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Changing direction towards a new energy future

Speech given by Jorma Ollila, Chairman, Royal Dutch Shell plc, at the International Energy Agency Governing Board at Ministerial Level, October 18, 2011.
Jorma Ollila

As the world transitions to a more sustainable energy future, the right decisions need to be made now to ensure that transition is as smooth as possible. In this speech, Shell Chairman Jorma Ollila discusses the important role that natural gas can play as an affordable, flexible energy source. He calls on policymakers to take a market approach to regulating CO2 to ensure all mitigation measures will be used, starting with those that are lowest cost and fastest to implement. He also talks about research Shell is conducting to understand the complex interrelationship between energy, water and food, and how we can be more efficient in managing them.

Changing direction towards a new energy future

Chairman Ferguson, Madam Director, Secretary Chu, your Excellencies, ladies and gentlemen: Good evening.

It is a sincere privilege to address this distinguished gathering, particularly at such a critical moment in the discussion of our energy future.

The International Energy Agency plays an important and influential role in our industry as a key participant in the ongoing debate over the future of the global energy system.

It provides companies like Shell a valuable forum to discuss energy issues with policymakers from around the world. We also rely on the IEA as a source of reliable information and analysis of global energy trends, with reports such as the annual World Energy Outlook.

The world today is in the midst of an unprecedented transition to a new energy future. The question is, will we invest in our future and prepare for it intelligently – in a way that avoids unnecessary disruption and pain?

I’d like to share with you tonight some of my thoughts on our energy future, on the important role natural gas can play, and what can be done to address the CO2 challenge.

Finally, I want to discuss the work under way at Shell to understand the links between our water, energy and food systems – and the implications those have for our energy future.

The energy outlook

Of course, everyone in this room is aware of the Big Picture in energy:
  
By 2050, global energy demand will double and could even triple from the level of 2000.
  
At the same time, the world must reduce CO2 emissions in half by transitioning to a more sustainable energy system.
  
The world will need to invest heavily in energy production, both in traditional sources and in renewables.

The World Energy Outlook estimates the world will need to spend about U.S. $38 trillion in the global energy infrastructure through 2035.

Shell estimates the world will need to produce 40 million barrels of oil a day by 2020, mostly from new fields that haven’t been developed yet. For some perspective, that’s about four times what Saudi Arabia produces today, or 10 times the combined UK and Norwegian production from the North Sea.

Earlier this year, Shell published an update to our long-term energy scenarios, which draw upon the thinking of experts from around the world. We concluded the world is headed towards what we call a “zone of uncertainty”, in which there will be significant stress between energy supply and demand. This stress will result from population growth, rapidly increasing wealth in developing countries, and intense urbanisation.

The transformation will be profound. Even with technological advances that today allow us to extract resources from remote, difficult locations, conventional energy sources will struggle to meet this growing demand.

We think by 2050, renewables could comprise as much as 30% of the world’s energy supply, up from 13% today. Getting to that level will pose a massive challenge, requiring historically unprecedented growth rates for new forms of energy.

But even if we get to 30%, that means at least 60% of our global energy will still come from fossil fuels, with nuclear accounting for the remainder.

The benefits of natural gas

Which brings me to recent talk of a “golden age” for natural gas. The World Energy Outlook’s recent special report cites several factors in support of a positive scenario for natural gas.

First, it’s the cleanest fossil fuel. When replacing other fossil fuels, natural gas leads to lower emissions of greenhouse gases and pollutants. Gas also is affordable and abundant, its resource base is vast and widely dispersed, and it can help to diversify energy supplies – all of which enhances energy security.

There has been tremendous growth in reserves thanks to the successful technology for recovering unconventional gas in North America. The good news is this success can be repeated elsewhere.

In addition, growing LNG volumes have improved security of supply, as LNG offers enhanced flexibility.

Gas is a particularly attractive fuel, not only for North America and Europe, but also in the rapidly urbanizing regions of Asia and the Middle East.

And it is an ideal replacement for aging coal-fired plants. It is, by far, the fastest and cheapest way for the world to reduce CO2 emissions in the energy sector.

The IEA estimates coal was responsible for as much as 44% of global energy-related CO2 emissions last year. A modern gas plant emits only half the CO2 of a modern coal plant, and up to 70% less than a decades-old coal plant.

Natural gas will be a significant part of a low-carbon economy for many decades beyond 2030 – in part because gas-fired power can be ramped up and down quickly. This makes it an ideal ally of wind and solar, which need to be complemented with a highly flexible alternative supply when the wind stops or the sun goes down.

The move to a greater percentage of renewables in the global energy mix will take time, given the enormous scale of the energy system. Natural gas can help us get there.

Growth of gas

The World Energy Outlook estimates primary natural gas demand will increase dramatically – about 60% globally between 2008 and 2035 in its “Golden Age of Gas” scenario.

This growth is being supported not only by the boom in production of unconventional gas in North America, but by vast reserves in Russia. Substantial production growth is also expected from China, Qatar and Australia.

We can expect further momentum when the industry starts to produce and liquefy natural gas at sea, opening up large-scale deposits once considered too remote or expensive to tap.

