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Technology and Sustainable Development

Speech given by Simon Henry, Chief Financial Officer, Royal Dutch Shell plc, at the China Executive Leadership Forum at Cambridge University, on July 21, 2010.
Simon Henry

In the coming decades, all countries must find more energy at a much-reduced cost to the environment.  In this speech Simon Henry, Royal Dutch Shell’s Chief Financial Officer, describes how building a sustainable energy system will require decades of innovation and investment. Much hinges on technological expertise, rooted in in-depth research and development work and aided by well-targetted government support. Shell is using its technological knowhow to contribute to the world’s sustainable energy resources in three main ways: by raising its production of natural gas, the cleanest burning fossil fuel; by developing clean coal and carbon capture and storage technology, which will help to improve the environmental performance of coal; and by expanding its biofuels business, which will tackle CO2 emissions from the transport sector over the next twenty years and beyond. 

Introduction

It’s a great pleasure to be invited to talk to you this morning, and to welcome you to the UK.

Last Monday morning, our Chairman Jorma Ollila explained why all businesses - including energy companies like Shell  - need to innovate to succeed in the post-recession world. 

Today, I’d like to discuss one aspect of that in more detail: the transition to a sustainable energy system, and the technologies that will help us to get there.

And by ‘sustainable’ I mean energy sources that are not only environmentally and socially acceptable, but that are also affordable and able to make a lasting contribution to meeting the world’s energy needs.

The global energy challenge

I offer this definition because in the decades ahead, the world must grapple with the twin pressures of rising energy demand and growing environmental stresses.

By 2050, global demand for energy could double, according to the IEA, driven by a rising global population - 9 billion compared to today’s 6.5 billion - and economic growth in the developing economies. 

Even with heavy investment in all energy sources - from oil and natural gas, to biofuels, nuclear power, solar and wind - it will be extremely tough for the world to keep pace with rising demand.

Of course, the story of the world’s growing energy needs is also, in part, the story of China’s economic success.

Throughout the global recession, China’s economy has demonstrated great resilience, despite current concerns about the slowing pace of production growth in the manufacturing sector. And it’s this robust economic growth that explains why China’s gas consumption could double or even triple by 2020, putting huge pressure on its supplies.

Progress towards a sustainable energy system

At the same time, consumers and governments across the world are increasingly determined to reduce the environmental cost of energy consumption. And their determination will only be strengthened by what is happening in the Gulf of Mexico.

The consequences of failing to tackle climate change may be less immediate than the damage done by a catastrophic oil spill. But the world must also manage its greenhouse gas emissions as a matter of urgency to avoid the worst effects of climate change. According to scientific warnings, emissions should be limited to 450 parts per million to avoid unsafe levels of global warming. Today, the level is approaching 390ppm.

Over time, cleaner energy sources will meet a growing share of demand, as global efforts to tackle climate change gather pace. China’s recent progress has been especially impressive, with its targets among the most ambitious across the world.

As you know, your government announced a 40-45% voluntary reduction of carbon intensity per unit of GDP by 2020 compared to 2005.

Technology deployment

Despite this rapid progress fossil fuels will continue to meet the majority of Chinese and global demand for decades.

After all, we must satisfy strong demand for energy today and in the immediate future. And there are significant technical and financial constraints to deploying alternative sources on a mass scale.

Sometimes people forget the sheer scale of the energy system, and what it means to shift to something significantly different.

Our industry is very different to consumer electronics, where businesses are under pressure to develop and market new mobile phones, for example, within eighteen months. 

At Shell, we’ve researched all current energy types. And we found that in the twentieth century, it took around 30 years for new energy types to capture 1% of the market after commercial introduction. For example, the first liquefied natural gas plant came on-stream in 1964 in Algeria, using Shell technology. 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%.

Yet we still think that by the middle of this century, up to 30% of the world’s energy could come from wind, solar and other renewable sources. And that would represent a historic transformation.

But it would also mean that fossil fuels and nuclear would supply the remaining 70% even then.

Thus, a sustainable energy system will be one in which cleaner fossil fuels, as well as renewable energy sources, shoulder an increasing share of the burden.  That in turn will require decades of innovation and research and development work.

Government support

It will also require extensive government support and a regulatory framework conducive to private investment. That, at least, has been the story of every major new energy source since coal and oil. 

That’s why, for example, the EU is funding the development of carbon capture and storage technology, with a view to making it commercially available by 2020. CCS technology is highly promising because it captures CO2 emissions from fossil fuel -fired power stations and other industrial installations and stores them safely underground. It can be applied to gas, coal and oil.

Against this backdrop, I’d like to focus on three areas where we, at Shell, can make immediate headway in expanding the world’s sustainable energy resources. 

First, natural gas, which will allow many countries to reduce their CO2 emissions in the next decade and beyond.

