Peter Voser talks to Critical Resource about partnering with resource countries, the ‘gas revolution’, and strengthening industry standards
In a wide-ranging Q&A with Critical Resource, Peter Voser, the CEO of Royal Dutch / Shell, describes Shell’s thinking on the advantages of natural gas, the need for stronger engagement by the industry on new technologies such as ‘fracking’, and the changing relationship between resource firms and resource-holding countries, among other topics.
Critical Resource: You’ve recently talked of the ‘natural gas revolution’ with growing global demand for the fuel driven partly by environmental pressures. Quite how big a role will gas play in the future global energy mix?
Peter Voser: As the world’s population heads toward nine billion, global energy demand could double in the first half of the century, if emerging economies follow historic patterns of economic development.
From China to Brazil, tens of millions of people are buying their first cars, televisions and refrigerators. And governments are taking steps to lift their poorer citizens out of energy poverty.
To keep pace with this surging demand, the world will need to invest heavily in all energy sources, from oil and natural gas to biofuels, nuclear power, solar and wind.
The International Energy Agency estimates that as much as $38 trillion investment is needed in the global energy supply infrastructure by 2035. For perspective, that’s around $30 billion every week.
At the same time, growing populations and higher demand for natural resources are increasing environmental stresses. Society continues to look for effective ways to respond to Global Warming.
Our scenarios team, here at Shell, thinks renewable sources could supply up to 30% of global energy by 2050 – up from 13% today. That would represent a shift of truly historic proportions, given the financial and technical hurdles facing new energy sources. But it also means that fossil fuels will continue to meet around 60% of demand and nuclear the remainder.
More policymakers around the world are now waking up to the many advantages of natural gas, as an affordable, abundant and environmentally acceptable source of energy.
As a result, according to the IEA’s new gas scenario, between 2008 and 2035 gas demand could increase by 60% globally. The pace will be even faster in some regions. Demand in the Middle East could double, while it could grow eight times in China.
Critical Resource: How substantial a long-term business bet is Shell placing on this trend? If it is premised on the world moving to a generally more sustainable energy future, what if such an outcome is not achieved?
Peter Voser: According to the consensus of climate scientists the atmospheric concentration of CO2 should be limited to 450ppm to avoid the worst consequences of climate change. It’s estimated that it has now passed the 390ppm mark, and continues to rise at some 2ppm every year.
The stark reality is that the world will probably overshoot the 450ppm target.
Natural gas, as the cleanest burning fossil fuel, can make an immediate impact in cushioning the environmental impact of the world’s rising energy consumption. Displacing coal fired power with natural gas is the fastest and cheapest route to CO2 emissions reductions in the global power sector over the next 20-plus years.
Coal was responsible for as much as 44% of energy related CO2 emissions in 2010. And it remains a central part of the energy mix in many countries, accounting for around 70% of China’s primary energy mix, for example.
Natural gas is the quickest way to tackle these emissions because modern gas-fired power plants emit half the CO2 emissions of new coal plants, and up to 70% less CO2 than the old steam turbine coal plants, of which there are still hundreds in Asia, Europe and the USA.
Unlike many electricity sources, gas-fired power can also be switched on and off with relative ease. That makes it the ideal and necessary ally of the intermittent power generated by wind, solar and other renewable sources. Moreover, natural gas capacity is faster and less costly to install than any other new source of electricity.
This year, for the first time, Shell will produce more natural gas than oil – but we also have some significant developments on the oil side.
A lot will depend on the second half of the decade. Will we be able to drill in the Arctic and will we be successful? How fast will Iraq develop? Future investment decisions will also have a major impact on the mix. We want to maintain our leadership in the world gas market – in particular liquefied natural gas (LNG).
Tight gas is also a significant part of our business. We see very strong developments in shale gas and tight gas in North America, China, Australia, and, most recently, we signed a deal in Ukraine. We are also looking for other opportunities in Europe but the development of shale gas in Europe will face some difficulties due to regulations and legislation, high population density, and challenges with permits.
Critical Resource: How do you respond to the concerns that environmentalists still have around natural gas – for example that, although cleaner burning than coal or oil, investing heavily in it will still create long-term economic structures for global dependence on fossil fuels? And with regard to shale gas extraction, should the industry and governments be doing more to regulate and mitigate the environment risks around this new technology?
