The Global Energy Challenge

31 August 2006 (Last Updated August 31st, 2006 18:30)

Concern about energy is legitimate, but ultimately unfounded. Jeroen van der Veer, chief executive of Royal Dutch Shell, believes that the industry is more than capable of rising to the challenge.

The Global Energy Challenge

Although there is a lot of concern about energy supplies and the impact of fossil fuels on the climate, the industry is well placed to provide solutions. No one should underestimate the challenges, but the industry's proven ability to develop and apply technology will help increase reservoir yields, improve efficiency and deal with emissions.

"For the foreseeable future, fossil fuels will remain at the heart of the energy system."

Because the world will be relying on fossil fuels to meet growing demand for a long time in the future, improving the methods for finding and recovering conventional oil and gas, developing unconventional hydrocarbons and making more efficient use of coal are priorities.

At the same time, it is vital to reduce the carbon dioxide emitted by fossil fuels, make alternative forms of energy economically viable and increase energy efficiency. To meet these challenges new technologies will have to be applied on an unprecedented scale and pace in increasingly demanding projects.

International energy companies will have a key role in developing the solutions, drawing on their integrated capabilities, global experience and commercial drive.

FEAR FOR THE FUTURE

People are increasingly concerned about getting the energy they need as well as the financial and environmental costs. They are worried that they face a future of growing energy shortages, rising prices and international conflict for supplies.

They worry that they will have to choose between rising living standards or unacceptable climate change. And they are not sure that energy companies can – or want to – offer solutions.

These fears are not without foundation. With continued economic growth, the world's energy needs could increase by 50% in about 25 years. That is the equivalent of another 100 million barrels of oil a day, which is a significantly larger increase than during the previous quarter of a century. Most of this increased demand will be in new markets where infrastructure has to be developed.

Meanwhile, carbon dioxide emissions urgently need to be cut. Scientific opinion is in almost complete agreement that emissions are contributing to climate change.

TOWARDS A SOLUTION

However, I do not believe that the world is running out of energy. Taking unconventional resources into account, we are not even close to peak oil. It is also unlikely that we will need to choose between economic development and action on climate change. Energy companies have a lot to offer in both areas, although climate change is a challenge that needs to be tackled by the whole of society.

The solution is not as simple as making scientific advances and developing new tools; the challenge is to deliver the technology. Any developments that are made will need to be applied on a scale where they can make a real difference. We will need to learn from experience so new ideas can be used more effectively, and anything learned needs to be shared.

Any solution will also involve integrating many technologies, and applying them to increasingly demanding projects, accessing ever more difficult resources and creating the complex chains required to deliver the energy that people need. This will all need to take place rapidly and on an unprecedented scale. We need to do three things:

  • Make the most of fossil fuel resources
  • Develop alternative forms of energy
  • Improve energy efficiency

For the foreseeable future, fossil fuels will remain at the heart of the energy system, and the most pressing need is to improve efficiency and reduce emissions. To start with, increasing the amount of oil recovered from reservoirs would make a huge impact. At present, just over a third is recovered.

"It is essential to convince young people that a technical career in the energy industry is stimulating and worthwhile."

Smart technology, which enables engineers to monitor and control reservoir processes remotely, could significantly boost oil recovery. At the same time, enhanced techniques using heat, gas or chemicals to make oil flow more easily are showing potential. However, these projects are costly, complex and technically demanding, and they depend on experienced people who can understand the subsurface possibilities, choose the right tools and apply them effectively.

The industry is also learning how to discover and develop hydrocarbons in more difficult geological conditions and harsher environments. For example, Shell is applying its deepwater experience from the Gulf of Mexico to projects in Nigeria and Malaysia.

MEETING DEMAND

Consumption of liquefied natural gas could double over the next decade. Meeting this demand depends on technological and commercial innovation, and Shell believes that gas to liquids (GTL) technologies offer a solution, providing high-quality fuels to help reduce transport emissions.

For the past 25 years, Shell has been working on GTL technologies, developing proprietary technology, gaining operational experience from its first plant in Malaysia and building markets. Its planned 140,000-barrels-a-day plant in Qatar is due to come into production around the end of the decade.

Technological advances will also be important in refining, dealing with heavier and more acidic crudes, and meeting demand for light and clean products.

UNLOCKING POTENTIAL

One way to meet future energy demand is by developing the technologies to access the large unconventional resources in heavy oils, oil sands and shales, contaminated and tight gas, and coal-bed methane.

There is also lots of coal, particularly in the USA and China. As energy companies learn to develop these resources economically and responsibly, the distinction between conventional and unconventional is blurring. Oil sands production in Alberta is already a robust and expanding business and Shell Canada aims to grow production from its Athabasca project to 500,000 barrels a day by the next decade.

