The role of an international energy company in a changing global energy environment

Given the ‘hard truths’ of the global energy outlook—accelerating demand, more challenging exploration and production environments, and increasing pressure to deal with carbon dioxide emissions—energy companies have a central role to play in diversifying their portfolios, developing and deploying new technologies, and enhancing the energy efficiency of their own and their customers’ operations. In the first plenary session of the APPEA annual conference, Linda Cook gives an international perspective on global energy, with a focus on natural gas and its vital contribution to meeting the energy challenge.

Energy agenda
The US anthropologist Jared Diamond once referred to Australia as the most isolated continent. But I would argue that its great natural resources, and the dynamism of its industry and its people, put Australia in the centre of the action today as far as global energy is concerned. This morning I’ll give an international perspective on global energy, with a focus on natural gas. But first, I’d like to set the scene by highlighting what we refer to in Shell as the energy challenge and “the three hard truths”. The first truth is that global demand for energy is accelerating.  Some statistics show that energy use in 2050 may be twice as high or higher than it is today. What’s driving this? Predominantly population growth and higher levels of prosperity. India and China are now in the energy-intensive phase of their development. Many of their citizens are buying cars, televisions and other home appliances for the first time. Today in China there are only 3 cars per 100 people, but this is set to rapidly change. Think about the impact of rising income levels in these countries on demand for electricity and transport fuels.

The second hard truth is that the supply of “easy oil” will not keep up. At the same time that demand is accelerating, conventional oilfields in mature basins are going into decline. Other resources such as oil shale and oil sands exist, but they come with technological challenges and higher costs. The third hard truth is that using more energy now means more carbon dioxide emitted at a time when climate change looms large as a critical global issue. So, what do we need to address these truths? First, a broad portfolio of energy sources: more oil and gas, more renewables and, like it or not, more coal and nuclear. We need a huge drive for energy efficiency. A barrel of oil saved is better than one discovered. Governments need to implement smart greenhouse gas emission regulations internationally in a coordinated and efficient way, addressing the life cycle from production to consumption of energy. And we need new technology now more than ever before: to increase recovery of oil and gas, to deliver breakthroughs in renewable energy sources, to enable the cleaner use of coal, to increase efficiency, to sequester CO2, and to do all of this at a lower cost than is possible today. A big agenda, but in many ways making this the most exciting time to be in the energy business.

Role of natural gas
In the race to meet the world’s growing energy and environmental demands, the role of an international energy company is, quite simply, to responsibly increase supply. So today, I’ll look at both the opportunities on the demand side and,  perhaps more critically, the challenges on the supply side. In doing so, I’ll focus on natural gas, which is now squarely positioned as the “preferred global fuel”, making Australia a key player.

If we zoom in on the United States, the world’s largest natural gas market, I believe demand will continue to be robust. Coal-fired and nuclear power generation will likely only expand slowly. Recent studies indicate that by 2025 we could see a gap of 15 to 20 billion cubic feet per day between US natural gas production and demand. The actual size of this gap will depend on the degree to which domestic production that imports to the US will grow. Historically, the US relied on Mexico and Canada for this. Today however, Mexico is a growing importer of LNG and Canada has a growing demand of its own. This points to LNG becoming an important key to future US supplies.

As for Europe, demand today is nearly 60 billion cubic feet per day. This is expected to grow to around 80 billion cubic feet per day in 2030, again driven by electricity demand. Today, approximately 46% of Europe’s gas supply is imported and, of this, more than half comes from Russia. Europe’s domestic natural gas production will soon peak. Most estimates indicate that, by 2030, the European Union will import around 75% of its natural gas. As a result, European policy makers and major utilities are driving diversity of supply, explaining why over 20 LNG import terminals have been built or are under construction in the region, with numerous others planned. Even in the country where I live – the Netherlands – whose domestic natural gas reserves will satisfy domestic demand for decades, a consortium recently approved construction of the country’s first LNG import terminal – to be built in Rotterdam.

