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Shaping the future of energy together
In the coming decades, all countries must find more energy at a much-reduced cost to the environment. In this speech, Royal Dutch Shell’s CEO, Peter Voser, focuses on how governments and industry can work together to build a secure, affordable and sustainable energy system. While the innovation of industry will be critical, much hinges on the implementation of a coherent policy framework.
Shaping the future of energy together
The UN Summit in Copenhagen is just days away. And right now all the media focus is on what will emerge from those talks – understandably enough.
Yet whatever the outcome, some important lessons have already emerged from the many months of negotiations.
Most important, that meeting the global energy challenge requires strong co-operation between business and government, and across international borders.
I want to talk about the energy industry’s role in all this. Before offering what I think should be a few clear goals for governments and policy-makers.
The scale of our activities puts Shell in the frontline of the global energy challenge.
Shell operates in more than one hundred countries, producing more than 3.2 million barrels of oil and gas every day. Worldwide, there are some 45,000 Shell service stations, selling transport fuels to some 10 million customers a day. And we run more than twenty-five major refineries and chemical plants.
In 2008, we had revenues of $458.4 billion, and invested some $1.2 billion in Research and Development, more than any other oil major.
And we, like the rest of the industry, are grappling with the deepest recession since the 1930s.
Global oil demand could fall by over two million barrels per day this year, the steepest drop since 1980. And after thirty years of near unbroken growth, demand in the European Union for natural gas is likely to fall by 5%.
Oil price volatility has intensified. Over the past year or so, the price of oil has fallen from a high of $147 per barrel to below $40, before recovering to between $60 and $70 – and even higher.
The uplift in prices owes more to disciplined production controls by OPEC and other oil producing countries than to a recovery in underlying demand.
Refinery margins are under pressure, as are margins in the chemicals business. And the energy industry continues to struggle with costs, which have doubled since 2004.
On a broader front, the global economic recovery is likely to prove fragile and prolonged. In many countries, the return to growth has been underpinned by hefty government stimulus packages. And critical decisions remain to be taken about when and how that support will be withdrawn.
In Europe, unemployment continues to rise and consumer confidence remains weak. Credit conditions remain tight as banks continue to rebuild their balance sheets. And in many countries, the public finances are under severe strain.
All this helps to explain why I expect business conditions to remain difficult for at least the next year.
The worst may be behind us, but we are still bumping along the bottom of the economic cycle.
Yet the energy industry must do its best to keep one eye firmly on life beyond the recession.
The long-term supply challenge
This matters because the long-term trend of surging energy demand will resume as the global economy recovers. By 2050, global demand will double, driven by a rising global population and economic growth in the developing economies.
Over the next half-century, the world will also need to manage greenhouse gas emissions to avoid the worst effects of global warming, about which scientific warnings are getting worse.
Heavy investment in all energy sources will be needed to maintain a secure supply, from oil and natural gas, to biofuels, nuclear power, solar and wind. And even then it will be extremely tough to meet the world’s growing energy needs.
The numbers are dazzling. The IEA has said that energy supply investment of $26.3 trillion will be needed by 2030, including $5.5 trillion in renewable energy.
Yet the global recession has caused a slump in investment across the energy industry over the past year.
This could have all kinds of adverse consequences.
Most urgent, we could face another oil supply crunch and renewed price volatility within a few years, choking the global economic recovery.
Shrinking investment also threatens the long-term transition to a low-carbon economy.
Shell has long experience of many different energy sources. In addition to today’s activities in oil, natural gas, biofuels and wind-power, we were once also involved in forestry, coal mining, nuclear, and, more recently, solar.
On the back of all this, we believe that by mid-century 30% of the world’s energy could come from wind, solar and other renewable sources.
Yet reaching this goal is far from a done deal. It will require decades of sustained effort and investment. And even then nuclear power and fossil fuels will still supply at least 70% of the world’s energy in 2050.
Technology deployment curves
Sometimes people forget the massive scale of the energy system and what that means for how quickly we can shift to something significantly different.
It takes around thirty years for new primary energy sources and carriers to obtain a one per cent share of the market. And even that is after commercial introduction.
Right now, biofuels are reaching a one per cent share of the market, after a quarter century of dedicated effort. And wind power could do so by the middle of the next decade, twenty-five years after the first large wind parks were built in the US and Denmark.
There are further constraints that must be overcome.
Whether we like it or not, almost every low-carbon energy technology uses more mineral resources than energy from oil or natural gas.
