The Purpose of Business

by Lord Browne of Madingley
Group Chief Executive
BP p.l.c.

I am aware of two overly simplified views about the role of business, and I believe they are both wrong. The first says the purpose of business is to make money and to deliver something called shareholder value. The second says we should do those things, but also that, to balance what by implication we are taking out of society in the form of profits, we should pursue a programme of "corporate social responsibility" – a programme of good works and philanthropy which is distinct from the business we are actually doing.

Why are those ideas too simple?

First, I do not think a business which just generated money would be a very good business. It would not invest in the future, for one thing; it would not develop people, ideas, markets or new products. Business is surely about the long term and not just about tomorrow.

Second, responsibility is not something to be added on as an afterthought or as a public-relations gloss.

Business is about something more complex. I believe a good, successful business is part of society and exists to meet society's needs. That is the purpose of business at the highest level.

We in business need to make money to reward those who have trusted us with their investment, but that is not our primary purpose. We also need to behave responsibly, but I think responsibility comes through what we do and the way we do it, not by adding on some extra activity or by adopting distracting concepts such as the triple bottom line.

We are fulfilling our purpose by supplying goods and services at a price people can afford and in a manner which makes the activity sustainable. That is complex rather than simple, but it is how business really works.

Complexity: An Example

Let me illustrate what I mean by talking about one of the major projects BP has been undertaking over the last few years. Following the fall of the Berlin Wall in November 1989, the Soviet Union, which had been in place for more than 70 years, began to come apart. The countries which had been part of that union began to assert their independence, some for the very first time. One of those countries was Azerbaijan, whose territory contains some of the first known oil fields in the world.

A hundred years ago Baku, the capital city of Azerbaijan, was one of the great oil cities of the world. By 1990 the oil industry in Azerbaijan was run down and in decline. I remember my first visit vividly, driving from the airport past the sort of nodding-donkey oil rigs which feature in films about the 19th century and early discoveries in Texas.

In Azerbaijan those rigs were still there in 1990, and they were surrounded by open pools of oil.

In our judgment the best prospect for new oil in Azerbaijan was under the Caspian Sea, in water depths Soviet technology had found impossible to penetrate. After a substantial negotiation with the new independent government in Baku, and with the new state oil company they had created, we confirmed the presence of a series of giant oil and gas fields.

Azerbaijan is some way from the main oil markets of the world, so as well as finding and developing the oil, we had to find a way to transport that oil out of the country.

We looked at many options, including the possibility of a pipeline south through Iran to the Persian Gulf, but we came to the conclusion that the best, safest and most commercially attractive route was through Georgia (another newly independent state) and Turkey to the port of Ceyhan on the Turkish Mediterranean coast. That meant installing a pipeline of 1,100 miles through some complex territory, close to some environmentally sensitive sites, and across countries where land ownership and even borders are not always certain.

Sixteen years later, that pipeline is about to be commissioned for the first time. This summer, a million barrels of oil per day will flow through from the Caspian to Ceyhan and into the world market.

At the same time, we will continue the process of constructing a parallel natural gas pipeline to supply local needs and eventually contribute to gas supplies for southern Europe.

The total investment so far, which we and our partners have made in the greater Caspian area, is around $15 billion. The complexity of the process from the beginning point in 1990 to first oil in the summer of 2006 is remarkable.

We have had to manage not just the engineering and all the associated technology of constructing an oil development and major pipeline, but also all the issues of local politics in states that are just developing the structures of government Westerners take for granted. We have had to agree on everything with three governments, each in a different stage of development:

• with Turkey, as that country approaches a crucial stage in its relationship with Europe and the West
• with Georgia, first under President Eduard Shevardnadze and, following the Rose Revolution of 2003, with the new government of President Mikhail Saakashvili
• and with Azerbaijan, under the first post-Soviet administration of President Abulfaz Elchibey, then under the restored authority of President Heydar Aliev and his son, Ilham

We have had to be aware at all times of the complex nature of the politics of the region, including the presence of a Kurdish minority in eastern Turkey, the conflict between Azerbaijan and Armenia, and the proximity and influence of Russia.

