Easy oil and gas are gone and there are significant technical and financial constraints to deploying new energy sources on a mass scale.
Tena koutou katoa. Nga mihi mahana ki a koutou.
I’d like to thank the organisers of this conference for the invitation to speak today. Warm greetings, too, to the many leaders of New Zealand’s energy industry that I see here today. It’s a privilege to be with you all.
The opening months of 2011 have, to say the least, been turbulent – the destruction and tragedy of Christchurch’s and Japan’s earthquakes, the volatility of the “Arab Spring” and of course the ongoing fallout from the worldwide financial crisis.
So against that backdrop of uncertainty, and volatility, I’ll begin my talk today by describing the twin pressures that are reshaping the energy landscape: surging long-term demand and global efforts to build a sustainable energy system.
I’ll then talk about how the energy industry might respond, particularly through partnerships, technology and a focus on gas as a bridge to a more renewable energy future.
Finally I’ll bring it back into the New Zealand context and share with you from a Shell perspective some of our current business activities and priorities here in New Zealand.
As you will appreciate, given the nature of our business, I will not be as open as I would like to be but what I hope I will do is reinforce that partnerships, technology and gas are also key to help meet New Zealand’s growing energy needs.
Definitions and cautionary note
Before I get into the meat of the speech I of course also have to show you this cautionary note with which I am sure you are already very familiar. In essence it’s a legal way of saying that you shouldn’t take everything you hear at face value.
In other words I will not be able to tell you much and what I tell you should be taken with a large grain of salt.
The global energy challenge
So, first, the big picture.
Here, at home, Christchurch’s earthquakes will continue to profoundly impact our economic and social lives.
On the global stage we don’t yet know the outcome of the surge for democratisation in the Middle East and North Africa, let alone their implications for the world’s finance and energy sectors.
What we do know is that in the short term the upheaval impacts energy supplies, increases volatility and drives up costs. And who can predict how long it will take to stabilise?
These recent events have provided a powerful reminder that the health of the global economy, as well the political environment, remain intimately tied to developments in the global energy system.
Recently the International Energy Agency issued a fresh warning about how a prolonged bout of $US100-plus oil prices could undermine economic recovery.
And oil price volatility is likely to remain a feature of the next decade and beyond.
That’s because energy demand will continue to surge upwards in the coming decades while at the same time there are many challenges to the energy supply side.
Last year, oil demand increased by 3%. Only twice before, has the world experienced such a strong growth rate – in 1976 and 2004.
Perhaps more telling, this is fully consistent with the long-term trend of rising demand and arguably gives credibility to the suggestion that by 2050 demand could double or even triple from its level in 2000, if the world continues to use energy in the same way that it has done and does today.
These forecasts are based on predictions of rising global population – 9 billion people, up from today’s 6.7 billion or so – and strong economic growth in the developing countries.
By 2035, energy consumption in non-OECD countries could rise by nearly two-thirds, compared with just 3% in OECD member countries.
In large part, that’s because many people in the emerging economies are starting to enjoy higher living standards on the back of rising wealth levels.
And that’s to say nothing of the billions of people who continue to live in energy poverty across the world. For example, 1.4 billion still lack access to electricity.In simple terms energy demand is strongly correlated to economic development.
Zone of uncertainty
By 2050, unless we drastically change our energy consumption habits, there is likely to be an enormous gap between supply and demand.
Easy oil and gas are gone and 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% of the market, as shown by the slow progress of biofuels. Shell scenario planners describe this as a massive “zone of uncertainty” looming over the global economy.
Such uncertainty, where supplies are unable to meet demand would inevitably lead to volatility and higher energy costs.
This would potentially slow or stifle growth and economic development and perhaps even lead to increased, rather than decreased, use of less environmentally acceptable energy sources.
There is no doubt, that to bridge the looming gap we will need to see an enormous expansion in energy supplies, coupled with extraordinary and unprecedented measures to moderate demand.
Shift to a sustainable energy system
At the same time there is increasing concern about the environmental consequences of fossil fuels.
So the coming years will see a second historic shift as global efforts to develop a sustainable energy system gather momentum.
According to the consensus of climate scientists, the concentration of CO2 in the atmosphere should be limited to 450 parts per million, to avoid levels of global warming with significant negative consequences.
