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Global energy outlook and policy implications

Speech given by Malcolm Brinded, Executive Director, Upstream International, at the FT Global Energy Leaders Summit, London, June 28, 2011.
Malcolm Brinded

 Growing population levels and economic growth are driving rising energy demand across the world. In the coming decades, all countries must find more energy at a much-reduced cost to the environment. In this speech, Malcolm Brinded, Executive Director of Upstream International at Royal Dutch Shell, describes how the current revolution in global gas supplies, driven by the opening up of tight gas and shale gas sources and the rapid expansion of LNG, will help countries across the world to develop a secure and sustainable energy supply. By displacing coal-fired power, natural gas is the quickest and cheapest way to cut emissions of CO2 and harmful local pollutants in the power sector. Over the longer term, carbon capture and storage technology will also have an important role to play in driving down emissions in the power sector. But it will take the right policies, including a robust price on CO2, for the world to take full advantage of the gas supply revolution. In the transport sector,natural gas is also set to play a bigger role, through the use of Liquefied Natural Gas as a fuel for trucks, ships and other heavy vehicles, and through gas-to-liquid fuels. 

Global energy outlook and policy implications

Good afternoon. Since you heard from Tanaka-san this morning let me begin by congratulating him on the International Energy Agency’s new ‘Golden Age of Gas’ report, which deepens our understanding of the astonishing changes taking place in the global gas market. 
And it couldn’t have come at a more important time. Events in energy have certainly continued to move quickly in recent months, with the ongoing unrest in the Middle East and North Africa and the aftermath of the tragic March 11th earthquake and tsunami in Japan, not least Germany’s decision to shut down its nuclear plants by 2022. Of course, it’s still too early to assess the long-term implications of all this.     
So today I’ll focus on what government and industry can do to accelerate progress towards a secure and more sustainable global energy system.
First, in the power sector where we must use the global gas supply revolution to displace as much coal fired power as quickly as possible, while also developing cost-effective carbon capture and storage technology. 
And second in the transport sector, where natural gas also holds increased promise.

The global energy challenge

But, first, the big picture. At Shell, we’ve just published an update on our long-term energy scenarios, which draw on the thinking of external experts from around the world.
And we think that by 2050 underlying global energy demand will double and that it could even triple on its level in 2000 if emerging economies follow historical patterns of development.
Of course, rising demand will also be driven by a rising global population – 9 billion people, up from today’s 6.7 billion.
To keep pace with demand, the world will need to invest heavily in all energy sources, from oil and natural gas, to biofuels, nuclear power, solar and wind.  According to the IEA, some $33 trillion of cumulative investment in the global energy supply infrastructure will be needed between 2010 and 2035.
At the same time, the world must make the transition to a more sustainable energy system.
Over time, renewable energy sources, like biofuels, wind power and solar energy, will meet a growing share of demand. Indeed at Shell we think that by 2050, renewables could supply as much 30% of the world’s energy – up from 13% today.  Even doing that would be a massive challenge, requiring historically unprecedented growth rates for new forms of energy.
But it would also mean that fossil fuels would still, even in 2050, supply over 60% of global energy, with nuclear accounting for the remainder.

Natural gas and the power sector

All of which underscores the importance of the changes sweeping through the global gas market.
The IEA estimates that coal was responsible for as much as 44% of global energy related CO2 emissions in 2010.
Moreover, the incremental increase in CO2 emissions from coal-fired power in China and India is expected to be roughly double the increase in emissions from all the world’s transportation before 2020. 
Hence gas displacing coal is by far the fastest and cheapest way for the world to reduce CO2 emissions in the power sector over the next 20 plus years. 
That’s because a modern gas plant emits only half the CO2 of a modern coal plant, and up to 70% less than decades-old steam turbine coal plants, of which there are still hundreds in operation in North America, Europe and China.
Nor should we underestimate the heavy social and environmental impact of coal-fired power’s emissions of local pollutants, such as particulates.
That further reinforces the appeal of natural gas. Analysis carried out by various organisations, including the US National Energy Technology Laboratory, confirms that a combined cycle gas plant emits negligible particulates. And compared with a supercritical pulverized coal plant emits:
• Around 20 to 40 times less SO2
• Almost 10 times less NOx
• While consuming around half the volume of water per MWh
Last year, a report published by the US National Academies looked at the broader negative effects of such emissions from 400 coal-fired plants in 2005, which together produced some 95% of US electricity from coal.
Taking into account their impact on human health, crops and other aspects, they  estimated that aggregate societal costs from damage from emissions of sulphur dioxide, nitrogen oxides and particulates from these coal-fired plants was somewhere in the region of $62 billion.
When you consider all these powerful advantages, it’s hardly surprising that global gas demand is set for such strong growth in the decades ahead.
According to the IEA’s new gas scenario, between 2008 and 2035 primary natural gas demand is expected to:

• Increase by 60% globally
• By nearly eight times in China
• By five times in India
• And nearly double in the Middle East.

