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Realising Australia’s natural gas potential

Speech by Peter Voser, Chief Executive Officer, Royal Dutch Shell plc at the Australian Petroleum Production & Exploration Association Conference 2013 in Brisbane, Australia on May 27, 2013.
Peter Voser

Australia is a nation blessed with an abundance of natural gas; its challenge has been that most of this gas is in remote or difficult locations. But thanks to improvements in technology that make tapping these reserves possible, Australia is positioned to become a major player in the world energy market. In this speech to Australia’s largest organisation representing the energy industry, Peter Voser puts Australia’s situation in a global context and discusses the steps the nation needs to take to realise its natural gas potential.

Realising Australia’s natural gas potential

It is always a pleasure to be back in Australia, especially here in Queensland, with its natural abundance and spectacular beauty. Once you experience Australia, you instantly understand the deep pride and affection its people have for it. So thank you, again, for giving me a reason to return.

I’ve been asked to discuss how Australia can realise its natural gas potential. But before I go there, I want to share with you Shell’s view of the world, to put Australia’s situation in a global context.

World energy outlook

Most of you are well-aware of the scale of the world’s future energy challenge. It’s being driven primarily by a rapidly growing population and rising prosperity in the developing world.

Every 10 days, the world’s population increases by the equivalent of another Brisbane. And every year, millions more people move up from poverty and join the middle class.

This is one of those good-news, bad-news stories. The rise in prosperity constitutes a remarkable human achievement, a benefit of the global economy. But it also raises issues that promise to become more challenging for all of us to address in the years ahead.

Millions of people in the developing economies are flocking to rapidly growing cities, where they are using their first appliances and driving their first cars. In other words, they are using a lot more energy.

This creates a “prosperity paradox”. The ongoing rise in prosperity creates stresses that over time threaten to undermine that prosperity.

By 2030, we expect demand for energy, water and food to have risen by 40–50%. 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.

In addition, the potential effects of climate change will influence all three.

You are seeing evidence of these stresses, and the effort to find the right balance between competing land uses, here in Queensland. It’s a situation that is being duplicated in many parts of the world as the demands on these resources become more acute.

So it’s clear energy, water and food need to be carefully managed together. We need to understand all the potential linkages and the impacts that one use has on the other. Only then can we make the right decisions.

Shell Scenarios

At Shell, we spend a lot of time analysing global trends like these. We do so to get a better handle on the future and, hopefully, 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 four decades, our in-house scenarios team has the mandate to look towards the future with an independent, unbiased eye. The future, of course, is neither completely predictable nor completely random. The scenarios 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 analyses 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. Here are a few highlights from the report:

  • By 2035, both scenarios anticipate the world’s renewable energy sources growing by at least 60%, or even double;
  • Yet in each scenario, fossil fuels are still likely to meet about 60% 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 although that’s down from 80% today, we are talking about a smaller slice of a much larger pie, so the demand for fossil fuels will remain strong;
  • 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.

But it appears clear that natural gas is poised to play a far larger role in the future. It is increasingly abundant, its supply is increasingly diverse, and it is a natural ally to renewables.

Renewables are intermittent sources of energy that need another fuel to generate electricity when the wind stops or the sun doesn’t shine. Gas-fired power plants can respond quickly to fill that gap, and when used to replace coal, gas can cut CO₂ emissions in half.

The abundance of natural gas and affordable prices are already giving the American chemical industry and other energy-intensive industries a global competitive advantage.

Countries and regions that fail to adopt a strategy to utilise their own shale gas resources could find their manufacturing industries on the losing end.

Australia’s position

That’s the global context. So where does Australia fit into this overall picture?

This nation obviously is blessed with an abundance of natural gas. Its reserves of the cleanest burning fossil fuel are well-documented. The big challenge is most of this gas is in remote locations, which is why it has remained undeveloped for years.

But thanks to improvements in technology that make tapping these reserves possible, Australia is positioned to become a major player in the world’s move towards a cleaner, more sustainable energy system.

Australia has the advantage of being situated at the front door of Asia, where much of the world’s energy demand growth will occur over the coming decades. And Australia’s emergence as a major natural gas source comes at a time when demand for gas, and liquefied natural gas in particular, is taking off.

Demand for LNG is expected to double in this decade alone. We see a bright future for LNG, not only as a power source, but as a transport fuel as well.

In fact, Shell is pioneering LNG for transport in Australia, with a large-scale project being considered to supply LNG as a fuel along Australia’s biggest trucking route. Similar projects are under construction in the United States and Canada.

These are among the reasons why Australia is a key part of Shell’s growth strategy. We plan to invest about $30 billion (US) in Australia over the next five years.

But like many other nations trying to develop their resources responsibly, Australia has its challenges. Major investments are needed for facilities and infrastructure to access Australia’s resources. And as you know, rising costs have become a significant challenge for companies doing business here.

There is also the inevitable challenge of accommodating different land uses and land users, as I indicated earlier. All these issues must be resolved in a fair and practical way if Australia is to move forward.

In addition, this country is facing rising competition from other gas producers in North America, Asia and East Africa.

In the end, Australians and their elected leaders will decide how best to address these challenges. There are some steps that, if taken now, can help Australia realise its energy potential:

  • First, setting the right regulatory and tax policies to drive innovation and investment;
  • Second, putting a priority on education, with a focus on boosting the number of graduates with the skills needed to take on big energy projects;
  • And third, industry and government must do a better job of partnering and working together to tackle these challenges.

