Speeches

Thank you [chairperson], and thank you to the Department for giving me the opportunity to be here today. 

Ladies and Gentlemen, I’d like to try and contribute to today’s discussion by outlining some global trends in transport energy as we see them in Shell.   We might speculate where these trends will take us in the next 25 to 50 years here in Australia, in the absence of policy intervention.  But, Australia doesn’t have to be simply a victim of global forces.   We can influence our own destiny – provided we have a strong vision of where we want to go.  The question is - “What is the vision for transport energy in Australia in 2030?”   I don’t claim to have the answer now and I guess we won’t nail it by the end on this conference.   But I will pose some questions that I think should help us determine our vision, and help us decide what we should be doing (or not doing) today, to get to that vision. 

 The Trends

 Slide 2

So, what are the key global trends as we see them, and how are they playing out in Australia?   I’d like to mention six trends that I think will impact the way our transport energy system develops.   I’ll speak about each of them separately but in my view, they’re highly interdependent.

 Slide 3

First, conventional fuels will continue to be the major source of transport fuels for the foreseeable future.  By conventional fuels, I mean primarily oil, but also to a growing extent gas.

The most common projections (and on the slide you can see one from the IEA) suggest that fossil fuels will continue to provide about 80% of the world’s primary energy needs to the year 2030, with oil accounting for about 40%.   And it’s for transport purposes that most of this oil will be used.

 Slide 4

Under the IEA Reference Scenario, world oil demand will grow 30% by 2030, with developing countries showing an average growth rate four times that of OECD countries.   The IEA predicts that developing countries will account for 45% of world oil demand by 2030.

We all know oil is a finite resource.   And while libraries are full of learned works on the rate of depletion, it’s pretty clear we’re not in imminent danger of running out.   Technology continues to unlock more difficult-to-exploit conventional reserves and technology also increases production from non-conventional sources, such as oil sands, and gas to liquids projects.   Companies like Shell are continuing to invest in exploration and production in new and difficult areas, and are pioneering development of high quality liquid transport fuels derived from gas, coal and other sources.

 Slide 5

And in terms of fuels refined from crude oil, we’re likely to see the continuing global dominance of petrol and diesel, as this next chart shows. 

This global trend is consistent with what we see in Australia.   Oil currently supplies about 34% of Australia’s primary energy, and ABARE expects this to remain relatively constant to 2030.   Petroleum products account for over 97% of Australia’s total transport needs.   Petrol has the dominant share now but I expect over the next decades we will follow Europe and increasingly turn to diesel in the quest for higher efficiency.   Much more of our oil is now being imported, as production from indigenous fields declines and APPEA, the Australian Petroleum Production and Exploration Association, predicts that the trade deficit in oil and condensate will increase from $4 billion in 2005, to somewhere between $12 and $27 billion in 2015. 

While I expect to see oil playing a major part in transport energy for the foreseeable future, the way in which we use that energy may change.

 Slide 6

That brings me to the second trend - for our transport fuels to become cleaner and more efficient.   This is in response to the energy challenge, which is to provide the world with the fuel it needs, and at the same time minimise the damage to human health and the environment from those fuels. 

We are seeing reduced sulphur and benzene content in conventional fuels and reduced emissions of carbon monoxide, nitrous oxide, volatile organic compounds, and particulates.   Most developed countries have stopped selling leaded petrol for many years now, and by 2010, unleaded petrol will be available almost everywhere.   Low sulphur petrol and diesel will be the norm in the developed world by 2010 and by 2030 should be available in all countries.   No doubt, we’ll continue to see conventional fuel quality improvements being made through to 2030, in the quest for improved air quality.

I expect everyone here is aware of the changes in fuel specifications applying to diesel and petrol in Australia from the beginning of this year.   Within the next few years, I think there will be little difference between the emissions performance of conventional and alternative fuels in Australia, with all fuels producing very low emissions. 