This demand growth is being supported by the boom in the production of tight gas, shale gas and coal bed methane. 
We’re all now familiar with what this means for North America –which now has a resource base large enough to last well over a century at current consumption rates.
 What’s becoming clearer is its major potential in the rest of the world, with Australia and China the most likely engines of production growth. Total worldwide recoverable gas resources are now estimated as being equal to 250 years of current production.
There’s a second key driver of the gas supply revolution: the expansion of the global LNG market. According to CERA, global LNG supplies will grow at an annual rate of nearly 6% throughout this decade. 

And this will gain further momentum when the industry starts to produce and liquefy natural gas at sea, opening up large-scale gas deposits that would otherwise remain too remote or expensive to tap.
Last month, Shell announced the final investment decision to build a floating liquefied natural gas facility to develop our Prelude gas field – 200 kilometres off Australia’s north-west coast. This giant Floating LNG plant will cool the produced gas into a liquid on the spot.
The largest floating offshore facility in the world, Floating LNG will be longer than four football fields laid end to end. And when fully equipped, and with its storage tanks full, it will weigh roughly six times as much as the largest aircraft carrier.  
This size gives it stability in the open seas. Indeed, the vessel has been designed to withstand a one in ten thousand year storm producing a 3 second gust of 390 km/hr wind – that’s 25% stronger than experienced in Hurricane Katrina.
With 3.6 mtpa of LNG capacity, the Prelude Floating LNG facility will produce enough LNG to easily cover Hong Kong’s annual natural gas needs.
Floating LNG will also enable LNG projects to go ahead more quickly, reducing the appraisal time and cost needed to establish gas resource certainty. That’s because an FLNG facility can be reused elsewhere at the end of a field’s life. With a design one/build many philosophy, we expect to develop more of these projects around the globe.

Misconceptions about gas

In recent months, the political debate has at last begun to reflect the new supply realities in the global gas market.
Even so, many policymakers still seem hesitant to take advantage of what is a massive opportunity to cut CO2 emissions in the global power sector.
In Europe, one reason is the stubborn myth that natural gas is just a transition fuel that will only play a temporary role before renewable energy takes over.
But the truth is that natural gas will be a critical part of a low-carbon economy for many decades beyond 2030.   That’s because the ability of gas-fired power to be ramped up and down quickly makes it the ideal ally of the intermittent power of wind and solar.
And over the longer-term carbon capture and storage technology could reduce CO2 emissions from gas-fired power stations by 90%.
It’s often overlooked that CCS technology will be most effective when added to gas-fired power since it only needs to deal with half the CO2 emissions of an equivalent coal power station, and requires only half the underground storage space.
All of which makes natural gas much more a ‘destination’ fuel than a transition fuel. And one with a long-term role to play at the heart of a low-carbon economy.
One new factor which could slow down the rapid expansion in global gas supplies is the emerging public concern about the safety and environmental impact of tight and shale gas production.
This has resulted in moratoria on hydraulic fracturing in a number of countries.
For the industry, this creates a dual responsibility: on the one hand, we must work hard to respond to the concerns of our neighbours and to maintain the very highest operational standards. On both fronts, at Shell, we aim to raise the bar not only for ourselves, but also the entire industry.
On the other hand, the industry should vigorously refute the significant misconceptions about tight gas production.
Otherwise, a public good in the form of abundant supplies of cleaner energy is at risk of being obscured by a deluge of misinformation.
One major misconception is that hydraulic fracturing poses a significant risk to fresh water aquifers.
The critical message is this: when a well is designed and constructed correctly, groundwater will not be contaminated. And we’d like to see strong regulation and enforcement that requires everyone in the industry to do it right. 
For perspective on this, I should also highlight that fracturing has been successfully performed more than 1.1 million times in the US alone over the past 60 years.
And at Shell, we only operate wells that can be safely isolated from potable groundwater. In fact, that is not hard to achieve: the natural gas we produce in some cases lies thousands of metres below fresh-water aquifers.
So it is virtually impossible for liquid – or indeed gas – to reach drinking water supplies through the localised cracks induced by fracturing the rock.
Nevertheless, we follow strict company standards to ensure that wells are constructed correctly. We use what is known as a “safety case” approach, requiring our staff and contractors to closely assess and document potential risks. And systematically establish ways to mitigate them all before drilling begins. So we always line our wells with multiple steel and concrete barriers to prevent gas or liquid from leaking out of the well itself.
A second criticism relates to water consumption and usage in fracking.
But here again sound operational practices can address these concerns. For example, at Shell we strive to avoid competing with local water needs. We design our operations with the explicit purpose of reducing the amount of potable water we use. And wherever practically possible, we use non-potable water, including by recycling and re-using the water from our operations. 
An example is our Groundbirch tight gas project in Canada, where we are funding a water recycling plant for the nearby city, which will treat waste water and sewage so that it can be reused in our operations and for other industrial and municipal purposes, such as water for sports fields.
But we need some perspective here too. According to various studies, including one by MIT, the water intensity of shale gas ranks among the lowest of all energy sources.
A third controversy is the result of a recent report from Cornell University, which stoked fears that greenhouse emissions from shale gas far exceed not only those from conventional gas, but even those from coal.
That stands in stark contrast to the IEA’s analysis, which found that, on a well-to-burner basis, emissions from shale gas exceed those of conventional gas by as little as 3.5% in the best case scenario and by 12% in the worst. Rigorous operations management helps to get to the lower number.
But in any event, shale gas fired power still emits only about half the CO2 of coal fired power.
I’ll leave the last word to the IEA. I quote: “…total emissions from (shale gas) production are only slightly higher than for conventional gas: and both the water and climate impacts can be mitigated using existing techniques”.