For example, wind-turbines consume double the amount of steel in producing the same amount of electricity as a natural gas-fired power plant. They also consume more nickel and chromium than conventional power stations, again for the same amount of electricity.
Another example is neodymium, a rare earth metal needed for the magnets in wind turbines and electric car batteries. But mineable concentrations of the metal are rare and difficult to produce in environmentally friendly ways.
To build a sustainable energy system we will need to make responsible use of all the world’s precious resources.
All this helps to explain why the global energy challenge is one of the great social and economic challenges of the century. And why it requires a coherent and urgent response from government and industry alike.
The contribution of industry
In this context, what should be the contribution of the energy industry and companies like Shell?
With an unrivalled tradition of technological innovation, the energy transition is a huge opportunity for Shell. And one that we must grasp with both hands.
That’s why we have stuck to our investment plans throughout a difficult 2009. This year, we remain on-track to invest some $32 billion in capital projects. While in 2010 we expect to invest around $28 billion.
Our investments are focussed on three main areas.
As a first priority, we must help to satisfy long-term demand, and make the most of the world’s oil and gas resources. With easily accessible oil and gas resources in decline, this increasingly means operating in frontiers like the Arctic and deep waters.
Take Shell’s Perdido Project in the Gulf of Mexico, where we will tap reservoirs that lie under nearly two miles of water, and that much farther again below the seabed. Such is the depth that all the sub-sea equipment is built by robots in pitch-black, near freezing darkness. When finished, it will have the capacity to produce the equivalent of 130,000 barrels of oil per day.
In addition, we are improving our enhanced oil recovery techniques to squeeze as many barrels as possible from existing fields.
Reducing the carbon intensity of fossil fuels
A second task for the industry is to reduce the carbon intensity of fossil fuels. And here again Shell is breaking new ground.
We are growing our natural gas business. So much so that by 2012 gas will account for around half our production.
Gas is the cleanest burning fossil fuel, emitting half the carbon dioxide of coal when burned for power generation. And by replacing coal with gas, countries can deliver sharp emissions reductions in the next decade.
Alongside this, Shell scientists continue to develop the fuel economy products that help our customers use less fuel, save money and reduce their emissions.
Our latest product for retail customers, Shell FuelSave, is a great example.
The most advanced fuel economy product in the market, it helps drivers save up to one litre of fuel per tank, based on a 50-litre fill-up.
We have launched FuelSave in five countries in Europe and Asia this year. And it has been so popular with consumers that it has won us more volume. So helping customers use less fuel can be commercially successful.
Our efforts aren’t confined to transport fuels. Take concrete, for example.
At Shell, we have developed a sulphur-based binder, Shell Thiocrete, which replaces conventional cement in concrete.
Initial studies indicate that Shell Thiocrete could reduce the lifecycle CO2 impact of concrete by between 30% and 50%, depending on what it is used for. An added advantage is that the sulphur we use is a by-product of our oil and gas production.
And in the past week, we announced the first commercial sale of Shell Thiocrete based products. Drainage channels made using Shell Thiocrete have been purchased for use along railway lines.
Elsewhere, we are working to improve energy efficiency across our own operations, and driving rapid advances in carbon capture and storage technology.
Carbon capture and storage technology
Thanks to the industry’s longstanding expertise in injecting Carbon Dioxide into oil fields to boost production, we have the knowhow to do it on a large scale.
According to the Intergovernmental Panel on Climate Change, the 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 distant future when renewable energy can supply a significant portion of global energy.
The need is urgent, especially for coal-fired power. Asia alone will build some 800 gigawatts of new coal-fired generating capacity over the next ten years, equal to the EU’s total electricity generating capacity today.
Shell is involved in a string of CCS projects around the world. One example is in Canada’s oil sands region, where our plans for the Quest project are moving forward.
Shell Quest aims to store up to 1.1 million tonnes of carbon dioxide each year from our Scotford upgrader. That’s the equivalent of taking around 175,000 North American vehicles off the road.
A third job for the energy industry is to help broaden the world’s energy mix.
In the field of alternative energy, we are especially excited by the possibilities of biofuels, which the IEA thinks might account for 11% of road transport fuel by 2030.
Shell is already the world’s largest distributor of transport biofuels. And today’s biofuels will be critical to reducing the carbon intensity of road transportation over the next decade.
Yet we also need to manage the social and environmental challenges of biofuels.
The benefits of biofuels vary according to the feedstock and production processes used. For example, North American ethanol produced from corn typically reduces greenhouse gas emissions by between 10% and 30%, whereas an efficient variety of Brazilian ethanol derived from sugar cane can reduce emissions by as much as 90%.
