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World Energy Source: Delivering Technology: The Key Role of International Energy Companies

World Energy Vol. 9 No. 1 2006

EXTRACT: Shell’s Sakhalin II project in Russia is an example, perhaps the most challenging oil and LNG project yet undertaken. Construction is proceeding apace, and we are learning a lot.

By Jeroen van der Veer
Chief Executive
Royal Dutch Shell p.l.c.

People are increasingly worried about energy: “Will I get the energy I need? And if I do, can I afford it, and what happens to the environment?”

People worry that they will 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 and unacceptable climate change. And they are not sure that energy companies can or want to offer solutions.

Nobody should underestimate the challenges. With continued economic growth, the world’s energy needs could increase by half in about 25 years. That’s the equivalent of perhaps an extra 100 million barrels of oil a day, significantly more than was added over the past quarter century. Most will be added in new markets, where infrastructure has to be developed, and much more will have to be traded internationally.

Adding to the challenge, this growth has to accompany a reduction of the carbon dioxide emissions from energy production.

The scientific advice is clear. Most science academies around the world, including those in the United States, agree that carbon emissions from human activities are changing our climate. They warn that urgent action is needed to reduce them. Of course, there are still great uncertainties. But the potential risks are too great for delay.

But I don’t believe the world is running out of energy. Nor do I believe that – taking unconventional resources into account – we are even close to “peak oil.” Nor that we must choose between economic development and action on climate.

I do believe energy companies have much to offer in both areas, although tackling climate change must be a challenge for all society. I also remain optimistic that the human ability to innovate and harness technology will help us to find solutions.

This is not just a matter of making scientific advances and developing new tools. That is only the essential first step. The challenge is – as expressed in this article’s title – to “deliver technology.”

That means applying advances on the scale necessary to make real progress. It means learning from experience to use them on an increasingly effective level, and quickly sharing that learning around the world. It means integrating many technologies, because that is where the real benefits come in this complex business. It means applying those technologies in increasingly demanding projects by, for example, accessing more difficult resources and creating the complex chains needed to deliver the energy people need.

The challenges we face will require us to do all this at an unprecedented scale and pace.

What Do We Need to Do?

We need to do three things:
• make the most of fossil resources
• develop alternative forms of energy
• improve energy efficiency

Because of their efficiency and abundance, fossil fuels will remain at the heart of our energy system. We need to make the most of them, which must include dealing with their carbon emissions.

The biggest impact would come from significantly increasing the amount of oil we recover from reservoirs, little more than a third on average at present. At Shell, we see considerable scope for this, but no simple solutions. It depends on sustained investment in extending knowledge and applying technology.

Continuing advances are helping us to:
• reduce geological uncertainties
• drill better-placed, more-productive and cheaper wells
• manage reservoir processes more efficiently
• enhance the recovery of stranded oil

“Smart” technology, which enables engineers to monitor and control reservoir processes remotely, could significantly boost recovery.

Enhanced oil recovery techniques, which use heat, gas or chemicals to make oil flow more easily, will be increasingly important. But these projects are costly, complex and technically demanding.

These techniques depend on experienced people who are able to understand the subsurface possibilities, choose the right tools and apply them effectively.

The industry is also learning how to find and develop hydrocarbons in more difficult geology and harsher environments. For example, at Shell we are using our deepwater experience from the Gulf of Mexico in places like Nigeria and Malaysia.

Consumption of liquefied natural gas could double over the next decade. But this also depends on technological, as well as commercial, innovation.

Gas-to-liquids (GTL) technology offers another way of getting gas to customers. Shell has been pursuing this for 25 years, developing our proprietary technology, gaining operational experience from our first plant in Malaysia and building markets. Our planned 140,000-barrel-a-day plant in Qatar is due to come into production around the end of the decade. We believe GTL will be increasingly important, providing high-quality fuels to help reduce transport emissions.

Our experience illustrates three things about developing energy technologies: It takes long-term commitment. Being integrated matters. And it opens further opportunities.

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

There are also very large unconventional resources: heavy oils, oil sands and shales, coal-bed methane and contaminated and tight gas.

And, of course, there is a lot of coal, particularly in countries like the United States and China.

The distinction between “conventional” and “unconventional” is blurring as we learn to develop these resources economically and responsibly.

Oil sands production in Alberta is already a robust and expanding business. Shell Canada, for example, aims to grow production from its Athabasca project to 500,000 barrels a day during the next decade.

Shell is also testing an environmentally sensitive way of unlocking the very large potential of oil shale in Colorado, 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, with the same technology as GTL, to produce high-quality liquid fuels.

I believe the world will be able to rely on the efficiency and convenience of fossil energy for a long time to come.