India already is the world’s fifth largest energy consumer, but it is in the early stages of maturing its natural gas sector. In 2005, we started up the Hazira LNG import terminal in the Gujarat region in North-West India, where a lot of industry is concentrated. The terminal had no firm LNG supplies and no customers. But in the last five years, demand for natural gas in this region has more than doubled. And in 2007, the Hazira terminal, with a capacity of 2.5 million tonnes a year, had a utilisation rate of 75%, importing cargoes from as far away as Trinidad and Nigeria, and selling gas to India’s steel mills, power companies and fertiliser manufacturers – all now willing to pay international prices for natural gas.

In China, demand for natural gas is also in it infancy – comprising less than 3% of its total energy portfolio. No doubt, coal will continue to be king for some time in this country given their large domestic coal resources. But environmental pressures are increasing, especially in the large urban and industrial areas along the coast, leaving the government no choice but to implement policies to support increased natural gas supplies and infrastructure projects. What was considered improbable less than ten years ago is now a reality. China has entered the global LNG market in a big way, moving quickly from accepting its first LNG cargo ever – from here in Australia – in 2006, to agreeing multiple deals for new long term supplies in 2007, proving their ability to compete internationally for these precious resources.

Finally, the Middle East. Normally thought of as an exporter of energy, it is now also a growing demand centre, with gas consumption expected to approach European levels by 2015. Visiting a city like Dubai, it’s not difficult to understand why. Dubai’s population has doubled since 1995 and the economy has grown at an average rate of 10% over the same period. As a consequence, several countries in the region are considering importing gas via pipeline or through LNG schemes. As we look at demand around the world, there are two emerging themes:

First, many countries are now talking about importing LNG for the first time. And many of these are countries that have traditionally exported natural gas such as Mexico, Canada and Indonesia. This will result in a more global and dynamic LNG market.

The second trend is the increasing discussion within natural gas exporting countries about the need to preserve resources for their own future needs. It’s a strategy the Dutch have followed for decades. Now we see this debate arising in Egypt, Trinidad and Nigeria. And even here in Australia, where gas reserves are equivalent to roughly 100 times the national consumption, LNG project developers are being asked to reserve a certain percentage of their natural gas for future domestic needs. Through our participation in the North West Shelf venture, Shell has helped underpin Western Australia’s domestic gas market for years. Looking ahead, we fully support the Government’s desire to ensure a sustained supply of competitively priced natural gas to meet the region’s longterm needs. We believe this is best facilitated by policies which promote growth, diversity of supply and competition.

Demand for natural gas is not just driven by electricity. It’s also impacted by the world’s increasing demand for more and cleaner liquid transport fuels. Converting natural gas to liquids – known as GTL – helps meet this demand. Today, clean-burning GTL fuel from our plant in Bintulu, Malaysia, is blended with conventional diesel and sold in almost 5,000 Shell retail sites in 11 countries. An Audi R-10, powered by Shell VPower diesel – a GTL-based fuel – was the first diesel car to complete and win the 24 hour Le Mans endurance race in 2006. It won again in 2007. And earlier this month, a giant Airbus 380 became the first aircraft to test GTL synthetic fuel – again from our Bintulu plant – on a flight in Europe.

Meeting the demand challenge

Clearly, global demand for natural gas is racing ahead. The question is whether new supplies can keep pace. This is not to suggest that industry has been resting on its laurels…on the contrary. Many exciting projects are under way or have recently been completed. In China, a consortium led by CNPC undertook the huge challenge of building the 4,000 kilometre West to East pipeline, linking the gas-rich northwest region with Shanghai in the east. Construction began in 2002 and was completed in 2004, an amazing accomplishment. The pipeline has a capacity of 1.45 billion cubic feet per day, and already there are plans to expand it and connect it with Kazakhstan and Turkmenistan in Central Asia. In Nigeria, industry is faced with numerous challenges every day, including remote locations, swamps, government funding, security and contractor availability. But here we have, in this country, one of the world’s fastest growing LNG ventures.

