Half of Shell's production will be gas by 2012, CEO says

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Oct. 9 -- Oil and natural gas are indispensable in a growing world energy market, and Royal Dutch Shell PLC plans to make gas roughly half of its total production by 2012, its chief executive officer said on Oct. 8.

“This is not merely a shift in our portfolio. Increasing natural gas production and transportation by liquefying it and shipping the LNG to global markets means that more natural gas will be available to displace coal as the fuel for power plants,” Peter Voser said in an address at the Woodrow Wilson International Center for Scholars.

“In the United States, new technology has opened up abundant gas resources contained in dense rock formations, increasing supplies dramatically,” Voser said, adding, “So you can see why I’m sometimes tempted to say: Nothing beats natural gas.”

Responding to questions following his talk, Voser said Shell will expand gas’s share of its total production beyond 2012. Shell is negotiating to capture gas that currently is flared in southern Iraq and export it as LNG, he said. For Europe, he said, gas is a steady supply source in itself, adding, “It’s the management of pipelines between countries that creates insecurities, which can be addressed by diversifying suppliers.”

Shell also has expanded its North American gas portfolio substantially over the past 2 years and intends to develop those holdings, Voser said. Gas hydrates contain even more resource potential, he noted, adding, “I think we are underestimating the contribution gas can make in helping the United States address global warming.”

Motor fuels outlook
Shell’s growing interest in gas does not mean that the company plans to surrender its position as the world’s leading motor fuel supplier, according to Voser.

“Car drivers want easy access to affordable transport fuel that takes them a long distance. That’s nothing new,” he said. “What has changed is the growing desire for driving that is fun, useful, and environmentally acceptable. This trend of cleaner driving is likely to continue, including in the United States, with fuel efficiency standards getting ever tighter.”

Shell will need to move beyond simply serving its customers efficiently in its new role, he said. “We’ll have to build and cater for a growing community of energy customers who want to feel good about the energy they use,” said Voser. “We can offer them fuel-saving transport fuels and lubricants, blend in sustainable biofuels, capture [carbon dioxide] at the point of production and store it underground, as we plan to do at Canada’s oil sands.”

Shell also can help its retail customers reduce their motor fuel consumption through programs such as FuelSave, which the Shell chief executive said has helped motorists in different countries cut their consumption 10-20% simply by driving differently. “Our philosophy is that customers who save fuel spend less money. And happy customers tend to be loyal customers,” he maintained.

Shell also is looking into energy alternatives, Voser said. But he also observed that it takes about 25 years for each new source to simply gain 1% of the total market. “Biofuels are reaching that mark about now. Wind could do so sometime in the next decade, 25 years after the first big wind farms were built here in the United States and in Denmark,” he said.

“Over a billion new vehicles are expected to come on to the world’s roads between now and 2050, more than doubling today’s total. So there will be room and need for many different fuel types, including conventional fuels, biofuels and electricity,” Voser said.

‘At the nexus’
Addressing to his talk’s theme, “The Energy Company of the Future,” Voser said companies like Shell “sit at the nexus of one the world’s most difficult and exciting challenges: building a new energy system capable of meeting the energy needs of future generations at much reduced environmental cost.”

This comes amid the International Energy Agency’s prediction that the world will need to invest $36 trillion in energy supplies through 2030, Voser said. Using International Monetary Fund calculations, that’s more than 30 times the amount which governments have used so far to save their banks and revive their economies, he said.

“Complex challenges rarely have simple solutions. Shell’s response has been multifaceted,” he said. “We develop scenarios and share them with the outside world. We invest more in new energy projects than any other private company. We spend more on research and development than any of our competitors. We develop new businesses, including in renewable energy.”

Since Shell is a business, and not a government, it has to focus on its own skills and capabilities to make certain it is in the right place at the right time, Voser said. That alone isn’t enough, he added: “When you’re in the right place today, there’s still the question: Will you be there tomorrow? This is the trillion-dollar question confronting all oil and gas companies.”