We also have had to manage environmental issues both in the Caspian region and along the pipeline route. We have had to develop a local workforce and all the skills necessary for a major project.

In a world characterised by terrorism, we have had to ensure that the line is secure at all times. We have had to work with local communities and with the governments of many of the surrounding states and the international community because a development on this scale affects everyone. The United States, for instance, has pursued under each of the last three administrations a clear policy of support for the independence of former Soviet states, and without the active support of the U.S. government, the Baku-Tbilisi-Ceyhan (BTC) pipeline could not have been built.

We have also worked with international financial institutions in both the public and private sectors to ensure that, with their support, the communities along the pipeline's route can benefit from the increased flow of revenue the line will bring.

Their investment is important, but we have also begun our programme of investment in local enterprise because we are conscious of the potential this project brings to an area which has seen only very limited development activity in the past.

In developing the Caspian project and the BTC pipeline, we had to be involved with issues well beyond the narrow technical and commercial dimensions. We have dealt issues of human rights, land ownership and environmental impact in close detail at every stage of the project's development. For the people running the project, those issues are not add-ons. They are not questions of public relations dressed up in the language of "corporate social responsibility." They are not something we do to win prizes. They are integral elements which must be managed to make the project viable.

For a major project such as this, the key is sustainability. Can we make an investment in a manner which will endure over decades to come? Can we produce and develop oil and gas, then bring it to market, without damaging the environment, the people or the local economy of the places in which we are working? Can we work with everyone on the basis of long-term, enduring mutual advantage?

The development of the Caspian fields and the construction of the BTC line is a very special story, but it is not unique. I could similarly describe the work we are doing in Russia, Angola or Indonesia. The details are different, but the message would be the same. In each case, the way we work is crucial. Our responsibility lay in our activity and the manner in which we pursue that activity. Responsibility is not additional; it is absolutely integral.

I am sure many, many other companies could describe their projects and experiences in similar terms.

Why Does This Matter?

In our business, responsibility matters because the world needs energy, and that energy is only going to be developed by business – by companies, some private, some owned by government.

We will only be able to maintain the flow of energy the world needs if companies responsibly explore, develop new paths in science and engineering, train people and invest. Given the time scales involved, they can only do that if they carry a degree of trust from the societies of which they are part. To understand why such trust is so important, it is necessary to look at the facts behind the focus on energy security which has developed in the United States and other countries over the last few months.

First, the demand for energy is growing. In the last 30 years, energy demand worldwide has doubled. In the last 10 years alone, demand has risen by 23 per cent. The reasons for that growth are the continuing increase in population numbers, which are rising by a quarter of a million every day, and the spread of prosperity – the fact that more and more people, especially in China and India, can now afford to buy the energy they need to improve their living standards.

Second, for the moment there is no viable alternative to hydrocarbons. Some countries are developing nuclear power, but there are issues of security and costs to take into account. As the International Energy Agency (IEA) predicts, demand will be almost 20 per cent higher 10 years from now than it is today, and the sources of supply for that growth will be oil, natural gas and coal. Given the convenience of use, oil and gas will be the most important.

Third, while there is no physical shortage of oil or gas, the available supplies of oil and gas are concentrated. Within 10 years, 70 per cent of the world's oil consumption will be traded, and three areas will account for the overwhelming bulk of that trade: West Africa, Russia and the Middle East.

The fact that the world seems set to become increasingly dependent on supplies from countries such as Iraq, Iran and Nigeria does make consumers nervous.

I think people are also nervous and uncertain about the environment, in particular about the implications of the growing emissions of carbon dioxide. Those emissions are growing at a rate between 1.5 and 2 per cent a year, with the result that the concentration of carbon in the earth's atmosphere is rising towards the level at which many scientists believe the world's climate could be seriously affected. The science is incomplete, of course, but the evidence is mounting, and the case for precautionary action to limit emissions is overwhelming.