 Slide 7

I expect to see increased global use of synthetic liquid fuels as we look to make transport fuels cleaner and more efficient, as well as use readily available indigenous resources.   Synthetic fuels are already being derived from gas, coal and biomass.   They offer reductions in emissions and they can be used in existing engines and distributed through the existing service station infrastructure.   While there is potential in Australia, I think economic production of these fuels is probably still some way off.   Shell has recently announced an alliance with Anglo American to develop clean coal technology.   One of the first projects that we want to incorporate into this Alliance is the Monash Energy project in the La Trobe Valley in Victoria, which is exploring technologies that produce liquid fuels from non-conventional sources, such as coal, and a gas-to- liquids (GTL) plant with associated power generation. 

 Slide 8

Let me turn to biofuels.   Shell expects that, over the next 20 years, biofuels will grow to more than 7% of our road-transport fuel volume globally, with this volume spread evenly between bio-gasoline and bio-diesel.   As you know, biofuels can offer varying degrees of benefit in well-to-wheel carbon dioxide emissions, depending on the agricultural practices and production processes used.   They do however carry some clear disadvantages compared with conventional fuels at present.   They need significant engine modification unless used in low concentrations, they have a lower energy content than hydrocarbon fuels, and they have relatively high costs of production and distribution.    That said, I believe biofuels will be part of the solution to the global energy challenge.

And part of the solution also in Australia.   As you know, the Federal Government has set a target of 350 million litres of biofuels in the nation’s energy mix by 2010, and all the major oil companies have submitted action plans to meet this target.   Nevertheless, as is the case elsewhere, I expect the establishment of a biofuels industry in this country will be neither low-cost nor rapid.   In this regard, we should note the caution contained in the Report of the Biofuels Taskforce to the Prime Minister.   The Report queries whether assistance to biofuels represents the most cost-effective and best-targeted option for assisting regional development.   Further, it registers concern about negative impacts on other important industries, where for example, high government subsidies allow ethanol producers to outbid livestock producers for feedstock.  These are all factors that we need to consider in determining the place of biofuels in the vision for transport fuels for Australia.   I note the presentation we have just had from Associate Professor Kearney in relation to the health benefits of biofuels and I look forward to the outcome of the Department of Health and Aging’s study on the likely health benefits of ethanol in fuels.

Slide 9

My third observable trend, closely linked with the second, is the development and production of more efficient engines.  

Everywhere, even in America, customers want to use less fuel to take them the same distance and we are seeing a trend towards smaller cars.   Particularly in Europe, we see a preference for more efficient diesel vehicles.   Driver education will be increasingly important.  We in Shell have just participated in the Fuel Economy Guinness World Record Challenge, where an Australian couple, John and Helen Taylor, drove around the world in a standard Volkswagen Polo, using Shell’s new fuel economy grade of petrol.   They traveled 30,000 km, through 25 countries, in 78 days, on 24 tanks full.   Quite an achievement.   Actually, just spending 78 days in a car with your partner is an achievement.   The Taylors have been working with us to help customers understand that the way they drive has an impact on how much fuel they use.  

Car manufacturers are working on improving existing engine technology for the shorter term at the same time as they’re developing new types of vehicles for the medium to long term, such as hybrids and fuel cell cars.   I don’t know if any of you have driven a Toyota Prius.   I have and it’s an astonishing machine.

 Slide 10

There’s little doubt that much of this consumer demand for greater engine and fuel efficiency is being driven by my fourth observable trend – continuing fuel price pressure. 

Around the world, not least in Australia, crude oil and fuel prices are high.   I don’t have a crystal ball that tells me what the price will be tomorrow, let alone in 2030.   We do know some things though.   On the demand side, we see structural growth in developing countries, and little abatement in the developed countries.   On the supply side, we anticipate continuing uncertainty over stability in oil producing countries, and it’s clear there will be increasing investment needed to produce oil from remote and technically difficult locations.  And I don’t expect that the new alternative fuels will moderate overall prices until they reach commercial scale and achieve wide consumer acceptance.   Some time away I think.

 Slide 11

This brings me to my fifth observable trend, the location and capacity of refineries. 

Building and operating refineries is a hugely expensive business, and not one that has offered particularly attractive returns.   Despite the current high margin levels, you would have made more money by putting your cash into long-term bonds than by owning a refinery in Australia over the last 10 years.   Even so, there is a continuing need to invest in facility improvements, not to even grow but just to maintain current business.   To meet the clean fuels specifications alone, Australian refiners will spend something like $2 billion in the decade to 2010.