Through a multi-billion dollar investment over the past 12 years export capacity has grown to around 22 million tonnes a year, with the completion of Train 6 in  December safely, on time, and within budget. In 2007, LNG deliveries went to the US, Mexico and Europe, and as far away as India, Japan and Korea. In Europe, Ormen Lange is another good example of the frontier projects industry must develop to meet rising natural gas demand. The field is located offshore in a sub-Arctic region of the often-stormy north Atlantic, with temperatures on the sea floor reaching freezing point. Getting the gas from Norway to the UK, the main customer, meant building a 1,200 kilometre undersea pipeline, the world’s longest. In September 2007, Ormen Lange produced its first gas. Going forward, this field alone is expected to meet 20% of Britain’s gas needs for around 40 years .

Another project in a cold climate: located on an island off the east coast of Russia, Sakhalin II is one of the world’s largest integrated oil and gas developments. It involves installation of three platforms in waters covered in ice for 6 months of the year, an onshore oil processing facility, two 800 kilometre pipelines running through mountainous terrain with 1,000 river crossings, and a two-train LNG plant at the island’s southern tip. When complete around year-end, it will have the capacity to produce 395,000 barrels of oil equivalent a day, including 9.6 million tonnes a year of LNG to be shipped to customers in Japan, Korea and North America. And my final example – the Pearl project in Qatar. Around 1.6 billion standard cubic feet per day of natural gas will be produced from two platforms in the North Field – the world’s largest. The gas will be converted into a range of clean liquid transport  fuels, base-oils and other products. Total production will be around 260,000 barrels of GTL products and natural gas liquids a day. By any measure Pearl GTL is a major endeavour. There are more than 1000 design engineers working on the project around the world. At the peak of construction later this year, 35,000 workers will work one million manhours every two-and-a-half days.

Supply issues
I don’t think we need more evidence that our industry is not one to shy away from big challenges. But more is needed if we are to meet growing demand. Perhaps most importantly, we need access to natural gas resources. North America is a good example. Large prospective areas have only restricted access or are off limits to our industry. Essentially all of the US Atlantic and Pacific coasts and the Eastern Gulf of Mexico are “off limits” for exploration by the industry. What little exploration has been done dates back 30 years – when we had no deepwater drilling capability, no super computers, no submarine robots and no 4-dimensional seismic models. Even when we are granted permits through established government
processes, we are often blocked by local communities or NGOs. Shell’s attempt to drill offshore Alaska last year is a good example: after spending hundreds of millions of dollars to acquire the leases, run seismic, and mobilise to drill in the short drilling season, we were blocked by legal action in California. The US isn’t alone in this. Local opposition exists in other places such as  Canada, some countries in  South America, the Netherlands, and Ireland. An Australian example of where industry is challenged is not related to accessing the hydrocarbon leases, but to accessing a suitable onshore site for development. Of course, I’m referring to the Browse Basin and the Kimberley Coast. Acceptable solutions mean factoring in protection of the area’s pristine environment, the needs of aboriginal heritage, local industries such as tourism and pearling, and protection of the “Kimberley way of life”.

We welcome the Government’s efforts to help operators find a suitable land-based development solution that strikes the right balance. It goes without saying that, in opening up new frontiers, the industry must behave responsibly, protect the environment and work closely with local communities. I think we’ve proven that we can do this, given the opportunity.

Enabling technologies

And we can help  ourselves do still better, most importantly through development of new technology:

• technology to develop tight gas reservoirs, for separation of contaminated gas, to deal with increased sulphur levels, and to drill and produce safely in the Arctic; 
• technology such as modularisation to mitigate constraints on projects in areas with a shortage of skilled labour.

