Asia account for about 80% of world oil demand but only have 10% of the conventional reserves. There is a broadly similar disparity for gas.

Coal incidentally is different - not only are resources abundant but they tend to be more conveniently located near the point of consumption - and this also has important long term policy implications.

As demand grows, more oil and gas will be traded across international borders. No wonder energy security has featured so prominently in public and political debate through the developed and developing world.

New oil and gas resources are increasingly difficult and costly to access - often from remote and challenging locations. It is here that the role of International Oil Companies (IOCs) such as BP is especially important. IOCs are the only truly global multilateral energy vehicles; we work on the frontiers of the industry and only IOCs have the capability to manage many large and risky projects simultaneously. We also ensure that the markets and infrastructure between resources and the customer work efficiently and effectively. In addition, always remembering that we are commercial enterprises, we are a source of energy policy advice and partnership with governments all over the world. I believe that far from dying out, the IOCs will play an increasingly important role in the future.

The final driver of the energy market is the environment and, in particular, the growing concern about human-induced climate change. There are differing views and some strong prejudices on this issue. There are however two stark facts.

Over the last century, atmospheric concentrations of CO2 - the blue line on this chart - have risen to their highest levels for over 650,000 years and this increase is almost certainly due to our use of fossil fuels. OECD and non-OECD emissions are now about equal. Secondly, global temperatures have been rising in line with this trend. So although there is some small residual uncertainty, there is a high probability that these trends arise from human activity and we must take the right decisions now to mitigate the future risks of climate change.

I have already noted that global primary energy demand is expected to double by 2050 relative to 1990. However, in July 2008 the G8 issued a statement which supported a target of reducing global greenhouse gas emissions by 50% by 2050. That scenario would mean that by 2050 we effectively need to reduce the carbon intensity of the world's energy by a factor of four in order to meet these dual objectives.

These are huge challenges but they are not without solutions.

I believe there are four elements of the available solution set, which need to be applied across the board:

1. Accessing and developing adequate energy resources to meet demand
2. Investing in new technology
3. Guaranteeing an efficient market, to underpin competitive economic growth and energy security
4. Underwriting all of this by good energy policy, framed to help markets work, behavior to change and technology to be developed

So, what does this solution set mean in practice?

Let me first look at an area of policy which has served our short term environmental needs well to date, but which may have unintended consequences. The message here is that the solution space between the four drivers is complex and requires continuously improving but reliable regulations and policy.

I am talking about European gasoline and diesel specifications and their effect on energy security and CO2. My day job is to run the Refining & Marketing segment of BP's business, so this is something I am closely involved in and which I feel strongly about.

Across almost all of Europe there is a policy of using fiscal measures to encourage diesel consumption instead of gasoline. This has been a response to the higher fuel efficiency of current diesel engines. However, the drive both for more diesel and lower and lower sulphur fuel to improve SOX emissions, has had unintended consequences. This is a policy which may now be failing to deliver best value either for consumers or for carbon emissions and energy security.

This chart illustrates the surging growth of diesel consumption in Europe relative to gasoline over the last decade.

Diesel and gasoline demand are shown by the yellow and blue bars respectively. You can see that demand for gasoline is falling and for diesel is rising steeply.

This growing European imbalance in gasoline and diesel, exacerbated by much more stringent diesel specifications, is forcing costly investment at the refinery and increasing operating severity, both of which result in more CO2 production from the conversion process but unfortunately do not give rise to any extra overall production volumes. In fact, in order to meet the demand, we are having to import diesel to blend with our own production.
As this next chart shows, that means that we are now importing over 600,000 barrels a day of diesel and gasoil, and most of this is coming from Russia and the Former Soviet Union. Simultaneously, we are producing more gasoline locally but as demand is shrinking, we are exporting nearly one million barrels a day of perfectly good product, over half of which is going to the US. Europe is therefore simultaneously becoming more dependent on supplies from Russia and exposed to the downturn in the US market.

A rebalancing of fiscal and other policy incentives would not only restore efficient use of the existing European refining capacity but also significantly reduce our dependence on Russia and the US markets, thus improving supply security.

Another unintended consequence is that in some countries such as the UK, the customer price for diesel is now well in excess of that of gasoline, so that it is not even clearer that the fiscal incentives are benefiting the end-consumer.

