Legislature(2017 - 2018)SENATE FINANCE 532

04/04/2018 09:00 AM FINANCE

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Audio Topic
09:03:10 AM Start
09:03:57 AM World Energy Outlook
10:22:46 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Joint with the Senate Resources Committee
+ Presentation: World Energy Outlook TELECONFERENCED
Mr. Mark Finley, General Manager of Global
Energy Markets, BP America
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
                         JOINT MEETING                                                                                        
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                    SENATE FINANCE COMMITTEE                                                                                  
                         JUNEAU, ALASKA                                                                                       
                         April 4, 2018                                                                                          
                           9:03 a.m.                                                                                            
MEMBERS PRESENT                                                                                                               
SENATE RESOURCES                                                                                                                
 Senator Cathy Giessel, Chair                                                                                                   
 Senator John Coghill, Vice Chair                                                                                               
 Senator Natasha von Imhof                                                                                                      
 Senator Bert Stedman                                                                                                           
 Senator Kevin Meyer                                                                                                            
 Senator Click Bishop                                                                                                           
SENATE FINANCE                                                                                                                  
 Senator Lyman Hoffman, Co-Chair                                                                                                
 Senator Anna MacKinnon, Co-Chair                                                                                               
 Senator Click Bishop, Vice Chair                                                                                               
 Senator Peter Micciche                                                                                                         
 Senator Natasha von Imhof                                                                                                      
 Senator Gary Stevens                                                                                                           
MEMBERS ABSENT                                                                                                                
SENATE RESOURCES                                                                                                                
 Senator Bill Wielechowski                                                                                                      
SENATE FINANCE                                                                                                                  
 Senator Donald Olson                                                                                                           
COMMITTEE CALENDAR                                                                                                            
PRESENTATION: BP WORLD ENERGY OUTLOOK                                                                                           
     - HEARD                                                                                                                    
PREVIOUS COMMITTEE ACTION                                                                                                     
No previous action to record                                                                                                    
WITNESS REGISTER                                                                                                              
MARK FINLEY, General Manager                                                                                                    
Global Energy Markets and U.S. Economics                                                                                        
BP America                                                                                                                      
POSITION STATEMENT: Provided BP's world energy outlook.                                                                       
ACTION NARRATIVE                                                                                                              
9:03:10 AM                                                                                                                  
CO-CHAIR ANNA  MACKINNON called the  joint meeting of  the Senate                                                             
Resources Standing Committee and  the Senate Finance Committee to                                                               
order at 8:36 a.m. She  announced members present from the Senate                                                               
Finance  Committee were  Senators  Bishop,  Micciche, Von  Imhof,                                                               
Stevens, and  Co-Chairs Hoffman and MacKinnon.  Senator Olson was                                                               
CHAIR  GIESSEL   announced  members   present  from   the  Senate                                                               
Resources  Committee  were   Senators  Meyer,  Coghill,  Stedman,                                                               
Bishop, Von Imhoff, and Chair Giessel.                                                                                          
^WORLD ENERGY OUTLOOK                                                                                                           
                      WORLD ENERGY OUTLOOK                                                                                  
CO-CHAIR  MACKINNON  announced  that  the  World  Energy  Outlook                                                               
presentation was the only item  on today's agenda and invited Mr.                                                               
Finley to the table to present "BP Energy Outlook 2018 Edition."                                                                
9:03:57 AM                                                                                                                    
MARK  FINLEY, General  Manager,  Global Energy  Markets and  U.S.                                                               
Economics,  BP  America,  said  he  is  an  energy  economist  by                                                               
training  and profession  and  has  spent 35  years  in both  the                                                               
public and  private sectors studying the  intersection of energy,                                                               
economics, and geopolitics.                                                                                                     
He said the long-term outlook  that formed the background for the                                                               
presentation  is  something  that  BP  uses  to  inform  its  own                                                               
strategic  thinking   about  the   future,  its   portfolio,  and                                                               
investments  across  the energy  space.  Why  share this  outlook                                                               
externally?  The  answer  is  two-fold:  first,  they  feel  it's                                                               
important to be  part of the conversation in the  world of energy                                                               
and the  energy transition that the  world is in. They  think and                                                               
hope their perspectives can add to that conversation.                                                                           
9:06:29 AM                                                                                                                    
As a  member of the  team that  produces the outlook,  Mr. Finley                                                               
said he has  another reason, which is to avoid  group think. They                                                               
want  to  expose their  ideas  to  as  many different  brains  as                                                               
possible  around the  world because  these are  hard, complicated                                                               
issues  and no  one has  a  crystal ball.  The more  constructive                                                               
conversation  and criticism  they  can get  for  their work,  the                                                               
better  off everyone  is. Mr.  Finley welcomed  members' feedback                                                               
and challenges as he goes through the presentation.                                                                             
MR. FINLEY said  they approach the outlook process  with a spirit                                                               
of humility. In  this case, they are looking out  to 2040, a long                                                               
time, and  can't be too  conclusive about  it. This is  not about                                                               
predicting  the future  but about  understanding the  uncertainty                                                               
that  the world's  energy system  faces:  what dimensions  people                                                               
have  some  confidence  in  and  what  dimensions  are  massively                                                               
uncertain  and could  put the  world in  very different  outcomes                                                               
depending on how key variables break out.                                                                                       
9:08:03 AM                                                                                                                    
Slide 2                                                                                                                         
Their approach  is to  use a range  of scenarios  that illustrate                                                               
key uncertainties around the world's  energy system. He used tons                                                               
of oil equivalent  (TOE) in energy demand and  supply profiles to                                                               
compare  energy  sources like  solar  energy  and coal.  For  the                                                               
purposes of  telling a story,  he built much of  the presentation                                                               
around the  scenario labelled "Evolving Transition"  (ET) that is                                                               
consistent  with the  continued  evolution of  the energy  system                                                               
over the last 20-25 years.                                                                                                      
9:09:35 AM                                                                                                                    
Slide 3                                                                                                                         
MR. FINLEY  said he used a  variety of lenses for  looking at the                                                               
