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Getting the future energy mix right: how the American shale revolution is changing the world

Speech by Peter Voser, Chief Executive Officer, Royal Dutch Shell plc at the Chief Executives Club of Boston, Boston, Mass., USA on March 21, 2013.
Peter Voser

Meeting the world’s future energy needs while addressing climate change represents one of the greatest challenges mankind has ever faced. In this speech to the Chief Executives Club of Boston, Peter Voser says doing so successfully will require us to be realistic, to face facts and question old assumptions. He explains how the combination of a rapidly growing global population and a rising middle class in developing countries is putting more stress not only on our energy resources, but on our water and food resources as well, creating a “prosperity paradox.”  Voser shares some of the recent thinking of Shell’s renowned scenarios team and explains how the American shale revolution is already changing the global energy landscape. He concludes with three steps the world needs to take now to get on the road to a more sustainable energy future.

Getting the future energy mix right: how the American shale revolution is changing the world

I want to begin by apologizing if any of you were expecting a stereotypical “oilman.”

I am a native of Switzerland, and I live and work in Holland, which has far more windmills and wind turbines than oil rigs. I have spent quite a bit of time down in Texas, which is the home of our American subsidiary, Shell Oil. 

But honestly, I really don’t look good in a cowboy hat, I obviously haven’t picked up the drawl, and I am not particularly fond of whiskey.

I mention this stereotype because the issue I want to discuss today really demands that we question old assumptions.  It also demands that we be realistic about where our world is heading.

I want to share with you my views on the future of energy, on the impact of the American shale revolution, and what the world needs to do now to begin addressing one of the greatest challenges mankind has ever faced.

Where we stand

So let me start by telling you a bit about Shell and where we stand, and maybe I can dispel a few more stereotypes.

Today Shell employs about 90,000 people in more than 70 countries around the world, including about 20,000 here in the United States.  About half of our employees work every day with some of the most advanced technology in the world.

In fact, last year the editors of MIT’s Technology Review listed Shell as one of the world’s most innovative technology companies.  In our industry, we are a high-tech company.

We believe climate change is real and time is running out to take real action to reduce greenhouse gas emissions.  We support governments putting a price on carbon, through such systems as cap-and-trade.

And, yes, we do see a need to develop renewables like wind, solar and biofuels.

We also need to make our cities more energy-efficient. And we need to keep pushing the technology to make our cars and trucks consume less fuel, and facilitate the use of alternative fuels, like electricity, hydrogen, biofuels and natural gas.

At the same time, we also need to find and extract more oil and natural gas, often in more challenging, expensive locations.

Now I realize that last line is what most people would expect me say. But hear me out.

The fact is our global energy system is so big, our energy consumption is on a scale so massive, and demand is growing so quickly that we will need to aggressively pursue all sources of energy for decades to come -- just to keep up. When President Obama says America’s energy policy should be “all of the above,” he is absolutely right.

The prosperity paradox

Here are a few numbers and facts to keep in mind.

Every day, our global population increases by more than 220,000 people.  That is the equivalent of adding a city of 1.5 million -- more than twice the population of Boston proper -- every week.

Here in the developed world, we do not readily see the impact of this. That’s because most of this rapid growth is elsewhere -- in China, India, Brazil and other developing nations.

As the population rises in these countries, there are also millions more people each year moving up from poverty and joining the middle class. 

This increasing prosperity has been a fantastic human achievement resulting from the globalization of our economy. But it also raises some global issues that promise to become more challenging for all of us to address in the years ahead.

Most of these people are flocking to rapidly growing cities, where they are using more energy as they use their first appliances and drive their first cars. As a result, in the next seven years alone, the world’s additional energy demand could be equal in size to China’s entire energy demand today.

This creates what we call a “prosperity paradox.”  That is when the ongoing rise in prosperity, combined with a rapidly growing population, creates stresses that over time threaten to undermine that prosperity. 

These stresses are building on all of our vital systems, and our environment. The United Nations estimates by 2030 the world will need 30 percent more water, 40 percent more energy, and 50 percent more food to keep up with the increased demand.  And that’s not far off:  A baby born today will graduate high school in 2030.

The challenge of addressing these resource needs is magnified many times by the linkages between them.  Water is needed for almost all forms of energy production, energy is needed to treat and transport water, and both water and energy are needed to grow food.  And the potential effects of climate change will influence all three. 

To successfully address these challenges, governments, business and society at large need to address them intelligently and in unison.

Shell Scenarios

At Shell, we spend a considerable amount of time analyzing these kinds of trends so we can get a better handle on the future and make better decisions. It is critical, really, because unlike most other businesses, our investment decisions can take 10, 20 or even 30 years to pay off.

