In this speech, Malcolm Brinded, Executive Director of Upstream International at Royal Dutch Shell, describes how the current revolution in global gas supplies, driven by the opening up of vast new tight gas sources and the rapid expansion of the liquefied natural gas (LNG) market, will help the world develop a secure and sustainable energy supply. By displacing coal-fired power, natural gas is the quickest and cheapest way to cut emissions of CO2 and harmful local pollutants in the power sector.
New upstream risks and opportunities: the natural gas revolution
I’ll focus on the most promising energy opportunity for decades to come: the gas supply revolution.
We’re witnessing some stunning developments in the global gas markets. But these are merely the opening chapters of an even bigger story. So I’ll assess the full potential of this revolution, before asking what the industry can do to make it happen.
The energy challenge
But let’s first remind ourselves why this supply revolution is a powerful force for good.
According to Shell’s scenarios planners, by mid-century global energy demand is likely to double on its level in 2000 if emerging economies follow historic patterns of development. Keeping pace with this demand will be extremely tough but essential for economic growth and societal wellbeing.
At the same time, the world must manage its CO2 emissions to avoid the worst consequences of climate change. Here, the priority must be to displace as much coal-fired power as quickly as possible.
Last year, coal was responsible for 44% of the world’s energy related CO2 emissions. From now to 2020, the incremental increase in CO2 emissions from coal-fired power in China and India alone is expected to be roughly double the increase from the entire global transport sector in that time.
The case for natural gas
The case for gas is clear.
First, acceptability: it’s the fastest and cheapest way to tackle coal-fired power’s environmental burden. That’s because modern gas plants emit half the CO2 emissions of new coal plants, and up to 70% less CO2 than old steam turbine coal plants, of which there are still hundreds in Asia, Europe and the US.
They also emit far fewer local pollutants like nitrogen oxides (NOX), sulphur dioxide (SO2) and particulates, which take a heavy toll on human health in cities across the world.
Longer term, gas will also help to deliver a more sustainable transport sector, both directly by CNG and LNG in transport, and indirectly by providing cleaner electricity to the world’s growing electric vehicle fleet. That would also ease many countries’ oil imports needs, especially in Asia.
The second compelling advantage of natural gas is its affordability: gas-fired power is faster and much less costly to install than any other new source of electricity. It requires less than half the capital cost of coal per MWH, one-fifth the cost of nuclear, less than 15% the cost of onshore wind and less than 10% of offshore wind.
Nevertheless, natural gas is often – and misleadingly – described as a “transition fuel”: a fuel with only a temporary role to play in the era before renewable energy sources take over.
The reality is that natural gas is a “destination fuel” with a long-term role to play at the heart of a low-carbon economy.
That’s because gas-fired power can be switched on and off more swiftly than other electricity sources. This makes gas the natural partner of the intermittent energy generated by renewables like wind and solar.
Over the longer term, carbon capture and storage technology could reduce emissions from gas-fired power close to zero. And CCS will be more effective in combination with gas than coal, because it then needs to deal with only half the CO2 volumes.
More governments are now waking up to these powerful advantages, as advances in tight gas production unlock massive new resources, with worldwide recoverable gas resources now estimated as being equal to 250 years of current production.
Natural gas: the scale of the opportunity
So let’s step back and assess this supply revolution’s potential impact.
According to the IEA, between 2008 and 2035 gas demand could grow by:
- 60% globally ;
- 8x in China;
- nearly 100% in the Middle East;
- and nearly 30% in North America.
This will partly be driven by environmental legislation, bringing gas’s environmental advantages to the fore. Even more important will be the opening up of vast new tight gas resources across the world at relatively low cost.
So what will it take to realise the revolution’s potential?
It is critical for governments to implement policy measures that recognise natural gas as the fastest and cheapest route to cutting CO2 emissions in the power sector. We ask for no special favours here. All that is needed is for gas to be able to compete in the power market on a level playing field that recognises the hidden costs of competing fuels.
The most important step will be to put a proper price on CO2. And the best way to do that is to cap CO2 emissions and trade emissions allowances.