challenges. He repeated  the same picture three  times but sliced                                                               
different  ways for  perspective. An  energy demand  profile from                                                               
1970 to  2040 was  sliced into  sectors of  the economy  with the                                                               
center panel slicing  it by location in the  world; another panel                                                               
sliced  demand by  fuel. He  said these  lenses provide  insights                                                               
into the progress and changes in the energy system.                                                                             
He explained  that much of  the analysis  is driven by  the first                                                               
panel,  the sectoral  profile, because  at  the end  of the  day,                                                               
people don't  consume gas or  oil. They consume space  heating or                                                               
mobility, and a lot of  the underlying economic drivers come from                                                               
this kind of energy consumption.                                                                                                
Slide 4                                                                                                                         
MR. FINLEY showed  the breakdown of energy demand  for regions of                                                               
the  world. The  U.S. is  in the  group of  countries called  the                                                               
Organization  for Economic  Cooperation  and Development  (OECD),                                                               
basically the club  of mature market economies  in North America,                                                               
Western Europe,  and Japan. There  is no growth of  energy demand                                                               
in the U.S. and other mature  developed economies of the world in                                                               
this scenario. One  of the key drivers is a  greater focus on the                                                               
more efficient use of energy, a  common theme around the world in                                                               
this scenario.  In fact, this  scenario projects that  the growth                                                               
of energy demand  will slow significantly over time  and that all                                                               
of  the  net  growth  will  be  in  the  emerging  economies,  in                                                               
particular, India and China.                                                                                                    
9:12:14 AM                                                                                                                    
SENATOR  MICCICHE  said  it's  interesting  that  the  population                                                               
escalator  for 40  years seems  unrealistically flat  considering                                                               
the variation in OECD countries.                                                                                                
MR. FINLEY responded  that is a fair challenge and  at the end of                                                               
the  day  they  need  to  humbly acknowledge  this  is  just  one                                                               
scenario  and  there are  lots  of  different possible  outcomes.                                                               
Recent  historical  data  shows relatively  flat  consumption  of                                                               
energy  since  about  the  year  2000  for  the  green  coutnries                                                               
including the  United States. That includes  the Great Recession,                                                               
but it also includes periods  of economic growth before and after                                                               
it. Some  evidence is emerging  that the  historical relationship                                                               
between growing  economies and growing energy  demand, especially                                                               
in these  more mature economies,  is changing. Partly  because of                                                               
efficiencies and  partly because of the  growing concentration of                                                               
services and  less-heavy industry.  However, there are  places of                                                               
upside risk for the demand profile.                                                                                             
9:13:50 AM                                                                                                                    
SENATOR BISHOP  asked if he  was factoring in  population growth,                                                               
because  the United  States'  population is  starting  to go  the                                                               
other way.                                                                                                                      
MR. FINLEY indicated yes. He  explained that population growth is                                                               
a  factor,  but   that  is  happening  mostly   in  the  emerging                                                               
economies. The  good news is  that the working age  population in                                                               
2040 has  been born already,  but the  per capita income  and the                                                               
degree of  urbanization/sophistication in those populations  is a                                                               
big  behind-the-scenes  issue.  He pointed  to  another  document                                                               
called  the  "Main  Outlook  Document"  that  explores  different                                                               
prospects for African  energy demand that is  driven by different                                                               
assumptions  around  the  rates   of  industrialization  and  the                                                               
urbanization of  the population,  because the profile  for energy                                                               
consumption is very different in a city than in the country.                                                                    
9:15:38 AM                                                                                                                    
MR. FINLEY  said the  right-hand side of  the panel  shows annual                                                               
average growth  rates broken  out into  10-year periods.  In this                                                               
narrative   scenario,  the   growth   of   energy  demand   slows                                                               
significantly  from where  Chinese  energy  consumption over  the                                                               
last  20 years,  which has  been the  big driver  of the  world's                                                               
energy  demand as  it  has embarked  on a  very  rapid period  of                                                               
economic  growth  and  industrialization.  But  that  is  already                                                               
changing; while  economic growth  in China  remains robust  it is                                                               
slowing.  Also, the  mode of  development is  changing away  from                                                               
heavy  industry   towards  domestic  consumption  of   goods  and                                                               
services. China  has air  pollution problems and  there is  a big                                                               
push to use  energy more efficiently and to shift  the profile of                                                               
energy consumed.                                                                                                                
Taking all  those factors into  account, India replaces  China as                                                               
the biggest  source of growing  energy demand in the  later years                                                               
of the outlook, he said.  But overall, global energy demand grows                                                               
much more  slowly than has  been the case historically  even with                                                               
continued economic growth.                                                                                                      
9:17:12 AM                                                                                                                    
In the  interests of  time, Mr.  Finley skipped  to slide  6 that                                                               
graphed  energy  demand by  form  of  energy (fuel)  noting  that                                                               
renewable forms  of energy today  are a  very small share  of the                                                               
world's  energy mix,  but by  far  the fastest  growing group  of                                                               
fuels.  This  is  primarily  due  to  wind  and  solar  in  power                                                               
generation,  but   also  bio-fuels  in   transportation,  smaller                                                               
quantities of  geo-thermal energy,  and other renewable  forms of                                                               
energy. By far  the fastest growing group of fuels  that rises to                                                               
almost 15 percent of the world's  energy by 2040 in this scenario                                                               
is renewables, which accounts for  about 40 percent of the growth                                                               
of total energy consumption in the world.                                                                                       
MR. FINLEY said  the other growth story is natural  gas, which in                                                               
this scenario is the fossil  energy type that gains global market                                                               
share. Global  consumption of coal  in absolute terms  is roughly                                                               
flat with  big declines in the  U.S., Europe, and China  that are                                                               
offset by  increases in India  and other emerging  economies. But                                                               
in  terms  of  market  share,   coal  drops  significantly.  This                                                               
represents  the biggest  change in  the outlook  relative to  the                                                               
experience of the last 20 years.                                                                                                
9:18:53 AM                                                                                                                    
Slide 7                                                                                                                         
MR. FINLEY said one of  the interesting observations he drew from                                                               
