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Innovation and Energy: you can't have one without the other
The global economy is changing. In emerging economies such as China energy demand continues to soar. Shell is investing in science and technology to help meet this growing demand, while limiting CO2 emissions. Natural gas will play a major role, as will capturing carbon to store it safely underground. Driving developments forward will take innovation and expertise: the Netherlands, where Shell has world-class research centres and supports future scientists, must draw on its strong resources of both.
Innovation and Energy: you can't have one without the other
Thank you and it’s a pleasure to be here.
It’s easy to forget how important the Netherlands still is for Royal Dutch Shell.
In the Rotterdam area, you find one of Shell’s three largest integrated refinery and chemicals hubs in the world.
Here in Amsterdam-North, and in Rijswijk, Shell has two world-class science and technology centres. These centres bring together some of the world’s most talented scientists, who have been responsible for progress in many areas in our industry, from liquefied natural gas to chemical products that go into, for instance, cars, home insulation and washing powders.
The Groningen gas fields, which we produce through the NAM joint venture, have brought huge economic benefits to this country and are likely to produce for another 50 years or so.
And we are working to reopen the Schoonebeek oil field next year, using special technologies that will allow us to produce its heavy, sticky oil for many years to come. When you drive past the production areas you will barely notice them, because our project team has employed a landscape architect to help minimise the above-ground footprint of our operations.
For our Downstream business, the Netherlands remains an important retail market, one where we introduce our latest fuels technology to our customers. The Netherlands was the first country globally for us to launch Shell FuelSave (April 2009). This energy-efficient fuel has been a success so far for Shell and, I believe, for our Dutch customers as well, as we are selling this improved product at no extra cost.
In the Hague/Rijswijk area, Shell not only has its global headquarters for the Group as a whole, but it’s also the seat of the headquarters of two of our global businesses: Upstream International and Projects & Technology.
All in all, Shell operations and offices in the Netherlands provide direct employment to around 11,000 people.
So Shell and the Netherlands have a strong base for continued partnership well into the future.
It’s with that starting point in mind that I’d like to focus today on global economic and energy developments, and how they are affecting all of us.
First, I will give you my take on the state of the global economy.
Then I’ll discuss a few global energy trends and Shell’s role in them. I will pay special attention to the growing role that natural gas can play due to its abundant availability and its strong environmental credentials.
Finally, I will share a few ideas about how the Netherlands as an EU member state might create a healthy climate for innovation in order to position themselves for the future.
Let’s start with the global economy.
In general, policymakers in advanced economies have reacted quickly to the recession.
However, the risk of a double-dip recession still exists: there are still concerns in the market over fiscal sustainability in especially some southern European countries.
Fundamental imbalances in the USA economy are also a cause for concern.
In addition, there still is a risk that financial institutions will have difficulty refinancing their debts, despite the stress tests.
To avoid a double-dip recession in months ahead, withdrawal of the fiscal and monetary stimulus in advanced economies must be managed – carefully and in a growth-friendly way.
At the same time, budget deficits and government debt must be controlled. The newly announced deficit reduction programmes here in the Netherlands and in the United Kingdom reflect growing realism that future generations need to inherit healthy public finances.
Over the longer term, financial stability will depend on the emergence of a smarter global financial system, grounded in a better understanding of risk, stronger international coordination, and more effective governance.
But the regulatory response should be well-targeted and proportionate, avoiding unintended consequences.
I single out Western economies, because another aspect of the recent recession has been the remarkable resilience of the emerging economies, notably China.
While advanced economies have lost around two years of trend output growth, China has maintained rapid growth. In the third quarter of this year, China posted a GDP growth rate of 9.6%, a bit lower than in the early part of the year but still an enormous figure.
This shift in the economic world order is also evident in the energy sector.
During the first half of this century, global primary energy demand is likely to double.
One of the key drivers behind this demand surge is simply the growth of the world’s population – from around 6.5 billion today to over 9 billion by mid-century.
The other key driver is the economic growth in the emerging markets.
In countries like China and Brazil, hundreds of millions of people are buying the fridges, telephones and cars their parents and grandparents could not even have dreamed of.
Billions more people want to follow their example.
So what does this surge in energy demand look like in practice?
Well, in 2009, global oil demand was 20% higher than in 1995, with all the net growth coming from non-OECD markets.
Between today and 2050, worldwide car ownership could triple to around two billion, driven mainly by new car owners in China.
Last year, China overtook the USA as the world’s largest vehicle market, with sales of nearly 14 million cars and trucks. And it’s still early days: there are fewer than 30 cars for every thousand inhabitants in China, compared to more than 750 in the USA.
In responding to these changing demand patterns, Shell wants to move fast.
In our Downstream business, we plan to exit from over a third of our retail markets by the end of 2012, and we also plan to reduce our refining capacity by 15%, from a 2009 baseline.