Peter Voser: Looking ahead, natural gas can, and should, play a critical role at the heart of a low-carbon energy system for many decades to come. Natural gas power stations can be switched on and off much more swiftly than other power sources, making them the ideal back-up to the intermittent energy provided by renewable sources such as wind and solar – after all, the wind does not always blow, nor the sun shine.
Another key plus for long-term gas usage is that carbon capture and storage (CCS) technology has the potential to reduce emissions from gas-fired power close to zero. And CCS is more effective in combination with gas than coal, because it then needs to deal with only half the CO2 emissions.
This new abundance of gas comes from many sources, one of which is the extraction of gas deposits trapped in very tight or impermeable rock. However, lack of effective engagement by the industry has meant there is some growing public anxiety about the safety and environmental impact of these processes. This has resulted in a number of common misconceptions about the impact of extracting gas using hydraulic fracturing – or ‘fracking’.
As an industry, we must all do much better at listening and responding to the genuine concerns of our neighbours and the public at large. We must be transparent about our operations. And we must push to achieve the very highest operational and environmental standards. For instance, Shell supports regulation on the publication of the chemicals used in hydraulic fracturing fluids in order to ease public concern. For the record, these typically comprise 99% water and sand, and around 1% chemical additives.
Indeed, we would like to see regulations that promote transparency and public engagement by the tight gas industry in relation to all of its activities. That doesn’t just mean how we build and design wells or how we protect water sources, but also what we do to prevent excessive lorry traffic on local roads, to avoid disturbing livestock, or to mitigate light pollution at night.
Critical Resource: General stakeholder expectations and demands on extractive firms have intensified over the last decade – is responding to and managing these expectations simply about risk management, or do you see it as a potential source of competitive advantage? Are there examples of Shell creating significant shareholder value from its work in this area?
Peter Voser: Our customers and partners appreciate our innovative approach to often complex and technical challenges, and the way we consider sustainable development in our activities. This can be a source of competitive advantage.
In recent decades, the national oil companies have risen to prominence, as major resource holding countries have – understandably – sought to obtain full value for their natural resources.
This has transformed the energy industry. Our ability to win important business opportunities now hinges on our ability to develop productive relationships with these resource holders – and demonstrating our ability to effectively manage risks is a key component of this.
For example, we see global partnerships, with countries such as China, as key to the development of our company. China will also be a key market over the decades to come. So Shell would like to have a firm footing there. Our partnership with China National Petroleum Corporation (CNPC) covers both those strategic aims. We work with CNPC in countries like Qatar and Australia.
Together with CNPC, we have purchased Arrow Energy, an Australian gas company, in a $3.2 billion deal. The joint venture plans to convert coal bed methane – an abundant unconventional gas source – to LNG for export to China. And together we are developing our business in China, which is around shale and tight gas – including wells management – and many other initiatives.
So it’s a great example of how strong relationships between Shell and national oil companies can drive advances in production, and value for our shareholders.
Critical Resource: What would you say have been the 2-3 key lessons Shell has learnt from some of its more socio-politically challenging projects (for example, its operations in Nigeria)?
Peter Voser: Shell operates in some of the most complex and demanding environments in the world. And wherever we operate, I believe that strong principles and building trust must underpin our approach.
For example, last year in Nigeria we took a significant step forward in transparency for our industry by establishing a publically accessible website to report on oil spills from the facilities operated by Shell Petroleum Development Company in the country. This helps to build trust, and allows the tracking of the response to every spill, whether it is operational or the result of sabotage or theft.
As another example, in 2002, Shell played a large role in the founding of the Extractive Industries Transparency Initiative, and we continue to actively contribute to the EITI. What we like about the EITI is that it can drive positive changes in countries and help governments to serve their communities and citizens well.
The reports published by the Nigerian EITI have had a positive impact in terms of the disclosure of payment data that had never been publicly disclosed before.
They have also provided useful feedback to the government revenue agencies about the effectiveness of their revenue collection processes, allowing for improvements to be made.
35 countries are now implementing EITI. We’ve been able to put the lessons learnt elsewhere to use in these countries. For example, in Iraq we feel that the EITI process has contributed to a better understanding by civil society of how we operate – including how revenues are shared – and how the industry presence could be a force for good in the reconstruction of the country.
Having clear principles about how we take investment decisions and how we operate is fundamental, and our Shell General Business Principles are the foundation of everything we do.