For the past 40 years, our scenarios team has had the mandate to look toward the future with an independent, unbiased eye. 

The future is neither completely predictable nor completely random.  The scenarios can at least give us the tools to anticipate what might happen and allow us to understand our options. In other words, they deepen our strategic thinking. And we share this thinking with governments, researchers, academia and the public.

In our latest report, the scenarios team analyzes how economic, social and political forces might play out through this century, and how those forces could affect the evolution of our global energy system.

On your tables you’ll find copies of the report, titled “New Lens Scenarios.” It goes into far more depth on each of the two scenarios than I can here, so I encourage you to take it home and dig into it. It’s fascinating reading.

Here are a few highlights from the report.

By 2035, both scenarios anticipate the world’s renewable energy sources growing by at least 60 percent, or even double.  Yet in each scenario, fossil fuels are still likely to meet about 60 percent of global energy demand by 2060.  That’s because, as I noted earlier, demand is expected to grow so sharply over the next 50 years.

And the 60 percent figure is still down significantly from about 80 percent today.

One of our scenarios foresees a world strongly shaped by market forces, in which oil, natural gas and coal continue to play a major role, as do renewables after 2030. But in this scenario, action to address climate change comes slowly. As a result, coal use continues to rise for decades with a resulting rise in CO₂ emissions.

In another scenario, the world is strongly influenced by government policies and the abundance of natural gas. Gas becomes the most important energy source globally by the 2030s. This is combined with coordinated global efforts to limit CO₂ emissions, such as government support for carbon capture and storage technology.

Again, these are scenarios, not predictions. The direction we take will depend largely on decisions being made now and through the coming decade. And as you may have guessed, there is no silver bullet.

The American shale revolution

Fortunately, there has been some very positive news on the energy front in recent years, news that has the potential to help ease the transition to a more sustainable energy system.

Here in North America, the energy outlook is much different from what it was just a few years ago as a result of the “American shale revolution.”  And it is already having an impact on the rest of the world.

Combined with increased oil production in the Gulf of Mexico, the potential for major deposits in the Arctic, and the growth in tight oil and heavy oil -- including oil sands -- North America’s energy picture is much brighter.

Improvements in the technology known as hydraulic fracturing are unlocking huge volumes of oil and gas.  And this technology has the potential to do so elsewhere around the world as well.

The United States has led the world in developing this technology and is already reaping the benefits of its deployment, in terms of greater energy security, economic growth and jobs.

As recently as 2008, North America was facing the end of natural gas self-sufficiency. Prices soared and plans were made to build import terminals for liquefied natural gas, or LNG. Today those plans have been mothballed, prices are down by two-thirds and there is discussion of LNG exports.

As a low-priced fuel and chemical feedstock, natural gas and gas liquids have the potential to revitalize America’s heavy industry and open up new markets in transportation. Now there is talk of the United States becoming energy self-sufficient by 2030.

As production of American shale oil increases, traditional oil suppliers to the United States are diverting cargoes to new markets. And because utilities have been switching to natural gas from coal to generate electricity, CO₂ emissions are down significantly. 

In fact, according to U.S. Energy Information Agency data, natural gas has displaced nearly 10 percent of the coal used to generate electricity in the U.S. over the past two years.

And where is that coal going?  To Europe!

There is a certain irony here:  Cheap U.S. coal is replacing cleaner-burning natural gas in Europe. Coal, of course, produces far more CO₂ than natural gas. So despite a major, costly push to subsidize and develop renewables, Europe’s CO₂ emissions were actually up last year, while here in America, they were down.

Which is more proof that government policy, or the lack of it, sometimes has unintended effects.

In Europe, there has been far less enthusiasm among policymakers for natural gas. Which to me does not make a lot of sense, because gas is the natural ally of renewables like wind and solar.

The fear among some is abundant natural gas will hinder the advance of renewables. But gas has a strong role to play as a backbone fuel as the renewable industry develops.

Wind and solar are intermittent energy sources. Natural gas can keep the electricity flowing when the sun doesn’t shine and the wind fails to blow. Unlike many other energy sources, gas can be switched on and off quickly. And its global supply is increasingly diverse, which enhances energy security.

So Europe is finding out that getting the energy mix right is crucial. If you invest in renewables to lower greenhouse gas emissions, but then switch from natural gas to coal to make up the difference, have you really improved anything?

Much of Europe is also believed to hold shale resources. But some countries have been reluctant to explore for them. And with no strong government policy direction in favor of natural gas, utilities have been reluctant to invest in new plants.

France has even banned hydraulic fracturing due to environmental concerns.