Finally, diesel vehicles have indeed been more fuel and CO2 efficient on a per kilometre basis than current gasoline engines. However, we believe that for personal transport, there is greater upside for future performance improvement in gasoline technology than in diesel and we should be encouraging the next generation of higher performance small gasoline engines.

In addition a rebalancing of fuel policy would also open the door to a more sustainable biofuels policy for Europe because it is fundamentally easier to source sustainable bio-components for gasoline than for diesel.
So, the bottom line is that policy formulation needs to be considered carefully in the light of all the drivers and not only in pursuit of one of them. Policies also need to be reliable, and yet capable of evolution.

Beyond paying attention to regulation of today's energy markets, I would now like to turn to the subject of which energy options could provide a material contribution to Europe's energy dilemma. Policy must encourage those technologies and options which are reasonably judged to have a material potential impact, if Europe is to be successful.

Let me begin with biofuels. I know there has been some recent controversy over biofuels - in my view some of it misplaced.

This chart shows a projection of biofuel penetration over time, indicating the potential for them to account for between 11% and 19% of the global transport fuel market by 2030. Announced regulation to date, including that of the EU, suggests we are certainly on track for the lower end of this range.

The fact is that biofuels are a proven source of low carbon energy and have a vital contribution to make to energy security. The controversy is based on three misconceptions: that biofuels necessarily mean the substitution of food crops; secondly that they also require destruction of natural habitats such as the rain forest; and thirdly that they do not necessarily provide a significant reduction of full cycle CO2 levels.

Whether there is substance in these concerns depends very much on where the feedstock comes from and how it is farmed and brought to market.

Today, the best biofuels are produced in tropical locations where there is plentiful sun, available land and a sustainable crop. Brazilian ethanol made from sugarcane offers emissions reductions of up to 90% on a through-cycle basis. This is why BP has recently made the oil industry's largest investment to date in Brazilian ethanol. In this joint venture with local partners, the cane is grown on existing plantations on under-utilised pasture land, while water comes entirely from rain-fed irrigation. Such biofuels are clearly sustainable and their production and use should be incentivised by an open market in which biomass import tariffs are harmonized.

Looking ahead the development of 2nd generation biofuels at a competitive price, by developing fuel molecules with better properties or by developing the capability to process lignocellulosic material, is very promising. At BP, we are preparing to demonstrate biobutanol - an advantaged molecule with a higher energy density than ethanol - and funding research programs to develop and produce commercially viable lignocellulosic biofuels and fuel from waste biomass as opposed to food plants. These will be the real breakthroughs. To support this work we are investing $500m in an Energy Biosciences Institute in partnership with some of the most prestigious universities in America.

So what does the EU need to do in order to encourage sustainable biofuels?

The first and most important thing is to lower tariff and other trade barriers, so the right feedstock can be imported from Brazil and other tropical locations. Secondly, we would like to see the confirmation of credible long term EU targets and market framework. Thirdly, the harmonisation of EU standards, including fuel specifications and CO2 life cycle performance and sustainability requirements. And finally the incentivisation of 2nd generation biofuels research and technology.

My next topic is nuclear.

BP is not involved in nuclear but it has an important place in the energy debate. Nuclear energy has advantages in terms of energy security and CO2 emissions but the engineering and planning challenges are significant. The latest generation of reactors offers great promise, including through passive safety systems, reduced proliferation risk and lower costs. But real barriers have to be overcome, particularly on nuclear waste, if nuclear energy is to win public and political acceptance. Nevertheless it is in our view difficult to see a credible lower carbon energy mix for many decades ahead without a significant nuclear component.

My third area which can make a material contribution is Carbon Capture and Storage.

This is a viable technology and the IPCC has estimated that CCS could account for up to half of the CO2 emissions reductions needed this century.

However, CCS has yet to be demonstrated at large scale, due in part to the high costs of early demonstrator plants. Nevertheless a huge amount is being done, including in BP, to understand and improve both the science and technology of CCS.

This technology provides a prime example of where energy policy is difficult. The EU is doing much to ease the way forward, for example by codifying the rules on permitting and regulatory issues. However, the largest hurdle remains the extra costs of a CCS plant compared to simple release of CO2 to atmosphere. How should that additional cost burden be shared between public and private sectors?