Policies in the power market

As well as tackling these misconceptions, the industry must also make the case for policies that properly reflect the advantages of natural gas in the power sector.
At Shell, we believe that putting a price on CO2 is the best way to push the world towards a low-carbon future.

And we think the best way to achieve that is to cap CO2 emissions and trade emission allowances. A market based approach ensures that all CO2 mitigation measures are used, starting with those that are lowest cost and fastest to implement. 
And a robust CO2 price would highlight natural gas as the fastest and cheapest route to cutting emissions in the power sector. 
We mustn’t forget all those SOX, NOx and particulates emissions from coal-fired power. The best way to tackle these is through the introduction of emissions performance standards for power stations.
We need power markets to reward the advantages that gas fired power provides in terms of consistent availability and proximity to demand, especially in relation to wind power.   
Alongside all this, we need a series of demonstration projects that allow us to prove the viability of carbon capture and storage technology on an industrial scale. Shell is proud to be involved in several of these around the world.
Of course, in the absence of a robust CO2 price, CCS demonstration projects don’t by themselves bring in revenues. So public financial support is needed initially to get the technology off the ground. And here we welcome the UK government’s continuing commitment to support CCS in this way.

Transport sector

I’ll finish with a word on the transport sector. Here high and volatile oil prices are emphasizing the need to diversify the fuel mix to give customers a broader range of options.
At Shell, we believe that biofuels are the only low-carbon transport fuel that can be scaled up fast enough to materially impact carbon emissions from transport in the next 20 years. That’s why we have set up a new joint venture in Brazil in sugar-cane based ethanol.
But today I’d like to focus on the transport potential of natural gas. Over the longer-term gas will provide a cleaner source of power for the world’s growing stock of electric vehicles. This could be particularly important in China.
But there are other transport applications for gas. Compressed natural gas or CNG is well-known and its use is growing fast in many cities. Another option with strong growth potential is the use of LNG in heavy vehicles, such as trucks, ships and trains.
LNG is already used to fuel ferries in Norway, for example. But its appeal is growing. That’s partly because it’s a smart way to reduce local emissions of sulphur oxides and particulates. And partly because LNG offers a competitive alternative to oil-based liquid fuels.
At Shell, we’re optimistic about the potential for LNG in the North American market, as a competitive alternative to diesel in selected applications. For example, it should be competitive for customers such as big trucking firms.
In growing this market for LNG there are several hurdles, not least developing and deploying small scale and mobile liquefaction and storage facilities. But none are insuperable.

Gas-to-liquid fuels

There’s another route for natural gas into the transport sector - one that doesn’t require new distribution infrastructure. Of course, I’m talking about gas-to-liquid fuels.
The large-scale conversion of natural gas into liquid fuels – including for planes - lubricants and chemical feedstocks is now getting underway for the first time at Pearl; Shell and Qatar Petroleum’s massive $18-19 billion gas-to-liquids plant in Qatar.
Only two weeks ago, we celebrated the departure of our first shipment of GTL gasoil from Pearl bound for Europe.
When fully up and running in 2012, Pearl will produce enough GTL gasoil to fill over 160,000 cars a day and enough synthetic base oil each year to make lubricants for more than 225 million cars.
Pearl is also one of the largest industrial developments in the world. At one point, more than 52,000 people worked on the site, which is big enough to cover the whole of Hyde Park and Kensington Palace Gardens. And workers installed steel equivalent to 2.5 Eiffel Towers every month. 
When blended with conventional diesel in high concentrations, GTL gasoil can help to tackle the pollution that dogs many of the world’s cities. It burns with lower SO2, NOx and particulate emissions than conventional diesel. That’s been proven by trials of GTL gasoil in several urban bus and taxi fleets, including here in London.


So that’s just one more way in which the industry is harnessing its technology to meet the world’s growing energy needs.
What we now need are energy policies that recognize the commercial engine as the most powerful tool for converting industry’s capacity for innovation into tangible benefits for society.
At Shell, we think effective and fully priced CO2 markets would have the deepest impact, by focussing our collective efforts on the quickest and cheapest ways to deliver CO2 reductions.
We also need more effective means to penalise the damaging wider societal impacts from coal-fired power.
And where government support is needed is to help carbon capture and storage technology through the early stages of demonstration and deployment. 
Finally, we need well-targeted and strictly implemented regulation, to preserve public confidence that the tight gas revolution really is a force for good.
With gas, the world has a tremendous opportunity to expand its supplies of cleaner energy in the coming decades. Industry and government must work together to take it.

Thank you.