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New Energy for a Changing World

Speech given by Peter Voser, Chief Executive Officer, Royal Dutch Shell plc, at the London Business School Global Leadership Summit, London, 5 July 2010.
Peter Voser

With economic recovery underway, the steady upward march of global energy demand is resuming. Almost all of the new demand will come from the developing world, thanks to growing population and increasing personal prosperity. The world will need to develop all types of energy in order to keep up, while simultaneously addressing the threat of climate change. That means everything from renewables like wind and biofuels to fossil fuels and nuclear power. In this speech, Peter Voser discusses the challenges of ensuring a secure energy supply while at the same time building a cleaner energy system. He explores the role of technology in responding to the challenges, as well as the practical steps already being taken to begin the transition to a new energy future.

Third, the key role of technology in making the transition.

As you know, the world’s developing countries have so far weathered the economic crisis in much better shape than the developed countries. That’s a testimony to their dynamism and underscores the momentum in their vibrant economies.

And of course there are signs of a fragile recovery in the rest of the world.

Already we see signs of the effects of increased demand in higher prices for some of the important goods we buy, such as steel.

Likewise for energy, the long-term trend of rising demand has resumed, after a pause caused by the economic crisis.

Global energy demand will nearly double by 2050. Almost all of that increase will come in the world’s emerging economies.

That’s partly due to population growth. The world will be home to about 9 billion people in 2050, up from 6.8 billion today. Most of those newcomers to humanity will be in developing countries.

At the same time, increasing wealth is improving living standards and raising millions of people out of poverty in developing regions. As incomes grow and living standards improve, people are buying their first cars or refrigerators. Which of course need energy.

The Shell scenarios team estimates that some 800 gigawatts of electricity generating capacity will be built in Asia just in the next 10 years. That’s the equivalent of Western Europe’s entire installed generating capacity.

The impact on transport fuels will be equally dramatic. Worldwide I expect the number of cars and trucks on the road to rise from about 900 million today to about 2 billion by mid-century.

Shell is just one of many companies that view this growth as a tremendous opportunity.

We recently completed our largest fully integrated refinery and petrochemicals complex in Singapore to help meet growing demand in Asia for the raw materials used to make plastics and other everyday products. It’s the biggest petrochemicals investment in our history.

...800 gigawatts of electricity generating capacity will be built in Asia just in the next 10 years. That’s the equivalent of Western Europe’s entire installed generating capacity.

Good morning. It’s an honour to be here at the London Business School.

I’d like to talk about three things today. First, how rapid growth in developing countries will affect the energy picture for all of us. Second, what the new energy future will look like and what Shell is doing to get there.

Meeting demand

As energy demand accelerates, keeping up will take concerted effort.

Even assuming heroic steps to use energy more efficiently, the world will need to develop all energy types.

That means everything from traditional fossil fuels and nuclear to renewables like biofuels and wind.

Indeed, unless we concentrate on increasing energy supplies, I think we could experience shortages in the decades ahead, especially for oil. And that’s even when you include additional production from Iraq.

To illustrate the task ahead, because of natural decline in existing fields, by 2020 the world will need to replace 40 million barrels of daily oil production. Most of it will need to come from resources that haven’t even been found yet. Forty million barrels a day is about four times what Saudi Arabia produces, or 10 times what the U.K. and Norway together produce.

The International Energy Agency figures the world will need to invest about $1.1 trillion every year for the next 20 years in new energy projects. That’s the equivalent of harnessing almost all of Canada’s current yearly production of goods and services just to build energy projects.

That’s the picture on the supply side. But there’s plenty to be done on the demand side, too.

Greater energy efficiency has a critical role to play. Particularly in developed countries. We need an energy revolution on the demand side, where we can make big changes relatively quickly.

I believe those of us in the developed part of the world have an obligation to make more efficient use of energy as part of our contribution to fuelling the rise in living standards in the rest of the world.

Government rules like the ones to improve vehicle fuel economy in Europe and the USA will help. But more effort is needed. And we all have a role to play, including companies and consumers.

We’re all well aware that there are also significant environmental implications to accelerating energy use.

Scientists tell us the world needs to cut greenhouse gas emissions in half by mid-century, if we hope to avoid the worst effects of climate change. So, the world will need twice as much energy, but half the emissions.

That’s a big ask.

New energy future

Which brings me to my second theme. We need to urgently take the necessary steps to address this energy challenge. By “we” I mean all of us in the developed world. We have the knowhow and the resources. And we know our responsibility to future generations to make smarter, more efficient use of our precious energy resources. So let’s get going.

The good news is, the challenges we face have already prompted companies and society to take the first steps toward a new energy future.

Let me paint my vision of what it might look like.

We need an energy revolution on the demand side, where we can make big changes relatively quickly.

I think we are moving toward a world powered by cleaner fossil fuels, more renewable energy and nuclear. It will be a world where cars, appliances and buildings are much more energy efficient than they are today.