this chart  if history is  extended and all the  non-fossil forms                                                               
of energy  are combined into a  single category, is of  the long-                                                               
term  evolution  of  the  different forms  of  energy  the  world                                                               
economy uses. First,  in this scenario, the world  ceases to have                                                               
a  single dominant  source of  energy, which  has never  been the                                                               
case  before. Moreover,  the world's  mix of  fuels becomes  much                                                               
more diverse  than has ever  been the case. This  highlights that                                                               
the  world is  trending in  the direction  of becoming  much more                                                               
competitive  in  the  energy  space. And  as  already  seen,  the                                                               
projected growth  of energy demand is  likely to slow so  the pie                                                               
isn't getting as  big as quickly as it used  to. Secondly, a much                                                               
more diverse  fuel mix results  in more opportunities  to compete                                                               
against  each other.  Finally, there  are  growing prospects  for                                                               
competition between different suppliers  to meet this demand. The                                                               
key  takeaway is  that  they  believe the  world  of energy  will                                                               
become even more competitive over time.                                                                                         
9:20:36 AM                                                                                                                    
SENATOR VON IMHOF noted the still  big demand for coal and oil on                                                               
slide 6  and said  she didn't  want people to  get the  idea that                                                               
renewable and hydro were going to overtake it.                                                                                  
MR. FINLEY said  that was an accurate observation.  While they do                                                               
believe  that  renewable energy  is  likely  to gain  significant                                                               
market share,  the world still  continues to  consume significant                                                               
quantities of fossil fuels, but its share will decline.                                                                         
9:22:05 AM                                                                                                                    
Slides 8&9                                                                                                                      
MR. FINLEY said these slides focus on five key questions:                                                                       
1.  What   has  been   learned  about   electric  cars   and  the                                                               
transformation of the transportation  sector, which is uncertain,                                                               
because by  itself, electrification  is unlikely  to be  the game                                                               
changer.  However, combining  electrification with  other factors                                                               
in  the mobility  revolution, particularly  in autonomy  and ride                                                               
sharing,  acts as  a force  multiplier  that can  result in  much                                                               
bigger implications for oil demand.                                                                                             
"How many electric cars do you  have in your forecast?" is almost                                                               
a "parlor  game" in the energy  circles, he said, and  the answer                                                               
is there  will be 300 million  electric cars by 2040  in a global                                                               
car fleet of 2 billion cars.  But that is the wrong measure. It's                                                               
not  how  many cars;  it's  how  they  get driven  that  matters.                                                               
Electric cars  in this narrative  scenario will total  30 percent                                                               
of miles driven.                                                                                                                
He explained that roughly speaking,  the global car fleet doubles                                                               
to about 1 billion and that grows  to 2 billion cars with most of                                                               
that growth in  the rapidly growing emerging  economies. And they                                                               
believe  that  electric  cars  will be  driven  more  miles;  the                                                               
rationale  being its  autonomy  and the  fact  they believe  that                                                               
autonomous cars  are likely to  become commercially  available at                                                               
scale  in the  mid-2020s and  will  grow rapidly  after that.  At                                                               
first, electric cars  will likely be relatively  expensive to buy                                                               
but not expensive to operate.                                                                                                   
MR.  FINLEY informed  them that  many ride  sharing services  are                                                               
really  big on  autonomous cars,  because it  turns out  that the                                                               
driver is  40-50 percent  of the cost  of operating  the vehicle.                                                               
So,  if you're  going  to pay  more  up front  for  a car  that's                                                               
autonomous, the economics work if  it is operated more miles. The                                                               
logic is that at least at  first as autonomous cars ramp up, they                                                               
will be primarily used in the ride sharing and fleet services.                                                                  
That same logic  also applies to electric cars,  and they believe                                                               
that electric  cars will  form the  majority of  those autonomous                                                               
cars as  they work their way  into the fleet. The  result is that                                                               
while only  15 percent of  the cars  are electric, they  drive 30                                                               
percent of the  miles driven, because they are  primarily used in                                                               
these autonomous fleet applications.                                                                                            
9:26:38 AM                                                                                                                    
SENATOR GIESSEL asked  him to update them on  how autonomous cars                                                               
work. How do they detect the road and determine speed?                                                                          
MR. FINLEY  said that expertise is  beyond him and noted  that BP                                                               
just published a  companion piece of work  called "The Technology                                                               
Outlook" that reviews in much  more detail BP's internal research                                                               
and its  understanding of  the underpinning  technological issues                                                               
around  not only  autonomy but  a wide  spectrum of  applications                                                               
within the energy space.                                                                                                        
CO-CHAIR   MACKINNON   reminded    Senator   Stedman,   that   as                                                               
Transportation  Chairman, he  should research  that and  remarked                                                               
that  Alaska's conditions  are very  different than  other areas,                                                               
especially in snow and ice. She  gave the example of her car that                                                               
has all the standardized bells and  whistles with an alarm if she                                                               
crosses  a line  or if  someone is  in the  car's perimeter.  But                                                               
sometimes  it  pushes  the  brakes   automatically  in  ice  road                                                               
conditions  when she  is trying  to  maintain a  steady speed  or                                                               
doesn't recognize the  difference between a white  line and snow.                                                               
So, it becomes dangerous specifically in icy conditions.                                                                        
SENATOR GIESSEL  added that  Alaska also  has a  lot of  dirt and                                                               
unpaved roads  and she  is interested in  how this  technology is                                                               
actually applied in those situations.                                                                                           
MR. FINLEY  said those are  fair questions  and in the  spirit of                                                               
being  humble  and  acknowledging  the uncertainty,  one  of  the                                                               
things BP observed  is as they think about risks  in the outlook,                                                               
that  talking about  the  number  of electric  cars  is only  one                                                               
scenario  among many.  Everyone says  no matter  what number  one                                                               
uses  that people  say it's  not big  enough, and  that's exactly                                                               
what you  would expect  a big  oil company  to say.  But autonomy                                                               
introduces a  dimension of  risk that  can go  either way.  He is                                                               
saying that autonomous cars are  beginning to come into the fleet                                                               
by the  mid-2020s, but it could  easily be 10 years  later if the                                                               
issues they  flagged rightly can't  be adequately  addressed. But                                                               
it's unlikely  that it will  be 10 years earlier,  because that's                                                               
