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Energy strategies for sustainable development

Speech given by Peter Voser, Chief Executive Officer, Royal Dutch Shell plc, at the Central Party School of the Communist Party of China, Beijing, 21 March 2010.
Peter Voser

As China continues to develop, the country’s energy needs increase. The Chinese leadership has set itself an unprecedented goal: reducing the energy-intensity of the economy and the carbon-intensity of its energy system while maintaining a lightning pace of development. At present, China is still heavily reliant on coal for electricity, but is on course to deploy low-carbon technology more quickly than other countries, perhaps even defying the “30-year law” of new technology deployment. That law, identified recently by Shell scientists, refers to the fact that in the twentieth century every new energy technology took 30 years to gain a 1% market share following commercial introduction. In this speech, Peter Voser lays out Shell’s views on the long-term global energy trends, historical patterns of energy technology deployment, and what governments and companies can do to build a more sustainable energy system.

Energy strategies for sustainable development

Thank you, it’s good to be in China – the country where even the sky is not the limit.

And it’s an honour to be here at the Central Party School, and engage with such a distinguished audience.

One of the things Shell representatives like about engaging with Chinese audiences is that we share a passion for thinking about the long term.

I’ve been asked to provide Shell’s views on global energy trends. I’ll be happy to do so. And I look forward to a lively discussion.

In that discussion, feel free to ask me all the questions you have always wanted to ask the CEO of a global energy company, so long as you don’t expect me to have all the answers.

In fact, given the breadth of the experience you represent today, I hope some of the answers will come from you.

Let me say straight away that I won’t say much about development in general. I will restrict myself to speaking about one of sustainable development’s crucial components: sustainable energy.

I have prepared some remarks to kick off our discussion. I propose to organise these as follows:

To start with, I shall give you a global outlook on energy in the post-recession landscape we are slowly entering.

Secondly, let me discuss what countries and companies can do to build a more sustainable energy system that also delivers security of supply. In this section, I will use examples from Royal Dutch Shell’s activities around the world, because these are the ones I know best.

At the end of my presentation, and with your permission, I will make a few suggestions that could be considered for China’s 12th 5-year plan.

Energy outlook

But, first, the future of energy.

A question we at Shell get asked sometimes is whether the current economic environment changes our views about the long-term trends in energy.
The short answer is that some of our assessments remain the same; others we have modified.

Let me remind you of the three key long-term trends that we identified as part of our scenario work two years ago.

We said that:

The global demand for energy would surge as a result of population growth and industrialisation. So that by 2050 humankind could be using double the amount of energy we do today.

We also said we expected greater price volatility and supply tightness. We did not see how new, additional oil and gas supplies could be brought on stream at the same pace at which demand was growing. And we said there would be a need to mobilise all forms of energy, ranging from difficult-to-produce oil and gas, to coal, nuclear and renewables.

Third, we believed that environmental stresses would continue to get worse, triggering a patchwork of national and regional responses by governments, cities, citizens and companies to speed up the deployment of cleaner energy technologies.

If we look through the current business cycle, the fundamental trends highlighted in the Shell energy scenarios remain valid:

The economies of China and other developing nations have shown resilience and dynamism, underpinning future growth in global energy demand.

We still believe it will be a challenge to bring on stream sufficient energy supplies to prevent a tightening of supply in the coming decade, particularly for oil, and this is despite the new supplies from Iraq.

The scientific evidence on environmental stresses continues to harden, and national positions do indeed reflect a patchwork of policies and cooperative arrangements between ad-hoc, key-party coalitions.

Concerns about security of energy supplies in consumer nations remain.

Having said that, there are some modifiers.

One is the unexpected severity of the economic downturn. As a result, we believe that the economic growth trend after the recovery will be below the long-term trend before the recession, to an extent that remains uncertain.

The economic outlook has gradually brightened in recent months. Yet the yawning public deficits across the world, and the need to at one point withdraw vast government stimulus packages in many countries, are reminders that the path to recovery is littered with risks.

Another modifier is the very fast ramp-up in production of unconventional gas in North America. This changes the US gas supply picture dramatically and frees up supplies of liquefied natural gas, LNG, for other countries. If the success story of unconventional gas can be repeated elsewhere, for example here in China, the long-term supply in natural gas should improve considerably.

