The Future of Energy: Local Blueprints for a Global Challenge

The future of the world’s energy poses a global challenge which companies like Shell will play a critical role in tackling. Meeting rising demand, supply challenges and environmental impact will require measured, comprehensive and strategic solutions. In his speech, Rob Routs explains how companies like Shell are investing in and developing new and innovative technologies and products, in particular in oil sands and biofuels, to respond to possible future energy scenarios. He also outlines how Shell is working towards what it calls a ‘Blueprints’ future. In short, tackling this global challenge requires technical innovations, political cooperation and the engagement of consumers and communities worldwide.

The theme of this year’s symposium – “global capitalism, local values” – is specially
timely for the business I’m in. It’s no secret that international oil companies like Shell operate in a global market – with flows of product, capital and talent that cross literally hundreds of national boundaries. Our business is about sustaining the lifeblood of the world’s economy – quite literally. And while critics of our industry challenge the billions of dollars we earn, the users of our products depend on the millions we invest – on a global scale.

But despite our global reach, our business and the way we manage it directly touches local values, sometimes very local. Our business is about providing billions of people with ways to warm themselves, feed their families, move about and make a living. At the same time it’s about protecting clean water, fresh air, biodiversity, and community cultures in every corner of the world where we operate.

A lot of people don’t think of oil companies as being on the front lines of environmental protection. But a lot of people would be surprised at how many passionate environmentalists work for our company. We all have future generations to answer to – indeed many of us have to answer to them across the dinner table every night! Our job is to meet the world’s growing need for energy in a way that keeps the world safe,  clean and liveable for our children… their children… and their children’s children.

Meeting that challenge means acknowledging what we’ve come to call the “Three hard truths” about energy. The first hard truth is that the world’s need for energy is growing. Fast.When I joined Shell 35 years ago, there were roughly four billion people in the world using the equivalent of 100 million barrels of oil daily. Today, there are 6.7 billion people using more than 228 million barrels of oil equivalent a day of primary energy. By the middle of this century there could be more than nine billion people using twice as much energy or more. It’s obviously not just the number of people that’s driving energy demand, it’s their expectations. Billions in China and India want – and deserve – to adopt a first world standard of living complete with cars, computers,washing machines, air conditioners, and high tech factories. Billions more around the world want – and deserve – simply to lift themselves out of poverty with access to clean, cheap energy to cook their food and light their nights.

The second hard truth is that conventional oil and gas – staples of our energy diet today – are becoming harder to find and produce. There are still large amounts of hydrocarbons in the ground but the stuff that’s left tends to be concentrated under very deep oceans, very thick ice, or very difficult governments. It takes huge amounts of technology, energy, money and patience to get at it. And that means the world is finding itself forced to tap less conventional sources of oil – like oil sands and oil shale – that require even more technology, energy, money and patience.

The third hard truth is that given today’s technologies, more energy use means more CO2 emissions – at a time when the climate can ill-afford it. To stabilize greenhouse gases in the atmosphere at anything like what scientists say is the upper limit – we need to cut the world’s emissions in half. So if the world needs twice as much energy and half as much CO2, then we need to figure out a way to cut the CO2 content of every barrel by three quarters. The math is easy. The strategy is a lot harder.

Indeed, these challenges are enormous. They involve tough trade-offs. To put the hard truths another way, the world wants energy that is clean, cheap and always available. But depending on where you sit, your priorities may look very different. An environmentalist may take one view, an energy minister another, a voter in a canton here in Switzerland yet another entirely. Some people have the luxury of looking at the challenge through a single lens. And too many of them resort to scaremongering. “Fossil fuels are going to kill the planet” , “tree huggers are going to wreck our economy”, “competition for oil will lead to the next global war.” Scary headlines provide no solutions and no insights and they put governments under tremendous pressure to “do something.” And most of us know what happens when governments are forced simply to “do something.” Generally, we wish they hadn’t.

Our industry does not have the luxury of looking at the challenge through a single
lens. Our task is somehow to reconcile these competing priorities, to be the honest broker between groups with different perspectives, between the global and the local. Every four or five years a team of Shell scenario experts develops a set of global scenarios, offering views of various energy futures over the next thirty years or so. These scenarios help us – and others – pick the right strategies. They help us make the right investments in complex and expensive projects that can live for as much as half a century. We recently completed the latest Shell scenarios. There are two of them. And they wouldn’t live up to the art of scenario planning if we didn’t give them names: one we call “Scramble.” The other, “Blueprints.” In the “scramble” scenario, companies and nations rush to secure energy resources. Energy security is seen as a zero-sum game with winners and losers. A kind of “energy nationalism” breaks out, with nations pinning their hopes on locally-produced coal and homegrown biofuels. Nobody has much time to think about tackling consumption until a supply shock finally kickstarts radical action.

