Achieving Energy and Climate Security

In an industry not famed for its eco-credentials, ConocoPhillips CEO Jim Mulva is something of a paradox: an oil industry executive who's a champion of carbon controls and the climate change challenge. But can climate change be reconciled with energy security?

“Last year we became the only US integrated energy company to call for a mandatory national framework to address greenhouse gas emissions”
-Jim Mulva, ConocoPhillips

In an industry given to bold pronouncements, Jim Mulva prefers a different approach: he lets his business acumen and considerable deal-making ability do the talking. In 2006 he orchestrated the $35.6 billion acquisition of US independent Burlington Resources that, virtually overnight, made ConocoPhillips one of the nation's top producers of natural gas; more recently, the alliance he brokered with Lukoil has seen ConocoPhillips build up a 20% equity stake in the oil major and secure access to the lucrative Russian market. Now, though, he's turning his attention to an altogether trickier union: how to address the challenge of climate change within the context of energy security.

It's a contentious issue. Public pressure to act over the threat of global warming has never been greater, and with a new administration set to redefine America's approach to carbon emissions and its use of cleaner energy, many see the next six months as a critical period. Inaction or procrastination now could hamper the environmental movement for years to come. However, with the US increasingly dependent on foreign oil, the need to ensure energy security is an equally pressing concern. Many in the oil industry believe that without a coordinated US policy, the industry is unlikely to be allowed to invest in much-needed expansion projects because of concerns over emissions. Clearly, Big Oil needs to be an active participant in the current discussion - and Mulva is determined to be at the forefront of negotiations.

ConocoPhillips is one of the more progressive of oil firms when it comes to tackling environmental issues, but even so he concedes that the impact of global warming has been a relatively recent concern. When Mulva's company first participated in the Carbon Disclosure Project (CDP) in 2004, for instance, it was with a certain degree of reservation. An independent not-for-profit organization that provides primary climate change data from the world's largest corporations to the global marketplace, CDP plays a key role in encouraging private and public sector organizations to measure, manage and reduce emissions and climate change impacts. ConocoPhillips' initial submission to the CDP-2 survey was only four pages long, and was not approved for public release. "The climate change issue was relatively new for us, and we did not have as much data on our recently merged company as we do now," says Mulva.

Today, however, there is a world of difference. The Intergovernmental Panel on Climate Change has concluded that global warming is unequivocal. The European Union's Emissions Trading System is beginning Phase II. And the new US administration has pledged to address climate change. This year, when ConocoPhillips filed its questionnaire, it was 19 pages long. "We had far more data available, much of it already released to the public," says Mulva. "Attitudes have evolved."

Energy and climate security

Mulva wants ConocoPhillips to serve as a positive example to the rest of the industry.

"Our company has taken a well-defined position," he explains. "We are very concerned about the potential impact of climate change, and last year we became the only US integrated energy company to call for a mandatory national framework to address greenhouse gas emissions."

In keeping with these beliefs, the oil giant is taking steps to better manage its own emissions. Earlier this year, the company developed a comprehensive climate change plan that included four key action items: to build organizational capability in the form of processes, people, tools and technologies; pursue new opportunities in low or zero-carbon businesses; leverage carbon trading and technology; and better engage externally with a range of bodies from the environmental, scientific and public policy communities. Mulva believes this approach is already bearing fruit. "We now regularly measure and forecast our emissions," he says. "We are improving the energy efficiency of our refining, conducting R&D on carbon capture and storage, and producing renewable fuels. We were already a leading producer of natural gas, which is clean-burning and low in carbon."

In a further sign of changing attitudes within the industry, the company also now belongs to the US Climate Action Partnership (USCAP), an organization that includes leading businesses and environmental groups concerned about climate change. It calls for strong national legislation that would slow, stop and then reverse the growth of US greenhouse gas emissions. "Current US climate policy is a key business uncertainty," explains Mulva. "This uncertainty must be resolved in order for the country and the world to move forward. For this reason, we urge the incoming presidential administration to work with congress to pass effective legislation. And further, to exercise world leadership in negotiating an international climate agreement."

For some, ConocoPhillips' advocacy is evidence of a shifting attitude towards green issues on the part of Big Oil; others see it as an obvious byproduct of a changed operating environment in which business-as-usual is no longer an option. Either way, the reality is that climate change is only one of a wide range of energy issues currently faced by the US and other countries around the world. And it is in balancing an increased focus on mitigating the impacts of climate change with competing - and in some instances contradictory - industry imperatives that the real challenge lies.