Second, cleaner coal technology. And, third, biofuels, which will make an important contribution to a cleaner transport sector in the next twenty years.

Natural gas

Natural gas, the cleanest burning fossil fuel, is critical in a world seeking more energy at a reduced environmental cost.

For one thing, there should be enough natural gas to satisfy rising global demand, thanks to advances in the production of gas trapped in relatively impermeable geological formations, which makes them hard to tap. By this I mean shale gas, coal bed methane and gas from tight sands.

On one estimate, the US now has one hundred years of supplies at current consumption rates. And, potentially, China has very large reserves of these gas resources too.

Environmental benefits of gas

As Jorma Ollila mentioned last week, a further advantage of natural gas is that the quickest and cheapest way to cut CO2 emissions from the global power sector is to replace coal-fired power with gas.

This would also provide a cleaner source of electricity for the world’s growing stock of electric vehicles.

Of course, there are constraints on how quickly the shift to electric mobility can take place.

For example, most consumers will continue to make pragmatic choices about which car to buy based on cost and convenience, which is why hybrids are likely to out-compete full electric cars for some time to come.

Hybrid vehicles combine electric mobility’s low-emission driving for shorter distances with liquid fuels’ long range and swift refills.

Indeed, pure electric cars must overcome several hurdles before they can compete with hybrids. For example, the journey range of batteries needs to go up and electricity grids modernized and expanded to handle more power.

Even so, at Shell, we think that’s it’s possible that electric vehicles, including hybrids, could supply as much as 40% of global vehicle miles by 2050 – a vast number. And here again China is in the vanguard, thanks to the likes of BYD.

A significant portion of the world’s electric cars are, ultimately, powered by coal. So by growing the presence of natural gas in the power sector, countries like China can also help to realize their aspirations for cleaner mobility. 

Satisfying rising gas demand

It’s clear that natural gas is critical to the development of a sustainable energy system. 

Which is why the Chinese government’s goal of more than doubling its share of the country’s primary energy mix over the next decade – to around the 8-10% mark – is a smart move.

Even with government support, meeting rising demand on that scale will be no easy task. You might wonder why, given that China potentially has large reserves of tight gas.

At Shell, we have learnt about the technical demands of tapping tight gas through decades of experience in Canada, the US, and, more recently, China.  

Compared with conventional gas, tight gas wells produce gas more slowly, and over a longer period, because the rocks are much less permeable.

So in any tight gas project, the main challenge is to boost the volume of gas produced by each well, chiefly by increasing the permeability of the rocks. And that can only be achieved by technological expertise, rooted in in-depth research and development.

Take reservoir and geological interpretation technology, for example. 

It’s through investing in the development of this technology that we, at Shell, have obtained the means to identify the most abundant tight gas fields, as well as the most promising parts of those fields.

For countries striving to obtain full value for their resources, this matters because it’s far more profitable to develop an abundant field than it is to try to make the most of a less productive asset.   

The gas in a shale field is dispersed across a wide area, which means that developing one block can require many hundreds of wells.

And to increase the permeability of the rock, it is necessary to drill thousands of feet down, and then again horizontally. And that’s before the shale rock is fractured by high pressure water to release the gas and allow it to flow to the production wells.

In helping us to decide where to drill the wells and how to fracture the rocks, interpretation technology plays a crucial role here too.

Cleaner coal technology

Of course, coal will remain an important part of the energy system in China, where it is so abundant and accounts for around 70% of primary energy consumption.

That raises the urgency of reducing coal’s heavy environmental cost.

You are doubtless familiar with China’s leadership here too, not least in the field of coal gasification technology, which is an important way to make coal environmentally acceptable.

For those of you less familiar with coal gasification, at Shell, we have the technology to produce synthesis gas – known as ‘syngas’ - a mixture of carbon monoxide and hydrogen that can drive gas turbines to generate electricity or provide a feedstock for fertilizer or to make chemicals.

So far, Shell has sold 19 coal gasification licenses in China, making us one of the leaders in the country’s market. In fact, we have been researching and developing gasification technology for decades, and have successfully applied it to biomass, oil residue – for refineries and tar sands – and gas, as with our Pearl gas-to-liquid fuels plant in Qatar, which, when completed, will convert natural gas into cleaner burning synthetic oil products.

And to deepen our understanding of this technology, we are working with universities in China and other members of the industry, through the China Petro-Chemical Industry Association.

But we already know that gasifying coal, rather than burning it directly, brings several environmental advantages.

Integrated Gasification Combined Cycle plants - or IGCCs - have lower emissions of CO2, sulphur dioxide, nitrogen oxides and particulates than conventional pulverized coal boiler plants, which remain the dominant type in the electric power industry. And they generally consume less water, and produce only about half as much solid waste.

Another advantage of applying coal gasification technology to power generation is that, at Shell, we think it will increase the effectiveness of carbon capture and storage technology.