Likewise, despite a lot of talk, nothing much gets done about greenhouse gas emissions or sustainability until major climate shocks trigger drastic political actions. The result: energy price spikes, volatility, irreversible damage to the environment – a rough, uncomfortable ride. The “Blueprints” scenario is no less challenging, but the landing is a lot softer. In “Blueprints” the world anticipates the challenges of energy security, energy supply and the environment. Coalitions emerge across the private sector and at local and national government level. Major cities develop links with industry to pilot innovative energy ideas. National governments introduce efficiency standards and stable, long-term regulation of greenhouse gases. Policies converge across the globe, and we figure out how to reduce personal energy consumption and to capture and store CO2.

Normally we simply offer up our scenarios to the world without stating a preference. This time is different. It’s clear that Blueprints offers options far safer and more manageable than Scramble’s dog-eat-dog race for resources, and we are working with governments and other interested parties to move toward a Blueprints future. In fact, Blueprints is already shaping our thinking across the business – from more efficient operations, to innovative ways to manage CO2, to lower carbon fuels, to partnerships and government policy, to our product line-up and investments. Blueprints underpins our determination to establish at least one material business in renewable energy. I’ll share with you how this thinking is reflected in three very different parts of my business.

First, oil sands. I can see some of you squirming in your seats already. You’re thinking of those pictures you’ve seen: Trees cleared, huge pits in the ground, trucks bigger than houses moving tons of black dirt. You’re thinking of reports you’ve read about water use, impacts on indigenous cultures, and of course CO2 emissions. I get the question wherever I go: “So, Routs, how can you use fine words like ‘sustainability’ and ‘responsible energy’ and still be investing so much money in exploiting hydrocarbons in Canada? Tell me how that is a ‘better
blueprint’.” Well, I can answer that because I’ve been there. I have stood in those mines, ridden in those trucks, seen where the water comes from, where the tailings go, how the oil gets squeezed out of the sand. I have talked to Canadian leaders about how best to manage those precious resources, the forests and fresh water as well as the oil. I have met with the people who have lived in that area for generations before we arrived and will be there generations after we leave. I’ve discussed with them how best to balance their economic opportunity with the long-term preservation of their land and way of life.

The picture I’ve seen is much different than the one you may have been offered. And I think a few myths need to be busted. For example, the well-to-wheels CO2 emissions of the oil we’re producing today from Alberta’s mines is 186 grams per kilometer. That’s about 15 percent more than conventional petrol. Not twice as much. Not three times as much. 15 percent. We’re already committed to reducing these emissions by up to 50 percent. And we’re developing a carbon capture and sequestration project that would strip out as much as a million tons per year of that CO2 and store it underground. It’s true that deeper oil sands reserves would require much more energy and emit much more CO2 with today’s technology. But we’re not tapping those reserves on a large scale today – and we won’t until we’re sure we can do it efficiently.

Mining Canadian oil does require water – as much as 2-4 barrels of water per barrel of bitumen. That’s a lot. But even producing 155,000 barrels a day, Shell’s water use is less than two tenths of a percent of the average flow of the nearby Athabasca River – yes, less than two tenths. In fact, operating at the industry’s aspiration production levels of 2.5 million barrels a day, total water use would be between 2 and 3 per cent of the average river flow --and we’re introducing technology that will reduce water use even further. And mining oil from the surface displaces a lot of trees and land. But we’re committed to ‘reclaim as we go’. Large-scale reclamation is expected within 15 years of disturbance, much sooner than the 25-year time frame historically used in the area. This means that within 15 years of the mine’s groundbreaking date, the soil will be reconstructed and put in place, vegetation planted toward a “self-sustaining ecosystem”, the standard to which we are held. But still, why bother with all of this? Why not simply leave it all alone?

Well, consider that Canadian oil represents a significant percent of the additional energy the world will need between now and 2050. Let’s imagine for a moment that Canada, tomorrow, was to take its oil sands off the market. That’s a million plus barrels of Canadian oil from the world’s energy budget. The world would not simply tighten its belt, would not collectively decide that it needs less energy. That energy would come from somewhere else. The production of conventional oil and gas has almost reached the limits of its growth and is plateauing around the world. Alternative energy from wind and solar are still struggling to claim more than about one percent of the global energy mix; making these technologies financially self supporting is very hard. We know, because we’re trying. We have interests in a thin-film solar manufacturing plant in Germany, and in existing wind farms in Europe and North America. We’re working hard to develop new wind projects -- some of them are showing promise; others we’ve had to give up on. But in any case it will be a long time before they make a real dent in the world’s energy diet.

In the meantime, where will the market go to fill the gap, if not to unconventionals like oil sands? Coal? Nuclear power? Suddenly Canadian oil starts to look like a much more viable part of a “Blueprints” world, especially in the hands of companies that are committed to managing it responsibly.

