We are at a critical point in the history of energy and for all of us the challenges are huge but so are the opportunities. In the coming 15 or 20 minutes I want to talk about how Shell and other energy companies are responding to the “new reality” and working with their partners to find solutions to meet the world’s growing energy needs.

It’s wonderful to be here at the New Zealand Petroleum Conference in the vibrant city of Auckland. It’s also great to have the opportunity to meet friends and colleagues from across the energy industry and share ideas.

We are at a critical point in the history of energy and for all of us the challenges are huge but so are the opportunities. In the coming 15 or 20 minutes I want to talk about how Shell and other energy companies are responding to the “new reality” and working with their partners to find solutions to meet the world’s growing energy needs.

The “New Reality”

The “New Reality” is in many respects a familiar reality: The world must grapple with the conflicting pressures of rising energy demand and environmental challenges.

More and more people in the world have access to modern energy supplies. By 2050, global demand for energy will double, according to the IEA, driven by a rising global population – from 6.5 to 9 billion - and economic growth in the developing economies.

The world demands that we maintain a secure supply to enable stable growth while on the other hand we are expected to drive efficiency, reduce the impact of our activities and help address the threat of climate change.

This global energy challenge is one of the great social and economic issues facing society and the oil and gas industry sits at the heart of this – finding ways to meet the energy needs of future generations at a much-reduced social and environmental cost.

No silver bullets

Even with heavy investment in all energy sources - from oil and natural gas to biofuels, nuclear, solar and wind - it will be extremely tough for the world to keep pace with rising demand. The IEA predicts that global demand will require investment of more than $1 trillion per year in energy supply and power generation for the next 20 years.

Over time, cleaner, renewable energy sources will meet an increasing share of demand. Yet for many years hydrocarbons will continue to provide the base load. That’s because there are significant technical and financial constraints to deploying new energy sources on a mass scale. So far it has taken more than 25 years for new energy types to capture 1 percent of the market. As an example, biofuels are reaching the 1 percent mark right now and wind could do the same by 2015, about 25 years after the first large wind parks were built in the US.

Scenario work shows that by the middle of this century 30 percent of the world’s energy could come from wind, solar and other renewable sources. But it also means that fossil fuels and nuclear will supply the remaining 70 percent even then. History provides a parallel. Just as the growth of oil and gas did not stop the world from using coal, the growth of wind and solar won’t see the end of oil and gas. On the contrary, the coming decade will see continued growth in fossil fuels demand.

From the above graphs and taking field decline into account, the world will need about 40 million barrels per day of new oil production on stream by 2025. To give you some perspective, 40 million barrels per day is equivalent to about four times Saudi Arabia, or ten North Seas. We will be busy for a long time.

Growing demands on Upstream

How will things play out in Upstream to meet these demands?

Easy oil and gas is over, and there is some argument that it never existed because the industry has always been required to innovate. Today exploration and production are shifting to more complex geology and more difficult hydrocarbons, as shown on the X-axis on the chart below, and to politically more sensitive areas and harsher conditions, as shown on the Y-axis.

Countries, even in the Asia – Pacific region, are facing shortages, especially on the gas side. This is not because of a lack of resources. The Asia region holds 6 percent of global gas reserves, more than the US which is experiencing a vibrant gas boom.

Part of the reason is that some of these resources are hard to reach for technical or political reasons. For example, there are some significant gas accumulations with high levels of H2S or CO2, making these more difficult to develop. Some of this gas is in tight reservoirs. And there are non-technical obstacles like border disputes, lack of aligned energy policies and environmental sensitivities.

Achieving the full potential of these more difficult resources will require technical solutions but also thoughtful management of political, social and environmental aspects.

How do we respond?

What is our role? I believe that the oil and gas industry is expected to provide responsible stewardship of the resources we are trusted with, and work with our stakeholders to bring the right energy solutions for a changing world.

What might be some of the answers?

I would like to focus on three of them: firstly, Technology, still at the core of how energy companies make a difference. Secondly it’s Partnerships because I believe that we need to work together to unlock the potential of both the subsurface and the value chain from the reservoir to the customer … and thirdly, it’s a Focus on Gas because it will help countries in reducing their CO2 emissions in the short term.

Emphasis on Technology

Complex challenges rarely have simple solutions and need innovation and technology. This is one of the areas where international energy companies can contribute.

Shell in New Zealand is helping to meet these complex challenges by maximising from the potential of its existing Taranaki assets – the offshore Maui, onshore Kapuni and near-shore Pohokura gas fields. Our drilling is at an all time high. For the first time ever we are drilling simultaneously at Maui and Kapuni with the aim of tapping into bypassed reserves.

The Maui partners – Shell, Todd Energy and OMV – are currently spending millions of dollars side-tracking seven wells to capture by-passed gas using world-class Shell technology. The use of a small hydraulic workover rig to drill these wells from the production platform was an innovative solution to drive down the cost of drilling so that it is now economically viable – as it was not in the past – to target pockets of gas that were bypassed during the normal production phase.

We have also used, for the first time in New Zealand, new technologies to look ahead of the drill-bit and steer the well while drilling to precisely locate the reservoirs concerned. These relatively small incremental gains add to the Maui gas flow and are critically important for the ongoing life of the field in its twilight years.

Kapuni was a landmark discovery more than 50 years ago and is commonly regarded as creating New Zealand’s natural gas industry. Its recovery rate is much higher than was originally forecast and it is still producing at about 20 bcf per annum The Kapuni Joint Venture is currently drilling two exploratory wells, involving managed pressure drilling into partially depleted reservoirs. Again, this has been the first deployment of this technology in New Zealand. The first well is now in production.

