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Natural gas: a vital part of Europe's energy future
Europe faces a natural gas puzzle. Its indigenous gas supply is in decline, but gas demand is set to increase. In fact, increasing the presence of gas in the power sector will be critical to helping Europe meet its CO2 emissions reductions targets. In this speech, Malcolm Brinded argues that natural gas as the cleanest burning fossil fuel has a central, and permanent, role to play in Europe’s low-carbon landscape. Europe’s gas supply picture is healthier than is often believed. By 2020, domestic production will still make an important contribution, underpinned by growing shale gas and tight gas production. Inevitably, imports will have to increase, and these will come from Russia, the Caspian, the Middle East, Africa and the Caribbean. The share of liquefied natural gas (LNG), which reaches Europe by ship, will increase fast. But to achieve long-term gas supply security, Europe needs to send clear, positive signals about the place of natural gas in its future energy mix.
Natural gas: a vital part of Europe’s energy future
Thank you for inviting me back to Paris for what is definitely one of the world’s leading oil and gas conferences.
Being in the oil and gas business, we should not be so surprised when Mother Nature pulls off a new trick. But I think in the last 10 days she has done more than usual to teach us not to be complacent.
So I come here from the Middle East - but with the unplanned pleasure of two days in Rome.
Even ash clouds have a silver lining. In this case: Shell has an office in Rome, and the telephone lines worked.
And I’m glad to see many of you made it to Paris.
Today I’d like to discuss the growing role of the cleanest burning fossil fuel, natural gas.
In particular, I want to talk about the place that natural gas will occupy in the future energy mix of Europe.
An important place, if you ask me.
Europe’s gas puzzle
But before natural gas can realise its full potential, Europe has a natural gas puzzle to solve. That puzzle consists of three elements:
First, there is uncertainty about gas demand and its place in the search for a low carbon energy future. It is clear that demand will grow – the question is how fast and for how long, especially given the political drive behind nuclear and renewable energy and the strong lobby aiming to prolong the coal industry.
The second piece of the puzzle is the decline of indigenous gas reserves in the face of rising demand for electricity.
And, third, there are concerns about Europe’s growing gas import dependency.
Solving this puzzle is not just a matter of facts and numbers – we’ll also have to address perceptions and misperceptions.
I hope I can make a small contribution today here in Paris.
Global natural gas outlook
But before we zoom in on Europe, let’s review the broader context and see how the global gas sector is evolving.
Between now and 2030, the global natural gas story is one of surging demand, massive investment, tremendous innovation, and a rapid globalisation of LNG.
On the back of rising global energy demand, global gas demand is likely to grow by around 2% per year.
By 2030, we’re looking at up to 4.5 trillion cubic metres (tcm) of gas per year, compared with 3.1 tcm today.
So demand is abundant. Can the same be said for gas supplies?
In principle there’s enough gas around. The IEA in its latest Outlook speaks of total technically recoverable gas resources, worth 250 years of current production.
But the IEA also warns that it will require cumulative investment of some $5 trillion in total (or $250 billion a year) to increase supplies by 40% over the next 20 years.
And the industry will have to introduce lots of innovative technologies.
Like the ones that made possible the expansion of unconventional gas production in North America. This is truly an energy revolution as yet unnoticed in many other parts of the world.
As a result, North America will not need as many imports of liquefied natural gas, or LNG, as people believed only a few years ago.
This frees up LNG supplies for Europe and other markets.
Which brings us to LNG.
Global LNG market developments
Figure 1: Floating LNG
Despite the difficult market we have today, global LNG demand is likely to grow even faster than overall gas demand – and double this decade, driven by China’s growth, by Europe’s growing gas import dependency, and by a host of countries in Asia that will begin importing LNG, including Indonesia, Malaysia, Thailand, Singapore and Pakistan, and in the Middle East – Kuwait, Dubai and Bahrain.
So the LNG sector will have to continue its rapid expansion and innovation to keep pace with the growing demand.
