Performance through adversity: Keeping our eyes on the energy and climate challenge

In this speech on “performance through adversity”, Jeroen discusses why we should continue to address the energy and climate challenge, despite the immediate challenges posed by the financial crisis. The energy challenge can be summarised as: more energy, less carbon dioxide. Shell takes this challenge seriously and intends to be among the industry’s leaders in responding to it. In this speech, Jeroen explains what policy frameworks Shell believes must be put in place internationally as a matter of urgency, and what Shell is doing to deliver affordable and sustainable energy for a growing world population.

Performance through adversity: Keeping our eyes on the energy and climate challenge

We have been asked as speakers to address the theme: ‘performance through adversity”. Of course, in Shell we know something about this theme. Our company faced a little adversity in 2004, survived it by improving our performance, and now we are back on track.  It’s hard work - your reputation arrives on foot, but leaves in a Ferrari,  with a Shell fuel that makes it go even faster.  In the grand scheme of things, Shell’s adversity was an isolated event, a local storm. The credit crisis is a real storm, affecting the global financial system and, now, the real economy. But the same leadership principles apply. Imagine you are the captain of a ship that’s caught in the middle of a storm.

Your first concern is to save the ship – of course. But that isn’t enough. When the storm dies down, you don’t want to discover that you have been blown way off course. So “performance through adversity” is about surviving the storm and staying the course. The financial crisis is bigger than most of us could have imagined. Many ships have been damaged and some were lost. But the storm will die down again and the financial system will survive. Of course, in Shell we have taken and are taking our measures. And we constantly review our planning in connection with financial risk.

Financial crisis

If there is one thing we should learn from the financial crisis, it’s that the world is not flat – at least not as flat as the Netherlands. We live in an interconnected world, but markets cannot function without governments. And of course, sometimes governments try to over-regulate us; I know that – you know that. Okay, then we raise our voice. The financial market is probably the most globalised of all markets, the most laissez-faire of all economic sectors.  But self-regulation clearly didn’t work.

And I think that we probably all agree that pure laissez faire is not the future. I believe that over the past few months, governments have done a pretty good job. The UK government in particular deserves praise for its leadership role: a good example of performance through adversity!

Looking further ahead, while there is good reason to be concerned about the economic slow-down, I also think there is still some room for optimism. There is a need for new public services, and new financial and IT products. Banks certainly will need new risk products. Today’s crisis may well be the first step in the direction of a smarter global financial system, with a better understanding of risk, more international coordination, and more effective governance. If we now turn to energy, the obvious question is, do we first need a crisis to create a smarter energy system or will we manage climate risk better than we did subprime mortgage risk?

Three Hard Truths

The answer matters. The problems of the financial crisis are huge, but they’re not as big as the problems awaiting us if we fail to build a cleaner energy system. Let me summarise the energy challenge in five words: More energy, less carbon dioxide. This challenge stems from three hard truths:

First, demand for energy will continue to surge. A period of economic slowdown may moderate demand growth for a while, but the longer-term trend is still upwards. That’s because 3 billion energy consumers will be added to the world’s population during the first half of this century.  And all those people like to have electricity. They all want to drive in at least a Tata. A Tata uses less petrol than a Hummer. But it takes energy to move the wheels, whichever car you drive.

Second, energy supplies – from all sources – will struggle to keep up with demand.

Third, the environmental stress from producing and using all this energy is increasing. This is our reality. Where do we go from here?

Blueprints

To answer that question, our scenario team developed two future outlooks for the period up to 2050. One is called Blueprints – the other one is called Scramble. In Scramble, governments focus on securing energy supplies. The risk of climate change is largely ignored until problems become severe.

Beyond Blueprints?

But I want to emphasise that Blueprints is not a Goldilocks outcome. In Blueprints, as we do with all our scenarios, we started with today’s reality. And in this case, we substantially increased the speed of technological change that we’ve seen historically. But even in an ambitious scenario like Blueprints, we do not see a downward trend in CO2 emissions from energy before 2020.  The reason is that the world is already locked in for the short term – think of the many coal-fired power plants currently being built in China, power plants that are not equipped with CO2 Capture and Storage technology and will remain with us for at least 40 years.  And, against the latest scientific evidence, even Blueprints ends at higher atmospheric stabilisation levels of greenhouse gases than scientists are recommending. This suggests that technology change needs to happen even faster than we’ve foreseen in Blueprints.

Governments and society at large will have to decide what more can be done and at what price – taking into account all three hard truths. To understand where the greatest cuts can be made at the lowest cost, Shell is working with other companies and NGOs in an effort to develop a global “CO2-abatement curve”.  The results of this exercise will be published before next year’s climate conference in Copenhagen. So, hopefully, it will help governments make informed decisions.