This creates room for us to invest selectively in growth markets. In May, we opened the Shell Eastern Petrochemicals Complex in Singapore, our largest fully integrated refinery and petrochemicals hub to-date.
In China, our business is growing fast. For instance, Shell has become the leading international oil company marketing lubricants and, vice versa, China is already our number one market for the Shell Helix brand.
So that’s the picture for demand and how Shell is following that demand as it shifts around the world.
Now, what about supplies?
The truth is that it will be a huge challenge for energy supplies to keep up with the growing demand, even if we include all the world’s known energy types, from hydrocarbons to renewables and nuclear.
Let me give you an idea of the supply challenge:
According to the International Energy Agency, the world will need to invest over one trillion dollars every year for the next twenty years in new energy projects and power generation.
In this context, I don’t think anybody can accuse Royal Dutch Shell of not taking our share of the responsibility:
We have been one of the world’s largest investors for several years in a row – right through the recession – and, going forward, we plan $25-27 billion in net investments every year until at least 2014.
Our spending on research and development has been the largest of any international oil and gas company – some $1.1 billion in 2009. When you include the national oil companies, our R&D investment is second only to that of China National Petroleum Corporation, CNPC.
But even if the world makes available sufficient cash, it will be a race against the clock.
This is especially true for oil.
By 2020, the world will need about 40 million barrels per day of new oil production on stream, from fields that haven’t been developed yet.
That’s equivalent to four times the current production of Saudi Arabia & ten times that of the UK and Norway areas of the North Sea.
The re-emergence of Iraq as a major supplier will help, but will not by itself change the structure of global oil supply.
That might happen if other major resource holders open themselves to higher levels of foreign direct investment.
Or it might happen if technological innovation transforms difficult oil – e.g. from deep water or shale – into easily producible oil, much as recent innovations in natural gas production have transformed tight gas in North America into low-cost gas.
Which brings me to natural gas.
At Shell, we think that global gas demand will rise by 50% by 2030, a faster growth rate than oil.
Half of the global demand growth will come from Asia. And China, in turn, will account for half of Asia’s demand growth.
In the Middle East and North Africa, the demand for natural gas is also surging – fuelled by economic growth and industrial expansion. As a result, that region’s gas consumption will approach European levels by 2020.
In the OECD markets, the growth of gas will depend primarily on the power sector. For instance, here in the Netherlands, better home insulation and more efficient boilers have cut in half the average gas consumption per household over the past thirty years. But in the past ten to twelve years, electricity consumption has increased by over a third, as a result of increased use of computers, televisions and air conditioning.
So what about gas supplies? Well, in contrast to most of the other known energy types, supply is actually not a bottleneck. Rather it’s a story of expansion.
The past few years have seen a boom in tight gas, shale gas and coalbed methane in North America. As a result, the gas resource base in North America has more than doubled in the past three years and is now large enough to meet current consumption levels for over a century.
The effects of this supply increase are felt in other parts of the world, too.
For one thing, it has triggered a search by other countries for their own new gas resources. Outside the USA, Shell is active in China, Australia and currently studying South Africa’s potential
Here in Europe there’s also a lot of potential for tight gas, coalbed methane and shale gas. For example, one speculative shale gas formation runs along the Dutch-Belgian border. It’s quite amazing if you see the seismic map. It makes you wonder if William of Orange and his sons, when they pushed back the Spanish Habsburgs, were the world’s first geologists, disguised as princes.
To develop these types of resources in densely populated Northern Europe is very challenging.
We will have to continue to push the latest technologies. For example, new drilling technologies allow us to drill 20-30 wells from a single above-ground location.
While we don’t know yet what the impact will be, these types of natural gas resources could help lift European production levels after 2020.
Worldwide, the International Energy Agency believes there’s enough technically recoverable gas in the ground to supply the world for over two centuries at current production levels.
But that’s not the only reason why I say that natural gas is abundantly available.
The other reason is the growth of the liquefied natural gas industry.
LNG supply growth is around 6-8% per year, three times the rate of natural gas overall.
In Asia, countries like Indonesia, Malaysia, Thailand, Singapore and Pakistan will all start receiving LNG soon.
Even in the Middle East, there is growing demand for LNG, from countries that don’t have huge gas resources. For instance, one of the first cargoes of LNG from Sakhalin in Russia went to Kuwait.
China, too, will continue to want LNG, because it’s an important source of flexible gas supply to demand centres in the coastal provinces, supplementing the main pipeline supply from the western regions.
Looking at the European gas supply picture, we think that by 2020, just over a third of Europe’s gas supplies will still be produced in Europe – that includes Norway. At least one-fifth will be covered by LNG imports. And the remaining 40-45% will come in by pipeline. After 2020, LNG imports will continue to increase, compensating for declining domestic production. Russia, will remain Europe’s key supplier – not just of pipeline gas, but increasingly also of LNG.
In short, the world’s governments and utilities can feel confident about investing in natural gas for the long term, including here in Europe.