Biofuels, wind and solar will grow rapidly from their small base. Renewables could make up 30% of the world’s energy by 2050, if you include hydroelectricity. Fossil fuels and nuclear will make up the rest.

In the transport sector, consumers will enjoy a wider array of fuel choices. I expect vehicles will be powered by everything from advanced petrol and diesel to biofuels, electricity and eventually hydrogen.

Indeed there are already more than 3 million hybrid electrics on the road today, combining the efficiency of electric power with the convenience and range of liquid fuels.

However, describing this cleaner energy system is a lot easier than creating it. The transition will take time. Indeed, longer than many people think, judging by the opinion polls about energy that I see from time to time.

History shows that once a new energy technology is proven, it takes about 30 years for it to achieve 1% of the overall market.

Biofuels are just now reaching 1% of the oil market, or about 0.5% of total energy, after decades of development and government support. Wind may get to the 1% mark in the next few years, nearly three decades after the first big wind farms were built in Denmark and the USA.

New energy sources take time to develop because of the massive scale of our modern energy system, which has been more than a century in the making. And because of the need to build industrial capacity and learn by doing.

For an example of how technology develops over time, consider that today’s largest wind turbines are nearly 100 times more powerful than the ones installed in the mid-1980s.

And we can’t forget that today’s new energy technologies may run into their own resource restraints and environmental issues as they grow.

Take lithium for car batteries. Most lithium currently comes from Chile and Argentina. If consumers buy electric cars at the pace some people predict, lithium could be in short supply by the end of this decade, unless there’s action right now to increase production capacity. And of course do so with minimal impact on the environment.

Shell’s contribution

As the world moves toward a cleaner energy system, companies, governments and consumers will all need to contribute.

At Shell we’ve already started. And we’re putting our money where our mouth is.

For beginners, we’re increasing our production of natural gas, the cleanest-burning fossil fuel.

Natural gas emits 50% to 70% less CO2 than coal when used to generate electricity. Shifting from coal to gas is the fastest, least-expensive way to lower emissions from power generation. That’s important because power generation accounts for about one-fourth of global greenhouse gas emissions.

History shows that once a new energy technology is proven, it takes about 30 years for it to achieve 1% of the overall market.

By 2012 more than half of our production will be natural gas. And that will continue to grow.

Just in the first half of this year we and our partners announced agreements to acquire substantial natural gas acreage in the USA and Australia in deals worth more than $8 billion. We also continue work on major liquefied natural gas projects in Australia and the Middle East that will provide additional gas to LNG customers around the world, including in Europe.

Then there are biofuels. Of all the low-carbon transport options, we think biofuels can make the greatest contribution over the next two decades.

We’re already the world’s largest distributor of biofuels. And we’re currently in discussions with a Brazilian company to form a $12 billion joint venture to produce ethanol from sugar cane and distribute it through our combined retail networks. Not all biofuel is created equal, but ethanol from sugar cane can cut CO2 emissions by 70%-90%.

Now, I know expanding the biofuels industry does raise social and environmental issues. But I think they can be addressed.

For instance, we have introduced sustainability clauses in our supplier contracts. Suppliers must ensure their fuels are not linked to violations of human rights and were not cultivated in areas rich in biodiversity. By the end of 2009 about 80% of our suppliers had agreed to at least some of our sustainability clauses.

We’re also working with businesses and NGOs to push for international sustainability standards.

At the same time, we’re partnering with companies and universities on advanced biofuels, some of which could be made from non-food sources such as crop residue. I’ll come back to that in a minute.

Cleaner fossil fuels

As I said earlier, fossil fuels will remain a big part of meeting consumers’ energy needs for decades to come. In order to produce cleaner fossil fuels, we’re working on ways to capture CO2 emissions from power plants, refineries and other large industrial installations and store it safely underground.

The International Energy Agency estimates that carbon capture and storage could account for more than half of the global CO2 reductions needed this century to avoid the worst effects of climate change.

At Shell we’re working on large-scale commercial projects, as well as research partnerships with companies and universities.

One of the commercial projects is the Gorgon liquefied natural gas development in Australia, where we have a 25% stake. There we and our partners plan to capture some 4 million tonnes of CO2 a year. As of the end of last year, it was the world’s largest confirmed full-scale storage project.

There has been recent debate about the possible role of CO2 storage here in the U.K. Much of the focus has been on coal-fired power stations. I think it’s worth pointing out that the technology works for gas-fired plants, as well.

It even has some advantages. For one thing, since gas plants produce half the CO2 of their coal counterparts, you only need half the available storage.

Shell’s other major focus is on energy efficiency – in our own operations and for our customers.

For our own operations, for example, we have an ongoing energy management programme at refining and chemicals plants. And we installed an advanced information system that helps operators improve efficiency at plants. Together these led to a 2% energy saving in 2009 at our manufacturing facilities.

We’re also introducing products and services that help our customers use less energy. A recent example is Shell FuelSave petrol. The most advanced fuel economy product in the market, it helps drivers save up to one litre of fuel per tank, based on a 50-litre fill-up.