Blueprints policy framework

What kind of policy framework is needed to make Blueprints work, or do even better than our scenario models indicate? I think there are a number of key ingredients – and I hope that the Copenhagen climate conference will deliver on them.

By far the most important ingredient is the deployment of worldwide cap-and-trade systems. Cap-and-trade is the foundation on which the rest of the policy structure rests. And let's remember that the emphasis is on the cap. It’s the cap that drives down the emissions and it's the trade that enables us to so at the lowest cost. Fundamentally it’s about government telling industry to reduce its emissions and fining them if they don’t. Shell has supported the European Union’s Emissions Trading Scheme from the beginning. For instance, we co-signed a letter to Tony Blair 2 years ago, urging the tougher end of the caps on ETS phase 2.

Secondly, as part of these CO2 cap-and-trade systems, we need full support for CO2 Capture and Storage, or CCS. CCS is the only technology we currently possess that could reduce CO2 emissions from fossil fuels in large quantities any time soon. We need an international CCS project mechanism that delivers a fully convertible certificate for one ton of CO2 stored underground. This could be established under the Clean Development Mechanism or as a separate instrument.

We also believe that CCS should be a priority in multilateral technology funds that focus on the needs of developing countries, such as the World Bank’s recently established Clean Technology Fund and Strategic Climate Fund, which the G-8 countries have said they would support. 

Of course, there is more to be done. In buildings and appliances, we should adopt robust energy efficiency standards. The potential for cost-effective savings are substantial. According to the European Commission, 30% less energy use in this sector would equal a reduction of 11% of the EU’s total final energy use. We also need to boost renewables by adopting simple, credible targets for wind and solar energy.  And in the transport sector, we need to promote 1) vehicle efficiency, 2) public transport and 3) sustainable fuels that emit less CO2 on a well-to-wheels basis. 

Shell’s contribution

Energy and climate will certainly also remain at the top of Shell’s agenda. Delivering energy remains vitally important. Between 1.6 and 2 billion people on our planet still aspire to gain access to electricity. That’s why the Shell Foundation, a charity, is helping to increase access to modern and affordable energy in the developing world. In one of its initiatives, the Shell Foundation finances and supports a small enterprise in a rural part of India that uses the waste from rice production to provide electricity for the first time to thousands of people. And to help supply the world’s growing energy needs, Shell itself is investing in long-life projects that will help us to grow production by 2-3% per year in the next decade.

That’s also why we’re investing in further growing our leading Liquefied Natural Gas portfolio. And we’re building the Pearl Gas-to-Liquids project in Qatar – the largest single equity investment in a single project by a UK plc ever! Already, over $1 billion of orders of goods and services for this project have been placed in the United Kingdom.

To promote energy security for the UK, Shell is continuing to invest hundreds of millions in the North Sea. Last year, we produced almost a fifth of the UK’s oil and gas production. This year, Shell UK brought four new North Sea fields on stream.

As regards the other part of the challenge, we said nearly 10 years ago that climate change needed to be tackled and we’ve been reducing our emissions and developing our product portfolio accordingly. We have quite a lot of technologies for making fossil fuels cleaner. For instance, we have an excellent coal gasification technology that facilitates CCS. We are involved in several CCS developments and our clean coal technology was selected for a project under consideration in the UK. And we recognise the potential of CCS for reducing the CO2-intensity of petrol from oil sands in Alberta.

Oil sands on a well to wheel basis are about 15% more CO2-intensive than conventional petrol. The CO2 emissions from all the oil sands production in Canada taken together is about a quarter of CO2 emissions from burning coal in the UK alone. So oil sands are not off the scale environmentally. It’s a problem that has to be dealt with - just like the UK's coal.

We also need to remember the consumer.  More than 20 million customers cross Shell’s doorstep around the world every day.  Shell is determined to help them reduce their energy consumption through innovative products and services. We already offer a range of “Fuelstretch” tips encouraging drivers to reduce the amount of fuel they use by driving more efficiently. Here in the UK, as some of you will know, motorists can trade in their loyalty points for carbon offsets at double the value for the other uses of their loyalty points. And, by the way, these offsets are under the official CDM programme for CO2 reductions that have actually been realised, audited and certified.

Conclusion

I realise there is a financial crisis that affects all of us, and we at Shell have taken our own actions. However, this is no reason to ignore the energy and climate challenge. Dealing with this challenge provides work for decades, and we must continue this work through the financial crisis and other future crises. I’m confident the technology is or will be there to help, as it has always done in the past, when society needed to overcome major hurdles.

What is more difficult to predict is consumer behaviour and political actions by future governments. Are people prepared to pay more for green? Will governments have the courage to make laws and set rules that consumers don’t like? Can we collaborate in order to get the required speed to address the energy challenge? And that brings us back to the point about leadership.