today. The  framework he is using  allows them to bring  in risks                                                               
on  both sides  of  the  outlook to  bring  some  balance to  the                                                               
9:30:11 AM                                                                                                                    
Slide 11                                                                                                                        
MR.  FINLEY said  this chart  tries to  show the  implications of                                                               
this scenario  for oil  demand by  cars. It  shows that  about 19                                                               
million  barrels per  day are  being  consumed by  cars and  that                                                               
about  20  percent of  all  the  oil  consumed  in the  world  is                                                               
consumed in cars in the form  of gasoline and diesel fuel. If the                                                               
number of cars on the road  doubles and nothing else changes, one                                                               
would expect the amount of oil  consumed by cars to double, also,                                                               
but  things are  changing, and  in this  scenario the  main thing                                                               
that  changes is  the fuel  efficiency  standards. He  emphasized                                                               
that this is a global  scenario and fuel efficiency standards are                                                               
tightened  aggressively  in China,  India,  and  Europe. In  this                                                               
scenario,  the  significant  improvement   in  the  average  fuel                                                               
efficiency of  a car completely  offsets the doubling of  the car                                                               
fleet.  If they  add in  an  additional reduction  of oil  demand                                                               
because  electric  cars are  being  used  in fleet  services  and                                                               
driven  more intensively,  they come  out  with a  view that  oil                                                               
demand by  cars in 2040 is  exactly what it is  today even though                                                               
the number of cars on the road doubles.                                                                                         
MR.  FINLEY noted  that electric  vehicles appear  twice on  this                                                               
chart due  to a  combination of factors  that auto  companies can                                                               
use to  meet their corporate  average fuel  efficiency standards.                                                               
He explained  that regulations as  written today do not  say that                                                               
every car has to get more  efficient, but that the average of the                                                               
fleet of cars that a maker  sells has to get more efficient. That                                                               
threshold can be met by making  all the cars more efficient or by                                                               
selling a higher  number of smaller cars, or they  can meet it by                                                               
selling electric cars.                                                                                                          
The key point  is that the number of electric  cars is irrelevant                                                               
for oil demand.  The regulation defines the size of  that box: if                                                               
you sell  more electric cars  it creates space for  the automaker                                                               
to  sell  more bigger  cars  instead  while still  meeting  their                                                               
average target.                                                                                                                 
9:33:11 AM                                                                                                                    
To fight the  next challenge of a scenario where  people say. "Of                                                               
course,  an  oil company  would  say  that electric  cars  aren't                                                               
having  that  big  of  an impact,"  they  developed  a  different                                                               
scenario  that says  let's  go  ahead and  ban  the  sale of  the                                                               
internal combustion  engine (ICE) in  cars by 2040  worldwide and                                                               
make it even  more rigorous by not allowing  plug-in hybrids that                                                               
would  offer  a  combination  of  ICE  and  a  battery.  In  this                                                               
scenario, only electric cars can be  sold by 2040 and those sales                                                               
have to ramp up very early in  the process. The result is that by                                                               
2040, instead of one-third of  the miles being driven are powered                                                               
by electric cars,  two-thirds of the miles driven  are powered by                                                               
battery cars. But why not  100 percent if the internal combustion                                                               
car  sales  are  being  banned? The  answer  is  legacy  internal                                                               
combustion  engine cars  will  still  be on  the  road that  will                                                               
account for the remaining one-third  of miles, because who buys a                                                               
car  every year?  So, overall,  oil demand  is growing,  and even                                                               
with  banning the  sale of  the internal  combustion engine,  oil                                                               
demand in 2040 is higher than  it is today. Cars account for only                                                               
20 percent of the world's oil  demand, but there is still growing                                                               
demand  for  trucking,  aviation, maritime,  and  for  industrial                                                               
SENATOR  VON IMHOF  referenced slide  23  and asked  if he  could                                                               
touch  upon  the  economic assumptions  used  for  the  renewable                                                               
energy sources,  because politics  influences economic  growth as                                                               
well as  creates secondary effects  such as the need  for copper,                                                               
lithium,  and   zinc  for  the   batteries  amid   growing  anti-                                                               
mines/development, environmental  obstructionists, and not  in my                                                               
back yard  (NIMBY) attitudes. There  is a desire by  Americans to                                                               
see renewable resources, but they  don't like the discomfort that                                                               
goes  along with  it.  She asked  if his  team  had analyzed  the                                                               
push/pull  that  will  certainly  happen in  the  next  30  years                                                               
regarding development of renewables.                                                                                            
9:37:25 AM                                                                                                                    
MR. FINLEY replied that as  economists, they translate everything                                                               
into  cost,  and public  opposition  and  permitting delays  were                                                               
accounted  for  in  the  narrative  scenario.  But  they  haven't                                                               
explicitly modeled an alternative  scenario that digs more deeply                                                               
into those assumptions.                                                                                                         
Slide 13                                                                                                                        
The right-hand panel graphed the  implications of banning the ICE                                                               
for global  CO emissions  using the CO  emissions from  energy in                                                               
the  narrative scenario  and a  scenario  consistent with  global                                                               
commitments to  the Paris Climate  Accord. The impact  of banning                                                               
the ICE  can hardly be  seen, and  the reason is  simple, because                                                               
you're only  attacking one piece  of one fuel. This  highlights a                                                               
theme he will come  back to which is the degree  to which you are                                                               
concerned  about  a  global  problem,   like  climate  change,  a                                                               
comprehensive solution  is needed. Policy options  that just push                                                               
a single lever, like banning the  ICE, won't move the needle on a                                                               
global  scale  due to  the  size  and  complexity of  the  energy                                                               
9:40:10 AM                                                                                                                    
Slide 15                                                                                                                        
The next question is, "When is  global oil demand going to peak?"                                                               
For most of the history of  the world's oil industry, people have                                                               
been  worrying   about  running   out  of  supply,   but  through                                                               
innovations  like shale  and simple  economics,  BP believes  the                                                               
world is more likely to see  an emerging age of abundance for oil                                                               
and gas.  The more likely  drivers will be transformation  of the                                                               
transportation system, climate policy, and other changes.                                                                       
Slide 16                                                                                                                        
The  narrative scenario  shows a  profile for  global oil  demand                                                               
that  grows  but slows  over  time.  The profile  indicates  very                                                               