"We cannot focus on climate change alone," explains Mulva. "We must also meet the challenge of improving our energy security. The tight oil market of early 2008 clearly demonstrated this need. As a result, the public agrees that the US needs more domestic production. This is why a majority now supports environmentally responsible offshore drilling." He believes the public would almost certainly reject any effort to address climate change if, as a consequence, it raised energy prices too far or too fast. Yet at the same time, the public clearly wants action to address climate change, so any effort to increase energy supplies would be similarly rejected unless carbon emissions were also addressed.

"For instance, any serious effort to reduce emissions would require the greater use of natural gas to generate electricity," he suggests. "But to do this, we would need expanded domestic access for exploration and drilling. We could not do the first without the second. So climate change and energy security issues must be resolved together through coordinated policies. The new administration and congress must set aside partisan politics and get down to business."

A sound climate change policy

When he takes office in January, energy and climate change will undoubtedly be one of the first things on President Obama's agenda - and it is an issue that needs addressing urgently, not least because of its international dimension. "Of the nearly 40 countries in which ConocoPhillips operates, some now have greenhouse gas regulations in place; in others, regulations are imminent. We have important operations in the Arctic, which is experiencing the impact of warming temperatures. And as we go about providing the energy that powers modern life, we consume energy ourselves. So we are not strangers to either the risks or the opportunities associated with climate change," says Mulva. "And we obviously have a vested interest in helping achieve global energy security. We believe that our industry must be involved in the effort to find solutions to both challenges."

He proposes a number of steps the energy industry must take in order to address these issues, including developing new conventional and unconventional energy resources, utilizing the industry's expertise to develop carbon capture and storage technology, and leveraging international business and trading experience in the emerging global greenhouse emissions industry. He also maintains that the US has a significant role to play in the international arena - but that first it needs well-founded policies.

"US climate change policy should be aligned with the 'four Es' - environmental integrity, efficiency, effectiveness and equity," he explains. "It should meet the long-term objective established in Article 2 of the UN Framework Convention on Climate Change, which calls for stabilizing greenhouse gas concentrations at a level that would accomplish two goals: preventing dangerous interference with the climate system; and enabling economic development to proceed in a sustainable manner. Make no mistake: we are talking about fundamental changes to the energy system that drives the world economy and our standard of living, so we must do this right."

Of course, US climate policy must be efficient in order to minimize costs to both business and consumers, and as such Mulva supports the development of a federal program. "We recognize the important role that state initiatives play, particularly in the areas of building codes, urban planning and education. But we oppose a patchwork state-by-state approach. We also believe that an overlay of competing and conflicting regulations, such as separate standards for renewable and low-carbon fuels, would be too costly or even unworkable."

The policy must establish a transparent and relatively stable value for carbon, which must be sufficient to change behavior enough to achieve the emissions targets. It must promote new technological solutions without picking winners. And it should contain look-back provisions so adjustments can be made in response to changing conditions.

Finally, it must be transparent and equitable. "It should not unduly burden any group of consumers, region of the country or industrial sector," says Mulva. "It should also protect industries exposed to competition from unregulated countries. This is necessary to avoid disadvantaging domestic industry and to prevent emissions 'leakage' from industries moving offshore. Ultimately, equity requires global participation, and a linked international system of climate programs."

A sound energy policy

And just as a comprehensive climate program should be linked globally, so it should also be linked to the development of the US domestic energy policy. Mulva maintains that the US needs a sound, comprehensive approach that should incorporate four principles: energy supply diversity, greater energy efficiency, technological innovation, and sound environmental stewardship.

Due to rising population and economic prosperity, the world will clearly need more energy in the future, in all forms. This includes alternative and renewable sources, like solar, wind and geothermal power, biofuels and others. But there is, to borrow a phrase, an inconvenient truth. The world will also need more fossil fuels, as well as more nuclear power - particularly given that experts predict that alternatives such as renewables could take decades to come online to replace these sources. "US energy policy should of course stimulate development of alternative and renewable sources, including some that have not been invented yet," he concedes. "But it must recognize the essential role of oil and natural gas, and open new onshore and offshore areas to development. And it should facilitate permitting and construction of energy infrastructure."

In Mulva's view, the policy should encourage the environmentally responsible development of unconventional fossil fuels, such as oil sands, oil shale and natural gas hydrates. "These are abundant, and are located within our borders or nearby. They represent hundreds of years of energy potential." He cites the example of the Canadian oil sands, which he says could provide 20% of US oil supply by 2020. While some oppose development due to their current carbon intensity, Mulva believes that the best course is to proceed, while continuing intensive R&D to reduce that carbon footprint.