Our project in the UK didn't go ahead because, even though we were looking for only the same level of government aid per tonne of CO2 enjoyed by wind and other renewables. It seemed that the politics and sheer headline cost presented too great an obstacle, even though this single project would have eliminated more CO2 than the entire UK wind park at that time.

We are consequently encouraged by the current legislative debate in Europe on the sourcing of finance for CCS demonstration projects from the Emissions Trading Scheme or comparable mechanisms. If Europe wishes to have a serious stake in this technology, then it is vital to bring this debate to a conclusion and to provide a sound financial basis for CCS operational demonstration.

If there is a 'silver bullet' in the whole spectrum of energy and climate policy it must be in energy efficiency - the last of the material impact areas I want to address. And yet this subject consistently attracts less public attention than many of the others I have already covered.

A few statistics may help to reinforce the point. We estimate that the targeted 20% improvement in energy efficiency by 2020 is equivalent to a reduction in European energy imports of 32% and a reduction in import dependency from 63% to 54%. Estimates vary, but the resulting cost saving to the EU economy could be as much as 1% of GDP.

This is a prize well worth striving for.

This chart, courtesy of McKinsey shows the price of CO2 in Euros per tonne at which 27 billion tonnes of CO2 could be mitigated economically. It illustrates many points, but two are of great importance.

Firstly, the green area of the chart on the left shows that about a fifth of emissions today could be mitigated through efficiency with no economic cost - in fact with economic benefit. The second important thing is that for a long term price of 40 Euros per tonne, most if not all sources of CO2 could be addressed.

Within the European economy there is considerable scope for cost effective mitigation of CO2 emissions, if the price signal is allowed to work in an effective manner and if regulations and education are harnessed to encourage energy efficiency. Given such an approach, the overall cost to the economy of more expensive options such as CCS and nuclear could be significantly reduced.

Each of the areas I have covered presents real and material opportunities, all with challenges but none of them insurmountable using the policy tools available.

In the last part of my presentation, I would like to move onto some of the overarching policy issues which assemble the whole energy mix together.

The need today is to overcome apparent reluctance by consumers or indeed industries to make the necessary short term investment for long term gain. I will focus on three areas where I believe governments, civil society and business in Europe can and should work effectively together in this direction. The first two are long-term carbon pricing and the need to incentivise the key and material technologies.

In our view the placing of an economic value on carbon emissions remains of central importance in reshaping consumption and investment decisions towards lower carbon solutions. The key is to set a reliable twenty year pricing signal for CO2 as the basis for rational operational and investment decisions and to encourage the more rapid development and deployment of key technologies. At heart carbon pricing is a market tool of the type familiar to all businessmen and we have no reason to fear such a recognisable instrument.

In principle there are many ways to establish an implicit carbon price through regulation, or an explicit visible market-wide price either through taxation or a market mechanism such as emissions trading.

This chart shows (1) the mainstream price for CO2 as established through the European ETS, indicating a long-term market price of about 40 Euros per tonne.

However, it must be recognised that the short term explicit market price for CO2 may not be sufficient to get the full range of key technologies to the starting gate. To encourage development of key technologies, there is a legitimate case for additional transition incentives, to stimulate the development at scale of new technologies to a point where they can fully compete in the market. As represented by the yellow dotted line (2), such transition incentives today give rise to implicit prices well above 40 euros per tonne, but these should taper away over time through innovation, technology and market competition and finally merge with the explicit price to yield a single market-wide price of carbon across the economy. Transition incentives should be focused on technologies which could make a material contribution and should be designed to reward progress towards commercialisation.

In our view transitional support for CCS would fall into this category.

In terms of explicit pricing we have a preference for 'cap and trade' mechanisms, as this provides certainty of environmental outcome and allows participants to minimise the economic costs of carbon mitigation. We expect local or regional cap and trade schemes to progressively link together into a wider global market. A successful EU Emissions Trading Scheme is likely to become a significant hub in the future development of a global carbon pricing mechanism.

