In the opening oil dialogue on Tuesday morning, Robert Dudley, Group Chief Executive, BP plc., speaks with Dr. Dan Yergin on the current oil environment & where BP has been focused. Here we share part of their exchange:

Dr. Yergin: Bob, I think you were the author of the phrase "lower for longer". But I think you amended that, you've added another phrase to that.

Robert Dudley: Yeah, "lower for longer, but not forever" I think. I actually heard that phrase in 1986, as well. Do you remember?

Dr. Yergin: Okay. I thought you were the author. What led you to that original formulation?

Robert Dudley: If you remember, everyone was flying high in some ways, unless you were in refining, I guess. $100 per barrel, $115 per barrel and we just started looking at the supply and demand. Demand was still high, but the stocks were building up, and excess production and it seemed to be building up sort of steadily. We just looked at the simple supply and demands of it and thought, "This is too much, and this is gonna take a long time to work off."

Dr. Yergin: Right. How does it look to you now?

Robert Dudley: Very different than a year ago. Remember how we all felt here at your conference a year ago? I don't think I heard anybody laugh last year at anything. It was pretty rough.

Dr. Yergin: It was very serious.

Robert Dudley: It was a very serious group, rightly so. I think we see it now, as his excellency just said, there's a serious intent that I see. He'll, of course, be the expert of the OPEC countries, the Gulf countries and for the first time 11 producing, nine OPEC nations to actually move back production. It feels like we're heading into a balance point here. It feels like there's a commitment to that. I think the world needs a higher oil price, or you end up with civil strife in many places. I think it's healthy for the world. And I think we've made some investments based on the confidence that we're in a $55 world.

Dr. Yergin: Right. Your own experience and the industry experience in terms of managing costs in this environment, are these lasting changes?

Robert Dudley: I think they have to be. The industry seems to always forget its lessons, that its commodity and it feels high. Three years of high oil prices, we all start to think, "Well, this is the way it is." The industry made money with a certain margin, and not that much at $100. It's about the same margin as we made at $40 and at $25. What we're seeing is a really tough re-wrenching of the cost structure.

I think one of the things that I see other companies doing as well, though, is not just slashing cost and making ultimatum and demands on suppliers. You sit down with them, who often have great ideas to make it more efficient and you go through these periods of strategic relationship with suppliers, rather than just demanding cuts. If you do that, I think it can be sustainable. There'll be some that will come back up with inflation.

Dr. Yergin: Right. Khalid talked about the investing for the long cycle. In the last few months, BP has stepped up and you've started several things. Maybe you might talk about what you've been doing.

Robert Dudley: Yeah, at BP, we've had our own special problems over the last six, seven years, they're well-known. We had to sell $50 billion of assets, and 75 billion if you count half of the Russian assets, to meet our obligations in the United States with the Gulf. We have been quietly working to build projects, and retool, and turn around our assets. We'll bring on more projects this year than we have in the history of the company, in terms of activity levels. 2011, we had about 8 million man hours of work going on across the company.

Dr. Yergin: 8 million?

Robert Dudley: 8 million. This year we'll have 88 million, so the level of activity…

Dr. Yergin: That's projects under construction.

Robert Dudley: Projects under construction around the world. We'll have seven major projects come on this year, starting with the first one this month. When you meet with investors, they say, "Well, that's really all very interesting. We've heard all that stuff before, so now just do it and then we'll give you some credit for it." The team is on time and under budget.

Dr. Yergin: What are some of the projects?

Robert Dudley: Massive projects. We've got one in the West Nile Delta, in Egypt, that should ply a very significant volume of gas, possibly even this month. We've got the Khazzan Tight Gas projects in Oman, massive large tight gas projects that we're also gonna expand another 50% in the future. We've got two big oil projects in the North Sea. The Quad 204 coming on, giant new FPSO tooled out for the West of the Shetlands. We've got two projects in Trinidad coming on. These are big projects, along with about eight or nine that are also being constructed. We have about 25,000 people working on these projects and pipelines, and about 14,000 or so, thousand people working in the desert of Oman. These are really important for the company.

Dr. Yergin: These are projects that have been initiated in the last few years?

Robert Dudley: They've been initiated in the last few years, they've generally been initiated or started or most of the construction during the downturn. Our original cost estimates are coming in well below those.

Dr. Yergin: Right. Does this represent a shift in your portfolio in terms of oil and gas?

Robert Dudley: Dan, it does. We're about 50% oil today. I think into the next decade, we'll be up to 60% with the size of these projects, Egypt, Shah Deniz, Oman and others. That does represent a big shift for us. They're projects we like, 'cause they're in countries where we can have fix gas contracts in advance. They're not subject to just the LNG markets; so we really like this portfolio and these projects.

Dr. Yergin: Right. So, BP does its own outlook, and the minister talked about a supply gap. What do you all see ... and of course the BP statistical review is something that everybody in the industry uses. What do you all see in terms of a supply gap, in terms of investment?

Robert Dudley: A little commercial for this, if you haven't had a chance to look at this, it's available on the website. It's free, so you can project soil and gas demand down to 2035. It's not necessarily the answer we'd like, but we see patterns of oil and gas and coal and nuclear and renewables, hydro all laid out there. Each year, they do change a bit, so it's interesting to look at. Then, once a year there's this statistical review which takes all the data once a year that we find around the world.

There'll be two billion more people on the planet in 2035, so there'll be, we think, a third more energy demand in just 20 years. That's an enormous number. That's like another United States, another China. All forms of energy are going to be needed. There'll be a great tussling battle between, I think, gas and coal, due to regulatory policies and things. The gap today, one and a half to two trillion dollars worth of investment, is either being canceled or deferred. Fatih Birol said yesterday, "We're gonna end up paying a price for that, the industry in terms of being able to supply energy." I will tell you that at BP, we're not planning on that. I mean we're gonna plan our structure in financial frameworks, as if the price is not gonna move up in 55 to 60 years, what we're gonna plan in the next five years on.

Dr. Yergin & Mr. Dudley continue to discuss the future of the oil market, including the impact of electric cars and BPs renewable and biofuel initiatives. View the full session on www.ceraweek.com.

This is an excerpted from CERAWeek 2017 and has been professionally transcribed as accurately as possible. Please note, some words and phrases may have been unintentionally excluded.

Posted 9 March 2017

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.