And, finally, we now expect to see a greater impact than we had initially assumed of government policies to reduce the energy and carbon intensity of economic growth. This could lead to accelerated declines in energy-intensity of economies.

Against the backdrop of rising energy demand and growing environmental stress, there’s a growing sentiment around the world that we need a more sustainable energy system.

Which begs the question: How do we transition the economy to a lower energy intensity one, and the energy system from a high-carbon to a low-carbon one? How much time will it realistically take and what can countries and companies like Shell do to speed up the process?

In answer to that, Shell’s scenario work shows that by the middle of this century 30% of the world’s energy could come from wind, solar and other renewable sources.

Everything from cars to homes will be more energy efficient than what we know today. There will be a greater variety of transportation fuels, including biofuels, electricity and hydrogen.

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

History provides a parallel: Just as the growth of oil and gas did not stop the world from using coal, so the growth of wind and solar won’t end the use of oil and gas – on the contrary, the coming decade will see continued growth in fossil fuels demand.

Technology deployment

understand why the energy transition will take time, one has to understand the nature of the energy industry.

Our industry is very different from, say, the consumer electronics industry.

A mobile phone company may have 18 months to develop and market a new mobile phone, if it wants to beat the competition.

In the energy sector, the scale of investments and new projects is massive, and “18 months” feels more like “18 minutes”.

We’ve researched all of the current energy types and found that in the twentieth century, it took 30 years for new energy types to capture 1% of the market.

For instance, biofuels are reaching their 1% share of the oil market around now, which is equivalent to 0.5% of total energy. Wind could do so by the middle of this decade, roughly three decades after the first large wind parks were built in Denmark and the United States, and thanks also to the huge effort made here in China to deploy wind capacity.

So why does it take so long for new energy technologies to become widely available?

The problem is that scaling up involves learning by doing. It simply takes time to build sufficient human and industrial capacity.

Following a scientific breakthrough in the R&D lab, it usually takes three more years to build a demonstration plant, one year to start it up, and two to five years to achieve a reliable operation.  So, from the first demo to the first commercial plant easily takes a decade. And it can take another decade to build a dozen such plants, or obtain social and political acceptance.

Similarly, in the wind power business, it took several decades of learning to move from the 50 KW turbines that were installed in the mid-1980s to the powerful 3-5 MW turbines we install today.

The capacity of an industry to absorb investment is limited in the early stages of deployment. It makes no sense for governments and companies to try to spend $1 trillion in a $30-billion industry, which is where solar power is today.

We found that this 30-year law applied across energy types, across borders, and across economic models. For instance, it applied to nuclear, where the driving forces behind the early deployment in the 1950s were the United States, the Soviet Union and the United Kingdom.

The 30-year law is not a natural law. It is a societal one.

And it should in principle be possible to speed up the learning curve and the deployment of new technology, especially if supported by governments.

But a word of caution: our Blueprints scenario, which is the one that assumes 30% renewable energy by 2050, already assumes a faster ramp-up for renewables than history tells us to expect.

It’s a scenario that optimistically assumes that twenty years from now, most new energy types will have captured 1% of the market, including solar power. It also assumes that carbon capture and storage is fully available and that there is significant carbon pricing and trading.

Role of governments

So when it comes to reducing the environmental footprint of energy use, there are no easy and quick successes.

At the same time, we all feel a sense of urgency, and are looking for ways to make progress.

Fortunately, there is a lot we can do, if governments and companies work together.

In Copenhagen, international support was given to the aim to limit global temperature change to 2 degrees Celsius.

The implication is that by the later parts of this century, the world needs a zero-emission electricity sector and a near-zero emission transport sector.

So a lot of thinking will have to go into current energy planning, given that a lot of the infrastructure that is built today will still be around by the end of this century.

To decarbonise the global economy, China, the European Union and the United States have each made important announcements.

The EU has committed to at least a 20% emissions reduction by 2020 compared to 1990, and the United States to a 17% reduction by 2020 compared to 2005. In each case, deeper cuts are foreseen beyond 2020.

China, as you know, has announced a 40-45% voluntary reduction of carbon-intensity per unit of GDP by 2020 compared to 2005, and the goal of 15% of China’s total primary energy mix coming from non-fossil sources by that same year.

