Thank you very much, and good morning.
It’s an honor to be here. The International Oil Summit has become a “must-do” venue… an important opportunity to exchange views and take stock of what’s happening in and around the energy world.
It takes conversations like this one… leaders like you… and organizations like the ones represented in this room… multiplied by hundreds … to tackle the world’s growing, complex global energy needs.
This morning, I’ll briefly offer a view of the broad economic and political trends that are reshaping the global energy landscape.
Then I will suggest that our industry must look beyond just the impact these trends have on our business… rather, that we need to acknowledge the role we play in meeting the societal challenges they pose.
And I’ll make an unapologetic plug for integrated energy companies – why our ability to combine both upstream and downstream value, our global presence, and our intimacy with markets and customers can help all of us in this industry tackle the challenges to come.
I started my career in the Upstream business. But after 15 years in our Downstream refining, marketing, chemicals and trading businesses, I’ve developed a deep appreciation for the face and the value our industry puts to our markets… to our communities and our customers… right down to the individual energy user.
And I’ve come to realize that the continued integration of upstream and downstream strategies has a hugely important role to play in meeting the energy challenges we face.
Our industry has a habit of thinking about the supply chain from the hydrocarbon supply to the customer, rather than (as most industries do) the other way around: from the customer’s needs.
That’s largely because rents have preferentially been captured upstream; the key strategic control point is access to the below-ground resources.
But the real value in what we do gets generated by what we enable our customers to do. The energy, the mobility, the products we produce and make possible, create value hundreds of times larger than we realise in our businesses alone.
Here – and not to insult my upstream friends – I observe that there’s nothing quite as practically useless as unrefined crude oil or gas stranded thousands of miles from a customer.
The fundamental value of what we produce is established at the customer end of our supply chains.
And the world is changing dramatically for our customers
Recent events have emphasized that many challenges we will face in the future are inherently unpredictable. The scientist in me says, statistically, ‘black swan’ events like earthquakes and revolutions aren’t really happening more often. But they sure seem to be.
Just consider what we’ve seen in the last few weeks: a devastating earthquake in Japan, political turmoil in North Africa, another spike in oil prices, a sweeping new energy policy in China, a re-think of nuclear power in Europe. These are based on huge, unexpected, systemic events that can blindside even the most robust institutions.
They are inherently difficult to plan for. They shake people’s faith in institutions and technology. They are game-changing.
Much of this political, social and economic volatility is – by definition – short term. And the impacts are amplified by unprecedented speed of communication and by the increasing interconnectedness of the global economy.
But longer-term, utterly predictable trends will affect us with the inevitability of an oncoming glacier.
Every second, five new babies are born in the world. By 2050, there will be about 9 billion people on the planet, up from fewer than 7 billion today. Adding 2 billion more people is like having another China and India on the planet.
These people will not only have basic needs to be met, but personal expectations that will compound their numbers when it comes to energy consumption.
They will want – and deserve – the jobs, cars, computers, and heated and air conditioned homes that billions of their parents and grandparents could never dream of. They will want – and deserve – the fuel and electricity to keep those things going.
According to the International Energy Agency, by 2035 energy consumption in the developing world could rise by 64% compared with 3% in developed countries. In China alone, energy use could increase by 75 percent in 25 years. In India it could double.
These changes will put huge pressure on our planet’s resources and on the global energy system. Even if we account for the new energy efficient technologies and the new supplies of energy we can imagine today, fueling expectations in 2050 could create a gap between energy supply and demand as big as the entire energy industry was in 2000 – roughly 400 EJ/a.
There is much we can and are doing at the production end of our value chain to close this gap… finding and producing more gas, extracting more oil from end-of-life wells, pushing the boundaries of exploration into deeper water and thicker ice, developing so-called unconventional fossil fuels, and investing heavily in biofuels.
But still, that 400 EJ/a gap is a recipe for volatility on a mammoth scale, as individuals, governments, and institutions are pressed to bridge it one way or another -- through a step change in efficiency, a dramatic jump in supply, or the disappointment of unmet expectations; with inevitable societal and political consequences.
At Shell, our Scenario planners call this the “zone of uncertainty.” It can be either a zone of extraordinary misery or of extraordinary opportunity, depending on how we respond. In either case, we are entering an era of major transitions, some of which will be volatile.
For example, we need to shift to a lower carbon energy system, as the scientific verdict about climate change grows more pessimistic, while the global efforts to tackle CO2 emissions make scant progress, and public opinion varies from alarm to confusion to outright denial.
