John Westwood’s speech at the SUT Scholarship Dinner at the Petroleum Club

2008.01.14 - Industry

Nothing is more boring than other people’s elections – UK TV is full of them. However, this time around, to me as a distant observer the US presidential process is very different – it seems that winds of change are ruffling the time-stiffened robes of state.

A presidential election recently occurred in Kenya. And the humanitarian tragedy that is unfolding there is an example of what happens when politicians do not listen to their voters’ demands for change. And we also see similar problems in Pakistan, following the assassination of opposition leader Benazir Bhutto.

Across the world, countries are realising the need for change in many things. However, all I feel qualified to comment on is the changes relating to the subject of energy.

On January 2nd we witnessed the markets’ brief flirtation with $100 oil. As many people are aware, for some years we have been forecasting this would happen – and in some respects we got it wrong. Even we are surprised at the speed at which we have moved from $30 oil to $100 oil.

A problem is that people constantly try to manipulate markets – $100 oil was an example of that. Just one trade out of 204,600 lots on January 2nd made history. This one thousand barrel lot was sold back at a loss of $100 – a low price to pay for an entry in the history books.

But in the case of energy, there is a more dangerous prospect than high prices – the danger of trying to keep energy prices artificially low – which leads to massive over-consumption and eventually even higher prices. One thing I have learnt in my 33 years in the oil patch is that markets are natural systems and politicians mess with markets at their peril.

We are of course all aware that this time it really is different – oil prices are primarily being driven by demand, from China in particular. And China is being driven by both America and the rest of the world’s love of cheap consumer goods. As a result, the US balance of trade has gone badly wrong and the dollar has fallen seriously.

And banks, who should be the bastions of financial caution, have lent money to those who could not afford to repay it. But as I said, you cannot mess with natural systems and the US banks sub-prime adventure has led to the virtual collapse of a major UK bank; at a cost, so far, to each UK citizen of $3,553. Also, back in the UK there is outcry over energy companies’ plans to raise natural gas prices (which are linked to oil price) and electricity prices between 17% and 27%. But trying to keep energy prices low is futile; because it is only high prices which will cause people to reduce their energy consumption, reduce demand and ultimately restrain prices.

In my view it is natural gas that will form the Western world’s bridge between our present oil-fired economy and a distant future based on renewable energy. So over the next couple of decades there will be major increases in the use of natural gas. Like oil, local gas supply is depleting and most of the remaining reserves are in distant countries. So in future years LNG is going to be a seriously big business.

And of course, we will need major increases in global E&P and our pipeline network, which bodes well for many companies in the sector. But, like election-time TV screens, natural gas suffers from an excess of political interference and no more so than in Russia, the world’s second largest reserve holder. Its state gas company Gazprom supplies Europe with some 25% of its natural gas and has become, “a giant aware of its power”. Just closing the valves on three pipelines can now achieve more than all of Russia’s investment in nuclear weapons did – virtually switch off the European economy.

Then, last Saturday, it became clear that Gazprom was making a major play for Nigeria’s natural gas reserves by offering much better deals that China, India, Europe and America. What might be next? At present Nigeria is one of America’s largest oil suppliers. West Africa is the port of Houston’s largest trade partner. As Henry Kissinger said a couple of years ago, “The Great Game is again in play”.

So what can we all do about this? Whether as companies or individuals we have to adjust our sails to meet the changing wind or capsize. In the Halliburton organisation, internal presentations are prefaced with a safety moment – perhaps an energy moment might also be appropriate. And the most important thing everyone can do is to invest in conserving energy.

In my own case I like a warm home in winter, big comfortable cars and first class flying, but have difficulty justifying the cost both in $ and global warming. But I do try to practice what I preach. For some years I have owned several acres of woodland, a chainsaw and a log stove. I have changed my light bulbs to low energy ones and adjusted the thermostat by a couple of degrees and we only buy 2 litre, 35 miles to the US gallon, diesel cars. And my veggie patch is mulched with composted copies of my daily Financial Times.

And as a company, we advise on both oil & gas and renewable energy industries. We believe that like natural gas, in future years renewable energy will be seriously big.

In fact, in this respect, the ‘gas-guzzling’ state of Texas is already a leader – it is the world’s third largest generator of wind power and the whole of the USA, with Spain, comes joint-second after Germany. And in my hotel parking lot the number of Toyota hybrid cars is growing by the month.

Also, in renewable energy the US is subsidising production of ethanol from corn. Now that’s great for the farm lobby, but only serves to increase global food prices in a world where hundreds of millions have to survive on less than one dollar a day. The far more efficient route would be to import sugar cane-derived ethanol from Brazil and less cheap consumer goods from China. And progressively increase gasoline prices to those of the rest of the developed world, spending the tax revenues on energy efficiency and public transportation, which in Houston currently resembles that of a third-world country.

In short, the way we have done things in the recent past is not an option for the future, whether it is in suppression of the will of the people, international relations or use of the world’s finite fossil fuel supplies.

So how does all this relate to markets for subsea technology? Offshore, and deepwater spend in particular is going to see continued long-term growth. As will offshore renewable energy, the new shallow-water subsea technology user.

Minerals will increasingly be sought underwater. Diamond mining is already happening. This month a $66 million contract was announced with SMD for the design & build of two ’Seabed Mining Tools’ for use in 1,600m water depth off Papua New Guinea.

So the demands for subsea technology are growing. However, the supply chain is already overstretched, particularly for that most valuable resource, experienced people. Attracting, training and retaining good people will continue to be the oil & gas sector’s biggest challenge

So to return to my starting point, in the words of the soundtrack to my generation, without a doubt, “the times are a changin”.

People of the United States, choose your next president wisely. You are deciding who will be the world’s most powerful person. And as a fully paid up citizen of the ‘rest of the world’ your choice will have great impact on me and my family.

And one final trivial plea – can I have less of your elections on my TV screen?

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