South-East Asia: the journey to a more secure and sustainable energy future
May 31, 2012
Speech given by Simon Henry, Chief Financial Officer at Shell, at the dinner to mark the 120th anniversary of Shell’s presence in Thailand on May 31, 2012.
One hundred and twenty years after Shell’s first delivery of kerosene to Thailand sparked a revolution in the global oil trade, South-East Asia is again at the forefront of historic changes in the energy industry. As the region undergoes an intensive phase of industrial development, its primary energy demand could incease by as much as half by 2025. The issue of how to develop a secure and sustainable regional energy system is high on the policy agenda, as ASEAN works towards a single market.
In this speech, Simon Henry, Shell’s Chief Financial Officer, describes three critical steps for the region: expanding and diversifying its energy supply, while preserving the pre-eminence of natural gas; promoting energy efficiency measures to moderate energy demand growth, especially in South-East Asia’s fast-growing cities; and implementing government policies that achieve these two objectives.
South–East Asia: the journey to a more secure and sustainable energy future
It’s a great honour and privilege to welcome so many of you to this evening’s dinner to mark the 120th anniversary of Shell’s business in Thailand. We’re enormously proud of our long history in this beautiful country.
Shell’s first delivery of kerosene to Thailand in 1892 was an important moment in the history of the oil industry. Its journey via the Suez Canal to Bangkok and Singapore was the first carried out by a bulk oil tanker. These tankers sharply increased the volume of oil products that could be transported, sparking a revolution in the international oil trade and, eventually, the global economy.
Fast forward 120 years and Shell is again growing its presence in South-East Asia.
That’s a great source of pleasure for me, personally. I came to know and love Thailand and the region while working here earlier in my career with Shell.
I’m also heartened to see the country making a strong recovery from last October’s appalling floods.
One way in which Shell is contributing is by donating some $1 million to the King of Thailand’s Chaipattana Foundation – which does such valuable work to benefit the Thai people and promote sustainable development.
Last week it was announced that Thailand’s GDP grew 11% in the first quarter of 2012, compared to the previous three months. That underscores the resilience and vitality of Thailand’s industrial sector.
Thailand is not alone. Countries across South-East Asia are achieving some impressive growth rates, despite severe economic problems elsewhere in the world. That bodes well, as ASEAN member nations work towards a single market in 2015.
But ASEAN’s gathering strength also brings challenges. I will briefly discuss one of the biggest: how the region can develop a supply of energy that is secure, affordable and sustainable.
Let’s first step back and look at the global picture.
Global and regional energy challenge
Global energy demand could double in the first half of this century, driven by a rising global population and strong growth in emerging economies.
This economic success is lifting millions of people out of poverty. According to McKinsey, as many as three billion people could join the middle – or consuming – classes around the world over the next two decades. As a consequence, energy demand will rise sharply, as people buy their first cars, washing machines and televisions.
To keep pace, the world must invest heavily in all energy sources, from oil and natural gas to biofuels, solar and wind. According to the IEA, the world will need to invest some $38 trillion to meet projected energy demand in the period to 2035. That’s $30 billion every week.
Despite the recent fall in oil prices, the long-term trend is still likely to be one of high and volatile prices, as demand puts supplies under pressure.
What are the implications for South-East Asia?
At Shell, we think that the region’s primary energy demand could increase by around half by 2025. Its power needs will be even more acute. According to one consultancy (Wood Mackenzie) power demand in South-East Asia could triple by 2030.
Yet the region also faces declining long-term production in some of its precious energy resources, notably natural gas.
This should not obscure the fact that the region’s gas deposits will make a significant contribution for many years. For example, Vietnam will continue to increase its gas production, while 2011 saw major gas discoveries in Indonesia and offshore Sabah.
But several of the region’s gas production areas are entering their maturity, including the Gulf of Thailand. That raises the prospect of growing dependency on imported gas, as well as oil.
Thailand will import more pipeline gas from Myanmar and liquefied natural gas from elsewhere – as well as more electricity from Laos.
Another factor is that the most intensive phase of the region’s economic development will happen against a backdrop of high and volatile oil prices. It will also take place amid concern about rising greenhouse gas emissions and air pollution.
The ASEAN Plan of Action for Energy Co-operation is a strong roadmap for tackling these challenges. I see three critical steps for the region:
- First, expanding and diversifying its energy supply;
- Second, moderating energy demand by promoting efficiency;
- And, third, the right government policies.
Expand and diversify the regional energy supply
So my first priority is for the region to expand and diversify its energy supply.
Clearly, renewables will play an increasing role: geo-thermal power and hydro-electricity will build on their established presence in parts of the region. And biofuels are set for rapid growth across South-East Asia. Even so, fossil fuels are still expected to supply more than two-thirds of the region’s total primary energy in 2035.
