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Speeches and articles
Investing in the future
At a time of political and economic uncertainty, the oil and gas industry faces strong short-term pressures. In this keynote speech to the annual Oil and Money Conference in London, UK, Peter Voser emphasises the need for the industry to continue investing in new energy supplies, in new technology and in its people. With global energy demand set to surge, Peter suggests that persevering with difficult projects today will bring rewards in the future.
Investing in the future
It’s a real pleasure to be back at the Oil and Money conference. And a welcome opportunity to reflect at this time of uncertainty for our industry.
The macro-economic outlook remains volatile, despite signs of recovery. And the summer saw a surge in the oil price due to the instability in parts of the Middle East. Right now, you could be forgiven for not looking beyond the end of 2013.
But I believe we’re at our best as an industry when we look to the future.
It’s clear that the future will bring enormous opportunities and challenges, as global energy demand surges.
So today I’ll stress the need to persevere and to continue investing in new supplies, in new technology and in our people. None of this is easy or cheap but we must remember it could bring enormous benefits over the long-term.
Let’s first step back and consider the big picture.
Global energy challenge
The coming decades will see a historic change in human society and the global economy. Billions of people are emerging from poverty in China, India and other emerging economies. They’re buying their first fridges, cars, washing machines, and all the consumer goods we take for granted in the West. Those same countries are undergoing rapid industrialisation and urbanisation.
This will transform the world’s energy system. Overall demand could double over the next 50 years.
It’s true that North America’s shale oil and gas revolution will relieve some of the pressure, especially if it’s repeated elsewhere. But it can only be part of the answer. Over the next seven years, the world could generate new energy demand equivalent to China’s entire energy system.
You also have to consider the impact of declining production in mature oil fields.
According to the IEA, crude oil production from fields that were producing in 2011 will drop by nearly two-thirds by 2035. That lost production would exceed OPEC’s total crude oil output in 2011.
Other events have intensified the pressure. Japan recently closed its last operating nuclear reactor for safety inspections. Prior to the Fukushima tragedy in 2011, nuclear power provided around one-quarter of the country’s electricity. To cover the shortfall, Japan has increased its energy imports.
In summary, supplying the world’s energy needs will be extremely tough. According to the IEA, the world will need to invest some 37 trillion dollars in the global energy infrastructure between 2012 and 2035. Let me repeat: 37 trillion dollars. That works out at an average of 1.6 trillion dollars a year or around 30 billion dollars a week.
That’s the inescapable reality.
Investing through the cycle
So how should our industry respond over the next decade?
Our first priority must be to invest heavily in new supplies and to maintain it through economic and political turbulence. Failing to do so would be a sure path to another supply crunch and major price volatility.
The cornerstone of this investment must be a sound balance sheet – one strong enough to withstand volatile energy prices and revenues and flexible enough to underpin billions of dollars of investment in new energy sources. We must balance this investment with a prudent financial framework, generating the cash to repay debt and provide shareholders with an attractive return.
This is an approach for the long term. One advantage is that it means we can access oil and gas trapped in difficult or remote locations, like the Russian sub-Arctic and the Gulf of Mexico.
Now, I recognise that these projects are daunting. In some cases, five or six partners can be needed to provide specialist expertise in drilling and construction. And major deep-water and liquefied natural gas (LNG) projects can now cost tens of billions of dollars. That’s a far cry from the 1990s, when mega-projects cost several hundred million dollars.
But the challenges of these projects must not obscure their vital importance. They are powerful engines of growth and profitability for our industry and play a critical role in supplying the world’s energy needs.
The Sakhalin-2 project is a prime example. It’s Russia’s first LNG plant and one of the largest integrated oil and gas projects in the world.
Building offshore platforms in the Russian sub-Arctic posed major challenges for our engineers. The sea is frozen for six months of the year and air temperatures can fall to minus 40 degrees Celsius. Sakhalin also sits in the middle of an active seismic zone. So we had to safeguard the platforms from this danger.
You may also recall that relations between the original shareholders and the Russian government were severely tested in 2005-6 due to concerns about costs.