Right now, supplies are growing at the rate of around 6-8% per year, around three times the rate of natural gas overall. And the number of LNG exporters is likely to increase by nearly one third by 2015.
This decade will see the industry converting Coal Bed Methane into LNG in Australia. Shell and PetroChina’s planned acquisition of Arrow Energy marks our involvement in this exciting area.
This new joint venture will help meet growing demand for cleaner energy in Australia and international markets through the export of LNG.
We will also drive progress on new innovations like floating LNG, which will allow us to liquefy gas at sea, instead of building pipelines to the coast.
That opens up gas resources once considered too remote to tap.
An added advantage is that once production has been completed in one gas field, the 3.5 million tonnes per annum floating LNG facility can be deployed to another.
Shell’s floating LNG plans for Australia are most advanced, but we think that there are opportunities to use this concept in the wider Asia-Pacific region, Latin America, the Mediterranean and Africa.
China and the Middle East: growing gas demand
Half of the global growth in demand for natural gas will be taken up by Asia. And, China, in turn, will account for half of Asia’s demand growth.
China’s gas demand – which stands at around 100 billion cubic metres today, is likely to double, and could even treble by 2020.
China intends to build tens of thousands of kilometres of new gas pipelines. This expansion will create a more flexible and integrated gas market, and will allow China to import more LNG, in addition to pipeline gas from Russia and Central Asia.
As a result, China could overtake Japan to become the largest gas market in Asia by 2015.
In the Middle East and North Africa, demand for natural gas is also burgeoning – fuelled by economic growth and a gradual switch from oil to gas for power generation.
As a result, the region’s gas consumption is predicted to grow by about 5 per cent per annum, similar to China, and twice as fast as in the major European economies.
LNG will play a surprisingly important role in satisfying this demand.
Who would have thought that one of the very first cargos from Sakhalin II in eastern Siberia would go to Kuwait.
All this means that Europe, if it is to attract sufficient LNG supplies, will have to ensure it remains an attractive customer for LNG producers.
The three As
So a key question is: will Europe do what it needs to do to compete with other markets and achieve supply security?
Much will depend on the choices of policy makers in determining their countries’ future energy mixes.
Governments and utilities understandably look for certainty around long-term Availability, Affordability and environmental Acceptability of natural gas.
I believe that natural gas scores well on all three counts. So let’s take a closer look at cost and environmental performance, before we take a deep dive into security of supply and the role that LNG can play.
Figure 2: Potential UK power CO2
For most EU member states, using more gas in power generation can make the largest contribution at the lowest cost to meeting the 20% emission reduction targets by the year 2020, which they committed to in Copenhagen.
Our scenario team did a case study on the United Kingdom. The UK faces the tough challenge of replacing a quarter of its power generation capacity by 2015.
We found that a new dash for gas – meaning a fast and large-scale displacement of coal by natural gas – could reduce Britain’s cumulative CO2 emissions by a quarter by the middle of this century.
This is at the same overall cost as the base scenario that keeps all existing coal capacity running until 2020, when nuclear could start replacing coal and retrofitting with carbon capture and storage technology could begin.
In both outlooks, we assume that the UK government’s plans for wind and nuclear power get implemented with minimal delay. So the difference between the two outlooks relates to gas versus coal only.
The term “dash for gas” has negative connotations for some in the UK, where concerns about import dependency feature prominently in the public debate.
This is despite the fact that, today, 40% of the UK’s power comes from gas and 80% of British homes are heated by gas. And despite the fact that gas supplies continued to meet demand during extreme circumstances this winter.
In fact, the phrase “dash for gas” is a appropriate for an energy type that is not only cleaner, but faster and cheaper to deploy than competing sources of power.
Modern combined cycle gas plants emit half the CO2 of modern supercritical coal plants, and 60-70% less CO2 than the old steam turbine coal plants of which there are still many hundreds in Europe, America and China. Many of these will have to be decommissioned in the coming 5-15 years, and replaced.
