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Natural gas: key to green energy future

Speech given by Peter Voser, Chief Executive Officer, Royal Dutch Shell plc, at the Oil & Money Conference in London, UK, October 12, 2010.
Peter Voser

In a world of rising energy demand, natural gas as an affordable source of low carbon electricity will play an increasingly important role in many countries. The UK provides a good example. The country’s energy challenge is acute: in the next 10 to 15 years, around 45% of the country’s total installed power generation capacity will face either expensive upgrading, or partial or full closure. Meanwhile, the UK has committed to challenging greenhouse gas emission reduction and renewable energy targets. Natural gas replacing coal is the surest, fastest and biggest way there is to reduce CO2 emissions over the next ten vital years. The combination of natural gas and carbon capture and storage technology (CCS) offers a low-cost pathway to secure, clean electricity well into the future. For natural gas and CCS to realise their full potential as lower carbon technologies, we need government policies that reflect their benefits. Carbon markets remain the most effective way to drive change and stimulate investment in low-carbon technologies.

Natural gas: key to green energy future

Good morning everyone. It’s great to be here in London for the Oil & Money conference.
 
This being an international conference, it may come as a surprise that I’m going to focus on what is happening right here in the UK.

I want to do so for a number of reasons.

The UK is playing a leading role – politically and intellectually – in shaping the international debate on energy and climate. At the same time, domestically, a lively debate is going on about the future of the country’s own energy supply.

In the UK, in the next 10 to 15 years, it’s likely that around 45% of total installed power generation capacity – coal, oil, nuclear and gas – will face either expensive upgrading, or partial or full closure.

Meanwhile, as an EU member state, the UK has committed to reducing greenhouse gas emissions by 34% by the year 2020, compared to 1990. And at the national level, through the Climate Change Act, the UK has committed to cut emissions by 80% by 2050.

There’s also the commitment that renewable energy should supply 15% of the UK’s total energy demand by 2020.
On top of that, UK consumers rightly demand affordable energy prices and reassurance about energy security, especially in an era of growing import dependency.

Clearly, the UK’s energy challenge is complex and acute.

My key message for today is that, in meeting that challenge, natural gas has a key role to play in the short-to-medium term. And, when combined with carbon capture and storage, natural gas also offers great potential for providing many countries with a low-cost pathway to secure, clean electricity well into the future.

I’ll return to this in a few moments.

Energy transformation

But, first, the global context.

We know that global energy demand is likely to double during the first half of this century. We also know that global greenhouse gas emissions per unit of energy must drop dramatically. So, to transform the world’s energy system, we need leadership and action on many fronts.

The first priority for an energy company like Shell has to be to deliver more energy supplies to help meet the world’s growing energy needs. To that end, we’ve kept up one of the most ambitious investment programmes in the world, right through the economic downturn.

That investment programme is beginning to bear fruit: in 2012 we will be producing around 3.5 million barrels of oil equivalent per day, an increase of 11% from 2009.
 
In addition, we’re assessing over 35 new projects from some 8 billion barrels of oil equivalent resources, which should underpin production growth to 2020.

In our portfolio, natural gas will play a very prominent role, with Australia, North America, and Qatar as key growth engines. Take North America: Shell’s tight gas production there could double from 2009 to 2015, with the potential to reach over 400,000 barrels of oil equivalent per day.

The world’s population is growing – and developing countries are trying to lift hundreds of millions of people from poverty. This means that advanced economies have a special responsibility to promote energy conservation.

So another important priority for all of us as consumers has to be energy efficiency and conservation. Vehicle and fuel efficiency standards are good examples.

A third priority is to diversify the energy mix and increase the share of alternative energies. Our main effort is in biofuels for transport, which we expect to grow from 2-3% of the world’s road transport fuel market today to between 7% and 9% in 2030.

We also operate a modest wind electricity business, mostly onshore, in North America. And we are involved in hydrogen for transport, because we think it has considerable potential for the longer term. 

So Shell is actively striving to help meet growing energy demand while at the same time building a more sustainable energy system.

Natural gas: diverse and secure supply

There are three main reasons why I believe natural gas is so important for the UK.

First, supplies are more abundantly available than in the past.

Second, new natural gas power plants are less costly and easier to build than any other source of electricity.
 
And third, the environmental benefits of natural gas as a source of electricity are tangible, substantial and immediate.

Concerns in this country about over-dependence on imported natural gas are understandable, but not valid.

The past few years have seen a spectacular improvement of gas supplies. It’s not an exaggeration to call what has happened a supply-revolution. That revolution is built on two pillars: tight gas and liquefied natural gas.

Only a few years ago, it looked as if North America’s domestic gas production would decline. Today, instead of declining, production has increased dramatically, as a result of our ability to unlock vast tight gas resources. The resource base is now big enough to cover North America’s current gas consumption for well over a century.