But I’m delighted to say that the project is now a major commercial and technical success story for all partners. The LNG plant reached full production capacity in 2010 and provides nearly 9% of Japan’s LNG. And Shell and Gazprom have entered into a strategic alliance agreement to expand our co-operation.
So the project is a great lesson that perseverance and long-term thinking do bring rewards in our industry.
That leads directly to my second priority: innovation.
During difficult times, it’s possible to lose sight of why this matters. This is especially true in our industry, where scaling up technologies can take decades.
But innovation is a precious investment in our future competitiveness. For example, in Qatar, Shell is converting natural gas into liquid fuels and chemical feedstocks at our massive Pearl gas-to-liquids plant. This 19-billion-dollar investment was the culmination of about 40 years of research and refinement to perfect this technology.
For countries like Qatar with vast reserves of gas, gas-to-liquids technology provides a way to get more value from their resources by carrying gas into new markets. It took around four decades to bring Pearl to fruition. But it’s a project that will provide returns for Shell and Qatar Petroleum for decades to come.
Our Prelude project is another good example. Work is well under way on this pioneering floating facility that will allow us to process, store and transfer liquefied natural gas at sea.
It will be the largest offshore floating facility in the world. It will be used to tap the Prelude gas field more than 200 kilometres off Australia’s northwest coast, a field that is too small and remote to be economically developed in the traditional way.
This massive display of technological know-how will eliminate the need to devote land and pipelines to process LNG onshore. It will unlock significant reserves of gas that otherwise might not be tapped.
At Shell, we first started a floating LNG work programme back in the mid-1990s. And the front end design phase for the Prelude facility involved more than 600 engineers in the Netherlands, France and South Korea. We estimate that Prelude FLNG will generate tens of billions of dollars in revenues over a 25 year lifetime.
So new technologies in our industry can take decades to develop – but they can also bring decades of rewards.
Investing in our people
Perhaps the best way to invest in the future is to invest in our people.
We need people with the technical and operational skills to build and manage difficult projects. And safety management must be at the core of their expertise. It’s vital to restoring public trust and confidence in our industry.
Last month saw the official opening of Shell’s new Wells Learning Hub in Sarawak, Malaysia. It trains well operators to the very highest operational and safety standards, and is the first of its kind in Asia. The hub uses advanced simulators to re-create the experience of working in well operations. Its training programmes are open to professionals from across the region and from other oil and gas companies. In fact, the hub has already produced 800 certified well operators.
It will help Malaysia to tap its deepwater resources. For example, Shell is developing the Gumusut-Kakap deepwater field, in partnership with Petronas and other companies.It is expected to produce an enormous 135,000 barrels of oil equivalent a day when up and running. These projects can only be delivered by people trained to the highest operational and safety standards.
I’ll finish by briefly looking beyond the next decade. Our industry should retain the courage and foresight to explore new opportunities and markets. I’m talking about opportunities that could blossom in twenty or thirty years’ time.
To help us understand the future at Shell, we draw on the expertise of our scenarios thinkers. For 40 years, this team of experts has produced independent analysis of the global energy system. Their new report assesses how major social, economic and political forces might unfold over the 21st century and their impact on the energy system.
The scenarios highlight several areas of promise. For example, biofuels can play a major role in removing CO2 from the transport sector, with oil use expected to increase until at least the 2030s.
Natural gas could play a growing role as a transport fuel, especially if global gas supplies continue their rapid expansion. Gas-fired power would support the growth of electric mobility in the world’s growing cities. We could also see increasing numbers of trucks fuelled by LNG and cars by compressed natural gas.
The scenarios suggest that carbon capture and storage technology will be critical to taking CO2 out of the power sector over the next 50 years. That’s because fossil fuels will continue to supply the majority of global energy for decades to come.
I’m not suggesting these opportunities will be easy, but they could be the bedrock of our future competitiveness.
And we must never under-value the future.
That’s the critical message to keep in mind at this time of uncertainty.
It’s true that our industry faces strong short-term pressures. But we also face an inescapable reality: the global energy system is in the early stages of a historic transformation.
The best way to respond is by investing in the future - in new supplies, in new technology and in our people.
History suggests that perseverance today can lead to major rewards tomorrow.