Shell, in fact, was the first to develop the floating LNG concept. Earlier this year, we authorised a major investment to build the Prelude floating LNG facility that will tap gas fields 200 kilometres off the coast of Australia. It will be the largest floating structure ever built. More significantly, this game-changing technology will substantially reduce the cost and environmental footprint of developing offshore gas fields.

There is no need for long pipelines, for platforms to pump the gas to shore, for dredging, jetty construction or onshore development. Of course, expanding the world’s use of natural gas will require us to utilise the highest standards for production – both onshore and offshore.

We at Shell are working hard to address the emerging public concern about the safety and environmental impact of tight and shale gas production. Our industry must also refute the significant misconceptions about shale gas production and the risk hydraulic fracturing poses to freshwater supplies.

Fracturing has been successfully performed more than 1.1 million times in the United States alone over the past 60 years.

At Shell, we only operate wells that can be safely isolated from potable groundwater, which is not difficult, because the natural gas we produce in many cases is thousands of meters below freshwater aquifers.

Addressing CO2

Earlier, I described gas as the fastest and cheapest way for the world to reduce CO2 emissions in the energy sector. But the increased use of natural gas alone will not be enough to maintain safe levels of CO2. Carbon capture and storage technology is also required.

When used on a gas-fired power plant, CCS technology could reduce CO2 emissions by 90%. And only about half of the CO2 would need to be stored, compared with an equivalent-sized coal plant.

But companies will not invest in such facilities until a long-term CO2 pricing mechanism is established to allow for a return on their investment.

We think the best policy mechanism is to cap CO2 emissions and allow for trading of emissions allowances. A market-based approach ensures all CO2 mitigation measures will be used, starting with those that are lowest cost and fastest to implement.

You may be interested to know that at Shell, we already put a price on CO2 and factor it into our decision-making process when we consider investing in new projects.

The water-energy-food nexus

As the world faces the need to address its energy and CO2 challenge, it’s worth mentioning some related research under way at Shell. We are focusing a lot of attention on better understanding the inter-relationship between our water, energy and food systems.

On the most basic level, the relationships are fairly obvious: It takes water to produce energy, it takes energy to produce and distribute clean water, and water and energy are both used to deliver food to our tables. And the same factors that put stress on our energy system are also putting stress on our water, food production and the environment.

We are particularly interested in the connection between water and energy. To help us prepare for the future energy-water challenge, Shell is leading a project in partnership with the World Business Council for Sustainable Development. We are exploring the water use associated with different energy types, both traditional sources and renewable, on a lifecycle basis. We are also working with the IEA on
this issue.

Mapping these interconnections is a huge task, but we believe it is increasingly critical we not look at these systems in isolation.

Take, for instance, the potential to incorporate “smart” technology to use less energy and water in our growing cities. A major opportunity exists as our cities grow to improve efficiency on a large scale.

This research is also important because we know major stresses on our global water, energy and food systems will have the greatest initial impact on the poor. It’s our responsibility to understand these interrelations to avoid policies and actions that hurt those who are most vulnerable.

While I am on this subject, I’d also like to say it’s important that governments, business and society continue to work toward the goal of universal access to energy. To its credit, the IEA remains a strong voice in support of this effort. Today, 1.3 billion people still lack basic access to electricity, and 2.7 billion people still rely on wood and other biomass for cooking.

As the World Energy Outlook notes, reaching the goal of universal access by 2030 would increase global demand for fossil fuels and related CO2 emissions by less than 1% – an amount that is trivial compared with the benefit.

All of the goals I’ve discussed tonight – universal access, reducing CO2 emissions, and meeting the global energy challenge – will require decades of focused effort, political discipline and, above all, strong leadership. Now is when we should be building a global consensus to attack these challenges.

I would like to conclude my remarks tonight with one final thought: The transformation of the energy system will come not from “breakthrough technologies.” It will come from the deployment of known technologies at scale.

It is sometimes difficult to appreciate how large our energy system is, and the time it takes for new technologies to reach the scale where they can make a real difference. Generally, it takes 30 years for a proven technology to go from viability to just 1% of the global energy mix – 30 years!

Our challenge today is to push the limits of these technologies, develop more difficult and larger projects, and integrate them into the overall system at a faster pace than we have seen before. Success will require a massive effort of international coordination, long-term planning and flawless execution involving full-scale deployment of all viable technologies.

I can sympathise with the elected officials and the government appointees who are charged with making these difficult policy decisions to shape our energy future.

And as technology develops quickly and becomes increasingly complex, it can be difficult for governments and policymakers to put adequate safeguards in place to respond in a timely way to public concerns.

In these cases, industry also has a responsibility to step up and propose solutions.

Of course, when it comes to energy issues, there is no shortage of data and opinions. The more you immerse yourself in all the data and opinions, the more you become aware of how complicated these issues truly are – how one decision here affects something or someone else over there.

But to get where we need to go, decisions must be made, realistic policies must be set – and soon. To continue in the direction we are going is not an option if we want to ensure a stable, sustainable future for generations to come.


Thank you.