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10th Anniversary of the EU-Russia Energy Dialogue

Speech given by Malcolm Brinded, Executive Director, Upstream International, at the 10th Anniversary of the EU-Russia Energy Dialogue, November 22, 2010.
Malcolm Brinded

Europe and Russia face a common challenge: making the transition to a low-carbon economy while maintaining their competitiveness. In this speech, Malcolm Brinded, Executive Director of Upstream International at Royal Dutch Shell, describes why natural gas will be critical in this context, because of its affordability, because of the current expansion in global supplies, in part driven by the growth of the world’s LNG infrastructure – with Russia at centre-stage - and because natural gas is the cleanest burning fossil fuel, and the quickest and cheapest way to cut CO2 emissions in the power sector. As such, a greater reliance on natural gas will be critical to allowing the EU to meet its CO2 reduction commitments, as well as to making an affordable transition to more renewable and nuclear power generation. Russia will remain the EU’s most important supplier of natural gas, maintaining its track-record of reliable supplies. But the country should continue to invest heavily in new supplies, not least because many of its resources lie in frontier areas.

10th Anniversary of the EU-Russia Energy Dialogue

Good morning. I first congratulate the EU and Russia for 10 years of fruitful dialogue, and would like to highlight the hard work of European and Russian policymakers who have made deeper EU-Russia energy co-operation a reality.

It is important that this continues and that the dialogue deepens.
 
Both Russia and the EU have changed dramatically in the past ten years - and today our shared challenge is how we move to a low carbon economy while maintaining competitiveness, in an intensely competitive world.
 
We can be certain of three things:

First, demand for energy will grow, and so must energy investments. Indeed energy demand is expected to double in the first half of the century.
 
To meet this will require huge investment: over $1 trillion per year globally over the next twenty years. And the world could need as much as 3.9 trillion cubic metres of gas supply by 2020, compared with 3.1 tcm today.
 
Second, hydrocarbons will continue as the most important source of energy since most of this growing demand will still be met by oil and gas.
 
There will be a shift here towards more difficult hydrocarbons such as tight gas and sour gas, heavy oil and those drawn from reservoirs that are more difficult to access, for example in ultra deepwater and the Arctic. All this opens up vast new opportunities for Russia.
 
Third, climate stresses will increase. Scientists tell us the world needs to halve greenhouse gas emissions by 2050 to avoid the worst effects of climate change.
 
Gas, which is today the heart of the EU-Russia relationship, is also central to moving to a low carbon economy while maintaining competitiveness. So why is gas so important to Russia and to Europe?

The advantages of natural gas

The answer is in the 3 A’s:it’s because gas is abundant, affordable and acceptable.
 
First, gas is abundant. The past few years have seen a spectacular improvement in gas supplies, and it’s estimated that 250 years of global reserves are available. Much of this is due to the growth in the unconventional gas sector, but a critical pillar has been the growth of liquefied natural gas or LNG.
 
LNG is as important to Russia as it is to Europe, and indeed the world.

By 2020, LNG supplies could meet one-fifth of global gas needs. LNG is really the ultimate pipeline, as it can come from almost anywhere, and go to almost anywhere, so greatly mitigating any security of supply concerns.
 
As the LNG market globalises, we see ever greater scope for investment in and focus on LNG. The highly successful Gazprom and Shell partnership in the Sakhalin II venture really showcases this potential.
 
This growing abundance of natural gas resources and expansion of the LNG industry together enhance gas supply security - and so will reduce long-term price volatility. Which should give governments and investors even greater confidence in natural gas for the longer term.
 
Second, gas is affordable.
The cost competitiveness of natural gas remains strong – and this is especially compelling in the power generation sector.
 
With deficits and government debt at historically high levels there is an acute need for strict budget discipline – and most countries will find that natural gas is far more affordable than any other source of electricity, especially in front-end investment terms.
 
Let me summarise very simply the relative capital cost of power generation:

Gas 1; coal 2 to 3; nuclear 5; onshore wind 7 to 10; offshore wind 10 to 15.
 
Third, gas is environmentally acceptable. The environmental benefits of natural gas-fired power are tangible, substantial and immediate.
 
For many EU countries, it will in fact be impossible to meet their 2020 emission reduction targets without more natural gas – so it’s surely time that gas gets more overt recognition and stronger political support.
 
Coal-fired power is today responsible for the fastest sector growth in CO2 emissions worldwide. But modern gas plants emit between 50% and 70% less CO2 than coal plants per kilowatt of electricity generated.
 
So, natural gas replacing coal is the surest, fastest and cheapest way there is to reduce CO2 emissions over the next ten vital years.
 
Some worry that a stronger focus on natural gas locks in another generation of fossil fuel plants. But retrofitting CCS to gas-fired power stations can reduce CO2 emissions by 90%. And Shell analysis shows that this can deliver CO2 reductions at a cost of about $60-$120 per tonne.
 
By comparison, offshore wind – at $275-$400 per tonne – costs roughly three-and-a-half to five times as much.
 
So greater reliance on natural gas power would cut greenhouse gas emissions immediately, and buy society time for learning curves and supply chain developments to allow a more measured and cheaper transition to new nuclear and wind electricity generation, and widespread CCS.
 
All this means major new gas market opportunities for the EU and for Russia.

Russia: Europe’s most important gas supplier

Russia will remain the most important gas supplier for Europe - due to geography, infrastructure, its resource base, and its track record as a highly reliable supplier over decades.
 
Russia will need to discover and develop new resources, especially in frontier environments, such as Eastern Siberia and offshore Arctic, presenting major new technical, environmental and financial challenges. Reform of the current fiscal framework and licensing regime will be needed to make the exploration and development of such frontier regions viable.
 
For Europe, the Energy Road Map to 2050 that the Commission is consulting on is an opportunity to look again at gas with hard headed realism about the major cost advantages and with recognition that historical concerns about over-dependence on imported natural gas are much reduced by the ongoing investments in LNG regasification terminals and interconnectors.

Conclusion

In conclusion, gas underpins the EU-Russia relationship and now is the time to orientate our economies more towards gas, to make them more competitive whilst putting them on a low-carbon path.
 
The energy relationship between the EU and Russia is a symbiotic and mutually dependent one where both work together to become stronger – the win-win that both Minister Shmatko and Commissioner Oettinger highlighted.  

This means now approaching the future of energy with both bold aspirations regarding climate change but sufficient realism to chart the most pragmatic, affordable route towards an environmentally sustainable power system. Which means more gas !
 
And this I commend as the basis for renewed EU-Russia dialogue for the next ten years and for the energy roadmap to 2050.

Thank you.