The policy's second tenet must be improving energy efficiency. Since the 1970s, the US has doubled its economic output per unit of energy consumed, but Mulva insists we can do more. "Currently, gasoline demand is down 3% - the first meaningful decline in years. Total distance driven fell by 12.5 billion miles in June from a year ago. Sales of hybrid cars are booming, and business is raising its efficiency. Government can drive continuous improvement through public education, and by enacting rising efficiency standards throughout the economy. This offers the dual benefit of improving energy security and reducing carbon emissions."

Third, the energy policy should promote innovation by encouraging research and development. "Enormous corporate investments are already under way," he continues. "But we also need public investments in technologies that cannot be logically funded by industry, such as nuclear fusion or fuel cells. Government can encourage investment by granting incentives, and by not taxing away the financial returns of energy companies. Government can also enhance national research capabilities through greater educational support."

Finally, Mulva's aim is to achieve these priorities while serving as a good environmental steward - protecting air and water quality, and preserving the land - while at the same time, investing in cleaner forms of energy. "At ConocoPhillips, we have dramatically increased our capital spending to more than $15 billion this year," he explains. "We primarily concentrate on our core businesses. But we also have a very active R&D program in renewable and alternative energy. We are a large blender of ethanol and we produce renewable diesel fuel. We are researching next-generation biofuels and developing new materials for batteries for electric cars. We are also considering investments in other energy sources. So we are committed to doing our part."

Meeting the challenge head-on

The world clearly faces serious challenges on both climate change and energy security. As economies around the world continue to develop, the growing global demand for energy must be met in concert with responsible actions on climate change. Balancing supply and demand will require more efficient use of energy and the full utilization of both conventional and innovative sources of energy into the foreseeable future.

"There are potential solutions available - that is, if we can rally public support and political will, and build a consensus for action," concludes Mulva. "If we fail, our country will be stuck in a worsening situation. We will become ever more dependent on foreign sources of supply. We will remain subject to wild gyrations in energy prices. And we will only be able to sit and watch as the climate changes around us."

Whatever happens, meeting the twin challenges of taking action on climate change and providing adequate and reliable supplies of energy will require technical innovation, resource commitments and responsible stewardship by energy producers and consumers alike. It will require some risk-taking, but given Mulva's previous track record in successfully balancing risk with opportunity, don't bet against ConocoPhillips meeting these challenges head-on.

Taking a leadership approach

No one entity can address these issues on its own, but ConocoPhillips has made a decent start in providing leadership on finding pragmatic and sustainable solutions to the climate change challenge, seeking to encourage policy measures that:

• Slow, stop and ultimately reverse the rate of growth in global GHG emissions
• Establish a value for carbon emissions, which is transparent and relatively stable and sufficient to drive the changed behaviors necessary to achieve targeted emissions reductions
• Provide long-term certainty for investment decisions
• Encourage the development and deployment of innovative technology to help avoid or mitigate GHG emissions at all stages of the product lifecycle
• Realistically match the pace and stringency of policy to the rate at which new technology or infrastructure changes can be developed and deployed
• Encourage energy efficiency at all stages of the product lifecycle
• Inform and influence consumer preference toward less GHG-intensive consumption
• Encourage the deployment of carbon capture and storage as a practical near-term solution
• Avoid placing a disproportionate burden on any one business sector or consumer segment
• Support equitable international competition
• Ensure that early actions are not disadvantaged
• Avoid undue harm to the economy

The challenge for the US

Access to resources is severely restricted in the United States and abroad, and the American oil industry must compete with national oil companies that are often much larger and have the support of their governments. US companies can only compete directly for seven% of the world's available reserves, while about 75% is completely controlled by national oil companies, and are not accessible.

However, ConocoPhillips is actively working to bring more energy to the market, explains John Lowe, Executive Vice President for Exploration and Production at the US giant. "Over the past six years we have reinvested - on average - 106% of our income. In 2007, we earned $12 billion but reinvested $13 billion - and we have over $15 billion in investments planned this year. This investment includes finding added supplies of oil and gas, expanding refining capacity and continuing to research and bring renewable and alternative fuels to the market."

In North America, ConocoPhillips is drilling exploratory wells, developing the Canadian oil sands and building infrastructure. But Lowe insists that more must be done to explore the vast areas of the US that are off-limits due to drilling moratoriums. These areas could more than double the nation's oil and gas reserves. "The US is in a global race for energy," he says. "We are competing against national oil companies that are far larger, and that enjoy preferred access and governmental cooperation. We must move beyond today's adversarial relationship and start working together to find real solutions. US oil companies should be viewed as the key to the energy solution - not as scapegoats, but as assets in this global energy race. We must be allowed to compete on level ground for the benefit of our country."