strong growth  in global  oil demand  due to  a combination  of a                                                               
strong  synchronized  global   economic  recovery  and  consumers                                                               
reacting to  the recent price  collapse. Going through  time, one                                                               
can see that  the growth of oil demand  slows significantly until                                                               
it ceases to  grow in 2035-2040. The net  declines slightly after                                                               
2035, but  it is  a very small  number. They refer  to this  as a                                                               
"plateau" rather than a "peak."                                                                                                 
Non-combustive uses  remains a positive contributor  and consists                                                               
largely of  petrochemical feedstocks. This is  important, because                                                               
it means  that that portion  of oil  demand can continue  to grow                                                               
but because it doesn't get burned it doesn't add CO  emissions to                                                               
the atmosphere.                                                                                                                 
He  said  that petrochemicals  is  the  basic building  block  of                                                               
modern economies and  if the world's economy is  to keep growing,                                                               
the petrochemicals need  to keep growing, too.  There aren't many                                                               
substitutes available  and the scope of  efficiency is relatively                                                               
limited. However,  a provision was  made for policies  around the                                                               
world that  seek to  reduce the use  of single-use  plastics like                                                               
water  bottles through  recycling,  which reduces  oil demand  by                                                               
about 2 million barrels a day.                                                                                                  
9:43:43 AM                                                                                                                    
Slide 17                                                                                                                        
MR. FINLEY  said that is just  one view of future  oil demand and                                                               
there are  lots of different  potential cases. He showed  a range                                                               
of different  outcomes on  this slide. He  said there  are upside                                                               
risks to  the outlook;  for example,  if fuel  efficiency doesn't                                                               
gain as quickly as projected and  oil demand goes higher. The key                                                               
question is, even  in a scenario that is  consistent with meeting                                                               
the Paris Accord, the world  will be consuming 85 million barrels                                                               
a day  of oil in  2040 compared  to about 95-100  million barrels                                                               
9:45:02 AM                                                                                                                    
Slide 18                                                                                                                        
MR. FINLEY  said this  slide had  been "profoundly  impactful" in                                                               
informing BP's  thinking and  basically illustrates  what happens                                                               
if  investment in  new production  doesn't  happen. He  explained                                                               
that an  individual well  declines over time  by about  3 percent                                                               
and so they just applied a  3 percent annual decline (even though                                                               
his operators would say that  is a very conservative number). But                                                               
a higher decline  rate is not needed to make  his point, which is                                                               
under any  imaginable future  scenario for  oil demand  the world                                                               
will need to continue to  invest significant amounts in producing                                                               
new supply  to meet it  due to  the phenomenon of  the underlying                                                               
decline  of the  existing  production, what  he  calls "mine  the                                                               
gap." There will be a lot  of competition to meet that supply, so                                                               
within  BP, executives  talk about  continuing to  invest in  oil                                                               
that is  competitive, because there  is a need to  continue doing                                                               
Slide 19                                                                                                                        
Where does  supply come  from to meet  this demand  profile? Half                                                               
comes from  the United  States (due  to growing  shale production                                                               
especially in  the early  years of the  forecast) and  half comes                                                               
from  the  Organization  of  the  Petroleum  Exporting  Countries                                                               
(OPEC).  But as  with  everything, there  are uncertainties.  For                                                               
U.S. shale, what  if the resource doesn't change but  the pace at                                                               
which  it is  developed accelerates  or what  if the  resource is                                                               
even bigger  than thought? Slide  21 graphs the outcomes  of both                                                               
scenarios is graphed on this slide.                                                                                             
9:48:27 AM                                                                                                                    
SENATOR MEYER  asked how he  defines "advantaged oil," a  term he                                                               
used earlier.                                                                                                                   
MR. FINLEY answered that it  simply means is the oil competitive?                                                               
For  much of  the industry  history,  people thought  this was  a                                                               
scarce resource  and they would run  out. So, they had  to access                                                               
it  where  it was.  But  that  is  not  the right  framework  for                                                               
thinking about the future world  in which they think the resource                                                               
is  abundant. (A  companion piece  of work  tracks the  BP annual                                                               
statistical review  of world energy  (proved reserves of  oil and                                                               
gas.) Since  1980, when  BP began to  track proved  reserves, the                                                               
world has cumulatively produced more oil  than it had, and it has                                                               
not  run out  of  oil. In  fact, the  proved  reserves today  are                                                               
double what  they were in  1980. The resource is  not constrained                                                               
and  therefore the  obligation to  their shareholders  is not  to                                                               
access a  resource at any cost  but rather to invest  in projects                                                               
that are competitive and can earn a competitive rate of return.                                                                 
SENATOR MEYER asked if Alaska is considered advantaged oil.                                                                     
MR. FINLEY replied  that he is not an expert  on Alaska, although                                                               
it  is  a world  class  province.  Based  on official  data,  oil                                                               
production in the state has increased  for the last two years and                                                               
according  to  the U.S.  Energy  Department's  data, that  hasn't                                                               
happened since 1987/88. So, the answer  is, it depends on how the                                                               
people in  this room are  able to  work with industry  to deliver                                                               
projects that  can compete  in a global  supply curve.  He merely                                                               
wanted  to note  that  in  a global  context,  that's  the way  a                                                               
company like BP would think about it.                                                                                           
9:51:18 AM                                                                                                                    
SENATOR  MEYER said  from a  state  legislator's perspective  and                                                               
since oil is so important  to Alaska's economy, it's important to                                                               
have  advantaged oil.  That concerns  him in  light of  shale oil                                                               
production in the Lower 48.                                                                                                     
MR. FINLEY  replied that  is a fair  observation and  pointed out                                                               
that  BP  believes that  the  combination  of supply  and  demand                                                               
factors playing out in the  oil market are changing the strategic                                                               
calculus  of a  number of  key  oil producers  around the  world.                                                               
Many key  Middle East oil  producers, for example,  have embarked                                                               
on  programs of  very aggressive  reforms to  their economies  to                                                               
reduce  their  dependence on  oil  revenues  and are  positioning                                                               
themselves to compete  in a much more competitive  oil and energy                                                               
space  going  down  the  road.   So,  holders  of  large  natural                                                               
resources  are  similarly  wrestling   with  trying  to  position                                                               
