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Meeting the energy challenges

Speech given by Beat Hess, Legal Director of Royal Dutch Shell plc, at the Dutch Business Roundtable in Geneva, November 20, 2009.

By the middle of this century, energy demand will double. Not even the recent global recession can prevent that from happening. To maintain a secure energy supply, the potential of all energy sources will need to be realized. At the same time, the world will need to manage greenhouse gas emissions to avoid the worst effects of global warming. In this speech, Beat Hess discusses the scale and complexity of the challenges posed by the choice of energy supplies in a world sharing one atmosphere. He points out what the energy industry and national governments can do to meet those challenges. The industry has to invest heavily to expand the world’s oil and gas resources, reduce CO2 emissions and develop alternative energy sources. Governments, in turn, can stimulate the industry's investments. They can also establish a political framework for tackling climate change, address the efficient use of energy and provide access to their countries' energy resources and critical raw materials.

Meeting the energy challenges

Swiss Mountains & Dutch Gas

Standing here, in Geneva, within eyesight (on a clear day, at least) of Mont Salève, I am reminded of one obvious difference between Switzerland and the Netherlands. Mont Salève, which is just a foothill of the Swiss Alps, stands a full 1000 metres taller than the highest point in the Netherlands.
To be fair, I should point out something that the Dutch have a lot of but the Swiss hardly at all: natural gas. Under the flat land of the province of Groningen lies one of the biggest gas fields in western Europe. Largely because of it, more than half of the Netherlands' electricity now comes from gas-fired power plants.
In marked contrast, the majority of Switzerland's electrical energy comes from hydropower. Switzerland’s snow-capped mountains have enabled the country to harness hydroelectricity to nearly the full extent possible.
So the difference in the two countries' natural resources has led them to develop different energy supplies.
But the two countries share the same atmosphere. They therefore face a common threat caused in large part by energy: rising atmospheric greenhouse-gas concentrations.
Greenhouse gases are behind the change in global climate that is expected to lead to higher sea levels. In the Netherlands, the authorities are taking measures to ensure that its system of dykes, seawalls and sluices can provide sufficient coastal defences.
The Swiss obviously don't have to worry about coastal flooding. But they too have to be prepared for the consequences of climate change. Summers are expected to become drier, and winters are expected to become milder. The combined effect is causing Alpine glaciers to melt.
Glacial melting, combined with an increase in total energy use, explain why hydropower's proportion of the total Swiss energy supply is forecast to decline. According to a recent forecast by the Ecole Polytechnique Fédérale de Lausanne, hydropower will account for less than half of the country's energy supply by 2035.
This example of Switzerland and the Netherlands serves as a microcosm of the challenges posed by energy supplies in a world sharing one atmosphere.
Let me now describe in just a bit more detail the scale and complexity of those energy challenges. I'll point out what Shell and other actors in the energy industry are doing to meet them. And finally, I'll suggest how governments of the world can also rise to those challenges.

Energy demand and CO2 management

The first thing you have to realise about the global energy industry is that it is a growth industry.
By the middle of this century, energy demand will double, with three billion energy consumers being added to the world’s population. Not even the recent global recession can prevent that from happening.
To maintain a secure supply, the potential of all energy sources will need to be realized. That includes nuclear, biofuel, wind, solar, coal, oil and—yes—natural gas and hydropower.
At the same time, the world will need to manage greenhouse gas emissions to avoid the worst effects of global warming. Some energy sources—hydropower, for example—have virtually no operational emissions. But in the grand scheme of things, their contribution to the energy supply will be modest. Hydropower currently supplies 16% of the world's electricity, and the International Energy Agency projects that the proportion will be a couple of percentage points lower by 2030.
Even under extremely optimistic growth scenarios for alternative energy sources, fossil fuels and nuclear power will still likely supply around two-thirds of the world’s energy in 2050. This makes it crucial that we develop low-carbon ways to use fossil fuels.
And that too will be extremely tough to do.