This is in addition to forest expansion, as well as the 20% energy intensity reduction target that formed part of the 11th five-year plan – (for the period 2006-2010).

These kinds of voluntary targets can provide strong motivations for action.

Action that China is taking in the form of, for example, the Ten Key projects, the top-1000 Program, and the Small Plant Closure Program. From what I understand, these are well on track to achieving their goals. The appliance and standards program is also performing well.

In our Blueprints scenario, the most optimistic scenario we published in 2007, we saw China’s carbon intensity falling by over 14% between 2005 and 2020. A more recent assessment suggests that China is on track to reach a 32% reduction for that period, despite stronger GPD growth and higher overall energy-use than we had assumed.

And the reason for this a much faster decarbonisation of the energy system than we had assumed, due to faster scaling up of natural gas, nuclear, and wind.

The world mix will include some countries going faster and some slower.  Our scientists recently looked at wind deployment in more detail and found that the current rate of deployment at world-scale fits the 30-year law. But that China is moving a lot faster than the global average.

Which brings us to the need for international cooperation.

As Prime Minister Wen Jiabao has indicated, China is also looking to participate in international cooperation to address climate change.

At Shell, one area where we believe China’s input is needed is in developing carbon markets.

Without the development of several large carbon markets in the next five years, it is difficult to see how large volumes of private capital will flow from developed countries into emission reduction projects and forestry projects in developing countries. And it’s unlikely that public financing will make up the difference.

This is especially true for carbon capture and storage, or CCS. Even if the public sector funds 100% of the required capital injection, it is difficult to see how any company will run a CCS plant without a carbon price incentive to justify its operational costs.

Having said that, there is a lot companies can and are already doing to help make available secure and sustainable energy supplies.

Company actions

To my mind, the contribution by the oil and gas sector to sustainable energy should focus on three areas:
... first, making more energy available,
... second, reducing emissions from fossil fuels in general and our own operations in particular,
... and, third, increasing the share of low-carbon energy, which in Shell’s case means: more natural gas and more biofuels.

To make more energy available, our industry will have to pioneer and perfect seismic technologies and drilling techniques that allow us to produce gas and oil . . . from ultra-deep waters, in Arctic conditions, from complex geological reservoirs, and from unconventional resources like tight gas and shale gas.

Here in China for instance, Shell is the operator at the Changbei tight gas field, under a Production Sharing Contract with PetroChina, signed in 2005. The field started commercial production on 1st March 2007 and reached the annual production target in 2008, two years ahead of schedule, and in time for the Olympic Games. It delivers natural gas to Beijing, Shandong, Hebei and Tianjin.

We need new technology, not just to get more oil and gas out of the ground, but also to develop new ways to distributing and using energy.

For instance, the ability to liquefy natural gas and ship it has linked new suppliers to new customers.

Shell has been one of the companies driving the development of LNG. In 1964, the world’s first commercial natural gas liquefaction plant came on stream in Algeria, designed by Shell.  That same year, we undertook the management of the first two LNG ships ever built.

Building on that experience, today Shell is the no.1 supplier of LNG to China.

The industry’s second major area of focus has to be to increase energy efficiency and reduce emissions from our own operations.

Here in China, Shell experts have been working together with partners and clients in the electricity, petrochemical and refinery sectors to increase energy efficiency. In some cases, energy bills were cut by as much as 10%.

Take the Nanhai petrochemicals project, where we work together with our partner CNOOC. The Nanhai project’s overall energy use is at least one-third more efficient than the national average, while it consumes 95% less water than other domestic petrochemicals plants.

Our third major area of focus as an industry is to invest in low-carbon fuels and technologies. I already mentioned CCS – a crucial technology to reduce emissions from power stations and large industrial facilities.

In fact, the international and national oil and gas industry can assist in these efforts by offering our collective expertise in capturing and transporting the CO2 and storing it underground.

When it comes to low carbon energies, each company has its own choices to make.

At Shell, the main low-carbon focus, apart from CCS, is on increasing supplies of natural gas as the cleanest-burning fossil fuel, and on increasing supplies of sustainable biofuels.

In our upstream business, natural gas will make up half of our production by 2012, and growing beyond that.