Shell is also testing an environmentally sensitive way of unlocking the enormous potential of oil shale in Colorado by using electric heaters to gradually heat the rock formation and release light oil and gas.

Coal gasification offers a way of using coal more efficiently, cleanly and flexibly. The resulting syngas can fuel efficient, combined-cycle power plants. It could also be used – applying GTL technologies – to produce high-quality liquid fuels.

GREENER ENERGY

Eventually we will be able to capture much of the carbon dioxide emitted by fossil fuels and sequester it underground or in inert materials. In the medium term, this is likely to be cheaper, more convenient and more flexible than alternative energies.

A typical 1GW coal-fired power plant produces the same carbon emissions as one and a half million cars. China alone is building about 17 of these plants a year, which is why sequestration for power plants should be a priority.

"Technology can provide the solutions to future energy problems."

Shell believes that providing carbon dioxide solutions presents a commercial opportunity because its coal gasification technology fits well with sequestration. It is currently involved in a power project to demonstrate this in Australia. Shell Canada is also working on a project to capture carbon dioxide from its oil sands upgrader for sequestration in aging oil fields or use in enhanced oil recovery.

Given the challenges, demonstration projects need to get underway as quickly as possible. Development would be helped enormously if governments provided market incentives and influenced the environment for commercial action. For example, the EU offers trading schemes that give companies the flexibility to plan their investment.

Making sequestration a priority does not mean neglecting alternative energies, and work needs to be done to make these competitive. Shell is focusing on developing advanced biofuels, such as cellulose ethanol and bio-diesel made using GTL technologies, which produce far less carbon than present biofuels. It is also conducting research into wind, thin-film solar and hydrogen sources of energy.

There is also the potential for energy efficiency, although progression is slow as it is politically painful to push forward changes that involve all energy users. Energy companies can also play their part by making their operations more efficient.

However, this is an increasing challenge because of the additional processing to upgrade heavier oil and produce cleaner fuels. The energy companies can also provide better fuels to support improvements in engine efficiency.

KEY CHALLENGES

The main challenge is economic. The scale of investment required to access more difficult resources and undertake long-term technology development is daunting. The International Energy Agency estimates that meeting global energy needs will require investing $17tn by 2030. Oil and gas prices have risen, but so have industry costs. And developing more difficult resources will mean higher unit investment.

Given the urgent investment needs, exacting 'windfall' taxes is counterproductive, particularly in an industry with a history of volatile prices. In an increasingly uncertain world, long-term investors need predictable terms.

The second key challenge is delivering 'elephant' projects, which are bigger, more remote, in harsher conditions, more technologically demanding and with greater social and environmental sensitivities.

Shell's Sakhalin II project in Russia, for instance, is perhaps the most challenging oil and LNG project yet undertaken. Construction is proceeding and Shell is learning a lot, which is good because such projects are the future. By 2015, Shell expects to have 10 underway.

A wider challenge is the industry's shortage of qualified and experienced people. In North America and Europe, fewer young people pursue scientific and technical education. In the USA, for example, the number of university students studying petroleum engineering has fallen by more than 80% since the early 1990s.

"Untapped energy resources need to be efficiently drilled."

It is essential to convince young people that a technical career in this industry is stimulating and worthwhile, meeting challenges that matter to the world.

Shell has recently appointed some of its leading experts as chief scientists with the mandate to help drive Shell’s increasing business focus on technology. They will also have an important external role in communicating the excitement of technology.

Shell is also focusing on recruiting globally, with considerable success in 2005, and on ensuring that all Shell people everywhere have the opportunity to make the best of their talents. Shell emphasises the rapid transfer of technology learning across its global business.

ROLE OF INTERNATIONAL COMPANIES

Meeting the world's expanding energy needs while tackling carbon emissions will require delivering technology at an unprecedented scale and pace. Major international operators will have a key role in this because of their integrated capabilities global experience, and 'delivery' mindset.

Their unique knowledge of the technical challenges and market possibilities, and the fact that they have experience of applying new technologies in global operations, harnessing that experience wherever they work, will benefit technology development.

They also have experience in balancing the risks and opportunities of investing in challenging projects, and have the capabilities to bring them to fruition. Energy companies have a history of responding to what customers need and society expects. They survive through constant innovation, delivery and service, fighting the ever-present threat of competition.

Concern about energy is a legitimate worry and the challenges are great. However, the industry is more than capable of developing solutions, primarily through its ability to deliver the technological tools to produce the energy people need while reducing the environmental impact.