Since last year, we have launched Shell FuelSave in eight countries across Europe and Asia. It’s been a hit with consumers and our volumes have risen in the countries where it’s available. We will soon introduce Shell FuelSave here in the U.K.

The International Energy Agency estimates that carbon capture and storage could account for more than half of the global CO2 reductions needed this century to avoid the worst effects of climate change.

Technology and Innovation

This brings me to the final point I’d like to cover.

Technology and innovation will be critical to producing enough energy to meet customer needs in the decades ahead -- while at the same time safeguarding the environment for future generations.

It’s innovation that has delivered the recent boom in gas production in the USA, for instance, transforming the country’s supply outlook.

Thanks to advances in drilling and production techniques, tight gas, shale gas and coal bed methane have become economically viable.

These are all abundant gas sources that are trapped in dense geological formations, making them hard to tap. Tight gas, for example, is natural gas trapped in reservoirs amid tightly packed rock grains – so tightly packed that the gas must travel through passages as narrow as one-hundredth the width of a human hair.

As a result of these advances, the USA may now have 100 years’ worth of natural gas supplies at current consumption rates.

The same techniques that have worked so well in North America will be applied in other parts of the world.

For instance, we recently announced plans to explore for tight gas in the Sichuan Basin with our partner China National Petroleum Corp.

To meet the challenge of producing twice as much energy with half the greenhouse gas emissions, the world will need many more innovations like the ones that unlocked tight gas.

That’s one reason why at Shell we’ve recently adopted a new technology strategy, with the explicit aim of making us the most competitive and innovative energy company in the world. It has three principal goals.

First, we want to come up with innovations that improve our existing business activities, or that play into existing markets. FuelSave, which I mentioned a minute ago, is a good example.

The second goal of the strategy is to develop more of the groundbreaking technologies that open up new markets. Our work on advanced biofuels is a good example. We believe these hold much promise as a means to drive down CO2 emissions in the transport sector over the longer term.

The third area of focus is emerging technologies. These are higher risk opportunities that may lead to new businesses in the longer term and allow us to adapt to major shifts in the global energy market in the coming decades.

Open innovation

At Shell, we recognize we haven’t got all the answers. No business can rely solely on ideas from within its own four walls.

Of course, this is a well-trodden path: Cisco and IBM are just two companies that have famously benefitted from open innovation.

We have also had successes. Take our GameChanger programme, which we set up in 1996.

It provides support for inventors inside or outside Shell to move from a rough idea to the proof-of-concept stage. Around half of these ideas come from university students and professors engaged in fundamental research.

Ideas may then be developed further by one of Shell’s businesses, converted into a spin-off company or sold to third parties. Since GameChanger began, we have invested nearly $250 million in more than 2,000 projects.

One project that Gamechanger helped to nurture in its earliest stages is Floating LNG. This is an enormous floating factory that will have the facilities to produce natural gas and turn it into LNG. It will enable us to increase our production of natural gas from offshore fields that would otherwise be too small or costly to develop.

To meet the challenge of producing twice as much energy with half the greenhouse gas emissions, the world will need many more innovations like the ones that unlocked tight gas.

It also avoids the need to build pipelines to the coast and on-shore processing facilities, reducing the environmental impact of gas production. Shell announced plans last year to develop our Prelude and Concerto gas discoveries off the northwest coast of Western Australia, using this technology.

We are now expanding our search for external ideas. For example, Shell recently announced a research agreement with Hewlett Packard to develop nano-sized electromagnetic sensors.

They could improve the quality of seismic signals we use to locate oil and gas underground. Although it’s early days, this could have a far-reaching impact on our ability to find new resources.

We are also harnessing the ideas and energy of smaller companies. We can apply our financial muscle and technical expertise to help take their ideas from the lab to demonstration level and then to commercial scale.

Take our work on biofuels, for example. Shell and a partner, Virent Energy Systems in the United States, recently opened a pilot plant producing petrol directly from plant sugars, instead of turning the sugars into ethanol.

The advantage is that the fuel can be blended with traditional petrol in high concentrations for use in existing engines and can be distributed through existing networks.

We’re now expanding this partnership to work on producing diesel directly from plant sugars, instead of converting vegetable oils into biodiesel. With diesel continuing to account for around half of new car registrations in Europe, this could play an important role in the shift to sustainable mobility.

Conclusion

Let me wrap up. I hope I have managed to illustrate just how profoundly surging growth in developing countries will affect the world of energy. And how that will have an impact on all of us.

We are embarking together on a long journey to create a new energy system. One that will continue to fuel human progress and help raise living standards across the globe. But importantly, one that leaves a healthy planet for generations to come.

I’m convinced that technology will help us double our energy supply, while at the same time tackling the threat of climate change.

But it’s a challenge we must all help meet by constantly looking for smarter, more efficient ways to use of the earth’s valuable energy resources.

Thank you.