Other nations are now looking to replicate the North American gas boom. For instance, Shell holds acreage with potential to produce shale gas and coal bed methane in Germany and Sweden, and we’re already drilling our first exploration wells. In Australia, in the years ahead, we plan to convert coal bed methane into liquefied natural gas for Asia’s fast growing gas markets.

And we are currently studying South Africa’s shale gas potential.

In China, Shell already operates the Changbei tight gas field, under a production sharing agreement with Petrochina. It supplies natural gas to Beijing and other Chinese cities. And we’re currently working together with CNPC and PetroChina to appraise and hopefully produce potentially very large tight and shale gas resources elsewhere in the country.
Assuming China will be able to harvest these resources in significant quantities, natural gas will be able to play a much more prominent role in the country’s energy mix – reducing the need to burn coal for electricity, space heating and cooking – and thereby reducing air pollution and greenhouse gas emissions.

Larger domestic gas resources would also help China to keep pace with surging demand for personal mobility, by fuelling its growing stock of electric vehicles. That would also help to ease its growing need for imported oil.  

All in all, the International Energy Agency estimates that, worldwide, there’s now enough technically recoverable gas in the ground for 250 years at current production rates.

Of course, the North American shale boom has also freed up liquefied natural gas supplies – initially destined for the USA – for other markets.

By 2020, LNG supplies could meet one-fifth of global gas needs.

For the UK, LNG only made up 1% of the mix in 2008, but this share is rising fast. Last year, it went up to 11%, and by 2020 LNG could account for 35%. The UK is at the end of Europe’s natural gas pipelines, but it may well become the first port of call for ships that carry LNG from countries like Qatar, Nigeria, Trinidad and Algeria. Norwegian pipeline gas will likely account for another 35% by 2020, with a big role for the Shell-operated Ormen Lange field.

The growing abundance of natural gas resources and the expansion of the LNG industry enhance gas supply security and reduce long-term price volatility. This should give governments and investors greater confidence to support natural gas for the long term.

Lower cost

Let me now say a word on the cost competitiveness of natural gas.

Budget deficits and government debt are at historically high levels due to the financial crisis and, despite positive signs of a recovery, there will be a need for strict budget discipline in the coming decade.

In balancing fiscal discipline with the need to invest in new power capacity, the UK and many other countries will find that natural gas is more affordable than any other source of electricity.

The UK will have to invest around £200 billion – or roughly $300 billion – in its energy infrastructure over the next 10 years. This is a project comparable to 20 Channel Tunnels.

It is crucial that the money is well spent and the risks to delivery are minimised. That means using technology that has been tested and proven. It also means going for low unit capital cost both to keep down the physical scale of the project and to reduce the strain on balance sheets. This investment will establish the carbon footprint of UK power generation for the next 30 years.

New natural gas capacity is faster and less costly to install than any other new source of electricity. A recent report by Mott MacDonald for the UK Department of Energy and Climate Change confirms this: gas-fired power is well under half the capital cost of coal-fired power. And gas plus CCS is about a third of the capital cost of offshore wind and nuclear.

We should also realise that an expansion of intermittent electricity from offshore wind farms requires adjustments to the electricity system, such as smarter grids and more storage capacity.

So the question is: what should come first? Adjustments to the infrastructure that can help cushion the impact of more intermittent electricity? Or growing the share of intermittent electricity without first preparing the power system to accommodate that?

This is not a plea against offshore wind. It has a role to play in a diversified energy mix. And I realise the UK has the aspiration, the coastlines and the know-how to be a leader in this field.

However, it is a plea to approach the future of energy with both bold aspirations and sufficient realism to chart the most pragmatic, cost-effective and financially sustainable route towards an environmentally sustainable power system.

So perhaps the country should consider diverting some investment away from new offshore wind farms – which are anyhow more costly to build and maintain than onshore wind farms – to the technologies that would allow the UK to adjust to a growing share of intermittent power.

Greenhouse gas emissions

At a time when the UK is striving to expand its sources of renewable energy, it may sound counterintuitive that there’s also a fossil fuel that can deliver cleaner electricity.

The reality is that without natural gas the UK would not have managed to achieve its Kyoto targets, not to mention the fact that the lights would have gone out long ago.

For many countries, it will be impossible to meet their 2020 emission reduction targets without natural gas – so perhaps it’s time that natural gas gets more positive press – here in the UK and elsewhere.

According to the IEA, coal-fired power is responsible for the fastest growth in CO2 emissions worldwide.

Modern gas plants emit between 50% and 70% less CO2 than coal plants per kilowatt of electricity generated.

Natural gas replacing coal is the surest, fastest and biggest way there is to reduce CO2 emissions over the next ten vital years.

Governments should throw their weight behind gas replacing coal every bit as much as with renewables, where the targets are going to be hard to meet.

CCS

Some people worry that a stronger focus on natural gas would lock in another generation of fossil fuels plants – driving out investments in renewables and increasing greenhouse gas emissions over the long term.