On one estimate they have now reached 390 parts per million, and continue to rise at an annual rate of 2ppm.
Shell was one of the first energy companies to recognise climate change and its associated consequences and challenges. As a result Shell has, and continues to reduce emissions from its operations.
Shell is also shifting its portfolio balance towards gas; and we continue to invest in various forms of renewable energy.
In addition, we believe the introduction here in New Zealand of the Emissions Trading Scheme is a good step in the right direction to reduce carbon emissions.
The scheme, however, should not be artificially constrained in terms of its pricing as this will ultimately send the wrong signals into the market.
We believe it’s vital for governments worldwide to implement a climate change policy framework that enables us to prepare for and adapt to a low carbon future.
In that future we think renewable energy sources could supply up to 30% of global energy by 2050, compared with 13% today.
This would be a massive achievement given the enormous financial and technical hurdles facing new energy sources.
But even then, fossil fuels would likely still supply around half of global energy in 2050.
In other words, a sustainable energy system cannot solely rely on renewable energy sources meeting a growing share of demand. Cleaner fossil fuels such as gas will also need to play a more prominent role.
Natural gas, which is still relatively abundant, is the quickest and most affordable fossil fuel for achieving near-term CO2 emissions targets. It’s a clean, flexible back-up option to renewables.
In fact we believe that gas provides an acceptable and affordable bridge to a sustainable energy future. This is why Shell has been shifting its portfolio increasingly to gas.
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.
So how might the energy industry respond to these challenges of surging long-term demand and the need to build a more sustainable energy system?
Globally, Shell is investing heavily in new natural gas and LNG supplies. We’ve increased our tight and shale gas acreage, especially in China and North America.
And in Australia, Arrow Energy, a joint undertaking with China’s CNPC, will convert coal bed methane into LNG. Both of these present exciting new gas supply opportunities.
We are also responding to the growing demand for natural gas in the Middle East by offering our integrated LNG capabilities and our ability to unlock difficult-to-produce sour and tight gas resources.
And perhaps the most exciting development, at least if you are an engineer like me, is Floating LNG. The Prelude project in offshore Australia is the first Floating LNG project globally to have achieved Final Investment Decision. By the time it is completed it is projected to be the largest seafaring vessel ever built.
It will process LNG offshore unlocking otherwise marginal gas fields whilst having substantially lower environmental impact than other similar developments. And it will give the LNG industry another important dimension to boost production.
Broadening the global energy mix
So while we believe gas is increasingly important, at least in the short and medium term, the energy industry must also, as a priority, broaden the global energy mix, expanding the contribution of renewable energy sources.
While we have and continue to explore a whole range of renewable options, Shell’s main effort is in biofuels, which fit our traditional expertise in process engineering and, of course, our global retail network.
Of all the low-carbon transport fuels, biofuels can make the biggest contribution to reducing CO2 emissions from cars and trucks over the next 20 years.
So what does this mean for New Zealand?
So what do these global priorities mean for the business here in New Zealand? Allow me to start with a little history.
Shell is celebrating 100 years in New Zealand in August this year.
From our first investment in New Zealand in 1911, in the Kotuku oilfields in the South Island, to our 50 years of operations here in Taranaki, we have played an important and pioneering role in this country’s energy supply.
I believe that during this long period we have built up very good relationships, deployed lots of cool technology and contributed to meeting New Zealand’s energy needs in a responsible manner.
Kapuni, which was discovered in 1955 and is still going strong today, of course presented both significant technological and partnership challenges.
Similarly Maui, which was discovered in 1969 and at the time was one of the biggest gas discoveries in the world, also required leading edge technology and ground breaking partnerships. The leading edge technology at that time enabled us to build a safe offshore facility which could withstand decades of battering in the Tasman Sea and also survive earthquakes.
Maui also required an innovative and I would suggest visionary public-private partnership between the Maui JV and the Government to get it off the ground.
Pohokura, which came on stream in 2006, really reflects how technology has developed and as a result we now have a state of the art facility right here in New Zealand’s backyard.
It supplies 40% of New Zealand gas and yet is fully unmanned both off and onshore, run by a single control room operator in our offices in New Plymouth.
