Energy: inevitable transformation & difficult choices

Energy industries will be transformed over the first half of this century. ‘Business as usual’ projections for rising energy demand and CO2 emissions are simply unsustainable. This change will be very challenging. How it occurs will depend on choices – by governments, companies and customers. Recent Shell scenarios to 2050 look at two possible ways. In the Scramble scenario, countries seek their own short-term solutions – particularly in securing energy supplies – while action on energy efficiency and CO2 emissions is put off. In the Blueprints scenario, a more cooperative and forward-looking approach brings early international agreement on market measures to promote efficiency, emissions reduction and technology transfer. Oil and gas remain an essential part of global energy supplies in both scenarios, although production is higher in Blueprints. CO2 emissions are significantly lower in Blueprints – with widespread introduction of carbon capture and sequestration (CCS) technology to cut emissions from power generation. Major producing countries like Abu Dhabi have a key leadership role: in maintaining vital oil and gas supplies, in driving the development of new technologies, and in helping to establish the global conditions necessary
for progress.

Energy: inevitable transformation & difficult choices

There are three hard truths about the future of the energy systems on which the world depends. The first hard truth is that – with more people and growing prosperity – energy demand is surging. If things go on as they are, by 2050 a world with nine billion people will be using twice as much energy as today. The second hard truth is that energy supplies – from all sources – will struggle to keep pace. The challenges to grow oil and gas production are well known. In fact, we have to run increasingly hard just to stand still. The IEA has estimated that 37.5 million barrels a day of new oil production – not far short of half today’s global production – might be required by 2015. Of this, nearly two-thirds would be to offset field declines. The IEA says that announced growth plans amount to only 25 million additional barrels a day by 2015, and it’s not clear that all those will go ahead. So, even if a period of economic slowdown moderates demand growth, there is a major gap to meet. And, we have to win that new production from increasingly difficult resources – smaller accumulations, in more complex geology or harsher conditions, that are more difficult to produce or get to market – all requiring new technologies, better capabilities and greater investment. Challenges here in Abu Dhabi, for example, include commercialising sour gas contaminated with H2S and applying enhanced oil recovery techniques to produce more from heavy oil fields. Other energy sources also face fundamental problems, including:

• the sheer scale of the logistics required to bring increasing quantities of coal to market,
• the land required for biofuels – by 2010 a third of US corn will be used to provide less than 9% of its gasoline – and how to ensure that biofuels production is truly sustainable,
• the storage, transmission and backup supply systems needed for wind and solar electricity,
• the challenge of managing nuclear waste safely, for all time.

The third hard truth is that the environmental stresses from producing and using energy are increasing. ‘Business as usual’ energy growth could well mean that carbon dioxide emissions from energy more than double to reach 65 gigatonnes in 2050. The international climate scientists of the IPCC are now 90% certain that global warming is caused by the increasing amounts of CO2 and other gases that humans put into the atmosphere. They think it is likely that this warming is already causing today’s increases in sea level and changing storm patterns. And they think that by the end of this century human activity could have raised global temperatures by between 2 and 5 degrees above the preindustrial level. Sea levels could be another 20 to 45 centimetres higher. That wouldn’t be the end of it – the trajectory would continue upwards. That’s a risk the world simply cannot take.
Energy transformation is inevitable. How it happens will depend on choices by governments, companies and customers. And nobody should kid themselves these choices will be easy. Transforming energy systems – in a few short decades – will be very difficult:

• difficult because of the scale and complexity of those systems,
• difficult because of the longevity of plant and equipment – with cars typically lasting 10 years and power plants more than four times that, and
• difficult because of the damage that poor choices and mistaken measures will do to essential energy supplies, and to wider economic, social and environmental goals.

Technology is key – but there are no silver bullets.

Shell has been using scenarios since the 1970s. They are not predictions. Rather they explore alternative possible futures to help us think about the choices we face, so that we can develop and test our strategies. The key question is not whether something will happen, but what would we do if it did? How can we prepare for – perhaps even shape – our future?

Scenarios to 2050

Shell’s latest long-term energy scenarios describe two alternative futures, which we call Scramble and Blueprints. Scramble is a world where countries seek their own short-term energy security – pursuing bilateral deals for supplies and increasing local production of coal, unconventional fuels and biofuels. Significant action on energy efficiency and emissions reduction is postponed, until supply constraints and
climatic events force hurried measures. This erratic approach is less effective and creates damaging volatility – reducing long-term growth and investment. In fact, Scramble is largely what we are experiencing today – and it’s not very comfortable. Blueprints is a more cooperative and forward-looking world, where challenges are anticipated and addressed collectively. Market measures are enacted to promote energy efficiency, emissions reduction and technology transfer. By 2015, a critical mass of countries is participating in interconnected emissions trading schemes, paving the way for the widespread adoption of CO2 capture and storage. CCS is a process whereby CO2 is captured at industrial sources – such as coal-fired power stations – and then injected into deep saline aquifers, or depleted gas fields, or to enhance oil recovery.