All of this is happening in an increasingly “flatter” world – where information and opinion twitter around the world through social media, creating instant and overwhelming tides of public opinion; and where the solutions to complex energy challenges increasingly depend not just on government policy and corporate innovation but also changes in the choices that individual consumers make.
So how will the world pass through this “zone of uncertainty?” Where will the investment come from? The innovation? The scientific judgment and political wisdom?
And why is an integrated energy company well-placed to help meet these challenges?
The value of an integrated company: innovating to match supply with demand
Let’s first step back and ask what it actually means to be an integrated company. I’ll use my own company as an example.
Shell produces around 3.3 million barrels of oil equivalent a day. We process and trade some 7.5 million.
We run 250 distribution centers and 2,500 storage tanks in some 60 countries.
We move oil and gas through 9,000 kilometers of pipeline. Our tankers handle more than 100,000 cargo operations a year.
We sell our fuels and lubricants through a network of 43,000 retail outlets. 6,000 trucks are on the roads, making a delivery somewhere in the world every 8 seconds.
We refuel an airplane every 12 seconds, and in the time I’ve been talking we’ve sold enough bitumen to resurface one kilometer of roadway somewhere in the world.
So we’re big. We’re complex. We’re global. But the meaning of all these billions in assets and furious human activity is deeper than just big numbers.
Energy is the most fundamental ingredient to economic progress. There is a reason the integrated energy companies – with their scale and complexity – are so vital to tackling the world’s energy challenges.
First and foremost, we match energy supplies with growing and changing demand on a truly global basis and along the entire value chain.
Upstream we reach deep into the heart of the earth to find the energy resources the world needs now and will need in greater abundance in the future. Downstream we sense the needs of a growing and more demanding population of consumers. And in between, we tie it all together in one of the most extraordinary enterprises in human economic history.
The fast growing liquefied natural gas (LNG) business is just one case in point. Gas is a beautiful fuel: clean burning and with a relatively lower carbon footprint than other fossil fuels. But often inconveniently located.
LNG gives us the ability to liquefy natural gas and ship it to far flung destinations. That links new gas supplies to new customers, strengthening supply security.
Right now, the LNG business is growing at the rate of around 6 to 8 percent per year, driven by a marriage of upstream technical expertise and downstream market savvy, an intimate knowledge of the world’s energy markets and a heavy investment in shipping and logistics. Shell played a large role in creating the LNG business, and it was only possible because we took an integrated view from the natural gas resource to the customer.
The devastating events in Japan have brought into sharp focus the ability of LNG to respond to short term demand fluctuations on a global basis. Within weeks we’ve diverted almost a dozen LNG cargoes to Japan from Dubai, Russia and Nigeria…with more to come.
Now, with the more unconventional gas resources coming on stream, the combination of increasing domestic gas supply and the flexibility of LNG make possible the large scale substitution of gas for coal in power generation…at lower cost and with a much lower CO2footprint. And with intrinsically lower CO2 emissions, technologies like carbon capture and storage – CCS – are more likely to be practical with gas-fired power plants.
This gas opportunity has revealed another benefit of integration. Along with PetroChina we are developing unconventional gas resources in both Australia and China, with a significant fraction of the Australian gas destined for China. So, our partnerships with NOCs are increasingly anchored in integrated plays.
GTL – gas-to-liquid – is another great example. We’re close to completing the $19 billion Pearl GTL project in partnership with Qatar Petroleum – the first-ever world-scale GTL plant.
We’ve used an essentially downstream technology – the fischer-tropsch process – to rescue huge amounts of isolated upstream gas in Qatar, by converting it into liquid products that can be transported to parts of the world that want and need it. But an important dimension of Shell’s participation in Pearl is our ability to leverage the global supply chains and marketing innovation.
When fully up and running in 2012, Pearl will produce enough GTL gasoil to fill over 160,000 cars a day and enough synthetic base oil each year to make lubricants for more than 225 million vehicles. Qatar’s gas will also become naphtha feedstock for the chemicals industry, kerosene for aviation fuels, paraffin for detergents, base oils for high quality lubricants, and even extremely high-quality, environmentally-safe drilling fluids for our industry.
In fact I’m convinced that customer demand for the benefits of GTL-based products – along with our ability to move and market it around the world – will drive even more opportunities for upstream gas plays in the future. And it will help unlock more of the world’s gas resources. That’s the Upstream and Downstream marriage at work.
