Global Energy and the Role of Russia Speaker: Lord Browne Title: Group Chief Executive, BP plc Speech date: 02 Jul 2004 Venue: Press Centre of the Ministry of Foreign Affairs of the Russian Federation, Moscow Deputy Minister, Ladies and Gentlemen, thank you very much. It's a great pleasure to come back to Moscow. It's also a great privilege to have all of you with us today. We've almost reached the first anniversary of the creation of TNK-BP so I thought it was an appropriate moment to reflect, to celebrate what has been achieved, and to look ahead. In particular I think this is a good moment to set what we have learnt here in the context of Russia's role in the development of the global energy market. When TNK-BP was created it was greeted by some observers with a good deal of scepticism. People said it would be impossible for a Russian company and an international company to combine their strengths. The only way to answer scepticism is with a track record of performance. That's what we've begun to establish and so far the track record is excellent. Production in the first half of 2004 will be 14% per cent higher than in the first half of last year. That production, of course, supplies both Russia and the international market and the growth in production, combined with the increase in world market prices has added revenue of nearly $7 bn so far this year. TNK-BP has also begun to add to reserves - applying the best available international technology, particularly to the established and mature oil fields in West Siberia. TNK-BP has replaced 133% of its 2003 production and intends to continue to grow reserves in 2004 and subsequent years. Those reserves will sustain production in the years ahead and they will also encourage investment. We expect TNK-BP to invest over $1 bn per year for each of the next five years. That will bring jobs and revenue to Russia on a sustained basis. Across the asset base, we've begun to combine Russian skills and expertise with the experience of an international major working in 104 countries worldwide. We've begun to apply some of the most advanced technology in the world - including in hydraulic fracturing and water flood optimisation. The results are already apparent in increased production and reserves. We've begun to apply international standards of ethical conduct, health and safety and financial control. And we've begun to develop the people who work for the company - with the aim being that over time they should take on leadership roles in TNK-BP and I hope in some cases international roles within BP. In addition to the original base established a year ago we've also added a proportion of the assets of Slavneft - 212 mbd per day of production, and some 0.45 bn bbl of reserves. Those successes are a tribute to Bob Dudley and his team - a team of both Russian and international specialists. TNK-BP now employs over 100,000 people - nearly all of whom are Russian. I believe we're one of the largest 1999-2004 BP plc Page 1 of 5
private sector employers in this country. And those successes are just the beginning. Twelve months is a very short time and we've only just begun to see the potential. To apply technology, to increase production, to generate revenue, and jobs and export earnings. That potential is very important because TNK-BP is now an important contributor to global energy security, and it can be an even greater contributor as time goes on. The world needs increasing volumes of oil and gas. Demand is rising - particularly in China and other parts of Asia. There is no physical shortage of resources across the world. The best estimates are that there are at least 40 years of oil supply left at current rates of consumption; and at least 65 years of natural gas supply. But what matters for energy security is whether those supplies can be found, produced, developed and brought to market in good time. Will there be enough supply to meet growing demand? The International Energy Agency has predicted that by 2015 - which is just ten years ahead - the world will need a third more energy than it does today, and that most of that growth will be met by oil and gas. The alternatives, such as nuclear power are either unacceptable and too risky in terms of terrorism and proliferation, or simply not yet commercially viable on a large scale - which is the case for more of the renewable sources of supply such as solar power. One day those alternatives will play a major role, but on the IEA forecast they will provide no more than 3 per cent of world demand in 2015. It is down to oil and gas. And the sources of that oil and gas are themselves highly concentrated. In 2015, according to the same IEA forecast almost 80 per cent of the oil traded internationally will come from just three regions. West Africa, the Persian Gulf - which means predominantly Iran, Iraq and Saudi Arabia... and from Russia, which in this timescale assumes a crucial role in world energy. Russia has proven reserves amounting to 60 bn bbls of oil and 1.7 thousand tcf of natural gas. There may also be some 70 bn bbls of oil and 1,000 tcf of natural gas yet to be found. The development of those resources, and the revenue that will bring to Russia, offer great opportunities. Those opportunities match the aspirations expressed in President Putin's