Energy now and for the future & Kazakhstan Energy Industry Reputation Management (Speech on KazEnergy Weekend, 28th September 2007)

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Martin Ferstl, Shell Kazakhstan CCh
Well as you might have guessed from the title of my speech, I would like to cover two topics:
Firstly that of what Shell calls the Energy Challenge, our view on the challenges facing the current energy system and how business and government can work together to ensure the objectives for an energy system are met.
Secondly, what role the reputation of an industry plays in helping to deliver on this energy challenge and what each of us can do to build and protect a positive reputation for the energy industry in Kazakhstan.
I know to many of you this may sound like quite a leap between topics. However, I hope to prove you wrong!

Energy Now & For the Future:
The world economic system, regions, nation states, cities and individuals all require security of energy supply, at an affordable price, and without sacrificing our shared environment. This is the simple truth and addressing these three, often competing, objectives is a challenge for every one of us. Indeed, in the decades ahead three fundamental factors will underpin how, and if, we can meet these objectives.
Firstly, global energy demand is accelerating. Energy use in 2050 may be at least twice as high as it is today. The main causes are population growth, from six to more than nine billion people, and higher levels of prosperity. Today the average American uses 32 times more electricity than someone in Sub-Saharan Africa. The average European uses 15 times more. Around the world, two billion people don’t have access to adequate energy supplies. Large parts of the world are understandably more intent on obtaining enough energy to lift themselves out of poverty today than securing enough energy for the first world’s homes, cars, and factories tomorrow. China and India are entering the energy-intensive phase of their development. This is the point when people buy their first television or car, or board a plane for the first time, and start to consume much more transport fuel and electricity. And most people in China and India have never boarded a plane, yet!
The second factor is that the growth rate of supplies of “easy oil”, conventional oil and natural gas that are relatively easy to extract, will struggle to keep up with accelerating demand. Just when energy demand is surging, many of the world’s conventional oilfields are going into decline. The problem is not the availability of resources as such. Overall, the International Energy Agency believes that there could be roughly 20 trillion barrels oil equivalent of oil and natural gas in place. In theory, this is enough to keep us going for about 400 years at the current rate of consumption. In practice, though, less than half can be recovered with existing technology. The world now produces 135 million barrels oil equivalent a day of oil and natural gas. We could still raise that number with new technologies, but only gradually and certainly not indefinitely. On balance, from the perspective of energy security, we would be wise to broaden the global energy mix as quickly as we can, including more unconventional oil and gas, alternative energy, coal and nuclear energy.
The third factor is that the predicted increase in conventional burning of coal will cause higher CO2 emissions, possibly to levels we deem unacceptable. The IEA believes that coal use could grow by around 60 per cent in the next 20 years. The main reason that countries turn to coal is energy security. China and India will continue to exploit their domestic coal reserves to be less dependent on oil and gas imports. So will the United States, which even now generates more than half its electricity with coal. But burning coal for electricity generates twice as much CO2 as burning natural gas…

The role of governments
The three factors I have just mentioned are creating, and forcing, change within the established energy system. Rapid change and nontransparent change can discourage investment and hamper the optimal functioning of national, regional and the global economy. We can mitigate at least some of this new uncertainty through clear and stable regulatory frameworks. The technologies and the economic instruments are available. And markets will direct resources to the most efficient solutions.
However, markets need regulations and incentives to change, especially when new technologies cannot yet economically compete with the established ones and in many cases have not yet been fully proved. This is where governments have a crucial role to play.
Governments, not industry, decide the energy mix of their societies. They determine how to balance energy security against the economic, environmental and social interests, using laws, taxes and incentives. What I would wish for is a Kazakhstan which is seeking to provide a regulatory framework to encourages and protect investment, drive the development of technology and enables the use and development of national skills and the local supply-chain.
We should recognise that in major resource holding nations such as Kazakhstan there is an additional challenge. That being how to manage and maximize the social good from the return from hydrocarbon extraction while avoiding the risk of economic overheat and Dutch Disease. Like many of its international counterparts Kazakhstan has gone a long way to avoiding this risk by investing in education, seeking to diversify the economy and the establishment of a managed national oil fund.