themselves to be competitive in that new reality.                                                                               
9:53:17 AM                                                                                                                    
Slide 21                                                                                                                        
MR.  FINLEY said  he  talked  about the  scenario  of U.S.  shale                                                               
getting delivered  more aggressively, but  on the other  hand, if                                                               
the resource turns  out to be bigger  than currently appreciated,                                                               
the U.S.  by itself  could meet  all of  the projected  growth in                                                               
global  oil demand  over this  outlook  with obvious  significant                                                               
ramifications for the  rest of the market place. So,  if the U.S.                                                               
increases production  rapidly, the question is,  "Is that because                                                               
the resource  is bigger or  simply because the resource  is being                                                               
exploited  more quickly  and likely  to decline?"  The answer  by                                                               
looking beneath  the surface to  understand the  drivers, because                                                               
the  longer-term ramifications  of those  two different  pathways                                                               
are profoundly impactful for the oil market outlook.                                                                            
9:54:39 AM                                                                                                                    
MR.  FINLEY said  the next  question is  just how  fast renewable                                                               
energy will grow,  and their renewables outlook  has been revised                                                               
higher every  year, especially  for India and  China and  not the                                                               
world as a whole. If it  was simply the case that renewables were                                                               
more competitive  for everyone, he  would expect the  forecast to                                                               
be higher for everyone. The  fact that revisions are concentrated                                                               
in  India and  China suggest  something else  in play.  And their                                                               
outlook  has been  built around  the  assumption that  government                                                               
support  for renewables  will be  reduced over  time, because  as                                                               
renewables scale  up they become  more competitive.  They believe                                                               
the  level of  government  support for  renewables  in India  and                                                               
China are more aggressive than previously expected.                                                                             
Slide 23                                                                                                                        
He  said  this slide  showed  the  base  underlying data  in  the                                                               
narrative  scenario;  the  left-hand  side  showed  the  regional                                                               
contributions to  the growth of  renewables in  power generation,                                                               
and historically  the Organization for Economic  Co-operation and                                                               
Development (OECD) countries dominated,  but now China has passed                                                               
the U.S.  to become the  largest producer of renewable  energy in                                                               
the world. Part of that is  because China has become richer, part                                                               
of that is  because renewables have become  more competitive, and                                                               
part of  that is because  China is  trying to diversify  its fuel                                                               
mix. He observed  that in the latter years of  the outlook (2030-                                                               
40)  significant  contributions  are  seen  from  other  emerging                                                               
9:57:31 AM                                                                                                                    
MR. FINLEY noted  that he began the presentation  by showing that                                                               
renewables gained market  share very rapidly in  the world energy                                                               
mix, but  the point of  the right-hand chart  is to show  that in                                                               
this scenario the  pace at which renewables  penetrate the global                                                               
system is  "without precedent"  in the  historical record  of the                                                               
world's energy system. The closest  analogue is nuclear energy in                                                               
the 1970/80s.                                                                                                                   
Slides 24/25/26                                                                                                                 
However, they  could be wrong,  so they examined a  scenario that                                                               
says what  if we keep  today's aggressive support  for renewables                                                               
throughout the  forecast interval.  The left-hand  panel scenario                                                               
shows more aggressive government  support; so, instead of getting                                                               
50 percent of the growth  of power generation, renewables get 100                                                               
9:58:38 AM                                                                                                                    
MR.  FINLEY said  in  the evolving  transition  case, the  carbon                                                               
content of the world's power generation falls by about one-                                                                     
third.  In the  far-right scenario,  consistent with  meeting the                                                               
Paris  Accord, one  sees  a total  decarbonization  of the  power                                                               
sector.  In the  "push  scenario" (now)  he observed  diminishing                                                               
returns: as  one pushes harder  to get renewables into  the power                                                               
mix,   it   becomes  more   expensive   to   manage  the   grid's                                                               
intermittency and storage needs.                                                                                                
Again, he reiterated,  if policy makers only push  one lever it's                                                               
hard to move the whole  needle. Other scenarios include scope for                                                               
gas to push  coal out of power generation, more  efficient use of                                                               
energy, and  carbon capture and underground  storage illustrating                                                               
that systemic-wide  policy options  have better  opportunities to                                                               
find  low cost  solutions  for  society and  to  really move  the                                                               
needle at a system level.                                                                                                       
9:59:58 AM                                                                                                                    
Slide 26                                                                                                                        
MR. FINLEY  said natural gas is  the only fossil fuel  that gains                                                               
market  share in  the global  mix and  BP and  many other  energy                                                               
companies are investing to grow the  role of natural gas in their                                                               
portfolios. So, how could they be wrong on that one?                                                                            
Slide 27                                                                                                                        
This slide has the base data  for the outlook of gas consumption.                                                               
The  left-hand  panel  shows  that  the  growth  in  natural  gas                                                               
consumption  is broadly  based around  the world.  On a  sectoral                                                               
basis, however, this  is really a two-horse race: a  story of the                                                               
growing  use of  gas  used for  power  generation and  industrial                                                               
applications. A bit  more is used in transportation,  but that is                                                               
not a global gas driver.                                                                                                        
Slide 28                                                                                                                        
Mr. Finley said  this slide has a rough estimate  of how much gas                                                               
is growing  just because  everything is growing  and how  much is                                                               
because gas  is winning market  share from other forms  of energy                                                               
(particularly from coal in power  generation and potentially from                                                               
oil in transportation).  The answer is another  question is, what                                                               
is driving much  of that switching that accounts for  half of the                                                               
growth of natural  gas in this scenario. Some of  it is economic:                                                               
in  the U.S.,  cheap  shale  gas is  pushing  coal  out of  power                                                               
generation,  but in  China and  Europe much  of it  is driven  by                                                               
policy.  So,   BP  asked  themselves  what   if  policy,  largely                                                               
environmental policy in this case,  is not as aggressive as their                                                               
narrative scenario assumes.                                                                                                     