Our view is exactly the opposite: a greater reliance on natural gas would cut greenhouse gas emissions and buy society time to make a less expensive transition to new nuclear and offshore wind electricity generation.

This argument is all the more true, if we make a collective commitment to push CCS through the demonstration phase and start deploying it at scale in the coming years. CCS is the only technology we currently possess that allows us to take CO2 out of the system and put it back where it was found.

The importance of CCS should not be underestimated. The IEA has said that if rapid deployment of CCS can start this decade, it could account for 19% of the total CO2 reductions needed by 2050.

When fitted with CCS, emissions from gas-fired power stations would see a net reduction of 90%.

The Mott Macdonald study I mentioned earlier shows that the combination of natural gas and CCS could be very cost effective. The report indicates that the overall lifetime cost of gas with CCS will be cheaper than coal with CCS and even the much-improved offshore wind technologies hoped for after 2017.

Shell analysis shows that adding CCS to gas fired power stations delivers CO2 reductions at a current cost of approximately $60-$120 per tonne. By comparison, offshore wind – at $275-$400 per tonne – costs roughly three-and-a-half times as much.

So both on cost and CO2 grounds, gas plus CCS is a viable and highly competitive low-carbon technology for the long term.

It’s true that we’re not ready to deploy CCS at commercial scale today.

But the technology for CCS is not in doubt. All elements of CCS – capture, transport, re-injection and underground storage – are in operation today.

For instance, Shell’s Rotterdam refinery collects a small amount of CO2 and pipes it to Dutch greenhouses to boost the growth of tomatoes in the summer. And in storing CO2 underground the industry would be replicating what we have been doing with natural gas for many years in hundreds of different locations around the world as short-term reserves for cities.

What we need now is a series of demonstration projects that allow us to prove viability and cost-effectiveness 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.

Shell is also involved in a project in Norway to test state-of-the art CO2 capture technologies applicable to gas-fired power plants.

But for CCS to fulfil its potential – and, in turn, for CCS to allow natural gas to fulfil its potential – we’ll need more CCS projects.

The UK has committed to a 4-project CCS demonstration programme, which we strongly support and hope will include at least one project for gas-fired power. We are a partner in the Scottish Power-led consortium for Longannet.

If the CCS demonstration programme moves ahead as planned, the country could move with confidence towards a lower-carbon power system in a pragmatic and cost-effective way.
 
It seems to us essential therefore that the funding mechanism to make this programme a reality is preserved when the Comprehensive Spending Review is announced next week.

The IEA sees CCS as an important new growth area – one that will require $1.3 trillion in investment globally to 2050.

By supporting CCS demonstration projects, the government can help ensure that the UK remains at the forefront of the CCS industry – and that UK businesses can participate in its global expansion.

The UK is well placed geographically for CCS. Together with Norway and the Netherlands, the UK has many depleted oil and gas fields, and saline aquifers in the North Sea that could serve as CO2 storage sites. Together they could cover around 40% of the European Union’s storage needs.

Successful demonstration will be critical to rolling out the technology in developing countries such as China and India. Many of these are faced with surging electricity-demand and will continue to rely heavily on coal. CCS is the most plausible technology to reduce the environmental burden.

Policies

For natural gas and CCS to realise their full potential as lower carbon technologies, we need government policies that reflect their benefits.

Carbon markets are the most effective way to drive change and stimulate investment in low-carbon technologies. They put a price on carbon emissions and ensure efficient implementation of CO2 reduction measures, starting with those that have the lowest cost and are fastest to execute.

Carbon markets need a sound architecture, both nationally and internationally. That structure exists today with the European Emissions Trading System, and it is the premise behind the Kyoto Protocol. However, we’re at risk of losing it on an international level as nations struggle to agree a way forward after 2012 when Kyoto expires.
 
In such frameworks, natural gas, given its low carbon footprint, would be the most attractive fossil fuel for electricity generation.

In combination with CCS, natural gas would also be a strong low-carbon competitor overall – and for the long term. 

We must remember that CCS projects don’t by themselves bring in revenues. So public financial support will initially be needed to help the technology to take off, just as the nuclear power industry required government backing in the beginning. We will also need to make CCS projects eligible for carbon allowances.

Conclusion

At the beginning of this speech I referred to the acute energy challenge the UK faces.

The good news is that this energy challenge also presents an opportunity: to back up years of energy and climate advocacy with action, to be a global champion for a cost-effective energy transition, and to let British companies take a leading role in the global expansion of CCS and other low-carbon technologies.

In meeting the energy and climate challenge, natural gas has a key role to play in the short and medium term. In combination with carbon capture and storage, natural gas also offers a cost-effective pathway to secure, clean electricity well into the future.

We live in a world of new realities: we’re gradually emerging from a deep recession. And we have a much-improved global natural gas market.
 
Future generations will first and foremost judge us by the speed and the cost with which we reduced greenhouse gas emissions. Amid strong short-term political pressures, we must not lose sight of that.

Thank you kindly for your attention.