Facing Up to New Challenges

31 August 2005 (Last Updated August 31st, 2005 18:30)

Assessing the state of the oil and gas industry, the prospects are good, but the challenges are considerable. Jeroen van der Veer, chief executive, Royal Dutch/Shell Group, elaborates.

Facing Up to New Challenges

Energy will remain one of the most important and dynamic industrial sectors, but we face great challenges in delivering the energy people need. Demand is likely to increase much more in the first 30 years of this century than it did in the previous 30.

Of course, we can't content ourselves with simply meeting new demand; we must constantly replace produced reserves just to stand still. Doing this will require more expensive and more difficult projects. Meeting changing patterns of demand will also require huge investment in delivery chains and downstream infrastructure.

This is a defining period for our industry, comparable to the 1970s. Major shifts will require us to change the way we operate. First, developing Asian countries are now the primary drivers of growing energy demand. They accounted for nearly half of last year's very rapid rise in oil consumption, and could be consuming a quarter of the world’s oil by 2030.

Second, concerns for supply security are rising as consumers become increasingly dependent on imported energy. Developing Asian economies could be importing three-quarters of their oil by 2030 – Europe even more.

Third, global energy intensity, the amount of extra energy for each additional unit of GDP, is increasing. This reverses a long-term downward trend and reflects the scale and speed of Asian development.

Fourth, hydrocarbon resources are maturing, in major exporting areas as well as consuming ones. Of course, there is still much more oil and gas to find. But we need to apply new technologies to extend recovery.

Fifth, there is greater focus on the potential of unconventional oil and gas resources. This includes possibilities for using coal in new ways, as well as renewable sources such as biomass.

Sixth, the international gas trade is expanding very rapidly, in both the Pacific and Atlantic. It is no longer a buyers' market.

Finally, ratification of the Kyoto Treaty suggests that the world is starting to get to grips with the challenge of carbon dioxide. This will have a profound impact on our industry.

High energy prices is another vital issue for our customers. Economic logic suggests that high prices will reduce demand and encourage investment in supply. But the elasticity of energy demand is not clear, particularly in buoyant developing economies. Prices also reflect uncertainty, in a system that no longer has sufficient spare capacity to be shock-proof.

"Meeting changing patterns of demand will also require huge investment in delivery chains and downstream infrastructure."

Projects now underway should reduce this tightness. But we must maintain the pace of investment in capacity. The necessary sustained, heavy investment in increasingly difficult and capital intensive projects will require higher long-term prices than we
have been used to in recent decades.

So what does all this mean for the industry? Our primary responsibility is to secure the energy supplies to meet the world's increasing needs. Nobody should underestimate this challenge. It means making the most of maturing reserves, developing new resources, in more difficult conditions or from unconventional resources, and greatly expanding gas delivery chains.

And, if the world is to continue enjoying the benefits of efficient fossil fuels, we also need to find effective carbon solutions. The industry should see this as an opportunity.

Finally, we have to continue reducing the local impact of producing and using energy. In some cases, this is our direct responsibility – how we manage our projects. We must also play our part in providing wider solutions. All this depends on committing investment, delivering innovation and harnessing integration.

COMMITTING INVESTMENT

The IEA thinks total energy investment could be $16 trillion over the first three decades of this century. Oil and gas could account for $6 trillion of this – $200bn a year. It could be more. That's the equivalent of building 170 of Kuala Lumpur's Petronas Towers every year. Much more of this investment will be in developing countries than in the past, accounting for a significant proportion of their GDP.

The perceived risks for investors will be higher. International oil and gas companies will continue to play a vital role as investors. It is our core business, and we know that developing resources requires continuing, long-term commitment. Shell plans to invest $15bn a year over the next few years, three-quarters on upstream projects. Energy projects will become increasingly challenging – in scale, scope, complexity, difficulty and sensitivity. The massive Sakhalin II oil and LNG project in Russia is an example of the sort of challenges that will be increasingly common.

Projects will only succeed if they respond to environmental and social sensitivities. This requires strong capabilities – skills and experience, clear standards, and effective processes at the heart of project management. It also depends on being able to work with others, including local communities and environmentalists.

DELIVERING INNOVATION

"If the world is to continue enjoying the benefits of efficient fossil fuels, we also need to find effective carbon solutions."

Innovation will be key to meeting new energy challenges. We have to develop new tools, new products, new ways of working. There is no magic bullet for increasing recovery, but we do have an expanding palette of better tools: new ways of monitoring reservoir conditions more accurately and systematically; more flexible, productive and cost-effective wells; automated 'smart' systems for managing production processes underground; and improving enhanced recovery techniques.

But these aren't the sort of tools that can just be bought off the shelf, plugged in and switched on. Rather they depend on advanced skills – and continuing, long-term investment – to choose, apply and integrate the best technologies to suit particular conditions. It is the same with accessing new resources.

The industry’s remarkable advance into deepwater has involved many new and improved technologies. But progress depends on learning to put them together to provide the efficiency and reliability required for deepwater conditions and economics. The experience of doing this in the Gulf of Mexico is now being applied around the world.

The major Athabasca oil sands mining project came on stream in 2003. The long-term goal is to expand capacity from the present 155,000 barrels a day to more than 500,000 – in a succession of building blocks to maximise construction efficiency.

Unconventional oil and gas is an essential part of Shell's strategy, and we are pursuing other opportunities and techniques. Another approach is to use gasification and Fischer-Tropsch conversion to turn gas, coal and biomass into high-quality fuels.

The IEA thinks GTL output could reach 1.5 million barrels a day by 2020. Coal gasification offers the potential for countries such as China to use their coal to produce a range of products, including gas for efficient combined cycle power generation and high-quality liquid fuels. Together with Sinopec, IEA is constructing a coal gasification plant for chemical feedstock in Hunan.

IEA is also working with Chinese coal companies on the potential for producing liquid fuel. Coal gasification produces significantly less carbon emissions than conventional coal burning, and there is the potential for sequestering the carbon dioxide contained in the process.

The industry is working on underground sequestration, for storage or to enhance recovery of oil or coal-bed methane. Another possibility is mineralisation, fixing carbon in inert construction material. Advanced biofuels could also play an important role. Blending biofuels into regular fuels allows them to be introduced without converting vehicles and infrastructure.

Using hydrogen as an energy carrier opens up the long-term prospect of carbon-free energy, but initially it would mainly come from fossil fuels.

The energy system on which the world depends is not suddenly going to be switched onto a new track. Advances must be integrated into the existing system in a continuing drive towards sustainability.

It is no exaggeration to suggest that the course of the twenty-first century will depend on this industry's ability to meet the world's energy needs without destroying our environment. These challenges offer many business opportunities, but we should not underestimate the challenge of turning prospects into reality.

Doing this depends on maintaining the pace of investment, finding innovative solutions and delivering their benefits, and harnessing global strengths to drive advances everywhere. I believe this industry has the commitment and creativity to meet these challenges.