Coal gasification helps CCS because it is a lot easier and cheaper to strip CO2 in the pre-combustion phase, as in an IGCC – when the CO2 is highly concentrated and the gases are at high pressure – than to capture it after combustion from a conventional pulverised coal plant.

CCS technology can also be applied to gas power plants. And it’s more effective to do so: it’s cheaper than coal with CCS, results in half the CO2 emissions, and requires only half the underground storage space.   

Government support will be critical to realizing the potential of CCS.

After all, CCS technology for coal fired power stations is still in the demonstration phase. And public funding, like that provided by the EU, and a clear regulatory framework are essential to its development. Moreover, the commercial viability of CCS will depend on an international framework that puts a price on CO2 emissions.

Biofuels

My third and final area of focus is biofuels.  

I’ve already mentioned the growth in the number of electric vehicles, aspart of a shift to a cleaner transport sector.

Transport accounts for nearly one quarter of global energy related CO2 emissions. And demand will only increase further as the number of cars and trucks on the road is expected to double by mid-century.

That means that liquid fuels will still be urgently needed for years to come. In fact, at Shell, we expect global demand for liquid fuels to rise by more than one-fifth in the next 20 years. 

In this context, biofuels come into sharp focus as a readily available and low-carbon alternative to gasoline and diesel. Of all the low-carbon transport fuels, biofuels can make the most significant contribution to cutting CO2 emissions over this period.

According to the IEA, on existing trends biofuels would meet 5% of global road transport demand by 2030, although that figure could double with more aggressive policies to diversify the transport fuel mix and reduce CO2 emissions. Today, biofuels have a 2% share of the road transport fuel mix. 

Shell is one of the world’s largest distributors of transport biofuels. And we are currently in talks with Cosan, Brazil’s largest biofuels producer, to form a 12-billion dollar joint venture. This would allow us to produce ethanol from sugarcane, which can reduce fuel-related emissions by between 70% and 90%.

In fact, Brazil highlights the potential of biofuels. They already command more than one-fifth of the Brazilian fuels market, thanks in part to longstanding government regulations requiring gasoline to be blended with ethanol.   

Technological innovation is another important part of the story.

For example, Cosan has developed a satellite system to monitor its sugarcane plantations, which allows it to identify and rectify any problems with its crops quickly, and to make accurate predictions about the harvest. This helps to raise production rates and lower costs.

In addition, at some of its ethanol mills, Cosan uses the residue remaining from the crushed sugar cane to produce electricity at co-generation plants. This generates power for Cosan’s operations, with the surplus being sold to the electricity grid, which strengthens the ethanol’s environmental benefits, while underpinning its profitability.  

At Shell, we are also working on the next generation of biofuels, many of which are derived from non-food biomass like crop residue.

And since it is not yet clear which of these fuels will be the most commercially feasible, we are investing in a range of technologies.

One example is our work with Iogen, a Canadian company whose technology uses enzymes to break down the cellulose in non-edible plants or crop waste and convert it to sugars, which are then fermented and distilled into ethanol.

Elsewhere, we have a partnership with Virent, an American company, which is working to produce petrol and diesel directly from plant sugars.

The advantage is that the fuel could then be blended with traditional fuel in high concentrations and used in existing engines and distributed through existing networks.

Yet it will take years of research and development to overcome the highly complex technical challenges and to produce them on a commercial scale.

The biofuels industry also faces a host of social, political and environmental challenges, as is well-recognized in China.

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%, much less than Brazilian sugar cane ethanol.

That means that governments should co-operate to develop standards and regulations that promote the most effective biofuels.

Another complication facing the industry is that supply chains are long and involve thousands of individual farmers. At Shell, we’ve introduced sustainability clauses into contracts with our suppliers, which, for example, ensure that biofuels have not been cultivated or manufactured in areas rich in biodiversity.

So here again, it will take dedicated research and development and the right kind of government support to realize the full potential of biofuels. 

Conclusion

In addressing your programme over the past fortnight, Jorma Ollila and I have sought to describe the challenges and opportunities facing Shell as the energy industry stands on the brink of a historic shift. 

At the same time as global energy demand doubles, consumers and governments will press for more of their energy to come from cleaner sources.

I hope that we’ve shown that Shell is already doing much to help develop a sustainable energy system, not least through driving research and development in areas from biofuels to the production of tight gas.

But I also hope that we’ve made it clear that we do not have all of the answers.  And that smart decisions by governments will also be needed.

It’s also clear that China, with its enormous natural and intellectual resources, will be among the most potent sources of creativity and technical expertise in the energy industry.    

And that’s another reason why I was so delighted to have the opportunity to come to Cambridge to talk to you – to hear your thoughts. And with that in mind, I now look forward to our discussion.

Thank you