All those factors are creating a sense of insecurity and anxiety. The evidence is that consumers want energy supplies which are safe and secure: safe in the sense that they are clean and can be used without destroying the world's environment, and secure in the sense that they come from places which are trusted as trading partners.

Restoring a Sense of Security

What can be done, then, to restore some sense of security?

The first priority is to develop and extend mechanisms to provide the first level of defence when things go wrong.

The IEA was created in the 1970s in response to the supply shocks and uncertainties of the time. It has worked very effectively, with a response mechanism in place, to allocate resources in times of shortage.

When hurricanes hit the United States last summer, the response of the IEA in bringing in supplies from Europe was rapid and highly effective. It ensured that the market stabilised and that very few people were left short of the energy they needed despite all the disruption of production and refining along the Gulf Coast.

I believe the IEA now needs to be extended to match the changes that have taken place in the market. We need to include the new major consumers, such as China and India, and to draw in key producers like Russia and the member nations of the Organization of the Petroleum Exporting Countries. We should also consider extending the coverage of the IEA beyond oil to natural gas, because that, too, is now crucial to energy security. Everyone has an interest in the market being stable, and the IEA is a mechanism of proven effectiveness in achieving that stability. That is the first step, and it could help remove some of the shorter-term uncertainties.

For the longer term, the key is investment. Investment is necessary in as many sources of supply as possible, and also in the infrastructure to bring that supply to market. In both cases it is important to develop diversity so that, as far as possible, no one is reliant on a single source of supply, delivered by a single route.

It is not enough, however, just to develop existing known supplies and establish infrastructure. Investment is also needed in science and engineering.

In the last 20 years, the average recovery factor – the amount of oil or gas which can be produced from any particular field – has risen from around 30 per cent to more than 40 and, in some cases, more than 50 per cent. Increasing the recovery factor of fields in North America by just another 10 per cent would add 10 billion barrels to reserves.

In the last 30 years, the limit to the depth of water in which drilling is possible has increased from around 100 feet to more than 6,000 feet. I do not believe we have yet reached the limit, and extending our current capability by another few thousand feet could open up significant new possibilities around the world.

Investment is also needed in creating the options for the longer-term future: developing sources of energy which, over time, can replace oil and gas and help us move to a low-carbon economy.

Investment is the key to security, and that investment will made by business.

Public policy is very important. Governments can set the right incentives and enable the market to operate effectively. They can remove barriers to trade and the flow of capital. They can price externalities, such as carbon, in ways which encourage the development of innovation and alternatives. They can agree on mechanisms to respond to immediate shortages. But the element of society which responds to incentives is business.

The process of investment is continuous, and the effect of all the investment made by the oil and gas industry over the last five years will become clear in the coming months and years. In total, the industry's private companies alone invested more than $550 billion in exploration, development and production between 2000 and 2004. The state companies have also invested significantly, and BP alone invested more than $50 billion. I believe such cumulative investment will help to stabilise the market in the short to medium term.

For the long-term future, the industry is investing in gas and in alternative energies such as wind, solar power and the fascinating technology of carbon capture and storage, which allows one to separate out, and securely store, the carbon from hydrocarbons, then to use the hydrogen to produce carbon-free electricity.

The engineering of carbon-capture technology is still at an experimental stage; BP has two test projects under development. If it works, it could provide a major contribution to global energy supply and security in the years ahead. And that is what business is about: sustainability in the long term. That is our purpose and how we think about the world in which we live.

As we pursue that approach, we know we cannot succeed on our own. Our industry needs good public policy, and we need good relationships built on mutual advantage with customers, suppliers and the communities in which we operate. Perhaps most of all, we need ideas and new knowledge. We need the advances in science that we, as professionals, can apply.

Lord Browne of Madingley, group chief executive of BP p.l.c., was appointed a managing director of BP in 1991 and group chief executive in 1995. He is a non-executive director of Goldman Sachs and the Intel Corporation and a trustee of the British Museum. He is also vice president and a member of the board of the Prince of Wales International Business Leaders Forum.