The second example I’ll use is biofuels. Shell has been working on biomass research since I joined the company 35 years ago. We have also developed expertise over the years in trading, storage, handling, blending and distribution of ethanol and FAME. We have become the world’s largest distributor of conventional biofuels - more than 5 billion liters in 2007. But there are significant issues linked to the production of some biofuels. They are not necessarily the environmental silver bullet they once seemed to some. Potential problems include human rights, community land rights, impact on biodiversity. And, of course, there is concern over land use, competition with food, and their CO2 emissions compared to fossil fuels.

Shell is at the forefront of efforts to impose safeguards and standards on the use of today’s biofuels. We’re implementing sustainability clauses in our supplier contracts. We’re working with multi-sector groups to drive development of international sustainability and CO2 standard. And we’re working with governments to implement such standards. But we’re also looking ahead to nextgeneration biofuels. We’re doing exciting work on new raw materials and new conversion processes. Some pathways are already showing real promise. Biofuels that use non-food materials and that deliver CO2 savings of as much as 90 percent compared to conventional gasolines and diesels are going to be a vital part of the fuels mix in the future. We partnered with the Canadian company Iogen to make ethanol from straw using enzymes – which in 2004 resulted in the world’s first commercial cellulosic ethanol demonstration plant in Ottawa.

We’ve also partnered with the German company, Choren, to develop a high
performance synthetic fuel from wood residue – through gasification and the Fischer-Tropsch process. Last November we announced a partnership with a Californian company called Codexis to develop new super enzymes to accelerate the conversion of biomass into fuel. A month later we announced a partnership with HR Petroleum in Hawaii to explore the production of algae. I assure you the location did not influence our choice of that partner. But we were swayed by the prospect of a biofuel feedstock that does not use fresh water or arable land and grows at astonishing speeds. And more recently we announced a partnership with a company called Virent to convert sugars directly into biogasoline. I think biofuels could grow from a mere one percent of the world’s fuel mix today to as much as 7 or 10 percent over the next couple of decades. I want us to lead in that space; and to that end we’ve increased our rate of investment in them – quadrupled it, in fact. But let’s be clear: when it comes to truly sustainable, low carbon biofuels, we can’t open the taps overnight. We still need more innovations to lower the costs and raise the yields. We still need to learn more about sustainable production. We still need to develop markets and use them to scale up capacity. We still need first generation biofuels, both to meet mandates and to build capacity for the next generation. All that means starting with the best of what we have now – today’s best technology, today’s best feedstocks, today’s best regulations – to develop even better solutions for tomorrow. Governments can do their part by raising the regulatory bar for sustainability of supply chains, by creating market-based incentives that reward biofuels with low CO2, and by creating a predictable investment climate that rewards high risk, long-term capital expenditures.

Then it’s down to companies like ours to develop and deploy better and better products. The argument that we should not touch biofuels until they are perfect is really an argument to abandon them altogether. That to me is self-defeating in a world of hard truths. But of course biofuels – even sustainable biofuels at 7 or 10 percent of the world’s fuel mix – are not by themselves going to resolve those three hard truths I talked about. Nor, by themselves, will oil sands or coal or wind or solar. In truth, one of the best ways to address the energy challenge is, quite simply, to find ways to use less of it. That’s where the marketing end of our business comes in, my third example – helping manage energy demand by providing ways to help customers use our products more efficiently – helping millions of retail and B2B customers use less energy and emit less CO2. We’ve created gasoline specially formulated to increase fuel economy, as well as  advanced lubricants that improve the energy efficiency of engines and moving parts. We’re also working directly with automakers to optimize the combination of vehicle, fuel, and lubricant. We surveyed retail customers in eleven countries and found that 60 percent of them had never tried to improve the fuel economy of their cars. So we developed a range of “FuelStretch” tips to educate consumers to drive in a more efficient way. We promote the goal of fuel efficiency through the annual Shell Eco-Marathons in the Americas and Europe, where teams of university students compete fiercely to produce a vehicle with the best fuel mileage over a given distance on the track. The winner last month in California clocked more than 1,208 kilometres per litre.

I hope by now you understand why so many of us have a passion for this business – a deep commitment to meeting the energy and climate challenge. It’s a hugely complex task – perhaps the most important of our time – requiring technical innovations, political cooperation, and the engagement of consumers and communities worldwide. And it’s a task that matters – deeply – to society’s future globally and locally. I invite all of you in this room to play a part – whether you’re designing more efficient cars and trucks, picking technologies to invest in, finding more ways to run your businesses with less energy, teaching new business leaders about hard truths, or simply making responsible choices as individual consumers. All those future generations are counting on us to do the right thing. Now. I’m optimistic that we will.