speech to the nation four weeks ago. The President spoke of doubling the size of the Russian economy over the next decade. That is a great goal - and it is a goal which we share. On the basis of the progress we've made in the last twelve months we believe we can nearly double the size of TNK BP in that timeframe - with increased production from an increasing reserve base. In that way, and perhaps through other activity, we can contribute to the growth of the Russian economy and to the objective set by President Putin that Russia should be ``a rich and modem state". And I hope do more than that. We believe that business and especially large scale international companies should work as active citizens of every country in which they operate - understanding the needs and aspirations of that country and working on the basis of mutual advantage to help deliver those aspirations. I first came to Russia in 1989, and I've been back almost every year since then. I'm struck each time I come by two things. By change and by consistency. The changes which have brought Russia into the international economy and the international community. The increase in trade, and the movement of people. The increase in investment and the development of a new pattern of relationships with Europe, China and the US. And the changes within the country at many different levels which have begun to establish market structures, and to create a modem economy which can thrive in the world. But I'm also struck by the consistency of the Russian perspective. By the belief in the enduring role and importance of this country, and the contribution it can make to the world as a whole. And by the belief in knowledge and education as the foundation of national strength. I find it fascinating now to see the two coming together - to see change strengthening and reinforcing Russia's enduring role in the world. 1999-2004 BP plc Page 2 of 5
The next step I believe will come through integration. Through Russian membership of the WTO, through an even deeper engagement with Europe, and through a strengthened partnership with the G8 nations. In addition to those state links, I believe integration will come through investment and the work of individual companies. That doesn't mean just investment from outside into Russia, but also investment from Russia, by Russian companies which secures an even greater share of the value of Russian resources as they supply the world market. What is the role of an international company like BP in all that? What do we seek and what can we bring? We have a major investment here, and therefore a great stake in the success of that venture. We hope to do more - in many different ways. We would welcome the chance to supply Europe, the U.S. and China with oil and gas. Developing fields, securing export contracts, winning markets, building infrastructure. We seek no subsidy, and no exemption from a fair taxation system. We seek simply a chance to compete on open terms, to invest on the basis of secure and established standards. Those things are important to all investors and particularly important in our sector where investments are very long term. The investments we are making now have a lifespan which runs into decades. So do the next set of investments - in the development of fields such as Kovyktinskoye in East Siberia. Successful investments depend not only on Russian and non-russian partners sharing a commitment to common objectives, but also on their readiness to think and to work on a long term basis and forgoing immediate advantage for the sake of longer term benefit. That long term focus and alignment is easier when all concerned have confidence in the stability of the legal and regulatory framework within which they are working, and in the adjudication and implementation of its provisions. Those are the things we seek. And what can we bring? I hope we can help to integrate Russia further into the international economy. The results of the EU Russia dialogue were encouraging - but the agreement reached there was just a beginning. There is huge potential for enhanced trade, scope for investment by a wide range of European companies, and above all the chance to renew Russia's role in Europe - to the benefit of all concerned. This is a common economic space. Europe is Russia's nearest neighbour but it isn't the only place where the potential for new and creative links. China too needs energy and trade. The demand for both oil and gas is growing rapidly. Much of that demand will be met by trade. Chinese oil imports rose by 600,000 bbl/day last year alone. That means that the opportunity exists now for the development of a new long term trading relationship between Russia and China, founded on mutual advantage. U.S. markets also represent a great opportunity for Russian crude oil and LNG. All those links can enhance global energy security. Russia has the potential to be a major player in all those regions, a force for stability, and a secure source of energy supply. And in every case there is an opportunity for those links to be developed and strengthened through the work of the private sector and individual companies. One of the loose assumptions some people make about the international oil and gas industry is that it will always be dominated by companies based in America or Western Europe. That has been the history for sure, but the future might look very different. We certainly see a change in the geography of the energy business across the world, and as we work here, and in China and elsewhere, we see enormous potential for Russian companies, perhaps in partnership, to become international companies - following the resources and products down the value chain, establishing enterprises which work across national boundaries. 1999-2004 BP plc Page 3 of 5