Canada’s Oil Sands are another example of how integrated upstream-downstream innovation can help close the supply-demand gap and rescue a potentially stranded resource.
The oil sands are some 10 percent of global proven reserves. As a secure and affordable source of energy they cannot be ignored. But neither do we ignore their unique challenges, involving CO2 emissions, environmental footprint and social impacts.
The Athabasca Oil Sands Project shows how we can be a leader in converting a difficult and challenging resource into useable products that people need. We’ve linked upstream capabilities like mining and bitumen extraction to downstream technologies to upgrade bitumen, while working to mitigate CO2 emissions with CCS – a technology that draws on both upstream and downstream skills.
Let me offer one final example of how innovative upstream-downstream integration can help make better use of the world’s energy resources:
We’re exploring with Saudi Aramco for sour gas in the empty quarter of Saudi Arabia. Saudi Aramco is a long time partner in our US and Japanese refining and marketing businesses, a joint venture partner in refining in the Kingdom, and a major supplier of crude oil to our refineries.
The trust and respect nourished by years of downstream partnership have helped realize the value of key upstream resources.
And in addition to exploration, drilling, and sour gas production technology, Shell is contributing unique downstream capabilities that enhance the opportunity. We’ve developed ways to convert waste sulfur into useable products. Shell Thiocrete replaces the cement typically used in concrete and uses far less energy with a smaller CO2 footprint than conventional concrete production.
I’ve mentioned Saudi Aramco, PetroChina, and Qatar Petroleum as partners in adding value through integration, innovation, and our ability to bring the world’s resources and the world’s customers closer together.
As an integrated energy company we believe we bring value to partnerships with NOCs while improving our own access to resources and markets.
But we also create value with business partners and customers at the other end of the value chain.
Take large customers like shipping companies. As an integrated company we talk to them not just about price and volume, but also strategies for keeping their marine engines running longer, or developing new fuels to meet their low sulfur requirements, or managing CO2 emissions. Through these partnering conversations we develop deep insights into what our markets need, and how we can deploy our researchers and scientists to meet those needs.
Our work with managers of truck fleets on telemetry and training tools can help their drivers save as much as 20 percent on fuel costs. At our technology centre in Hamburg, we work with our car manufacturing partners on prototypes to optimize the combination of fuel blends and engine design.
Wal-Mart recently named us their Sustainability Supplier of the Year for our work providing them with EcoBoxes – recyclable bags to store motor oil which have saved Wal-Mart more than 6 million plastic bottles a year, as well as $1 million in waste oil.
On a broader scale, we think biofuels clearly offer the most practical and commercially viable way for governments as well as customers to reduce CO2 emissions from transport fuels today. In fact, we’re sure enough of the importance of biofuels that we’ve committed to an industry-leading Downstream and biofuels production joint venture with Cosan in Brazil. And we’re at the forefront of managing the complex challenges that biofuels pose around sustainability, public policy, and consumer acceptance.
Our partnership with customers reaches right down to the Retail forecourt. Our tips for driving more efficiently have been used by more than 150,000 drivers, while our FuelSave branded petrol saves consumers up to a litre of fuel for every fifty litre tank they buy.
So, today’s volatility – the “zone of uncertainty” – facing our customers, our communities, our economies, and our succeeding generations is unprecedented.
How the history of civilizations unfolds – whether we enter a “zone of misery” or a “zone of opportunity” – will depend fundamentally on our industry’s willingness to create more efficient, more available, cleaner products running the gamut from the chemicals that wash people’s clothes… to the fuel that goes into cars and trucks… to the power that keeps lights on and factories humming.
It will depend on our success in managing our value chains from the customer back. It will depend on the partnerships and trust we build in our markets and in our communities… not just our ability to manage mega-projects and global commodity flows.
In other words, it will depend on fully integrated, upstream-downstream strategies that connect across multiple players…multiple technologies… multiple challenges…and multiple human needs.
As both a scientist and as a thirty year veteran of the energy business, I am both troubled and excited by this challenge. Troubled at the sheer scale and complexity of it. But excited by the opportunity – I might even say the duty – we have to make an historic difference.
I’ve seen our industry face major challenges before, and time after time I’ve seen a combination of ingenuity, creativity and motivation overcome them.
I am hopeful that we’ll do it again.
Thank you all very much.