The power of innovation in collaboration
Good morning, everyone.
I’m Shell’s Projects & Technology Director, and today I’m going to focus on the projects part of my job title and almost totally exclude the technology part. That is, I’m going to talk a little about the non‑technological aspects of big energy projects.
That’s not to say that technology is unimportant. Quite the contrary. But I’ll let other speakers cover that aspect of innovation today.
My point is that innovation involves more than coming up with cool gizmos. Its scope is much wider than just technology.
Innovation can also streamline processes or establish entirely new business models without the need of a new machine.
And although you do hear stories of lone inventors, the fact is that in the vast majority of cases innovation involves working with others to solve problems. That means: Exchanging ideas. Keeping an open mind. Being creative. Making concessions.
In short, collaboration.
That doesn’t always come naturally.
I personally believe that creativity is an individual endeavour, but innovation – effective innovation – is a “contact sport”…although not quite like what you see in hockey games.
One thing’s for sure. Innovation will be absolutely necessary as we tackle one of the toughest challenges that humanity faces: ensuring that our children and grandchildren have access to clean, affordable energy so that they – and their fellow humans elsewhere in the world – can enjoy the lifestyle that you and I enjoy today.
The global challenge
Like any business, Shell must adapt to changing market circumstances and customer needs to stay competitive. No business can complacently assume that things will always remain the same – especially when it involves building oil and gas facilities that must safely and reliably operate for 40 year or more.
So we at Shell periodically assess different long-range planning scenarios, considering critical “what if” questions whose answers drive future energy needs.
Drawing on the most authoritative external information, we consider key global factors and trends: economic growth; energy supply and demand; environmental stresses; geopolitical tensions; social pressures.
In our latest scenarios (which look to the year 2100) global energy demand is set to increase substantially. This is a consequence of world population growth and the rise in living standards in developing countries.
In fact, the increase in energy demand is so great that only radical changes to the global energy system will enable the world meet it.
And it’s not just Shell that is saying this. Global organisations like the International Energy Agency have reached very similar conclusions.
There is a clear consensus that the world’s energy system needs:
- a wider, more sustainable mix of energy resources, and
- a more effective response to social needs and environmental stresses, including a drastic reduction in carbon dioxide emissions to counter climate change.
We think it’s plausible for the sun to be the world’s largest primary energy source by 2100.
But to reach that point will take a collective global effort – beginning right now. And even if we all agree to start immediately, it will still take a long time to build that sustainable energy system.
So irrespective of our best efforts, the world will continue to depend on fossil fuels. And we will need to continue producing oil and gas while alternative energy technologies like renewables and carbon capture and storage come on stream.
Shell firmly believes that the global energy industry needs to think differently – and more creatively – about how to transform itself to meet future energy needs. And Shell knows it has to rally others outside of the industry to adopt this mindset too.
The challenge of nations
Big, integrated energy companies like Shell are not the only actors involved in changing the energy system. In fact, we’re mere bit players on the world stage.
State-controlled companies account for more than 90% of the world’s conventional reserves of oil and gas. They closely control who develops them too.
And there are the governments of the countries themselves – both the energy-exporting ones and the energy-importing ones. They enforce regulations in the interest of public safety and the natural environment. And they take taxes, duties and royalties to fund their social welfare needs, such as healthcare and education.
Countries reserve the right to act in their national interests, of course. And sometimes those actions can have international repercussions – particularly if the country is a dominant consumer or producer of fossil fuels.
Fossil fuels are also on the international agenda because of the carbon dioxide that they release into the atmosphere when burned.
The strutting and fretting of the actors on the international stage sometimes distracts attention from concerns that are closer to home – especially if your home is in the vicinity of oil and gas facilities. Yet this is where companies like Shell perhaps can have the greatest impact. And this is where innovative collaboration can yield the most immediate results.
The people living near our oil or gas projects have taught us that a successful project is one that does more than just meet the technical specs. It’s about being a decent neighbour. We’ve learned that our role involves bringing palpable benefits to local society. That may mean setting up a water-treatment plant in Dawson Creek, for example. Or a community centre in Fort McMurray. Or a land conservation project in southern Alberta. All of which Shell has helped to do.
With so many entities operating at the global, national and local levels, no single entity has the means to meet the various intertwined challenges at every level. Public and private companies, governmental and non-governmental bodies will all have to work together to transform the world’s energy system.