The EU emissions trading scheme remains a great opportunity to establish a viable blueprint for schemes elsewhere. But to stimulate heavier low-carbon investment, it needs to send a stronger carbon price signal. So for the third phase of the scheme (2013-2020), the cap on CO2 emissions should be tightened, with a reduction in the number of free emissions allowances issued at auction.
Another imperative is to reduce SOX, NOX and particulates emissions from coal-fired power. That calls for the introduction of emissions performance standards for power stations.
Plus we need power markets that pay for the power being there when and where you need it – which gas-fired power is, but other power sources often are not.
At the same time, the industry must expand the tight gas revolution into a truly global phenomenon.
North America now has more than one hundred years of supplies at current consumption rates, only a few years after it was feared that long-term production decline had set in.
But this is only the beginning.
China, Latin America, Australia, Eastern Europe and South Africa all hold significant tight gas deposits. And, according to the IEA, unconventional gas sources could account for one quarter of global gas supplies by 2035 (up from 12% in 2008).
But public concern about the safety and environmental impact of tight gas production is mounting. Even though this is mostly based on misconceptions, it now poses a threat to the rapid expansion of the world’s gas supplies, with several governments imposing moratoria on hydraulic fracturing. How should the industry respond?
We must first adhere to the highest operational and environmental standards, second listen and respond to the concerns of our neighbours, and third make a better case for tight gas.
Shell recently announced our five operating principles for global tight gas operations. These provide a framework for protecting water, air, wildlife and the communities in which we operate. And we require all Shell-operated projects that use hydraulic fracturing to adhere to them.
These include the simple imperative to design, construct and operate tight gas wells in a safe and responsible way, using the “safety case” approach as in the North Sea. This requires our staff and contractors to assess closely, and systematically mitigate all potential risks before drilling begins. That means always lining wells with multiple steel and concrete barriers to prevent leaks.
An especially potent public misconception is that hydraulic fracturing poses a major risk to freshwater supplies. The simple truth is that when a well is designed and constructed correctly, groundwater will not be contaminated. And we’d like to see strong regulation and enforcement that requires everyone in the industry to do it right.
Shell only operates wells that can be safely isolated from potable groundwater, which is generally not difficult, because, for example, the shale gas we produce usually lies a couple of kilometres below freshwater aquifers.
And we support regulation promoting the publication of the chemicals used in hydraulic fracturing in order to minimise public concerns.
Gaining public trust in tight gas is a key priority for our industry and needs a much more visible and effective campaign from all of us.
Global LNG market
I’ll finish with a reminder of the second major driver of the global gas industry revolution: liquefied natural gas.
LNG’s flexibility and global reach were highlighted by the industry’s response to the tragedy in Japan in March. Cargoes were diverted at short notice from sources as diverse as Russia, Australia, Qatar and Nigeria.
At Shell, we expect global LNG demand to double this decade, with Asia the main driver.
Many more countries, including Pakistan, Malaysia and Vietnam, will soon begin importing LNG. And by 2035 China is likely to become the world’s largest importer (IEA), absorbing one-third of global LNG supplies – despite the major gas production expected from its own tight gas resources.
This burgeoning demand is triggering a remarkable expansion in LNG supplies, which we expect to grow at nearly 6% per annum, throughout this decade.
This decade will also see the industry start to produce and liquefy natural gas at sea, opening up large deposits that would otherwise remain stranded because they are too costly to tap.
In May, Shell announced the final investment decision to build a floating liquefied natural gas facility to develop our Prelude gas field, 200 kilometres off Australia’s north-west coast. This giant floating plant will cool the produced gas into a liquid on the spot.
The largest floating offshore facility in the world, its length (488m) will extend to more than 3.5 times the height of the London Eye (135m). And it will have LNG capacity of 3.6mtpa (4.8bcm): that’s equivalent to around 5% of the UK’s total gas consumption last year. I am sure that Prelude will be the first of many such floating LNG facilities around the world.
Let me conclude. With the gas supply revolution, the industry has a wonderful opportunity to tackle coal’s heavy environmental burden. But to realise its full potential, we must bolster public confidence in tight gas as a safe and sustainable energy source.