Industry Reputation
While the reputation of individual companies can be financially measured, tracked through surveys such as “Fortunes most admired companies” and has a clear impact of share price, the value of a positive reputation for an industrial grouping or economic sector is slightly harder to quantify. However, despite this it is clear that the international standing of a countries energy sector can have significant impacts on the ability of that sector to deliver on its commitments and to attract both domestic and international investment.
Where a sector represents a significant percentage of a countries GDP the economic performance of that country can depend, to a degree, on the reputation of an industrial sector, and the reputation that the sectors regulatory authority has developed in managing and supporting the sector. Kazakhstan is a good example of this.
While a negative reputation can discourage investment, and lead to stagnation and potentially decline, a positive industry level reputation can delivers value to industry participants and the host nation in a number of ways.
Firstly, it enables it helps attract high quality national and international staff to work in the industry. In the energy industry where there is a limited skilled labour pool and where constant technological innovation is vital to success, attracting and retaining quality employees with the right skills to do the job is vital. This challenge is becoming more difficult as Kazakhstan’s economy diversifies and there are emerging industrial sectors competing for the same limited resources.
Secondly, due to the importance of natural resources to the economic growth of Kazakhstan the reputation of the extractive industry is one fact that is reviewed by external agencies such as WTO, OSCE and other national governments. Ensuring a energy industry reputation built on transparency, openness along with legal and environmental compliance will held Kazakhstan in its international relations and ambitions.
Finally, many of Kazakhstan hydrocarbon reserves, such as the giant Kashagan field, are located in challenging and often potentially dangerous conditions. In order to ensure the optimal and safe extraction of what are some of the most challenging fields in the world the Kazakh energy industry needs to draw on the expertise of partner companies from across the world. A strong industry image will help attract these foreign partners, who will in turn use and develop the local supply chain and recruit local staff.

Where are we now:
As some of you will know Shell was asked to support KazEnergy in understanding the combined activities and contributions of KazEnergy members and, via external research, reviewing the reputation standing of our industry. Following this first phase of work, and depending on our findings, lead the development of a plan to help improve the image of the energy industry. This is a project which Shell was happy to accept.
The assessment phase of this project is now complete and I am delighted to be able to share some highlights of the findings with you today:
Following the conclusion of our intra company research let me present you with some baseline facts around KazEnergy members:
•    Over 50% of the industrial production output of the Republic comes from KazEnergy Members (in KZT bln).
•    Members of KazEnergy paid KZT 860 billion in the form of taxes and other mandatory payments, which is 40% national government budget expenses.
•    Members of the Association employ about 80 thousand people. This represents approximately 11% of all salaried industrial employees in the Republic.
•    In 2006 Member companies of KazEnergy accounted for 43% of export revenues from the Republic totalling $16,5 bln.
From our external market research the people of Kazakhstan told us a number of positives around their perceptions of energy industry activties:
•    Increase in per capita wealth in the hydrocarbon producing regions.
•    Tax to local oblast budgets promotes revenue spending on local needs.
•    Of those surveyed in the Western Region 75,4% believe oil companies make a positive social and economic contribution.
•    AGIP KCO is perceived as the oil company which is socially contributing the most to Mangistau and Atyrau.
•    The majority of those surveyed believe oil companies will significantly increase their social contributions in the short-term.
The same research participants also told us a number of not so positive things around how individuals perceive our industry:
•    In all regions over 80% of those surveyed believe oil companies have a detrimental effect on the local environment.
•    The oil industry is creating significant upward pressure on house prices and the cost of living.
•    Only 20% of those surveyed believe oil companies are using technology to overcome environmental issues.
•    In the West Region of Kazakhstan 18% believe local companies are not sufficiently involved in the oil industry supply chain.
It is how we together seek to maximise the positives and reduce the negative perceptions of our industry which I will now turn.

How would you build an Industry Image

Building a strong industry reputation is not just a derivative of our combined external communication and advertising activities, it is also a result of how member companies do and the way we are seen to act. From the reputational research I shared with you earlier today a number of themes can be identified where we can work together to bridge the gap between where the reputation of our industry is now, and where we would hope for it to be in the future.
•    The technical and environmental challenges industry members face and how we are overcoming them – real stories from real people
•    What the industry can do for Kazakhstan and how Kazakhstan can help the industry thrive – highlighting mutual benefits and social performance
•    The need to build trust and be transparent
o    transparency of income and use of funds from oil&gas, Kazakhstan must implement EITI initiative;
o    social responsibility of oil companies to nation of Kazakhstan.
Within the industry reputational enhancement project Shell is drawing on expertise and experience from the activities of energy industry organisations from around the world, including the Middle East, Europe and the United States. This has led to the drafting of a KazEnergy Reputation Improvement Plan.
In conclusion, I would hope that with the combined national and international expertise of the KazEnergy membership, much of which is represented in this room today we will be able to further develop both the reputation of our industry and reap the benefits this will provide.