Less aloof, more assertive
Feb 12, 2015
Speech given by Ben van Beurden, Chief Executive Officer (CEO) at Shell, at the IP Week Dinner in London, United Kingdom, on February 12, 2015.
The oil market will remain volatile in 2015. But in the longer term, argues Ben van Beurden, there will be no change to fundamental drivers such as rising demand and the need for new supplies. Like the oil price, energy transition will continue to be an important issue this year. At the end of 2015, the UN’s Climate Change Conference will be held in Paris. In the run-up, the energy industry should make its voice heard alongside other credible parties. Together, they can offer some realism and practicality to the debate about climate change.
Last month, ladies and gentlemen, Barack Obama gave his State of the Union address.
It took him less than two minutes to mention oil. And if he hadn’t been interrupted by applause, he would have got there even faster. This shows how important oil is to advanced economies.
We all know why. Oil is an essential part of the energy mix. And energy, in turn, is the lifeblood of human existence. Without energy, our lives would be almost unrecognisable.
I’m proud to be part of an industry that truly powers economies. That’s especially true tonight, as I am among so many flag-bearers of the energy sector. Thank you, Energy Institute, for the opportunity to address this distinguished audience.
I’ll use this opportunity to talk about the future of our industry, both in the short and the long run.
Let me start with the months ahead. Oil prices will of course be an important issue throughout the year. Since summer, the price of Brent Crude has plunged.
Higher shale production in the US, an unwillingness by OPEC to cut its own production, and an energy demand slowdown in China — these are just some of the factors shaping a complex situation.
Low prices have big implications for exporting countries like Iran, Russia and Venezuela. But also for shale-producers in the US, and even the domestic budgets of producers in the Gulf states. In consuming nations, low oil prices are an economic boon stimulating growth and demand.
What will happen in 2015? I can’t predict the future, but oil demand is clearly linked to economic growth. Compared to last year, the International Monetary Fund expects the global economy to grow. So, global oil demand is expected to grow as well.
But seeing today’s prices, supply will probably not keep pace with this growth. It may even decline, as prices are close to cash costs, according to consultants like Wood Mackenzie. As a result, energy companies could shut down some of their existing production.
If the brighter economic outlook becomes reality, the market could tighten, and this would support higher prices. But two questions remain. Firstly: How far and how long will prices fall? Secondly: How quickly can prices recover?
A rapid recovery could occur if projects are postponed or even cancelled. This would lead to less new supply — not so much now, but in two or three years. Combined with economic growth, the market could tighten quickly in this scenario.
But what if the largest supply growth engine, US shale oil, proves to be resilient in the face of falling prices and the markets remain well-supplied? In that case, with moderate economic growth, prices could stay low for longer.
Either way: The market will remain volatile in 2015, if only because for now OPEC shows no sign of wanting to resume its role as swing supplier. But for the longer term, I see no change to fundamental drivers of oil markets such as rising demand and the need for new supplies.
Our New Lens Scenarios are one of the tools Shell uses to look at the future.
In the two scenarios, ”Mountains” and ”Oceans”, oil demand will continue to grow for at least two decades.
And then, of course, production from oil fields typically declines at a rate of at least 5% a year. This means that the need for new supply could be as high as 5 million barrels a day, year after year until at least 2030.
This amount of supply cannot be delivered by OPEC or shale oil producers in the US alone. It will need to come from new and challenging areas, and has to be supported by an oil price that justifies huge investments.
As I said, ladies and gentlemen, the oil price will remain an important issue throughout the year. While a boon to consumers, these are tough times for some producers. But at Shell, we’re determined to avoid a start-stop approach to investment.
Shell will remain a large investor in 2015, with a strong focus on costs. And we will certainly continue to invest in research and development. R&D is our sector’s lifeline at a time of energy transition.
2015 is an important year in that transition.
At the end of the year, the UN’s Climate Change Conference will be held in Paris. In the run-up to this conference, the climate debate will rise to new heights of intensity.
The outcome of the political process is uncertain, but the trends behind it are unmistakeable. Even more than the oil price, these trends will shape the future of the industry over the coming decades.
For a sustainable energy future, we need a more balanced debate. Fossil fuels out, renewables in — too often, that’s what it boils down to. Yet in my view, that’s simply naïve.
Yes, climate change is real. And yes, renewables are an indispensable part of the future energy mix. But no, provoking a sudden death of fossil fuels isn’t a plausible plan.
Today, 3 billion people still lack access to the modern energy many of us take for granted. This isn’t just about having a dustbuster or a television set. Energy access often makes the difference between poverty and prosperity.
At the same time, demand is growing. There will be more people on this planet, more people living in cities and more people rising from poverty. They will all need energy if they are to thrive.
The issue is how to balance one moral obligation, energy access for all, against the other: fighting climate change. We still need fossil fuels for a lower-carbon, higher-energy future.
It is of course true that the use of renewable energy is growing, especially in electricity markets. But it will take some time before renewables can play an equally important role in transport, and the heating and cooling of people’s homes.
This is our chance to get ready.
To discuss opportunities for new forms of energy or energy transport, Shell has a Future Technology Group. It reports directly to me, because I believe that future technology is crucial to the future of Shell.
Exploring new horizons now is our chance of being a constructive part of the energy system later — both through the products and services we offer, and our contribution to the debate.
In the meantime, however, the world’s energy needs will underpin the use of fossil fuels for decades to come. So, rather than ruling them out, the focus should remain on lowering their carbon emissions. Three things are crucial to achieving that goal.
Firstly, a shift from coal to natural gas. When burnt for power, gas produces half the CO2 coal does.
Secondly, carbon capture and storage. CCS fitted to power plants can be a real game-changer, like for example our project under design at Peterhead in Scotland. CCS can remove up to 90% of CO2 emissions from power generation.
Thirdly, and most importantly, a well-executed carbon pricing system. This would help promote natural gas as well as CCS, and a whole range of other low-carbon technologies.
Despite some encouraging signs, we’re a long way from achieving these three objectives. The debate — driven by NGOs — still revolves around emission targets, whereas the policies needed for meeting those targets are often overlooked.
As a result, ineffective, inefficient or even counterproductive measures are taken in some countries and regions. Take Germany, the largest economy in Europe.
The good news is that renewables, with strong support from the German government, are growing. The bad news is that coal plants are used as a flexible back-up.
That’s caused CO2 emissions in Germany to actually increase in 2012 and 2013, according to the European statistics agency Eurostat. This is bizarre and demonstrates the issues we face.
What can we as an industry do to help clear the way for a more informed debate? In the past we thought it was better to keep a low profile on the issue. I understand that tactic, but in the end it’s not a good tactic.
The debate about the future of energy is not always very balanced, partly because we keep such a low profile and there’s so little dialogue within our sector.
Our industry should be less aloof, more assertive. We have to make sure that our voice is heard by members of government, by civil society and the general public.
I’m well aware that the industry’s credibility is an issue. Stereotypes that fail to see the benefits our industry brings to the world are short-sighted. But we must also take a critical look at ourselves.
You cannot talk credibly about lowering emissions globally if, for example, you are slow to acknowledge climate change; if you undermine calls for an effective carbon price; and if you always descend into the “jobs versus environment” argument in the public debate.
So, to make our voice heard, our sector needs to enter into the public debate alongside other credible parties — ranging from academics to non-governmental organisations and policymakers. Together, we can offer some realism and practicality to the debate.
Making our voice heard — this should be our goal in the run-up to Paris. The world will benefit.