World Energy Congress, Sydney- 8th September 2004

It is both a pleasure and a privilege to be invited to address you as delegates to the 19th World Energy Congress, especially on a topic as challenging as this one.

I have been fortunate enough to work in the global energy industry for over 30 years, and I can honestly say that I think we are standing on the cusp of one of the most exciting periods ever.  We truly are in the midst of a changing landscape, not as observers but active participants.  Of course, change can be unnerving, not knowing where we are headed, and not knowing whether we have prepared sufficiently for the journey.

As some of you will be aware, Shell pioneered the use of long-term energy scenarios – looking out over some 50 years – to help us better understand how energy systems might change.  Scenarios are not an exercise in prophecy, but rather alternative stories of how the world might develop.  I thought it would be useful to share these scenarios with you, to show how the landscape of energy might change.

The scenarios turn around three fundamental challenges:

1. Giving all people access to the benefits of efficient, commercial energy from which nearly a fifth of the world is still excluded;
2. Meeting the expanding and shifting energy needs of an urbanising world as economic development raises the living standards of billions of people; and
3. Addressing climate change which has the potential to damage health, blight the environment and threaten vital natural systems.

In meeting those challenges, there will be three key drivers that have the potential, either by themselves or in combination, to bring about fundamental change in our energy systems:

1. Energy resource scarcity –the ability to find, extract, produce, transport, store and sell energy to customers will continue to be critical, and will determine what energies are viable. 
2. New technologies will be developed that have the potential to radically change the sorts of energies we use, and how we use them.
3. Social and personal priorities – the attitude of governments and the public towards energy security or self-sufficiency will influence the uptake of certain energy sources.  Similarly, personal choices related to values, the environment and lifestyles will dictate which technologies individuals will take up.

With those three common drivers in mind, let me outline for you Shell’s two current energy scenarios, as pictures of how the energy landscape might look in the future. Our scenarios remind us that energy systems are dynamic, able to respond to changing conditions, choices and possibilities.  They also suggest that the rise in human-induced carbon dioxide emissions can be halted within the next 50 years without jeopardising economic development.

The first, called “Dynamics as Usual” shows an evolutionary progression from the past wood and coal ages, to the present oil age, and then to gas, and possibly nuclear, and thence to renewables.  This scenario is driven by society, where policies, taxes and values are implemented by governments in response to lobbying by different groups in society. The key driver behind this scenario is social and personal preference, particularly as concerns the impact of energy on the environment.  Concerns about supply security and air quality and climate change stimulate the development of cleaner fuels, more efficient engines and ultimately the development of renewable technologies. The energy system becomes a diverse mix of energy sources and technologies, with no clear winners. 

The second scenario, called “The Spirit of the Coming Age”, tells the story of how hydrogen provides a solution that triggers a technological revolution and breaks the evolutionary chain that has gone before. In contrast to the previous scenario, The Spirit of the Coming Age is customer driven, and shows how meeting the needs of customers can take you off the beaten track. In response to customer demand for clean, efficient, easily portable energy, the scenario contemplates the development of ‘hydrogen fuel in a box’, where fuel would come in two litre bottles.  Six bottles will be enough to power a fuel cell car for 400 kilometres, and the bottles can be distributed like soft drinks through multiple distribution channels.  In this scenario, it is technological change, reinforced by social and personal preference, that provides the impetus for energy transition. By 2030, a century long process of developing hydrogen infrastructure will begin, and hydrogen will dominate the energy market thereafter.

Interestingly, both scenarios forecast that the way we use oil, and the geography in which it is used, will change in the years to 2050, but for quite different reasons.  Neither scenario predicts that oil will cease to be part of the energy mix, although its relative contribution to the mix will decline.

“Dynamics as Usual” foresees a focus on health and the environment in the industrialized countries propelling the development of cleaner hydrocarbon fuels and more efficient engines, which require less oil to go the same distance.  This is complemented by the expected demographic growth in developing countries, and the consequent growth in demand for transport and heating fuels. This scenario shows the counterbalancing effect on oil supplies of concern for the environment in the industrialized countries on the one hand versus the desire for cost efficient personal mobility in the developing world on the other.

“The Spirit of the Coming Age” also predicts a decline in oil as a source of primary energy, although it will continue to be used widely in the production of hydrogen.

It is interesting to note that neither scenario forecasts the end of oil’s dominance in world energy markets due to us running out of oil.  Concerns over the environmental effects of burning oil, coupled with concerns about security of supply, will prompt the world energy consumers to adopt alternatives.

If we jump from looking at the future for today’s primary fuel to what we think will be the fuels of 2050, our scenarios predict a much greater role for the so-called ‘alternative technologies’ – renewables and hydrogen powered fuel cells. 

The key theme running through both scenarios is concern about global warming, and the effect of energy on the environment.  It is this concern that will drive us towards a greater use of renewables and hydrogen in the longer term – with the only real uncertainty being the pace of change.

The advantages of renewables are well established, from an environmental point of view.  On the other hand, whilst fossil fuels will be a ready source of hydrogen for the foreseeable future, hydrogen does offer environmental advantage because the harmful emissions are concentrated at the point of production.  This gives sufficient scale to allow those emissions to be candidates for emission reduction technologies. 

