Natural gas: The demand opportunity and the supply challenge

In the coming decades, the world must meet the challenge of producing more energy for a growing world population, while addressing greenhouse gas emissions. In this speech, Linda Cook discusses the growing demand for natural gas as the cleanest fossil fuel in an increasingly global and dynamic market. As the gap between domestic production and demand grows in the United States, Europe and other countries, imports of Liquefied Natural Gas (LNG) will increase. But to meet this supply challenge, the industry must develop new technology, improve energy efficiency and unlock more challenging resources. Contractors and suppliers must increase their capacity to support the industry, reducing cost and schedule uncertainty and improving productivity. Governments can contribute by providing access to areas that are currently off-limits to the industry and adopting efficient and coordinated greenhouse gas emissions regulations.

Three hard truths
This is a fascinating time to be in the United States as the presidential campaign is taking center stage. It’s shaping up to be quite an exciting race. Not surprisingly, energy concerns often feature in candidate speeches and debates. This heightened attention to energy is echoed around the world. It brings into focus the race to address 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? 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, and 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.

Demand opportunities
In the race to meet the world’s growing energy demands, natural gas remains the favourite. So today I will look at both the opportunities on the demand side and perhaps more critically, the challenges on the supply side. Starting with natural gas demand, all forecasts indicate this will accelerate as economic growth requires more electricity and environmental concerns make natural gas the preferred fuel.

If we zoom in on the United States, 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 U.S. natural gas production and demand. The actual size of this gap will depend on the degree to which domestic production can be extended. But all scenarios agree that imports to the U.S. 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  utilization 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, agreeing multiple deals for new long term supplies in 2007, proving their ability to compete internationally for these 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. And now we see this debate arising in Egypt, Trinidad, Nigeria, and in Australia where LNG project developers are being asked to reserve a certain percentage of their natural gas for future domestic needs.

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 V-Power 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. Clearly, global demand for natural gas is racing ahead. The question is whether new supplies can keep pace.

Industry’s response
This is not to suggest that industry has been resting on its laurels…on the contrary. Many exciting projects are underway or have recently been completed. In China, a consortium led by CNPC undertook the huge challenge of building the 4,000 kilometer 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 U.S., 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 3 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.

A bit closer to home for most of you, we have the Pinedale field in Wyoming, the second-largest gas field in the US, discovered in the 1960s. It took decades of advances in drilling and completion technology to unlock the economic potential of the deep, tight reservoirs. Shell became involved in 2001, and since then we’ve drilled more than 180 wells, increasing production to nearly 350 million standard cubic feet per day, and reduced well delivery times and costs by over 25%.

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, 40,000 workers will work one million manhours every two-and-a-half days.

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.

Supply challenges
North America is a good example. Large prospective areas have only restricted access or are off limits to our industry. 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. 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 mobilize 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, Ireland and Australia. But, we can’t just blame governments or local opposition. We can help ourselves, most importantly thru development of new technology: Technology to develop tight gas accumulations, for separation of contaminated gas, to deal with increased sulphur levels, to drill and produce in the Arctic and to develop remote offshore gas accumulations.We also need the people who make this possible. The task is particularly urgent as the industry work force is rapidly graying. A survey by the American Petroleum Institute found that the average age in the U.S. oil and gas industry in 2004 was 49, among the oldest of any industry.But it’s not as easy as just increasing recruitment. The number of US petroleum engineering graduates in the US has dropped 90% since 1982, to only around 1,000 in 2007.

We need to do more as an industry to encourage kids to study science and engineering. And perhaps inevitably, we will also need to ‘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. 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. Inflation for new upstream energy projects has skyrocketed, as can been seen in this 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. As 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. And, finally, 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.

Conclusion
So what do we have? A world racing ahead with unparalleled growth in demand or energy — in particular natural gas. And an industry challenged to keep pace.It’s as tight a race as the US presidential campaign. The difference is that this is not a zero-sum game with only one winner. This is a race all of us must win – because increasing supplies of natural gas are a key to building a secure bridge to a sustainable energy future. I’m optimistic. We’ve done it before. We have so many examples of overcoming seemingly impossible technical and operational  hurdles. We have some of the best minds in the world and a real will to succeed. Thank you.