We all realise that coal is important for China today, and will be important tomorrow. And I know that a lot of work is being done to improve the energy-efficiency of China’s coal plants.

But we also know that by far the quickest and cheapest route to cleaner air is to increase a country’s reliance on natural gas in the electricity sector.

Natural gas plants are more energy-efficient than coal plants, and a modern Combined Cycle gas plant emits half the CO2 of a supercritical coal plant.

That’s why we fully support and hope to playe a role in increasing the share of natural gas in China’s energy mix. We will make available more LNG for China’s coastal region. And we are keen to partner with Chinese companies in order to assess and unlock China’s potentially large tight gas, shale gas and coalbed methane resources.

As a result, by 2020, Chinese gas consumption could quadruple from around 80 bcm per year in 2009 to over 320 bcm, making it the third largest gas market in the world.

What about mobility? Well, a lot of the gas we just spoke about will go into powering the growing number of electric vehicles in China.

Our Blueprints scenario has electric mobility accounting for 40% of the world’s passenger miles by 2050. That’s huge.

But we also know that the total number of vehicles on the world’s roads will probably more than double to around 2 billion, which means there will continue to be a huge thirst for liquid fuels, including biofuels.

Indeed, Shell is already the world’s largest distributor of biofuels. We are currently working very hard in the R&D space to make available the next generation of biofuels, the ones  that can be produced from non-food biomass like straw or even algae. But it may take another five years before they will become commercial.

In the meantime, we must focus on today’s biofuels. Today's biofuels are critical to reducing emissions from transport. Tropical ethanol from sugarcane can reduce fuel-related emissions by as much as 90%. That’s one of the reasons why we are currently in talks with Cosan, Brazil’s largest biofuels producer, to form a 12-billion dollar Joint Venture.

What this shows is that oil and gas companies can do a lot in the space of low-carbon energy, but we must all specialise, and focus on the needs of our customers and stay close to our core skills.

And that’s exactly what we’re doing by helping China to help increase its access to domestic and foreign resources of natural gas.

Recommendations

You asked me for – and I promised – some recommendations for China.

I do so with hesitation, because I am not Chinese, and I don’t know all the ins and outs of China’s energy policies and achievements.
So let me focus on what I know best:

First, I would encourage China to continue with its efforts to reduce the energy intensity of its economy. Your country is in a phase of development and industrialisation, traditionally a phase of high energy intensity. And that’s why it seems useful to set another reduction target for the next five-year period.

With your country’s recent announcement to reduce carbon intensity by 40-45%, an important new target has been added.

Keeping both targets as drivers for action in the 12th five-year plan would help strengthen China’s international leadership role in developing cleaner energy.

Secondly, as I already indicated probably the cheapest and quickest way to reduce energy intensity and carbon intensity on the supply-side is to increase the country’s reliance on natural gas. Gas plants are more energy-efficient and emit much less CO2 than coal plants. Nuclear power too has a role to play here, but the capital costs involved are much greater.

Finally, let me come back to carbon pricing.

A carbon price is essential for the deployment of technologies whose only differentiator is lower emissions, yet these are the technologies we need in the coming decades.

Of course China should continue to make full use of the CDM mechanism. But in the longer term, the CDM on a stand-alone basis won’t be enough to fund all the necessary low-carbon projects. The CDM needs the big cap-and-trade systems to buy the credits it generates. Without them, there is no market. Japanes and European buying of CDM credits has its limits and that’s why we need carbon markets to expand into North America and elsewhere.

So I would be interested in hearing your views on whether the voluntary regional emission trading schemes at the Shanghai, Tijanin and Beijing Environmental & Energy Exchanges are likely to be continued and perhaps even expanded into a more formalised system, with international links.

This would allow China to be an architect and a learner at the same time, obtaining a competitive advantage.

And, ladies and gentlemen, isn’t that what it is all about?

Whether we lead countries or multinational companies, I think all of us share the aspiration to help shape today’s markets and help shape the future, for ourselves and our children.

We as leaders have the responsibility and the ability to promote the interests of the countries, cities and companies we lead – and at the same time to pass on to future generations as many options and choices as we enjoy today.

From Shell’s point of view, this means supplying energy that powers people's lives today and sustains their way of life tomorrow.

Thank you.