However, the journey to this renewables and hydrogen future is not without its challenges.  Chief among these challenges is making renewables and hydrogen work commercially.  Here we are caught in the classic Catch-22 situation – we need sufficient scale to make such technologies cost competitive, but we know that large numbers of customers will not use this technology unless it is already cost competitive. 

It is also difficult to predict which of the renewables technologies will win in the end – as each of the technologies attracts significant public concerns on matters other than cost.  It is not until the social and personal priorities of society can be balanced that renewables and hydrogen will form a major part of the energy mix.

So, if oil will play a declining role in the energy mix, but renewables and hydrogen will not be commercially ready to take its place for at least the next 20-30 years, what then will bridge the gap?  It is our belief that this role will be filled by natural gas. 

Gas is a fuel with great potential.  It has many competitive advantages, including:

• Relative abundance and geographic diversity;
• Cost;
• Cleanliness and lower carbon; and
• Flexibility.

For these reasons, world gas demand seems set to continue growing strongly.  The world could be consuming more gas than oil by 2025.  That would mean very large incremental growth providing two to three times more gas over the next 30 years that we have in the period since 1970.  It would also mean delivering much more gas across borders and over much longer distances.  Indigenous supplies now meet 80% of demand.  By 2030 it could be less than half as pipeline imports double and LNG supplies grow five times. Both scenarios predict a dramatic increase in the proportion of natural gas in the energy mix from now until 2050, most particularly in the period to 2025, whether as a primary fuel, or a fuel used for generation of electricity or hydrogen.

However, even with natural gas, we should not underestimate the challenges involved or the need for an environment which supports the necessary very large and long-term investments.  But there are other challenges too, particularly responding to community and environmental concerns.  To offer an example of some of the concerns that we need to address, many of you will know of the strong concerns expressed against building LNG import terminals in the United States.

These concerns are generally based around a desire to protect coastlines and marine environments, a fear of leaks, pollution, explosion or possibly terrorist attack and some general confusion over LPG storage and handling rather than LNG. Shell, and the general gas industry, is involved in helping to overcome those concerns through a process of education and awareness working with the community and regulators, drawing upon the decades of experience and safe operation of these terminals in Europe and Japan but we know that it will take some time.

As well as gas being a bridging fuel, we believe that there are also bridging technologies that may prove to be part of the answer.  These new technologies which will enable us to alleviate the social and environmental concerns associated with the use of traditional hydrocarbon energy sources, such as oil and coal.  These technologies have the potential to support the ongoing use of fossil fuels until such time as the uncertainties associated with the new alternative energy technologies have been resolved. 

These technologies include coal gasification, coal to liquids, gas to liquids and the development of oil sands and tar sands extraction technology.  The potential of the coal related technologies is huge, particularly in places like China, which has huge indigenous deposits of coal and a rapidly growing demand for energy. Coal offers a relatively inexpensive source of energy, with little concern over supply security – but using it in the traditional ways carries a large environmental and health burden.  Coal gasification and coal-to-liquids technologies would enable coal to be burnt more cleanly, with dramatically reduced emissions to the atmosphere. 

As well, there are other technologies which enable us to contain the potential harmful emissions before they are released to the atmosphere.  I am thinking particularly of geological sequestration of carbon dioxide gases in underground reservoirs.  Here in Australia, Shell and our Gorgon joint venture partners are committed to pioneering the use of geological sequestration to contain the carbon dioxide that will be associated with the production of gas from the Gorgon gas fields.  Shell is also working on a patented product called “Shellment”, which converts captured C02 into building materials.  Not only does this use what would otherwise be potentially harmful emissions, it has higher compressive strength than ordinary concrete, making it a valuable product in its own right.

However, geological sequestration is likely at best to only be a medium term solution, as there is insufficient underground capacity suitable to hold all the world’s greenhouse gas emissions in perpetuity.  For example, here in Australia, the Co-Operative Centre for Greenhouse Gas Technologies estimates that only about 12 % of our potential C02 storage capacity is suitable for use, due to a combination of technical, economic and regulatory constraints.  If we could improve the technology, improve the economics and increase public acceptance of geological sequestration as an option, that would enable us to improve the usable capacity to about 60% of storage capacity.  However, this would still only be equal to about one year’s worth of Australia-wide greenhouse gas emissions. 

The crucial question as I see it in this bridging phase is how serious society is about containing greenhouse gas emissions by 2050 and reducing thereafter.  If society is truly serious about reducing emissions, and combating global warming, then, unless new technologies break through early, I see that we will all have a stark choice.  T

There is only one significant technology available today which could offer zero emissions, and is able to be commercially scaled up to meet significant demand – nuclear.  However, as you will all be aware, the use of nuclear energy raises a whole host of social and environmental concerns. But - if global warming is the primary concern of society, will these environmental and social concerns be overcome to allow nuclear to provide the answer?

This is but one of the open questions regarding how the energy landscape might change in the medium term and in the longer term.  I would like to end this formal part of my presentation with some more of those questions, in the hope that you will join my fellow panelists and me in discussion about these issues:

• First, what decisions will best stimulate the development of, and switching to, new energy forms?  How will new infrastructures be paid for to accelerate the competivity of these new energy forms?
• What can individual actors do to catalyse a true global consensus on action to address global warming?
• What impact will the bridging transition have on geopolitical and national alliances?
• And finally, what will follow the gas bridging age?

I look forward to debating these issues with you.

Thank you.

Tim Warren