And new capacity will have to be added to the system. By 2030, Europe’s electricity demand is likely to increase by 25-30% on today’s levels.
By 2030, renewables could make up a third of the electricity mix – up from one-fifth today. If the share of nuclear remains stable, then it will account for around 20%. This leaves natural gas and coal to compete for the remaining half of Europe’s generating capacity.
As the UK case study made clear, if the aim is to reduce emissions from the power sector quickly, the first step to take is to displace old coal capacity with new natural gas capacity.
A next step should be to fit the larger, more modern coal plants that will be around for some time with carbon capture and storage, or CCS.
And, longer term, when emissions from natural gas plants need to come down to zero or close to zero, we can also retrofit CCS to gas plants.
This option is as cheap, or cheaper, than retrofitting CCS for coal on for every MWh of electricity generated.
And we would need to find less than half the CCS storage space, because of the lower emissions.
Finally, we will also have to have additional gas capacity to provide flexible and reliable back-up “swing-power” for the growing number of wind farms that provide clean but intermittent electricity.
Affordability – Attractive economics for electricity producers
The environmental benefits of natural gas are clear.
But what about the cost and the pace at which we can build new gas capacity?
The good news is that new gas plants are much cheaper to build than any other new-build source of electricity.
They require half the capital cost of coal per MWh; one-fifth the cost of nuclear; and 15% of the cost of onshore wind, let alone heavily subsidised offshore wind. This front-end cost advantage is key for cash-strapped economies.
Gas plants are also faster to install than coal or nuclear plants. Modern gas plants take 24-28 months to build; supercritical coal plants 52-58 months; nuclear plants 54-60 months.
And this does not take into account the often prolonged permitting processes for nuclear and coal.
The ability to increase gas capacity quickly and at relatively low cost is important: in a carbon-constrained world, we must address cumulative emissions, so every tonne of CO2 saved today has a long-term benefit.
In short, natural gas has many benefits and will be essential for Europe’s journey towards a significantly cleaner energy system.
This is why we at Shell refer to natural gas a destination fuel, rather than a transition fuel.
However, in determining whether Europe can safely increase its reliance on natural gas, there’s another important piece of the gas puzzle that decision makers understandably focus on: security of supply.
With domestic supplies dwindling, they wonder, can Europe import enough natural gas to keep the lights on and homes heated, not just today and tomorrow, but for the long term?
The answer is yes.
While I realise that this sounds deceptively simple, I think it’s important to stress that Europe’s starting point is a lot better than people often assume.
If we include Europe’s domestic supplies, Europe is within reach of 70% of the world’s gas proven gas reserves.
There still are considerable domestic supplies of gas available. And new conventional supplies like Norway’s Ormen Lange continue to be found and developed. Ormen Lange supplies 20% of UK demand. New discoveries continue, like the offshore Gro field in Norway, in 2009.
Unconventional gas resources could also positively affect the European supply balance in the coming decades.
It’s difficult to see shale and tight gas having the same, game-changing impact as in North America. And it’s not going to make a big impact before 2020.
But it will help to lift production levels. For instance, Shell already holds acreage with potential to produce unconventional gas in Sweden, Germany and elsewhere and is already drilling its first exploration wells.
Europe’s steadily improving interconnectivity will act as a form of collective insurance policy, so that’s another big plus.
Having said all that, Europe’s overall indigenous production of conventional gas is undeniably declining.
And higher levels of imports will have to fill that growing supply gap.
This is a surmountable challenge:
Europe is surrounded by huge sources of natural gas, in Russia, the Caspian, the Gulf region, North Africa, Nigeria and even the Caribbean. All this gas can reach Europe either through its well-developed and still growing pipeline network, or by ship as LNG.
Russia, Europe’s main supplier, is investing in new fields and pipelines, and will probably produce and export enough gas to satisfy around a third of Europe’s growing gas consumption.