Biofuel supply chains are long and involve thousands of individual farmers. Shell has taken many steps to ensure our supply chains are environmentally sustainable. For instance, we include sustainability clauses in our contracts. And, so far, three-quarters of our suppliers have signed up to them.
With partner companies and universities in the US and Europe, we are also working on future fuels that use non-food biomass, like crop residue or even algae. Yet much hard work lies ahead to overcome all the technical hurdles and to produce them at competitive prices.
Alongside all this, we will continue to operate our wind business, mainly located in the United States.
In all these ways, the industry and Shell can drive progress towards a sustainable energy future.
Industry and government: working together
But much hinges on the ability of industry, governments and consumers to pull in the same direction.
And Switzerland has pioneered a bold approach here.
Through the Energy Trialogue, key stakeholders are pursuing an inclusive approach to energy policy, involving the government, consumers, NGOs and the energy industry, including Shell. And I was delighted to serve on the board until earlier this year, when my Shell colleague Ralph Stalder took over.
The Trialogue calls for significant emissions reductions in line with the targets put forward by the EU. And it contains a range of measures, from putting a price on carbon emissions to efficiency standards for vehicles, buildings and appliances.
None of them will be easy to get right, and they all involve tradeoffs.
But they stand a much greater chance of success with a broad coalition of support behind them, stretching right across society. And I’m hopeful that the Trialogue’s approach will be replicated in other countries.
Proper industry and government co-operation is also needed to channel technological innovation and consumer choices in the right direction.
To see why this matters, you only have to look at energy efficiency.
The easiest and cheapest way to limit the impact of energy on the environment is to conserve it.
Yet the story of energy efficiency is a surprisingly complex one.
History shows it is all too easy to squander big efficiency gains unless they are accompanied by regulations that ensure a lasting positive impact.
Take the car industry.
From the 1970s onwards, fuel injection, microprocessors and other technical advances improved energy efficiency. But they did not result in better fuel economy for the average vehicle.
That’s because the efficiency gains were used to add power for quicker acceleration and higher maximum speeds. Or to move heavier vehicles, such as the pickup trucks that became so popular for personal transportation in the United States. Improving fuel economy was simply not a priority.
As a consequence, over the past thirty-five years there has been only modest improvement in the average fuel economy of new cars in Europe, and virtually none in the US.
All this shows the importance of well-targeted government policies. And in developing new economy standards in the EU and US, car owners, vehicle manufacturers, oil companies and policy-makers have come together to moderate both energy demand and carbon emissions.
And that is surely a blueprint for real progress.
All of which leads onto the final element of an integrated response: international co-operation.
The energy challenge is such that no country can make the journey alone. Take the example of Switzerland.
Thanks to hydropower, alternative sources already provide a sizeable chunk of its electricity. And the country is taking important policy steps to curb its carbon emissions.
Yet unless the world’s heaviest emitting countries do the same, Switzerland faces far-reaching consequences. Our glaciers are shrinking. And as precipitation declines and energy usage increases, hydropower is forecast to meet a declining proportion of Swiss energy demand.
What are the critical elements of a global framework?
At Shell, we believe that a first priority is to put a global price on carbon dioxide.
And we think the best way to achieve that goal is to create a system to cap CO2 emissions and trade emission allowances, which would channel resources towards the most cost-effective reduction measures.
A global agreement should also set out a clear path for the rapid and large-scale deployment of CCS technology. And include measures to promote energy efficiency and to reduce emissions from deforestation.
The Copenhagen talks give the world the opportunity to make progress on all these fronts.
Yet we must be realistic. Negotiating a binding agreement is proving to be a long, hard slog. And expectations of a binding deal have been revised downwards in recent weeks.
Yet whatever emerges from next month’s talks, all countries must strive for renewed momentum in 2010.
Now is not the time for the world to retreat behind national borders. And there is no doubt that the leadership of the United States can make a powerful contribution here in the months ahead.
By working together, industry and government can set the world on the path to a secure and sustainable energy future.
It is easy to call for this kind of unified action. Delivering on-the-ground progress is a lot tougher.
Yet in the global response to the financial crisis over the past year, we have a route-map. Together, taxpayers, governments and businesses have shouldered the responsibility for saving the world’s banking system. Strong international co-ordination has contained the protectionism that threatened the global economy just twelve months ago.
And policymakers continue to work across borders in pursuit of a viable system of financial regulation.
That looks like a model. And it’s one I’d like to see used to tackle the global energy challenge.