Slide 29                                                                                                                        
He  answered that  it  turns out  that  eliminating that  policy-                                                               
driven  switching would  reduce the  growth rate  of natural  gas                                                               
demand by  about half, which  may not look  like much, but  it is                                                               
the difference between gas gaining  market share around the world                                                               
and losing market share. So,  from a strategic perspective, it is                                                               
a significant change. But the  future of natural gas demand could                                                               
fail  to  materialize  in scenarios  with  both  more  aggressive                                                               
environmental policy  where it  would lose  to renewables,  or in                                                               
scenarios  with less  aggressive environmental  policy, in  which                                                               
case, gas fails  to gain market share from coal.  So, one can see                                                               
that  the  gas   outlook  is  highly  sensitive   to  gas  policy                                                               
10:03:08 AM                                                                                                                   
Slide 30  Prospects for liquefied  natural gas (LNG)  exports and                                                               
MR.  FINLEY said  on the  LNG export  side, the  U.S., especially                                                               
driven by  the rapid growth of  Lower 48 supply, is  a big driver                                                               
of that  growth. On the  demand side,  its Asia. The  reason they                                                               
think  this rapid  growth (doubling)  of global  trade in  LNG is                                                               
important is because it provides  the opportunity to more closely                                                               
link regional gas markets through trade.                                                                                        
He  observed   that  this  more  flexible   LNG  trading  system,                                                               
especially for  the Lower  48, is well  situated to  compete, but                                                               
being on the margin has both  risks as well as opportunities. If,                                                               
for example, China  and other Asian consumers don't  push as hard                                                               
to open up their economies to gas,  or on the supply side, if the                                                               
Emirate of Qatar  decides to do what OPEC producers  are doing on                                                               
the  oil side,  which  is grow  their market  share  and be  more                                                               
competitive, both of those things  could squeeze the supplier who                                                               
is  at the  margin.  They think  the  Lower 48  will  be in  that                                                               
10:04:45 AM                                                                                                                   
Slide  32: Energy  transition  and  the move  to  a lower  carbon                                                               
MR. FINLEY said while CO  emissions will grow less rapidly in the                                                               
future, they will  still grow by a little over  10 percent in the                                                               
narrative  scenario,  and  to  be  on  a  sustainable  trajectory                                                               
consistent  with  the  Paris commitments  the  transition  should                                                               
happen faster.                                                                                                                  
10:06:28 AM                                                                                                                   
Slide 33: Impact of faster transition on global energy system.                                                                  
MR. FINLEY said a serious conversation about CO  should begin and                                                               
end  with the  power sector,  because  over half  of the  world's                                                               
energy is consumed  just to generate electricity. It  is also the                                                               
sector  where all  the fuels  compete  with each  other. So,  the                                                               
opportunity for finding the low-cost  solutions are most apparent                                                               
in the power sector.                                                                                                            
The graphs on slide 33  illustrate what the world's energy demand                                                               
profile would  like in some  different scenarios. He said  in any                                                               
scenario  including those  that are  consistent with  meeting the                                                               
Paris climate objectives, world-wide  energy demand grows. In the                                                               
Paris  objectives, all  of the  growth -  labeled as  even faster                                                               
transition (EFT) -  comes from renewable energy.  But even there,                                                               
oil and  gas consumption in 2040  is about what it  is today. So,                                                               
while this is  a much more aggressive scenario for  the uptake of                                                               
renewable energy,  there is also significant  space for continued                                                               
investment in oil and gas.                                                                                                      
10:07:22 AM                                                                                                                   
Slide 34: Conclusion.                                                                                                           
MR.  FINLEY  said BP  doesn't  do  this  outlook to  predict  the                                                               
future; they  do it to understand  the risks they are  facing and                                                               
identify  what dimensions  of the  energy system  they have  some                                                               
confidence in and  key uncertainties. So, one  can be "reasonably                                                               
comfortable" that if the world  continues to grow its economy and                                                               
continue to lift people out  of poverty and improve their quality                                                               
of lives,  that the  world is  going to need  more energy  in the                                                               
future.  That  growth  may  slow   due  to  a  greater  focus  on                                                               
efficiency, but at the same time  on the supply side, they see an                                                               
emerging age  of abundance  in terms of  a much  more competitive                                                               
dynamic  in the  oil and  gas space  and for  the world's  energy                                                               
system.  Renewables   play  a  growing   role,  but   even  under                                                               
sustainable climate  trajectories, there  is still  a significant                                                               
role for investment in oil and gas.                                                                                             
Some of the key uncertainties  are around electrification and the                                                               
interplay  of electrification  with other  factors like  autonomy                                                               
and ride sharing  services. They have seen very  clearly from the                                                               
data  that the  future  pathways for  natural  gas and  renewable                                                               
energy are  highly dependent on  underlying assumptions  made for                                                               
policy and technology.                                                                                                          
While  they  see  significant  progress   in  using  energy  more                                                               
efficiently  and   reducing  the   carbon  intensity   of  energy                                                               
activity, a much  more decisive break from past  trends is needed                                                               
if the world is to get on a more sustainable trajectory.                                                                        
MR. FINLEY thanked them for the opportunity to speak.                                                                           
10:09:50 AM                                                                                                                   
SENATOR GIESSEL commented  that one of the upsides  for Alaska is                                                               
"our significant  wealth in minerals,  which the  renewables will                                                               
SENATOR MEYER asked if the  recently announced trade tariffs with                                                               
the United States and China and  other countries played a role in                                                               
their forecast.                                                                                                                 
MR. FINLEY replied that all  the scenarios he presented today are                                                               
built  around  a  starting  point  of success  in  the  sense  of                                                               
continuing  to  grow the  world's  economy,  lifting 2.5  billion                                                               
people out  of poverty, and  improving peoples' quality  of life.                                                               
Trade  frictions and  both  international  and domestic  policies                                                               
could put  potential future economic  growth at risk. At  the end                                                               
of the  day, energy  is consumed to  fuel economic  activity, and                                                               
one can imagine  scenarios with higher or  weaker economic growth                                                               
that  results  from  these  policy  developments  that  would  go                                                               
straight to the bottom line of world oil demand.                                                                                
SENATOR STEVENS  remarked that China is  often underestimated and                                                               