Unless, of course, there were to be a massive diversion of Russian gas from the West to the East.
For Russian gas deliveries to reliably continue at the required level, Europe will have to offer competitive prices and long-term security of demand.
Long haul pipelines from the Caspian, the Middle East and North Africa, while politically sometimes challenging and financially costly, should also help to increase availability of supplies for Europe.
LNG for Europe
Figure 3: World’s largest LNG carrier
By 2030, around 70% of Europe’s gas needs will likely be met by a combination of domestic conventional and unconventional production, and by pipeline imports, with the remaining 30% or more coming in by ship as liquefied natural gas, or LNG.
This LNG will come from the Middle East, Africa and the Caribbean, but also from Russia. The experience Russia has gained in the Sakhalin II venture in Eastern Siberia surely gives confidence to tackle new Arctic LNG projects, like Yamal in Northern Siberia.
Look also at the new regasification terminals being built in Europe. By January this year the number of regas facilities in Europe had increased by 30% relative to 2007. And that will grow to 60% by 2012.
Even the nuclear power country par excellence, France, is increasing its LNG import capacity, given that Algerian gas mostly ends up in Italy and Spain, and Norwegian gas mostly stays in northern Europe.
In 2009, Shell ventures supplied more than 30% of global LNG volumes, and we had involvement in around a quarter of the global LNG fleet.
The LNG tanker you see on the picture is one of 25 in the new-built fleet of the Qatargas Transport Company, Nakilat. A Shell Captain and crew operate and maintain these 25 vessels. At 260,000m3, this is the world’s largest LNG carrier. The tanker is destined for Milford Haven in Wales.
The gas comes from the North Field in Qatar, the world’s largest gas field. It holds 13% of the world’s gas.
When Shell discovered this gas field in 1971, we were looking for oil. Back then this gas seemed far too far away from major markets. But through technology and good partnership between IOCs and NOCs, what was thought impossible 40 years ago is now a reality.
Indeed, many such partnerships between IOCs and NOCs in the Middle East and North Africa help hugely to increase Europe’s and the world’s energy security.
Security of Supply
I’m at risk of making it all sound too easy.
I realise that increasing Europe’s reliance on natural gas imports is a challenge, economically and politically.
It’s also a challenge for Europe’s utilities and other industrial gas buyers: they have to choose between different sources, accounting for cost, flexibility and security. If utilities invest in new gas power stations, they need to know that the feed gas will actually be there.
But they are not the only ones who have to make big investments and early commitments in a world fraught with uncertainty.
At the other end of the value chain, gas suppliers need security of demand to justify investments in new supplies.
That’s why it’s so important for European governments to give clear signals that gas has a vital place at the centre of Europe’s energy future.
And building regas terminals, while a positive sign, is not enough.
To secure future supplies of LNG, European customers will have to support LNG project development by contracting for purchases early, and for the long term.
That’s what Asian countries are doing, and that’s partly why the focus of supplier countries and the industry is shifting back to Asia.
If Europeans make these commitments, they will find that gas suppliers are keen to commit to long-term contracts.
And that, in turn, would boost both security of supply and security of demand.
In conclusion, it's not often that I quote Greenpeace. But they recently commissioned an excellent report from Sussex University which concludes – and I quote - that “the common assumption that imported gas is inherently less secure than [domestic] gas is not supported by the evidence.”
I couldn’t agree more: the number of gas suppliers is increasing fast.
New gas discoveries are being made in different countries, and the globalisation of LNG brings even greater security and stability.
LNG brings more supply flexibility than pipeline gas: you can’t easily change the supply source for a pipeline but you certainly can for an LNG regas terminal.
And if you add up the cost and environmental benefits of natural gas, then it must lie at the core of a sustainable energy future.
I see natural gas as not just a transition fuel, but a destination fuel, a vital part of a low-carbon energy mix. And I’m convinced that European decision makers will agree with this assessment and will be acting on it.