Voser said Shell, in various stages of its history, invested in energy market segments not normally associated with its core oil, gas, and chemical businesses. These have included solar, forestry, nuclear power, and coal mining, and Voser said Shell sold these interests because it found that others were better at those businesses. “That doesn’t mean we have given up on trying new things. For instance, we’re a technology leader in the biofuels space; we distribute more biofuels than any other company, and we work very hard to build sustainable supply chains,” he said.

Greater access
This also would not be the first time the oil and gas industry has had to respond to the prospect of tighter supplies, Voser said. “In the aftermath of the oil crises of the 1970s, for instance, the industry gained greater access to the Gulf of Mexico, which today makes a vital contribution to America’s supply security,” he said. The company also would like to bring more oil from Alaska’s offshore, which it considers the most promising US hydrocarbons basin, to the Lower 48 states, “but we’re facing legal opposition there,” he added.

“Shell has been a responsible operator in Alaska since the 1950s, on land and at sea,” said Voser. “We’re confident that developing more of Alaska’s resources would be a win-win-win situation for the state and local governments, the local communities, and the companies involved.”

Elsewhere, he said Shell is pioneering development of a floating LNG technology which would let it produce and liquefy gas at full sea off Australia’s coast, reducing environmental impacts ashore and sparing the company the cost of piping the offshore gas to land over a great distance (OGJ Online, Oct. 8, 2009).

Improved oil recovery rates also will be increasingly significant, he predicted. “Right now, on average, oil and gas companies produce 35% of the original oil in reservoirs. The rest stays in the ground because it’s uneconomical to produce,” Voser said. “If we could increase this by just 1% worldwide, it could yield some 20-30 billion bbl of additional oil, as much as the proven oil reserves of the USA.”

For traditional multinational oil companies, the days of easy access to easy oil are gone, he declared. Governments of countries with abundant resources want their societies to benefit, and they want their national oil companies more heavily involved. The oil multinationals can offer the most advanced technology, a global reach with a huge market of consumers, and the willingness to invest in local talent, the Shell executive said.

Role of partnerships
“Take Qatar, where we are investing billions of dollars in an LNG plant and the Pearl [gas-to-liquids] plant, which will turn natural gas into liquid transportation fuel and other products,” he said. “We will operate and maintain a fleet of 25 of the world’s largest LNG tankers, while developing capabilities within Qatar’s own shipping company Nakilat. The aim is to phase out our own role and hand over the management of the fleet to Nakilat.”

Partnerships with producing nations will become increasingly important because some energy exporting countries such as Egypt, Indonesia, and Mexico will soon become importers, he said. Growing worldwide interest in addressing global climate change also matters, Voser said, noting that the company hopes one result of the upcoming conference in Copenhagen will be tangible progress in developing a global carbon market.

That would include a US carbon cap-and-trade system, which Voser said is more effective than a direct carbon tax in setting a market price. “We need such a market as the most effective way of promoting low carbon technologies, in particular carbon capture and storage. A lot, not everything, will depend on how far the United States is prepared to push the agenda forward,” he said.

“There is the perception that the oil and gas industry is 100% opposed to congressional efforts to enact climate legislation. While other companies can address their own positions, this is not the position of Shell,” said Voser. He said that Shell, as a member of the US Climate Action Partnership, is actively involved in helping Congress enact a fair and effective cap-and-trade program. “We recognize the value of such action in spurring investment and positioning the United States as a leader in the coming international climate negotiation,” he said.

Voser said that amid this transformation, it’s still important for Shell as a corporation to think in an integrated way. He conceded that this is a growing challenge since its businesses range from producing oil from deep beneath the frozen waters off Siberia to refueling millions of cars and trucks daily and heating homes, businesses, and institutions. “Future customers will base their choices on more accurate information, which they will obtain more quickly, from around the world. Winning companies will be the ones that stay ahead of the rising aspirations of energy customers, through innovation, pushing the limits of what is possible,” he maintained.

Contact Nick Snow at nicks@pennwell.com.

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