Raw-material supplies

There are also other factors beyond market share or CO2 emissions to consider. We must look not only at the outputs of different energy sources but also at their inputs: all of the Earth’s precious natural resources that they drawn on. From that perspective, renewables bring some developmental challenges of their own.
Take wind power as an example. Wind turbines consume double the amount of steel to produce the same amount of electricity as a gas-fired power plant. They also consume more nickel and chromium. And a lot of cement is needed for their concrete foundations.
Because wind farms are typically situated far from urban centres, long transmission lines would have to bring the generated electricity to the end users. This would, in turn, increase the need for copper.
Finally, the permanent magnets in modern wind turbines contain the element neodymium. But more than 90% of the world’s neodymium comes from China, which recently indicated it might tighten its export of that metal.
This example shows how we must be fully aware of all the resources entailed by the responsible development of an energy source—especially with renewables.
Like it or not, virtually every low-carbon energy technology uses more mineral resources than hydrocarbon-based energy. In terms of resource intensity per unit of energy produced, nothing beats an oil well.
That’s why the world’s energy mix should be precisely that: a mix. This is especially true for a resource-poor region like Europe.

Size & complexity of endeavour

Whether renewable or non-renewable, energy sources create a web of dependencies that is truly massive in size and complexity.
NASA's Apollo mission to the moon is often cited as a shining example of a feat of applied technology. But believe me, harvesting energy and bringing it to end users dwarfs that achievement. It's fair to say that the energy industry constitutes the most complex and costly logistical effort on Earth. The effort includes everything from the extraction of raw materials to the delivery of fuel, electricity or heat to end consumers.
And because of its sheer scale, it can be transformed only gradually. We at Shell should know, because we've accumulated a lot of first-hand experience in trying to change the industry's course.
It was Shell technology that made the first liquefied natural gas plant possible, in 1964. Since then, the growth of LNG has been spectacular. But four decades later, the share of LNG in the global energy mix is still only 2%.
History shows that it takes at least 25 years for any new primary energy type to gain just one percent of the global supply. This lead-time certainly applied to LNG. Biofuels are reaching the one-percent mark about now, also after a quarter decade or so of development. The first big wind farms were built in the United States and Denmark only 15 years ago.
So wind energy is likely to pass the one-percent mark sometime in the next decade.
There's no escaping it: the development of a secure and sustainable energy supply will proceed slower than many would wish. It will take many decades. And it will require massive investment over that time.

Investments in an ailing economy

According to the International Energy Agency, an investment of some 26.3 trillion dollars will be needed between now and 2030. That's more than 30 times what the International Monetary Fund calculated has been spent by governments throughout the world to save banks and revive national economies in the past year or so. Billions of dollars more will also have to go into new power grids and more energy-efficient vehicles, buildings and factories.
Yet energy investments are going down—despite the efforts of Shell and other oil majors to maintain their investment levels. The IEA warns that we could see a 20% drop in upstream oil and gas investment this year compared to last year. Investment in renewables could be 40% lower.
It may seem as though there is plenty of energy around today. But a steep fall in investment could aggravate tomorrow’s shortages.
As you may have gathered by now, there are no easy answers to the challenges of developing a secure and sustainable energy supply at an affordable cost.
So how should the energy industry respond?
Above all, the industry must do its best to maintain heavy investment in the face of strong price volatility. And our investment priorities should be three-fold.

Expanding oil & gas supplies

As a first priority, the industry must continue to expand the world’s oil and gas resources. We need to open up resources that have so far been considered "off limits". Think of most of the outer continental-shelf areas of US waters.
But we can also do a lot more to increase the amount of oil we presently recover from existing fields. Usually, more than two-thirds of the oil in a field remains in the field. It is left there because it’s uneconomical to produce. If we could increase the recovery from existing oil fields by just 1% worldwide, it would yield some 20 to 30 billion barrels of additional oil—as much as the proven oil reserves of the USA.
An encouraging example is provided by the heavy-oil fields in Belridge, California. Our joint venture Aera has shown that more than 80% of the oil of some of those fields can be produced if it is first heated with steam, to make it flow more easily underground. Without this steam-based enhanced oil recovery technique, we would have been lucky to recover 10% of the oil in those fields.