Developing Carbon Solutions

How does this fit with the need to reduce carbon dioxide emissions?

I have a vision of green – or greener – fossil fuels with much of their carbon dioxide captured and sequestered either underground or in inert materials. I believe this is practical and could, certainly in the medium term, be cheaper, more convenient and more flexible than alternative energies.

A typical 1-gigawatt coal-fired power plant produces the same carbon emissions as 1.5 million cars. China alone is building about 17 of these plants a year. That’s why I think sequestration for power plants should be a priority.

I see providing carbon dioxide solutions as a commercial opportunity and have appointed a senior Shell executive – “Mr. CO2” – to ensure we pursue this vigourously. Our coal gasification technology fits well with sequestration, and we are involved in a power project to demonstrate this in Australia. In addition, Shell Canada is working on a project to capture carbon dioxide from its oil sands upgrader for sequestration in aging oil fields or for use in enhanced oil recovery.

Given the challenges, we need to get demonstration projects under way as quickly as possible. Governments would be wise to provide market incentives to speed development. They can also influence the environment for commercial action. Trading schemes, such as those in the European Union, give companies the flexibility to plan their investments.

Giving priority to sequestration does not mean neglecting alternative energies. We need to continue working to make these competitive. For example, one thing we are focusing on in Shell is developing advanced biofuels, such as cellulose ethanol and bio-diesel made using the same technology as GTL, both of which produce far less carbon than current biofuels. We are also pursuing energy from wind, thin-film solar and hydrogen.

Finally, there is the potential for energy efficiency. I believe the world is just starting this journey, partly because it is politically painful to push forward changes that must involve all energy users.

Energy companies will play their part. We can do this by making our own operations more efficient, although this is an increasing challenge because of the additional processing to upgrade heavier oil and produce cleaner fuels. We can also provide better fuels to support improvements in engine efficiency.

Key Challenges

The first key challenge is economic, involving the scale of investment required to access more difficult resources and undertake long-term technology development. The International Energy Agency estimates that meeting global energy needs will require investing $17 trillion (in 2004 money) 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: bigger, more remote, in harsher conditions, more technologically demanding and with greater social and environmental sensitivities.

Shell’s Sakhalin II project in Russia is an example, perhaps the most challenging oil and LNG project yet undertaken. Construction is proceeding apace, and we are learning a lot. This is good because such projects are our future. By 2015, I think we could have 10 under way.

A wider challenge is the industry’s shortage of qualified and experienced people. In North America and Europe, fewer young people are pursuing scientific and technical education. In the United States, for example, the number of university students studying petroleum engineering has fallen by more than 80 per cent since the early 1990s. We need to convince young people that a technical career in this industry is both stimulating and worthwhile, meeting challenges that matter to the world.

Role of International Companies

As I have stated, meeting the world’s expanding energy needs – while simultaneously tackling carbon emissions – will require delivering technology at an unprecedented scale and pace.

I believe major international operators will have a key role in this endeavour because of our integrated capabilities, global experience and “delivery” mindset.

We bring to technology development a unique knowledge of the technical challenges and market possibilities. And we learn fast from applying new technologies in global operations, harnessing that experience wherever we work.

We can balance the risks and opportunities of investing in challenging projects, and we have the capabilities to bring them to fruition.

We respond to what our customers need and society expects.

We survive only by our ability to innovate, deliver and serve. There are always others anxious to take our business.

National and international companies have complementary strengths, and our relationship will be vital for the future.

Delivering Technology

It is understandable that people are worried about energy. I do not underestimate the great challenges. But I have no doubt this industry can offer solutions. They will come from our ability to deliver technology: to develop and apply new tools to produce the energy people need while reducing its impact on the environment we all share.

Jeroen van der Veer is chief executive of Royal Dutch Shell p.l.c. He was a managing director of Royal Dutch Petroleum from 1997 until the unification under Royal Dutch Shell in July 2005.

He joined Shell in 1971 and worked in manufacturing and marketing in the Netherlands, Cura�ao and the United Kingdom. In 1984 he returned to Shell Nederland as manager of corporate planning, and then of Pernis Refinery. After an assignment in Shell International, looking after Africa and Canada, he became a managing director of Shell Nederland in 1992. Four years later he became president and chief executive of the Shell Chemical Company in the United States.

He was born in Utrecht, in the Netherlands, and is married with three daughters. He has a degree in mechanical engineering from Delft University and another in economics from Rotterdam University. In 2005 he was awarded an honorary doctorate from the University of Port Harcourt in Nigeria. He is a non-executive director of Unilever, serving as a member of the Nomination and Remuneration Committees.

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