How do the energy outcomes of these scenarios compare?

Hydrocarbons continue to play a key role in both Scramble and Blueprints. In Scramble, oil and gas consumption in 2050 is 6% up on 2000. Perhaps surprisingly, in the more cooperative Blueprints world, it is nearly 20% up – and hydrocarbons would still account for more than a third of total energy supplies in 2050.

In Scramble, energy security concerns prompt a ‘flight to coal’ and global consumption grows by nearly half in the first two decades of the century. This is already happening; Chinese coal demand has grown by some 85% in five years.

However, coal growth in a Scramble world would become increasingly constrained by the difficulty of expanding the global coal transport infrastructure quickly enough. About 20% less coal is used in Blueprints. But, more important is the rapid introduction of CCS technology to curb power station CO2 emissions. It is hard to overstate the importance of tackling these emissions. According to the IEA’s outlook to 2030, the growth in CO2 emissions from coal fired power in just three countries – China, India and the US – could be 80% more than the growth in emissions from transport worldwide. This CO2 will come from little more than a thousand new power stations, unlike the several billion new vehicles commissioned worldwide in that period. CCS has the potential to be a practical and effective way of dealing with these emissions. I say potential because – while there has been considerable work on the technology – the world has almost no experience of applying CCS on a commercial scale.

Commercialising this technology is a challenge for industry, and for governments. It is one that I know Abu Dhabi is responding to as part of the Masdar Initiative – with the aim eventually of reducing UAE CO2 emissions by almost 40% and increasing oil recovery by an additional 10% through injecting some of that CO2 in new enhanced oil recovery schemes. Let’s look briefly at the other energy sources, which will together account for around 40% of supplies, depending on the scenario. Nuclear grows steadily in Blueprints – but still provides only 7% of energy in 2050, the same as in 2000.

Biomass energy grows much faster in Scramble as countries focus on energy security, and accounts for 15% of energy. Solar and wind together account for another 15% in both scenarios. Centralised solar driving steam turbines in power stations – a technology of particular interest in places like Abu Dhabi – plays a significant part in the electrification that is a theme of Blueprints, increasingly a world of electrons rather than molecules. Turning to those crucial CO2 emissions ...

In the Blueprints scenario, almost all coal-fired – and gas-fired – power plants in OECD countries are equipped with CCS by 2050, and half those elsewhere. This takes out more than one quarter of global CO2 emissions, or the equivalent of 55 million barrels of oil a day. That highlights the competition for CO2 space between coal and oil, which I’ll come back to. Overall, CO2 emissions from energy in Blueprints are considerably lower than in Scramble.

Will this be enough to avert significant climate change? I don’t know.

The world may well look for even faster change at the follow up to Kyoto in Copenhagen next November. However, I do know that achieving even that Blueprints outcome will be very challenging.
In this industry, we understand the time required to deploy new technologies, build new skills, and deliver complex projects. So new targets are all well and good, and many politicians seem to delight in them. But more urgent is clarity on just how we’re going to achieve them, while maintaining essential energy supplies. And, people must appreciate that not all human-induced greenhouse emissions come from energy. Controlling emissions from non-energy sources, such as cement production, is equally important – increasingly so as we find ways of controlling those from energy. By 2100, energy emissions in Blueprints will only be a third of the total greenhouse gas emissions.

Transport fuel choices

Let me highlight how the two scenarios model transport. In Scramble, the choice is liquid fuels, with biofuels augmenting fuels from fossil sources. By 2050, biofuels – increasingly from less damaging sources – account for a quarter of demand. In Blueprints – with its sustained focus on efficiency – the energy used in transport is a fifth lower than in Scramble. But the key shift assumed is electrification – with electric and hydrogen vehicles accounting for a sixth of the energy mix by 2050.

But is this the best solution? There would be many advantages to sticking longer with liquid fuels, from hydrocarbons and sustainable biomass. They can utilise the same infrastructure and require an evolution – not a revolution – in engine technology.

On the other hand, the advantages of electrification in Blueprints depend not only on the rapid global introduction of CCS, but also on a massive turnover in vehicle technologies, plus reinforcement of electrical grids, plus being able to produce half of global electrical power from renewable sources by 2050. So, we are doing more work to see whether a liquid-fuel scenario could match the emissions reduction in that original Blueprints. In the medium term, blending in the right biofuels combined with continuous improvements in vehicle efficiency have the greatest potential for decarbonising mobility. In the longer term, the indications are that these can match the benefits of electric vehicles, with the addition of CCS on liquid hydrocarbon fuel production. This would be good news for oil producing countries and companies, and for our customers. However, while we continue to work on the details, I have no doubt that the basic premise of Blueprints is right; that we will all have a better future if countries and companies work together globally to anticipate challenges, and address them early on.

A Scramble scenario would be a  turbulent, risky and ultimately unsustainable world. A Blueprints approach would offer a better long-term basis for sustaining the use of hydrocarbons for energy and chemicals, and for building economies and maintaining global growth. And, I believe that major producers like the United Arab Emirates will play an increasingly important leadership role in such a world.