What’s the best way ahead in the power sector?
The prospect of nuclear power gaining a foothold in ASEAN has become more uncertain after last year’s accident in Japan – although several countries continue to ponder its merits.
And with regional gas production set for long-term decline, governments are relying more on coal-fired power. This is, to an extent, unavoidable.
But I would like to re-assert the importance of natural gas as a reliable and sustainable fuel for South-East Asia. As the cleanest burning fossil fuel, natural gas has clear environmental advantages. Gas-fired power plants greatly reduce emissions of pollutants like sulphur dioxide and nitrogen oxides.
These take a terrible toll on air quality and human health in Asia. In 2007, the World Bank estimated the health cost of air pollution in China to be in the range of between 1% and nearly 4% of the country’s GDP. Gas-fired generators also typically generate 40-60% less CO2 than coal-fired power plants. And they are the natural ally of renewable energy, because they can be quickly switched on and off when the wind stops and the sun doesn’t shine.
Over the long-term, carbon capture and storage technology could reduce CO2 emissions from gas-fired power close to zero.
To strengthen gas supply security, ASEAN countries must be encouraged to realize the full potential of their gas resources. That means continuing to look for and develop resources in frontier areas, such as deep water fields.
It also means expanding the Trans-ASEAN gas pipeline and regional power networks. This will promote economic integration, as well as a more secure and flexible energy supply.
In fact, this is already a major priority for the Thai government and its neighbours. The ASEAN energy ministers have resolved to strengthen energy ties and co-operation between their countries.
They also want to develop a common regional framework for the trading and marketing of oil and gas.
The private sector will play an important role in realizing these aspirations. But I should emphasise that it will not be sufficient for the region to focus simply on attracting capital investment and building the physical infrastructure.
ASEAN must also address complex legal and regulatory issues. These include setting common and robust regulatory standards – especially on safety – and clear guidelines for regional energy co-operation.
Natural gas revolution
I would also invite ASEAN governments to reflect on the remarkable expansion in the world’s gas supplies.
In North America, technological advances have opened up vast new reserves of tight gas, shale gas and coal seam gas.
Over the past decade, Shell and other energy companies have developed technology to unlock gas from dense rock such as shale. We use horizontal drilling and a technique called hydraulic fracturing, which pumps water under high pressure into the rock, creating cracks that allow gas to flow more freely to the well.
North America may now have 100 years of gas supplies at current consumption rates. Only a few years ago, it was assumed that long-term production decline had set in.
This new gas abundance has led to much lower prices for North America – providing businesses with a major competitive advantage.
Gas there now costs around $2.50 per million Btu, compared with a 10 year average of about $6 per million Btu.
Tight gas holds much promise in the rest of the world. For example, Australia holds significant coal seam gas deposits, while China’s shale gas resources could be even bigger than those of the USA, according to a 2011 report by the US Energy Information Administration.
In South-East Asia, there are deposits of coal seam gas in Indonesia, for example in South and Central Sumatra. Several companies are drilling pilot wells, with the Indonesian government keen to ascertain the potential for large-scale production.
Liquefied natural gas (LNG)
The tight gas revolution carries a much bigger implication for South-East Asia: it adds impetus to the expansion of the global and regional LNG market.
Of course, LNG has a long history in the region, with Indonesia, Malaysia and Brunei all major long-term suppliers. And now Thailand has become an LNG importer, with plans to expand the Map Ta Phut re-gasification terminal.
At Shell, we regard the country as a potential LNG customer of great importance.
Several other countries in the region are also preparing to become LNG importers, including Malaysia, Indonesia and the Philippines. This highlights the region’s progress in strengthening its energy infrastructure.
These countries will benefit from the rapid expansion in global LNG supplies.
Last year’s tragedy in Japan highlighted LNG’s ability to match gas supply with demand as it fluctuates around the world. To cover the shortfall in Japan’s energy supplies, LNG cargoes were diverted at short notice from a range of locations, including Russia, Australia and Korea.
Over the past three years, global liquefaction – or production – capacity has increased by around 40%. In becoming the world’s largest LNG supplier, Qatar has provided much of this increase.
This is great news for Asia: about 40% of Qatar’s LNG is reserved for Asian markets, on the basis of long-term contractual commitments.
This is only the beginning. An increasingly diverse group of LNG exporters will supply South-East Asia, providing access to vast gas reserves around the world.
By 2020, Australia could rival Qatar as an LNG exporter. The country has around half a dozen large-scale LNG projects planned or under construction. These include projects to convert coal seam gas to LNG, making this abundant gas source exportable to Asian markets.
Then there’s North America. Its tight gas production boom means that it no longer requires major LNG imports, freeing up significant supplies for Asia and Europe.