Unlike Maui and Kapuni, Pohokura is at the beginning of its life-cycle but produces approximately 40 percent of New Zealand’s gas. This year Shell was recognised for the environmental management of the field when the Taranaki Regional Council gave the company a sustainable development and technical innovation award. It’s rare that an oil and gas company should receive such an award. In what was a first at the time, horizontal directional drilling was used to preserve the local coastal environment by drilling behind a cliff face and underneath the foreshore.

This is a local example of Shell working hard to do our part for sustainable development and technical innovation. Globally, we invest more in energy projects than any other private company. We spend more on research and development than any of our competitors.

As I’ve just explained, we develop ways to get more oil and gas out of the fields we are trusted with, and we have brought some of these technologies to New Zealand. Worldwide we are also developing new energy solutions such as gas to liquids and in renewable energy. We are, for example, the world’s largest distributor of biofuels. And we ensure reliable and trusted operations are a foundation on which to build growth.

The concept of trust brings me to the second of the answers I would like to discuss – partnerships.

Investing in Partnerships

There is a Maori proverb that illustrates the point:

“Nā tō rourou, nā taku rourou ka ora ai te iwi - With your food basket and my food basket the people will thrive.”

If we don’t invest in partnerships, we won’t have a long-term business.

The industry faces shared challenges that require our combined skills and capabilities. Mutually beneficial partnerships will be vital, between national and international oil companies, but also with host governments and service companies.

These partnerships allow us to leverage technical knowledge and project management skills, to share risk and to better connect the resources in the ground with global consumers. They bring stability in an increasingly volatile industry. And ultimately, they enable higher levels of investment and greater benefits from the energy sector to the nations concerned.

Shell’s commitment to partnering in New Zealand is exemplified in the longevity of the relationship between the government and Maui under the Maui gas contract. The 30-year contract which ended last year was a foundation project in New Zealand’s development history. It was the country’s first offshore gas field, one of the largest in the world at the time, and helped provide a secure energy supply which continues today.

A large global company like Shell has competing internal demands for its investment and innovative technologies. New Zealand has distinct advantages over other countries, however, in its reputation as an effective place to do business. Shell has been doing business here for a hundred years and we look forward to a good many more years of working constructively through our partnerships for the benefit of all New Zealanders.

Equally, Shell is working with partners from around the Asia - Pacific region. Last year, PetroChina and Shell signed agreements for the long-term supply of LNG to China from the Gorgon project in Australia, from Qatargas 4 and from our global LNG portfolio. In March this year, Shell and PetroChina announced plans to buy Arrow Energy in Australia and develop Coal Bed Methane for LNG export, as well as plans to develop tight gas in China’s Sichuan basin.

Partnerships unlock opportunities that are not available to individual players.

Let me move on to talk about new exploration opportunities in New Zealand, specifically an imminent major project. The frontier Ruru prospect sits within the Maui licence and extends into the adjacent Petroleum Exploration Permit on the eastern side of Maui off the Taranaki coast. It won’t be clear until we drill whether the prospect holds oil or gas.

Drilling depends on a number of things, most importantly the availability of a suitable rig, but we would like to start exploration activities as soon as possible. If successful it may be we can efficiently use the existing Maui infrastructure to bring the hydrocarbons to shore – and so extend further the Maui field life.

Natural gas - a logical bridge

Now I’d like to focus on gas. Natural gas, the cleanest-burning fossil fuel, is a logical bridge to a more renewable energy future.

One reason is that it is Abundant: As technology advances, so does our ability to unlock the world’s more difficult gas resources. According to the IEA, technically available gas resources equal 250 years of current production.

Gas is Acceptable: Modern combined cycle gas plants emit half the CO2 of modern coal plants, and up to 70 percent less CO2 than old steam turbine coal plants. And it can also help to get to a cleaner transport sector through more use of Compressed Natural Gas.

And thirdly, it is Affordable. New gas plants are cheaper to build than any other new-build competing source of electricity – less than half the capital cost of coal per MWh, less than one-third the cost of nuclear, and less than a fifth of the cost of wind.

From a global perspective, natural gas offers the quickest and cheapest way to cut global CO2 emissions from the power sector, and is an important component of a sustainable global energy mix. Even in New Zealand, with its high proportion of renewable energy generation and its relatively small utilisation of coal, gas will continue to be an important component for a clean, affordable and secure energy supply.

As natural gas is an important part of the solution it is one of our focus areas for technology and innovation. An exciting area of progress is in Unconventional Gas resources in the form of Tight Gas, Shale Gas and Coal Bed Methane. Unconventional gas has taken off in the US already, and we are expecting the Asia-Pacific region to follow on a large scale soon.

Shell is developing tight gas in the Sichuan basin in China and testing both Shale and Basin Center Gas opportunities, and we are moving towards converting Coal Bed Methane into LNG in Australia, while studying the CBM potential in other parts of the region.

Conclusion

So, in summary: the global and regional energy challenges are stretching, but not as “new” as often depicted. At Shell, we are working with our stakeholders to find solutions to meet the world’s growing energy needs. We are on a journey into a new energy future with our customers, business partners and the communities where we operate, with a shared purpose of powering progress together.

At Shell, we don’t believe we have all the answers, but we do believe we are part of the solution, particularly around the three focus areas I mentioned - Technology, Partnership, and Natural Gas.

Our neighbours in Asia are surging ahead economically, and with this will come rising demands for energy to power up the cars, computers and air-conditioning that people want. There are ample oil and gas resources to be developed. This makes the region a very exciting place to be in.