Still technological surprises

I will come back to that. First a reminder that – however much effort we put into exploring the future – we’re still going to be surprised by technology.

Which is why in Shell we put so much effort into getting ahead of the game – increasing our R&D spending nearly threefold since 2002, to 50% higher than our nearest IOC competitor. Of course, we undertake our technology development together with our partners in operations around the world. And I should mention here the Abu Dhabi Investment Fund’s stake in the Shell Technology Ventures Fund. Let me give an example of technology surprises in North America, always of interest in this industry.
Five years ago, there was an influential report from the US National Petroleum Council stressing how hard it would be just to maintain US gas production, and the likely need for very large scale LNG imports. As you know, companies scrambled to establish LNG import capacity – 50 or more terminal schemes were mooted, and 14 have been or are being built. The flat trend of Lower 48 production from 1998 to 2006 seemed to confirm the pessimistic outlook. But, today production is growing rapidly – by some 9% in just the last 2 years. People are wondering just how little LNG the US will require. This growth in domestic gas supply is the result of greatly improved technology for producing gas from tight sands and shales. For example, since buying our Pinedale tight gas field in Wyoming in 2002 we have utilised multiple new technologies – including microseismic and underbalanced drilling – to treble production while halving costs and well times. Such advances are expected to open some 500 Tcf of untapped unconventional gas resources in North America in the next 15 years, possibly considerably more.

New technology could also unlock major additional North American oil resources.

An example is Shell’s new in situ upgrading technology, which converts heavy oil into high quality products underground. The technology can also be applied in oil shales, which could hold some 800 billion barrels of recoverable oil in the US alone. Of course, the impact of technological advances is not restricted to North America. They have the potential to shift energy supply/demand balances globally, including here in the Gulf.

A key leadership role

We’ll need all the help technology can give, as the world faces such great energy and environmental challenges. But, above all, the world will need leadership. And here I am sure that Abu Dhabi can and will play a very strong role. One vital area of leadership is in meeting the world’s growing need for oil and gas. Abu Dhabi has an impressive record of serving its global customers:

• by applying advancing technologies – together with its international partners – to build its production capacity,
• by its strong commitment to developing the necessary skills and capabilities for the future, and 
• by its consistently statesmanlike role in global energy markets.

I have no doubt that this leadership will continue. Every time I arrive in the Emirates – which I have visited many times, over many years – I am struck again by the remarkable industrial, commercial and social transformation. A consequence of this is one of the world’s fastest rates of energy consumption growth, which could constrain Abu Dhabi’s exports, particularly of gas and perhaps also chemicals.

Again, Abu Dhabi is responding vigorously – by unleashing the potential of alternative energy and energy efficiency technologies to replace hydrocarbons in domestic consumption. This could change the supply/demand balance – in the same way that unconventional technologies are doing for gas in North America – and release more oil and gas to meet the needs of others. I was proud to attend the Masdar inauguration ceremony more than two years ago. Its aim of making Abu Dhabi a centre for developing and exporting alternative energy technologies is both bold and visionary – that’s exactly what I mean by leadership.

As well as further reducing emissions, this would provide an important boost in developing these essential technologies for the rest of the world. The Zayed Future Energy Prize – honouring the environmental vision of the late Sheikh Zayed bin Sultan Al Nahayan – will inspire energy innovators everywhere. These are areas where Abu Dhabi’s leadership is already manifest. There are, however, a couple of other areas where I believe you could also play a vital role in leading our industry.

The first would be in recognising how biofuels can complement hydrocarbon fuels in beating the challenge of electric vehicles to provide more environmentally-friendly vehicle transportation. The second relates to my earlier comments about why the introduction of CCS in coal-fired power stations is so important. This will not happen unless the sequestered carbon is given a market value through cap and trade mechanisms.

And it needs to happen soon because of the rapidity with which coal fired power stations – without CCS – are now being built. As an indication of this, coal consumption in China’s power industry rose by nearly 18% in the first half of last year.

Why is CCS in coal power so important for oil producers and our customers. Because tackling coal emissions urgently will leave more carbon space to prolong the window to use oil in transport, where it is a convenient and relatively cheap energy source. Coal power CCS is also a more manageable and likely lower cost route to reduce carbon emissions than a rushed displacement of oil in transport. That’s why I believe achieving a global carbon market is a vital shared interest for this industry.

Harnessing all capabilities

Meeting the world’s energy challenges will depend on harnessing all the capabilities we have available: breakthrough technologies, skilled people and capable organisations, and huge financial resources. Abu Dhabi has consistently followed a strategy of utilising the knowledge and capabilities of international oil companies as partners in its energy industries. Likewise, Masdar is also based on cooperation with international partners. This is the Blueprints ethos, and – as I have discussed – the best hope for our world. It is another example of Abu Dhabi’s capacity to lead.
In Shell, we’re very proud to play our part in supporting Abu Dhabi’s progress.