Reducing CO2 emissions of fossil fuels

The industry's second investment priority is to reduce the CO2-emissions of fossil fuels. That calls for an intense focus on energy efficiency—getting more energy for each tonne of carbon emitted into the atmosphere.
At Shell, we are doing this in several ways. First and foremost, we are expanding our natural-gas business. Natural gas is the cleanest-burning fossil fuel and a direct competitor to coal for power generation. When burned for this purpose, it emits half of the carbon dioxide of coal. We expect that, by 2012, gas will account for around half of our hydrocarbon production.
Reducing CO2 emissions also means advancing as rapidly as possible the technology for carbon capture and storage—or CCS. CCS facilities trap carbon dioxide at its source and inject it underground.
According to the Intergovernmental Panel on Climate Change, such technology could deliver around half of the total emissions reduction needed to stabilise atmospheric greenhouse gas levels by the end of the century. It would also build a bridge to a more distant future, when alternative energy sources account for not just one, two or three percent of the energy supply but perhaps seven, eight or nine percent.
Shell is involved in a string of CCS demonstration projects across the world, in countries such as Germany, the Netherlands, Norway, the US, Australia and Canada. But there’s still a huge gap between where we are today and realising the full potential of CCS.
I mention CCS specifically, because pioneering companies should be able to earn allowances for the CO2 they store underground. The operating principle must be that a tonne of CO2 stored permanently underground is as good as a tonne of CO2 not emitted into the open air.
Incidentally, Shell is not only reviewing its own operations for ways to reduce CO2 emissions but also helping its customers to do the same. We recognize that, in so doing, we can help them save money.
In the Netherlands, for example, Shell has recently introduced a 95-octane petrol that saves up to a litre of fuel per 50-litre tankful. The reception by Dutch customers has been positive; Shell has gained market share. What's more, a motorist who saves fuel also emit less CO2.

Developing alternative energy sources

The third priority for the industry is to do what it can to broaden the global energy mix – meaning to introduce more renewable energy sources as well as more "unconventional'' oil and gas.
By "unconventional oil and gas" I mean hydrocarbons that are produced by means other than traditional vertical wells. Such resources include oil sands as well as gas extracted from impermeable rock or coal formations.
A recent report commissioned by the Dutch government inventoried the unconventional gas resources of the Netherlands. The report estimates that, all in all, those resources could amount to as many as 100 Groningens.
In the area of renewable energy, Shell has been active in wind, solar, hydrogen and biofuels. For the next few years, we will concentrate on biofuels—an area that holds great promise and that has a close fit with our business competencies.
So those are the industry's priorities and Shell's contributions to advancing them.

Government role

But what about the role of government? What can it do to help us meet the energy challenges?
First, it must stimulate investments in energy supplies. Nowadays, governments are understandably focused on getting their economies going again. National budget deficits have risen as a result. Replenishing the drained government coffers by taxing the energy industry may seem like a good idea to some. But it isn’t. It would increase the risk of a severe supply crunch further down the road.
What we need is governments promoting, rather than discouraging, investments in energy projects.
Second, governments need to agree on a global framework for tackling climate change. Next month in Copenhagen, nearly two hundred countries will meet to negotiate such a framework.
At Shell, we would like the agreement to recognise a full range of mitigation options, including energy efficiency, the promotion of alternative energy sources, reduced emissions from deforestation, and a clear pathway for the deployment of technology to capture and store CO2.
The negotiations are complex and detailed. And a positive outcome is far from assured.
Third, governments should properly address energy use. "Smart" power grids couple with "smart" energy meters, better insulation for homes and offices, fuel-saving vehicles, more efficient fuels and lubricants – these types of products take the bull by the horns.
Finally, governments possess the key to providing access to energy resources and critical raw materials, securing supply routes and thus diversifying the energy mix.


Ladies and Gentlemen: Even as we forge a unity of approach to tackle climate change, the world needs diverse energy supplies.
Broadening the variety of energy sources will help to meet the unstoppable growth in demand. Including renewable and nuclear energy in the mix of supplies will help to keep carbon dioxide emissions in check. And by including oil and gas in the mix, we can better husband other natural resources.
All energy supply options should be kept open....yes, even Swiss hydropower and Dutch natural gas.