The reality is hydraulic fracturing has been performed more than 1 million times over the past six decades in the United States alone. Documented instances of freshwater contamination have been extremely rare. When a well is designed and constructed correctly, groundwater will not be contaminated.

That said, our industry needs to work with governments to do a better job of addressing these concerns. Strong regulations and tough enforcement are needed to ensure all operators drill shale wells properly and protect groundwater and the environment. Shale development must be done in a demonstrably responsible way to gain public support.

At Shell, we also support regulations to disclose chemicals used in hydraulic fracturing fluids, and to promote transparency and public engagement by the shale gas industry in relation to all its activities. Here in the United States, we already publicly disclose our fracturing fluid chemicals through the FracFocus online registry, to the extent allowed under our supplier contracts.

As I said, the shale revolution does have the potential to go global. Some reports suggest China may have considerably more shale gas than the United States. Exploration is under way there to determine its potential.

China, like the United States, has an abundance of coal, but is also looking for cleaner alternatives as it deals with its rapid growth and increasing pollution.

But the growth of shale resources globally is by no means certain. The technologies, skills and policies needed for this revolution to take hold outside North America will need to be transferred and developed.

So what are the geopolitical implications of the American shale boom?

The abundance of natural gas and affordable prices are already giving the American chemical industry and energy-intensive manufacturing a global competitive advantage. Countries and regions that fail to adopt a strategy to utilize their own shale gas resources could find their manufacturing industries on the losing end.

The situation with oil is more complicated. The same technology that has led to the gas boom is being used to free up oil trapped in shale. As a result, the United States will likely import far less oil from the Middle East over the next two decades.

But most analysts expect the United States will still need to import. And it will still have an interest in ensuring global energy security. 

One reason is there is limited refining capacity in the U.S. for light oil. This means some oil will need to be exported and other crudes will continue to be imported to accommodate the refining infrastructure. Overcoming this imbalance will take time and considerable investment.

But there are other practical, strategic reasons for the United States to remain engaged in the region. The European Union and Japan are key political allies who will continue to be highly dependent on Middle Eastern oil. China is expected to become more dependent as well. 

Because the oil market is global, any major disruption to the flow of oil in any region would affect the global and U.S. economies. So it is hard to see a scenario in which the United States abandons its interests in the Middle East. 

There is no doubt the shale revolution has been good for North America and its economic recovery, and that it has altered the region’s energy picture favourably.

Conclusion: what needs to be done

But the American shale revolution alone will not get us on the road to a cleaner and more sustainable global energy system. So, in summary, what needs to be done?

First, the world needs to follow America’s lead and take full advantage of the cleanest-burning fossil fuel:  natural gas. The International Energy Agency estimates there is enough technically available natural gas globally to last 250 years at today’s consumption levels.

Increased use of natural gas is the biggest single step the world can take today to begin reducing CO₂ emissions. In generating power, natural gas produces about half the CO₂ emissions of coal.

As I said earlier, gas is the natural ally to renewables. And its supply is increasingly diverse, which enhances energy security.

Second, governments must support development of carbon capture and storage technology to make fossil-fuel use cleaner. This is critical to take CO₂ out of the power sector over the next 50 years. It can help meet the demand for cleaner energy at a time when renewables are still being deployed on a relatively small scale.

But the technology remains in the early stages of development. It needs major financial support and strong mandates around the world to get off the ground.

Finally, all governments need to promote more effective, efficient urban planning and transportation. There is a tremendous opportunity for good planning to moderate the growth in energy demand, especially in the swelling cities of China, India and other high-growth nations.

It’s simple, really:  Cities with higher population density are more energy-efficient than sprawling cities. They encourage people to use public transport and drive less. Widespread development of more compact cities offers savings on average of 2-thousand kilometres per person annually in car use, compared with the low-density development common in many parts of the world today.

Intelligent urban planning could transform the global transport system over the next 50 years, by providing the infrastructure for cars and trucks powered by electricity, hydrogen and natural gas. The increasing use of LNG in trucking and marine transportation here in North America is an excellent example.

Substantial efficiency gains should be targeted in other areas as well. These include retrofitting homes and commercial buildings, optimizing energy use in the heavy and petrochemical industries, and redesigning our transportation systems.

But for these things to happen, we will need far-sighted government policies and far more collaboration between governments and businesses. I don’t need to tell you this is something that generally has been lacking in the West.

In fact, China has been perhaps the most pragmatic and far-sighted in setting energy policies to prepare for a future in which demand will soar. China has set clear goals with a view towards ensuring a cleaner, more diverse and sustainable energy system.

We know the scale of the challenge ahead of us.

We know it will require a global, coordinated and intelligent response. 

The time to act is now.