And we need technology to develop remote offshore gas reservoirs, such as Floating LNG. FLNG has the potential to provide a lower cost development for small gas accumulations located far from shore. It eliminates the need for a long and expensive pipeline and considerably reduces a project’s environmental footprint. One of the first applications of FLNG could be right here in Western Australia. It is emerging as the possible preferred development concept for Shell’s Prelude field in the Browse Basin. While it is still early days, we are excited about the technology and its potential application in Australia and other regions around the world.

People and skills
We also need more people to make this all possible. The task is particularly urgent as the industry work force is rapidly greying. A survey by the American Petroleum Institute found that the average age in the US oil and gas industry in 2004 was 49, among the oldest of any industry. But it’s not as easy as just increasing recruitment. We need to do more as an industry to encourage kids to study science and engineering. And perhaps inevitably, western international energy companies such as Shell will need to increasingly “look East” to find the talent we need. According to a report by Duke University, roughly four times as many engineering students graduated from universities in China and India as in the United States in 2003-2004.

Here in Australia, it’s heartening to see a steady but slow increase in the number of students completing engineering and related technical courses over the last decade. Having the right global talent strategies will become a strategic differentiator. But the energy companies can’t meet the energy challenge alone. We need our  contractors and suppliers to increase their capacity to support our industry.

Raising the bar
Costs for new upstream energy projects have skyrocketed, as can been seen in the inflation index from CERA. As a consequence, the cost of some industry projects has doubled and unplanned construction delays are becoming almost commonplace. And we now see contractors adding significant risk premiums to bids, in some cases greater than 100%. This is unsustainable. Productivity needs to be improved. Delivery time for major equipment needs shortening. Costs need to come down and uncertainty needs to be reduced. If the industry as a whole fails to do this, the pace of new projects will inevitably slow. But to meet rising demand, we need even more… We need governments to honour their commitments on fiscal terms. Our industry is a long term one. We often spend billions of dollars before first revenue, with payback over years. We need governments who offer supportive and stable investment climates if we are to take these huge financial risks. It was very heartening to hear Australia’s Resources and Energy Minister Martin Ferguson confirm recently that his top priority is getting the policy settings right to deliver open, competitive markets and investment certainty for the energy sector.

As I mentioned earlier, we need wise and coordinated CO2 legislation, taking into account the life cycle impacts of energy sources and consumption. A tonne of CO2 emissions reduced in China is as good for the environment as one in the US. If  industry is required to reduce emissions, please allow us to do it in the most economic way. It’s the only way the world’s economy can afford to address this important issue. Energy companies have their own role in addressing the challenge of climate change. The first priority must be reducing our own emissions. What better group to lead the way on energy efficiency than the energy industry? We have what it takes in terms of know-how and technology. And a barrel of oil saved through more efficient operations is another one we can sell, so the commercial argument is strong. We should also pressure our suppliers to do the same. We should understand the emissions involved in producing the goods we purchase, and make energy efficiency a key factor in our procurement decisions. Energy companies should also increase the availability of energy-saving products and services for our own customers: cleaner transport fuels, more efficient refining processes and, of course, more natural gas.

We can also leverage our technology. One example is in CO2 sequestration – who knows more about finding good reservoirs, drilling wells and injecting things underground? The Gorgon project is a good example, where CCS is part of the design. The venture expects to sequester over 125 million tonnes of CO2 over the life of the project. Another example is Shell’s coal gasification technology, which we’re using to support the ZeroGen Clean Coal project in Queensland –  and where we’re also bringing our CCS expertise.

Race for all to win
As I said at the beginning, this is a very exciting – though daunting – time for our industry. The world is racing ahead with ever-increasing energy needs. We are under pressure to keep up. But this race does not have only one winner. This is a race all of us must win. And international energy companies have a unique and vital role to play in making that happen. I am optimistic that, working together, we can win. Our industry has some of the best minds in the world and a real will to succeed. We’ve done it in the past. We will surely do it again.