And then we see the potential for the export of goods and services as well as resources. In the caricature of Russia which is sometimes painted in the West the enormous strength of the basic industries here is often neglected. We believe there is a great potential for Russian expertise and companies, again perhaps in partnership and alliance with others. And that isn't a wild aspiration. An early indicator of activity outside the resource industries is the interest international hitechnology companies such as SchIumberger, Intel and HP - to name but a few - have taken in sponsoring Russian students at Russian centres of academic excellence. So integration in many forms, and the development of many different links to the benefit of all. And then there is another strand where we believe we can make a contribution as a corporate citizen of Russia. That is in the development of the human resource base - in people. We're beginning to do that within the company as I mentioned but we want to go further. We announced last year a programme of scholarships to enable Russian students and postgraduates to come to study at the best universities in the UK. That programme is now underway thanks to the tremendous help given by Rector Sarkissov and the staff at Mendeleev University. But we want to do more, and in particular to contribute to the fulfilment of another of the aspirations laid out in President Putin's address to the nation - to improve the availability of higher education for Russian students. Excellence in education promotes innovation in industry. This innovation in turn enhances the competitiveness of companies, industries and nations. This virtuous cycle will improve Russia's ability to integrate with and compete within the global economy. We want to help develop the great universities which exist in Russia and to see them established at the leading edge of global higher education. We have begun this process already with Mendeleev University. We will expand our support for education in partnership with Gubkin Russian State University of Oil and Gas - which trains technical specialists for our industry - and Moscow State Institute of International Relations which trains specialists in the field of energy diplomacy. We will support research and the development of capacity. In addition to that we want to help to build links between those institutions and the other universities with which we have close relationships around the world - such as Stanford in California, Cambridge in England, Yale in Connecticut, and Tsinghua in Beijing. That will involve exchange programmes for students, post graduates and for Faculty. We're investigating how to do that, with the help of friends and colleagues here who understand the potential and the precise needs. That work continues but let me set out the commitment. We will invest, directly, $10 m over the next five years in higher education in Russia. Those various steps will help in different ways to achieve the goal of making Russia a prosperous part of an integrated international economy. But that success could be undermined if we don't attend to one of the basics. In BP every meeting, everywhere in the world, starts with a moment about safety. What are the risks, where are the fire exits, what should you do if something goes wrong. It is part of our culture. And we want to apply that culture here in a very specific way. I've been reading about the wonderful work which is being across Russia to provide a basic system of immunisation for small children who would otherwise be at risk in a world which is not free of the threat of disease. That programme which has been led by one of the greatest living Russians, Mstislav Rostropovich, is an inspiration to all of us. And so to mark the successful conclusion of our first year here in Russia as a major investor, we will donate $1 million to support the work of the Rostropovich Foundation. Ladies and Gentlemen, the role of companies is to provide goods and services which people want to buy and to make a return of the investments which savers entrust to us for their pensions and their future. But companies can only hope to do that on a sustainable basis if they are working in thriving, healthy societies. And they have a role and a responsibility to help to ensure that the societies in which they are operating are indeed thriving. 1999-2004 BP plc Page 4 of 5
No country is more important in the global energy scene now and over the next few decades than Russia. Russia is already the largest producer of oil and gas in the world. Enormous progress has been made over the last twenty years. I believe even more progress can and will be made over the next twenty years. We are delighted to be part of that future. Thank you very much. 1999-2004 BP plc Page 5 of 5