Pohokura clearly has a significantly smaller footprint and includes many innovations that reduce its impact on the environment and neighbours.
So what of the future?
So what of the future ? We are firmly focused on making the most of late field-life opportunities in our existing assets. The infrastructure is in place, we know how to operate them safely and efficiently and we have a fairly good understanding of the reservoirs.
It obviously makes a lot of sense to leave no stone unturned to (economically) squeeze the last drop from the reservoir. Regrettably things aren’t getting any easier, cheaper or less risky. To the contrary – and this is where technology can again play a major role.
Maui is in its twilight years and, whereas in its hay day Maui produced more than 90% of New Zealand’s total gas supplies, it currently produces only around 20%.
A programme of 20 well interventions since 2007 has helped to mitigate some of the decline, and building on these successes we are now considering another series of similar projects for both the Maui B and the Maui A platforms.
As you are all aware, we have also been drilling the Ruru exploration well, south and adjacent to Maui. This is a new venture that is yet to produce results, but in case of success one of the possible development scenarios is to produce it through the existing Maui facilities.
I am sure you have read or heard all about our weather-related difficulties which have delayed progress. Given the generally less favourable weather conditions during the New Zealand winter we have decided to leave the vessel in port, do some upgrade work and resume the drilling programme later this year.
The Kapuni field has been in operation for more than 40 years and arguably should by now also be well and truly in its twilight years. We believe, however, that with the application of new techniques and technology, there are opportunities to extend the field life for potentially quite a few more years.
We are currently planning to embark on a pilot project to evaluate whether and how we might economically recover what we call more difficult or tight gas from the Kapuni reservoirs. If – and in our business that is always a big IF – this is successful, then we see a bright and possibly long future remaining for this field.
Despite what you may have heard, we are and continue to be on the lookout for other opportunities around New Zealand. Perhaps one of the reasons why we have not pursued any of these so far is our focus on and belief in our existing producing assets.
A changing New Zealand
At this point I would like to touch briefly on New Zealand’s regulations to protect the environment.
We very much welcome the establishment of the government’s new Environmental Protection Authority and new laws to regulate deep sea oil and gas activities in the exclusive economic zone.
That said we have of course already been operating in the EEZ to rigorous international best practice safety and environmental standards for many years.
The new rules should give the industry and all New Zealanders the additional comfort that the country’s resources will be developed safely and responsibly.
Another important piece of work we look forward to progressing, in conjunction with Maritime New Zealand and other interested parties, is to mature guidelines and clarity around the decommissioning requirements of offshore facilities. Clearly this is important both in respect to our existing facilities as well as future investment decisions.
Finally I would like to come back to Partnerships. Clearly we don’t have all the answers but we do believe that we can play an important and constructive role in supporting New Zealand’s economy and people while looking after its environment.
I believe the reason we have been successful in New Zealand and around Taranaki for such a long time is the result of our relationships and partnerships, developed over the many years of operations.
There is no doubt that societal norms, values and expectations change over time. This is not only understandable, it is, I believe, also appropriate.
We haven’t always got it right and some will always be suspicious of the oil and gas industry and of those, like me, who work in it. But we try to honestly and openly inform, to genuinely listen and to respond as best we can.
We recognise that our “licence to operate” is only as good as the relationship of trust we enjoy with our community and many partners.
It depends on how well we respect the values of the people with whom we live and work. It’s about getting things done and doing the right thing.
We’ve taken on young Kiwis, given them skills and benefited from what they’ve offered back.
We’ve forged partnerships with New Zealand companies and provided a business platform for many suppliers and contractors.
We’ve had to learn what it means to be a genuinely New Zealand business, that trust and respect must be earned, rather than assumed.
We look forward to honest, open and robust debate where the views of iwi, the contribution of environmentalists, and accurate, credible information about oil and gas can be weighed up together.
It is all about finding the right balance between the environmental, societal and economic parameters.
Today, more than ever, is a time to listen and learn, to negotiate a way forward that works for all New Zealanders.
I’d like to finish today by acknowledging the many individuals and groups we work with.
We value our relationships. Shell has been here for 100 years, and we look forward to at least 100 years more.
We believe we are well positioned to achieve this through our partnerships, our technology and our expertise in natural gas.
Thank you very much for your attention today.