 Slide 12

So what does this mean for Australia?     The fact is that all our refineries are small by world standards.   Even the largest is less than a quarter the size of many Asian refineries and proposed greenfield refineries in Asia and the Middle East are two or three times larger again.    While the cost of building and maintaining these mega-refineries is huge, these costs can be spread across a large throughput, and are more economic than upgrading older refineries in more developed locations.

I doubt very much that we will see another refinery built in Australia.  Investors are much more likely to build new capacity in Asia or the Middle East.   And that means we will likely see more imports, perhaps rising to around 30% by early next decade.   As Australians, we might wish that it were otherwise, but I don’t think that’s realistic, nor would it be our longer-term economic interests.

 Slide 13

Which brings me to the final trend I wish to cover.   I see a growing tension between the desire to be self-sufficient in fuels from indigenous raw materials and to some extent local refining capacity and to continue to have access to energy at a reasonable cost.   

These desires are not always compatible.    I can understand the longing for price certainty and control but I don’t think ‘fortress Australia’ gets us there.   It runs the risk of increasing rather than decreasing prices, it may impact the ability to export other goods and services, and it would send a negative signal to global investors.   All of which would tend to slow economic growth. 

I don’t of course argue that diversifing our transport energy sources to be less reliant on imports of oil is a bad thing, especially if it prompts technology development in new areas and even more if it leads to more export opportunities.  

The vision for transport fuels

Slide 14

I’ve mentioned six trends.   So what?   What do they mean for transport fuels in Australia over the next 50 years?   Are they inevitable?   Are they desirable for the long-term prosperity of this country?   As I said at the outset, I don’t have a crystal ball but I do believe these trends are important for us and I’m keen that we take this opportunity to start thinking about them.

Firstly, do we have a vision for transport fuels in Australia for the next 25 years?   I would argue that we do not.    Maybe we have one for the rest of the decade, as contained within the Government’s 2004 Energy White Paper.   But, should we have a vision beyond that?   Is it even possible to see that far out?   I think the answer is ‘yes’, not only because it helps determine what we should do today in a policy sense, but also because it tells us what we should not do.   Energy infrastructure - exploration and production projects, pipelines, refineries, biofuels plants, etc – needs very long term investments.  The decisions we make today will determine the energy landscape of the future. 

What questions should we ask in forming our vision?   Well, here are a few…..

1.     What fuels will be present in the vision?      Obviously oil will be there.   But what about gas in the transport mix, either as gas or converted into liquids?   How can we harness our huge coal resources for transport energy?   And how do we plan for the fuels we don’t even know about yet?
 

2.     Where will our fuels come from, both in terms of raw materials and location of manufacturing facilities?    If we want more indigenous sources, how will we promote the development of the relevant production facilities and distribution infrastructure?   What impact might this have on other industries?   Is it important to maintain a national refining industry?    What does this mean for energy security?    What impact will our decisions have on the national current account balance?

3.     What is the interplay between fuels for transport and for power generation? Should we reserve some fuels for transport use only?   This is particularly important in relation to the gas to liquids and coal to liquids technologies I mentioned.

4.     What environmental footprint will the fuels of the future have?   What further changes do we need to make to fuel quality specifications to ensure minimal environmental and health damage? 

5.     What do we need to do today to set ourselves up to achieve the vision?   Do we need more information?  What stakeholders should be consulted?  What should we not do today?   I would suggest that what we should NOT do today is try to pick the winners of tomorrow.

Conclusion

So that’s a long list of questions and, obviously not exhaustive.  I don’t pretend that this will be an easy process but it is one that I believe is absolutely necessary for the future of our country.  

Ladies and gentlemen, I have outlined for you today some trends that I think will influence where we go from here.   Based on the evidence, I have tried to pose some policy questions that I think we ought to be asking to help determine what our future might look like.   Now we need to start the process of dialogue, and I welcome any questions you might have of me now that can help with that process.

Thank you.