North America’s enormous tight gas resources will probably now give rise to a trans-Pacific LNG trade. The US Department of Energy has granted permission for LNG exports from the country’s Gulf Coast. And the development of even half of the projects under consideration would turn the US into a significant LNG exporter.
That’s not all: two weeks ago, Shell and our Asian partners announced plans to develop an LNG export facility in Canada,the world’s third largest gas producer.
So South-East Asia has every reason to back natural gas as a secure and sustainable energy source, and every reason to make the most of its domestic gas resources.
What about the transport sector?
Despite the promise of electric vehicles, global demand for liquid fuels is likely to rise by around one-fifth by 2030.
At Shell, we believe that biofuels – such as biodiesel and ethanol – are the most effective way to broaden the global transport fuel mix over this period. We expect their share to increase from around 3% today to 9% by 2030.
Biofuels are also the best way to reduce CO2 emissions in the transport sector. For example, Brazilian sugar cane ethanol reduces emissions by around 70% compared to petrol, across the lifecycle from the cultivation of the sugar cane to using the ethanol as fuels.
Thailand’s strong agricultural base is supporting a growing biofuels industry. Not only should this ease Thailand’s dependence on imported oil, it could also prove an excellent export opportunity. The government’s 15 year alternative fuel plan is an important step in the right direction.
Of course, biofuels can throw up social and environmental challenges. One way we’re addressing these is by working with NGOs and others to push for international standards for the sustainable sourcing of biofuels.
All of which brings me to a second priority for the region: curbing its rising energy consumption.
Stricter fuel efficiency standards will be crucial -- as will the construction of more efficient power stations.
We must also consider the historic transformation underway across the region, as countries make the transition from rural to urban societies.
South-East Asia’s urban population has almost doubled in the past two decades: some 44% of the population now lives in urban areas. That will rise to two-thirds by 2050 (UN).
This has significant implications: urban dwellers typically consume more energy than their rural counterparts, partly because they tend to be wealthier.
More positively, the shift to urban living provides opportunities to improve energy and resource efficiency. This is partly a question of scale: energy, water, and other services are increasingly managed at a city, rather than a national, level.
Careful planning and controlled urbanisation can have a major impact on future energy use.
Cities with higher population density, such as Singapore, are more energy efficient.
By contrast, sprawling cities in the USA have much higher levels of energy consumption. In many, per capita energy consumption for personal travel is five to ten times higher than in some developed Asian cities.
Urban mass transit is another way to keep personal vehicles off the road. Bus rapid transit corridors are a cost-effective option that can handle up to 50,000 passengers an hour – nearly as many as subways.
Jakarta is the first South-East Asian city to introduce such a system. The results are striking: in 2009, the Trans-Jakarta Busway was used by some 250,000 people a day, an 11% increase on the previous year. That resulted in estimated fuel savings equivalent to some $100 million.
All of which leads to my final point. The right government policies will be critical to meeting the region’s energy challenge.
One important political issue is the subsidies that support the consumption of fossil fuels.
In a global survey, the IEA identified 37 countries with estimated subsidies totaling $409 billion in 2010.
Subsidies shield consumers from higher energy costs. But they also bring unintended consequences: in South-East Asia, subsidized power tariffs discourage industry investment in new energy supplies and power capacity. And, globally, subsidies simply encourage people to use more energy.
The Thai government has made a strong start in reforming prices for liquefied petroleum gas and compressed natural gas in the transport sector.
But as the government contends with public opposition, we must remember the broader benefits of removing subsidies. The IEA estimates that if subsidies were phased out worldwide, global energy demand would fall 4% by 2020 and nearly 5% by 2035.
The IEA also estimates that only 8% of the $409 billion in support in 2010 reached the poorest households. The agency argues that providing similar levels of financial support directly to low-income families would be far more efficient.
For ASEAN countries, policy frameworks that incentivize energy investment are also important.
I’m talking about stable fiscal and regulatory frameworks for investments that can run to billions of dollars over several decades.
Governments around the world often respond to oil and gas price increases with tax hikes, only to leave the higher rate in place when the price weakens. This discourages investment and accentuates energy price volatility.
In summary, Shell has a long and proud history in Thailand, including pivotal moments in the history of our industry.
Today, South-East Asia is again at the forefront of historic changes in the energy industry.
To meet surging demand, the region must secure a reliable and affordable energy supply. It must also limit the environmental stresses associated with energy consumption.
One step will be to expand all available sources of energy, while preserving the pre-eminence of gas as an energy source. Another priority should be to promote energy efficiency.
I’m confident that Thailand will rise to the challenge with its customary dynamism, optimism and resilience.
And that Shell’s next 120 years in this great country will be as happy and mutually beneficial as the first.