Now, you could argue, why does all this matter? After all, in a world that needs to cut greenhouse gas emissions, we need to focus on the technologies that will help us to do that.
Well, natural gas is a vital ally in the world’s search for cleaner electricity and a more sustainable energy future.
I say this as the representative of a company that is also building one of the world’s largest biofuels businesses, with strong emphasis on technologies and policies that will allow us to produce them sustainably.
We also run a modest wind business, mostly onshore, in North America. And, as some of you may know, we also jointly own and operate the first-ever Dutch offshore wind farm. That has been intellectually challenging and exciting. One thing we’ve learned is that it’s not possible to build and operate an offshore wind farm profitably without government support.
Perhaps that’s something to bear in mind going forward – since there are plans to spend over 4 billion Euros in subsidies on two new offshore wind farms in the north.
These two wind farms combined would have a joint installed capacity of 600 MW of electricity but, given their intermittency, would deliver roughly the same amount of electricity per year as a modern 200 MW gas plant would deliver at a capital cost of Euro 280 million.
The environmental benefits of natural gas plants are also strong: modern, combined cycle gas-fired power plants emit 50% less CO2 than modern coal plants like the ones being built in the Netherlands as we speak.
And they emit 70% less CO2 than old (steam-turbine) coal-fired plants of which there are still hundreds in operation today in Europe, America and China, including a few here in the Netherlands.
That’s why, for most countries, taking quick action to let natural gas rather than coal grow to meet power demand will prove to be the cheapest, surest, fastest and most comprehensive way there is to reduce CO2 emissions.
Netherlands and Europe
Which brings us to the final theme: how can the Netherlands as an EU member state adapt to this changing world and help forward the agenda of sustainable and secure energy?
At the national level, the Netherlands faces the challenge of substantial additional coal-fired power capacity coming on stream in the next few years.
The electricity will to an important degree be exported to other EU member states, but the CO2 emissions will count as Dutch emissions.
On the positive side, and if you take a European perspective, these are modern plants – they can mix in biomass – and Rotterdam is one of the best possible locations from a logistical point of view.
But going forward, the country would be wise to continue its focus on its role as a natural gas hub. This means keeping up investments in gas logistics and technologies.
With regard to climate policies, it’s important that the Netherlands continues to be an advocate of carbon markets, because these remain the best mechanism to support a fast and broad deployment of low-carbon technologies, even though international enthusiasm for emission trading schemes is currently low.
One of these low-carbon technologies is carbon capture and storage, or CCS.
The International Energy Agency has said that if rapid deployment of CCS can start this decade, it could account for nearly a fifth of the total CO2 reductions needed by 2050.
All elements of CCS – capture, transport, re-injection and underground storage – are in operation today.
For instance, our Pernis refinery collects a small amount of CO2 and pipes it to greenhouses to boost the growth of tomatoes in the summer.
What we need now is a series of demonstration projects that allow us to prove viability and cost-effectiveness of CCS at an industrial scale.
Shell already is a partner in a series of demonstration projects around the world. This includes the Gorgon liquefied natural gas project in Australia.
The IEA believes that CCS will require $1.3 trillion of investment to deliver those emissions reductions. So it’s a huge growth area that will generate new jobs.
The United Kingdom has made a clear decision to participate in that growth.
I hope the Netherlands will maintain its early lead in this field and participate in the global expansion of CCS.
If you ask me, the challenge of our time will be to secure sufficient and affordable supplies of energy, food and water, while protecting the planet’s capacity to sustain human civilisation.
The Netherlands is well placed to help advance a positive agenda - through its modern agricultural sector and its experience in water management.
However, Dutch universities and students are in fierce competition with their counterparts elsewhere in the world. And a truly global enterprise like Shell needs to recruit the best talents, wherever they are from.
That’s why education is so vitally important.
In the Netherlands, Shell and other companies have been involved in the Jet-Net programme since 2002. The goal is to promote interest in the sciences among secondary school pupils. Shell employees focus on 29 schools, clustered around the main Shell locations.
The good news is that since 2000 there has been a 60% increase in the number of first-year students who opt for universities of science and technology, and that is in no small part thanks to the Jet-Net programme.
President of the European Commission Mr Barroso has called the Jet-Net programme a best practice in Europe.
Next year, a similar programme will begin at the European level, with support from Shell.
I’d also like to add that Shell people in the Netherlands are working together with universities and the government in the areas of chemistry and physics to create real centres of excellence.
Ladies and gentlemen, I’ve tested your patience, so let me close:
We’ve seen how the global economy and energy patterns are changing. That’s happened before and it will happen again.
The challenge is to adapt and help drive these developments, rather than look the other way.
Our futurewill depend to a large extent on sustainable energy and innovation: we can’t have one without the other.
The Netherlands as an EU member state has plenty of human capital and innovative strength. Let’s use it.
Thank you kindly for your attention.