Innovation

Innovation is critical to keeping Australia competitive. Our Prelude project is a good example. Work is well under way on what we expect to be the first floating facility to process, store and transfer liquefied natural gas at sea. It will be the largest floating offshore 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 also holds the promise to unlock additional significant reserves of already discovered gas that otherwise would not be tapped. In turn, it will create jobs, substantial tax revenue, improve Australia’s balance of trade and provide new opportunities for businesses here.

Here are a few numbers; over its 25-year expected lifespan, Prelude FLNG will:

  • Add an estimated 45 billion (AU) dollars to Australia’s GDP;
  • Create about 350 direct and 650 indirect jobs;
  • Contribute tax revenues totalling more than 12 billion dollars;
  • Result in another 12 billion dollars in spending on Australian goods and services;
  • And improve Australia’s balance of trade by more than 18 billion dollars through exports of LNG, liquefied petroleum gas and condensate.

Another example of innovation that holds tremendous potential is being developed as part of our Arrow project to convert coal-bed methane into LNG here in Queensland. Shell has teamed with China National Petroleum Corporation to deploy an entirely new drilling concept. It’s called the Sirius Well Manufacturing System.

It eliminates the need for big, multi-purpose rigs. Instead, the system uses a series of small, mobile, computer-controlled rigs, each designed for a specified task. Sirius will allow Arrow to drill faster, more consistent wells at lower cost and on a significantly smaller footprint, reducing the impact on farm land.

Here’s one more example, this one from the other side of the world. In Qatar, Shell is converting natural gas into liquid fuels and chemical feedstocks at our massive Pearl gas-to-liquids plant. This $19 billion (US) investment was the culmination of more than three decades 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 form their resources.

Each of these achievements resulted from developing technology to overcome obstacles, then drawing upon our decades of operational expertise to make it work. It’s something we at Shell do well; it’s what we bring to the table.

With innovation comes smarter, better and more efficient ways of extracting and using resources while protecting people and the environment.

Although I am proud of Shell’s track record of innovation, the fact is that new technologies just as often originate from small and medium-sized businesses all over the world. Providing incentives that support these businesses in developing new technologies is critical, not just to meet the energy challenge, but to develop your local and regional economies.

I’m optimistic about the role technology will play in the decades ahead in helping us meet our future energy and climate challenge. But its benefits will come only from a long-term commitment from industry, government and academia to research and find ways to apply that research in the field.

Education and partnerships

Government and industry support for education is also a necessity. This is particularly true in Australia, where our industry is dealing with a shortage of employees with specialised technical skills. We are already working in partnership with several universities in Australia to address these needs, but more work needs to be done.

At Shell, we believe strong partnerships in many areas will be increasingly essential as the world transitions to a new energy future. What our industry needs to do better, and soon, is improve our collaboration with other industries, with governments and civil society. No one company can go it alone anymore; the scale of the energy challenge is too big.

Shell has a long tradition of partnering and collaborating with other independent oil companies and with national oil companies. In Australia, all of our key upstream projects and exploration activities are in partnership with others.

Our investment in Arrow Energy to develop LNG here in Queensland is a good example. By partnering with PetroChina, we have the opportunity to strengthen our ties with the Chinese market, to the benefit of Australia.

Increasingly, we are partnering with leading companies in other industries as well, including IT, aerospace and even video rendering, to create advanced technology solutions to new challenges.

From our experience, successful partnerships result when both sides are clear on what they want to achieve, when their needs are taken into account in a balanced way, and when they are able to adapt to changing circumstances over time.

Doing it the right way

We have also learned over the years that there are no shortcuts to doing our projects the right way. That means being transparent about our plans, respecting and consulting with the communities in which we operate, and addressing public concerns.

As an industry, we have not always done our best to engage in public debates about resource issues. This often results in misconceptions taking root. We have seen this in North America and elsewhere with concerns about the impact of hydraulic fracturing.

We need to do a better job of listening and responding.

To this end, Shell has adopted five operating principles for our onshore tight oil and gas operations. These provide a framework for protecting water, air, wildlife and the communities in which we operate. We have committed to support regulations that are consistent with them.

Our hope is they can be applied over time to all tight oil and gas operations around the world. We also support regulations to disclose chemicals used in hydraulic fracturing fluids, and to promote transparency and public engagement by the tight and shale gas industry in relation to all its activities.

As an industry, we should insist on strong, consistent regulation and enforcement that ensures everyone in the industry does the job right.

The good news is we are seeing broader recognition around the world of the benefits of natural gas as it becomes more abundant due to improved technologies, like hydraulic fracturing.

There are environmental and operational challenges associated with the production of tight and shale gas. But our industry has the expertise to effectively deal with these challenges.

In conclusion, Australia clearly is in an enviable position when it comes to energy. But Australia also faces many of the same challenges as other countries that are blessed with abundant resources.

The policy decisions made today will have a profound effect on your economy and society. By embracing innovation, partnership and collaboration, this nation will ensure it has a critical role to play for decades to come in meeting the world’s energy challenge.

I am optimistic that Australia, with its can-do spirit and pioneer legacy of overcoming challenges, will summon the will to realise its natural gas potential.

Thank you.