The promises of natural gas
One key step that some countries have taken is to focus more on natural gas. China, for instance, targets a doubling of the share of gas in the country’s primary energy mix in its 12th Five-Year Plan, which runs till 2015.
Why? Well, for one thing the environmental benefits of gas-fired power are substantial and immediate.
Modern gas plants emit less than one-tenth the smog-causing pollutants of old coal plants. And they emit at least half the CO2 per kilowatt of electricity generated. So, having natural gas replace coal in power generation would be the surest, fastest and cheapest way there is to improve local air quality and reduce CO2 emissions.
Some sizeable gas fields are located right here in British Columbia, Canada’s second-largest gas-producing province. And developing them further could give an economic boost to the entire nation.
Gas-field developments have an economic impact that goes beyond their immediate surroundings, because many different kinds of companies are needed to supply the goods and services that the field operator requires. And one growing industry quickly creates others in cascading fashion down the supply chain. The result is multiplying increments in GDP and an expanding circle of jobs.
So countries holding indigenous gas resources have some attractive opportunities. With the right technology, the right relationships with local communities and a regulatory regime that promotes transparency and improving standards, they might secure an affordable and lower-carbon source of energy to promote domestic economic growth.
And there may be additional value to be derived from exports too, if the natural gas is cooled into a liquid and sold as LNG to other nations.
With the maritime LNG trade, virtually all countries – at least those that are not land-locked, like my native Switzerland – become a potential marketplace.
LNG therefore offers the potential for a greater diversity of sellers and buyers, and that translates into healthy competition among sellers and greater energy security for buyers.
There is thus an opportunity for Canada – and British Columbia in particular – to create a vibrant export industry for a commodity that is ready to take on a greater role in the world’s energy mix.
The practicalities of natural gas
But an LNG project connects resource holding countries with resource hungry countries. So it is unavoidably caught in the middle of international relations.
Project partners have to understand the reality of these relationships, and the risks they bring. Fortunately for Canada, the LNG market on the other side of the Pacific is one of the fastest growing in the world. And Canada’s fiscal and regulatory stability can reassure a buyer there that the supply would be reliable.
An LNG project also requires a large capital outlay, and so the project owners also must keep a wary eye on the global financial markets. As any investor knows, these are susceptible to unpredictable changes too.
And there’s the question of time. It takes a few years to drill the wells, lay the pipelines and build the plant. To capture the full return on the total investment, these assets must have a productive life of at least a few decades
It also takes time to engage local residents, to build trust and understanding, to secure their support. Here in Canada, input from First Nations communities is key. We have to ensure that opportunities and issues are addressed – ideally in the planning stages, even before ground is broken at the construction site.
So how do you manage a project that costs a lot, takes years to get off the ground and will need to operate safely and responsibly for a generation or two?
The traditional way to manage the risk for integrated oil and gas projects has been to put no serious money down until contracts are in place – for the drilling, for the surface facilities, for the transportation and – finally – for the sale of the oil or gas. LNG is no exception.
Back in the 1980s, when natural gas was mostly used to heat water in residential and industrial boilers, it also made eminent sense to peg the price of LNG to that of fuel oil – the closest substitute. Now, 30 years later, some question the wisdom of preserving that link.
But the reassurance that long-term, oil-indexed contracts have historically given both buyers (in terms of supply) and sellers (in terms of price) still applies. About 80% of Shell’s LNG is sold under such terms.
As in any marketplace, you can expect buyers to be looking for lower prices and sellers to be looking to maintain prices. Little wonder that up-and-coming gas-consuming economies, such as China and India, seek ways to weaken the price linkage between LNG and oil.
But energy security is also a priority for them, and LNG sellers that offer reliable supply have a competitive advantage. And caveat emptor – let the buyer beware: linking LNG to the vagaries of a gas-trading hub may not necessarily provide as stable a pricing mechanism.
A call for innovative collaboration
Ladies and gentlemen: If we’re serious about creating a truly sustainable global energy system by the year 2100 – even one based largely on solar energy – the earth will require many new oil and gas projects.
And setting up an integrated gas project can be a tricky venture – to say the least. But the promise of economic and environmental benefits – at the local, national and global levels – are worth it.
It requires an unusual collaboration that combines a visionary’s drive, an accountant’s meticulousness and a diplomat’s tact.
And to make that mixture work, you also need a magical ingredient: innovation. Innovation in technology, of course – but also innovation in the way policies, regulations and relationships are put together.
And that’s what this Innovation Summit is all about. We need innovative collaboration.
Thank you for listening.