We consequently remain positive supporters of the EU ETS and believe it is important that the system is carried forward successfully into a third phase of operation and beyond.
Of course there are areas of controversy in the current EU legislative proposals but it is striking that there seems to be relatively little contention about either the level or rate of reduction of the overall emissions cap.

Allocation of emissions allowances within the cap should be on the basis of quality baseline data and should also include a proportion of cash auctioning, in order to strengthen both the price signal and the incentive for marginal CO2 mitigation.

Nevertheless the auctioning element could also present a genuine competitiveness issue. Up front cash cost of allowances will reduce profitability and may drive carbon intensive industrial capacity out of Europe, if there is a significant exposure to international competition. This will need to be managed carefully.

In our view this serious issue can be solved within the ETS architecture by the use of free allowances, assessed for all industrial sectors on the basis of equitable, harmonised and transparent criteria taking into account international exposure. We are encouraged that the current debate appears to be moving in this direction. And we do support carefully managed auctioning as a component of the system.

In addition to using transition incentives and the price of CO2 to encourage new technologies, it is critical to harness Europe's full technological capabilities. Here there is more to be done, and is the third overarching area of focus.

Technology does not provide all the answers to the energy and climate change challenge but it is difficult to see sustained progress without a very strong technological component. In my view it is not unreasonable to compare the scale of the task with the nuclear energy or space programmes of previous decades.

We need to strengthen the 'pipeline' of research and innovation in the European economy. Europe is fully able to produce world class scientific ideas but can learn a great deal from the US when it comes to integration of multiple academic disciplines and interaction with business and finance to produce commercially attractive solutions.

This was certainly our experience when we came to evaluating the best global location for our $500 million investment in the Energy Biosciences Institute which I mentioned previously and is now taking shape in California and Illinois. The European bids were simply not in the same league as those from the US. In Europe the potential is there but it needs to be liberated by a bolder and more integrated approach.

Finally, let me address the issue of European leadership and Europe's energy policy response.
On some measures the wider Europe is the largest economic block in the world and has abundant scope to both lead the changes necessary in energy policy, and also to benefit from this leadership as the world economy returns - as it certainly will - to a more stable growth path. Mastering the challenges of new policy, technology and energy efficiency and integrating them into the wider economy can, if led correctly, be sources of real global competitive advantage.

There are many voices saying that now is the wrong moment to set out on the next stages of the European energy journey. The financial markets have dried up, the economy is heading into difficult territory and now is not the moment to make difficult and possibly costly changes.

This is not an argument that should be accepted.

It assumes that change can be avoided where all our history - as I said at the beginning of my remarks - suggests that change over time is the only thing that is certain.

In setting out a clear energy policy framework for the future, Europe has not only recognised the challenges but created the basis for future commercial opportunity and competitive advantage. It is an opportunity that deserves to be taken and not feared.

This is not to say that policy decisions should be imprudent or fail to take account of competitive realities. The proposed EU energy and climate package will put in place the architecture of European energy policy but the pace of implementation can and should be managed with care to avoid unnecessary competitive disadvantage.

The pace and level of introduction of cash auctioning for emissions allowances is a clear case in point but we must make a material start in this area.

We should also guard against an assumption that it is only Europe that is moving. Indeed this is demonstrably not the case. The US and China - amongst others - are beginning to muster formidable regulatory, financial and innovative resources to confront the challenges ahead. In that respect I think the US Presidential election race marked another significant step, with both candidates advocating the introduction of carbon trading.

I said in Brussels back in 2006 that we were setting out on a journey towards a new energy future.

Europe has no reason to hesitate. We are on a long journey involving up to 80 Presidencies and many successive Commissions and Parliaments and we must start now. The target of 20/20/20 by 2020 will not be the end of the road but simply another milestone. It is a tough set of goals but faced with the long term challenges, it remains a sensible ambition to get there on time and one that deserves all our support.

What the Commission has put together establishes a framework in line with the materiality of change required while allowing a reasonable timeframe, to 2020, for markets, technology and innovation to get started and iterate towards the best solutions.

Achieving these objectives is realistic but challenging. It will need the full engagement of business and a strong sense of continuing partnership between government, civil society and industry to mobilise the necessary resources and sustain the necessary commitment.

Thank you for listening.

Source: BP Solar