asked if China has energy  sources that people haven't considered                                                               
like hydro,  renewables, nuclear,  and shale, because  BP assumes                                                               
the U.S. will keep producing and China will keep buying.                                                                        
10:12:24 AM                                                                                                                   
MR. FINLEY answered  yes; that is a highly  uncertain issue. Both                                                               
the  future trajectory  of economic  growth and  therefore energy                                                               
demand in China are uncertain. In  the last 20 years, the Chinese                                                               
economy grew by 9 or 10  percent per year on average. The outlook                                                               
projects growth  that is more like  4 or 5 percent.  So, based on                                                               
history  there  was  even  faster   growth  in  the  economy  and                                                               
therefore energy  demand. The narrative  scenario has  China very                                                               
rapidly  growing nuclear  energy,  essentially  building one  new                                                               
nuclear reactor every three months for  the next 20 years. Not so                                                               
much  on  hydro,  because   the  large-scale  conventional  hydro                                                               
applications are already developed.  China has the biggest growth                                                               
of renewable energy of any country  in the world in this scenario                                                               
and yet still has room for  growth of natural gas: partly because                                                               
it's  still  growing  and  partly  because  of  their  effort  to                                                               
displace coal.                                                                                                                  
He said another chart shows that  about 30 percent of the world's                                                               
energy is consumed in the form  of coal. In China, it's more like                                                               
two-thirds   and   they  are   trying   to   reduce  that   share                                                               
significantly to  diversify their energy  mix, but also  to clean                                                               
up local air pollution.                                                                                                         
China is also  looking at buying natural gas from  Russia and via                                                               
pipeline  from  central  Asia  republics  like  Turkmenistan  and                                                               
Kazakhstan. Other potential competitors  of supply come from LNG.                                                               
The  Emirate  of Qatar  for  a  long  time  had a  moratorium  on                                                               
developing new gas projects, but  they are sitting on the largest                                                               
gas field in the world.  And they recently lifted the moratorium.                                                               
So, it's  important to keep an  eye on the internal  dynamics for                                                               
China, but  also the other  eye on the potential  for competition                                                               
from elsewhere in the world.                                                                                                    
SENATOR MICCICHE reminded members this  is one company's view and                                                               
others' risk assessment on the  future of energy could look quite                                                               
different. The  ICE ban is  a fascinating concept, but  he wasn't                                                               
sure how realistic it is.  The weight of electrification and ride                                                               
sharing is  stronger than probable  along with  the environmental                                                               
hypocrisy  of  the reality  of  renewables  and what  that  would                                                               
require as they  oppose every option for  providing the materials                                                               
of those  renewable technologies. He understands  the reasons for                                                               
BP's  outlook,  but he  wouldn't  put  a  lot  of weight  on  one                                                               
particular study.                                                                                                               
10:16:26 AM                                                                                                                   
SENATOR BISHOP  said he thoroughly  enjoyed the  presentation and                                                               
asked how BP has diversified its portfolio into renewables.                                                                     
MR. FINLEY  answered that BP  acknowledges the dual  challenge of                                                               
how to provide  the energy the world needs today  and work toward                                                               
a more  sustainable energy system  at the same time.  To straddle                                                               
that, BP's strategy is aimed  at making sure their operations are                                                               
as  efficient and  safe  as  possible so  that  they  are up  and                                                               
running  all  the  time,  because   that  is  good  business  and                                                               
continued investment in "advantaged"  oil. They have been growing                                                               
the role  of natural  gas in their  portfolio and  renewables. BP                                                               
has significant investments in wind  energy in the Lower 48; they                                                               
are  a significant  distributor  of  bio-fuels worldwide  through                                                               
blending  into their  fuels in  their distribution  network; they                                                               
also invest in  the production of biofuels in  sugar cane ethanol                                                               
in Brazil; they  have a joint venture in with  one of the leading                                                               
chemical  firms to  work on  next generation  biofuels; and  they                                                               
also  have invested  significant venture  capital into  a lot  of                                                               
different potential  start-up new  technologies in  the renewable                                                               
and  the  more  broadly   energy  space  environments,  including                                                               
digital innovation.  They sprinkle  the money  around to  kind of                                                               
watch and learn where the landscape is.                                                                                         
MR. FINLEY added that when he joined  BP 17 years ago, it was the                                                               
largest  producer of  solar panels  in the  world. However,  they                                                               
learned that  just because something  is growing  rapidly doesn't                                                               
mean  you can  make money  at  it. It  has to  play to  corporate                                                               
strengths,  and  the  particulars of  manufacturing  solar  cells                                                               
didn't do that. Now, more recently,  BP has invested in a company                                                               
in the UK  that builds and distributes solar  systems but doesn't                                                               
actually build the solar cells.                                                                                                 
Relevant  to  the  conversation,   although  it's  not  renewable                                                               
energy, he  also observed  that BP  not only has  to play  to its                                                               
strengths  but has  to  change  themselves to  keep  up with  the                                                               
changing world.  An illustration of that  is what BP has  done in                                                               
the Lower 48  with its on-shore production  unit. Having realized                                                               
that this  is a  game that  is fast-moving  and driven  by world-                                                               
class   operators,  they   legally  separated   their  Lower   48                                                               
production business and  hired a CEO from  an independent company                                                               
and asked  him to try to  remake that company into  a more-nimble                                                               
company and more  like an independent to enable  them to compete.                                                               
The results are good so far.                                                                                                    
10:20:46 AM                                                                                                                   
SENATOR BISHOP  remarked that it  appears to be a  buyers' market                                                               
going forward.                                                                                                                  
MR. FINLEY agreed with him but  added that big challenges need to                                                               
be addressed. But  within that, they believe this is  a much more                                                               
competitive space, but it is a  good news story in the sense that                                                               
they  conclude across  all of  the scenarios  that the  world can                                                               
have the energy  it needs, and Alaska has the  energy it needs to                                                               
continue to grow its economy.                                                                                                   
10:22:46 AM                                                                                                                   
CO-CHAIR  MACKINNON finding  no  further  questions, thanked  Mr.                                                               
Finley  for joining  them today  and adjourned  the Joint  Senate                                                               
Resources and Finance Committee meeting at 10:22 a.m.                                                                           

Document Name Date/Time Subjects
040418 BP Energy Outlook Presentation (4 March).pdf SFIN 4/4/2018 9:00:00 AM
OIl and Gas