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The natural gas revolution is changing the energy landscape


14/09/2010 -- Speech given by Peter Voser, Chief Executive Officer, Royal Dutch Shell plc, at the World Energy Congress in Montreal, September 13th, 2010.

Peter VoserIn a world of rising demand for energy and growing environmental stresses, natural gas as an abundant, affordable and clean source of electricity deserves to play a greater role. The supply picture for natural gas has improved spectacularly in the past few years. Indeed, it is not an exaggeration to speak of a supply revolution, driven mainly by the boom in production of tight gas, shale gas and coalbed methane in North America. But the echoes of this supply revolution are heard far beyond North American shores: it has freed up supplies of liquefied natural gas - initially destined for the USA - for other parts of the world, and it has inspired other nations to search for new gas resources themselves. These developments together should give governments and investors the confidence to commit to natural gas for the long term. In the emerging markets, the demand for natural gas will grow across all sectors of the economy, driven by continued economic growth. In the OECD markets, much hinges on the role natural gas will play in the electricity sector. The environmental credentials of natural gas as a cleaner source of electricity are strong. Modern gas plants emit between 50% and 70% less CO2 than coal-fired plants. New gas-fired capacity plants can also be installed faster and at much lower capital cost than other sources of electricity. This makes natural gas a vital ally in the world's search for a more sustainable energy future. If we give natural gas the space to grow, it will alter the world's energy landscape for the better.

The natural gas revolution is changing the energy landscape Good morning everyone, and thank you for this opportunity to share some thoughts about the global energy picture. In doing so, I'd like to zoom in on the role of natural gas.

In a world of surging energy demand, we will need to mobilise the world's entire mix of energy sources unless we want to risk condemning billions of people to energy poverty. In that mix, natural gas, as the cleanest-burning fossil fuel, will play a prominent role in the decades to come.

When it comes to natural gas supplies, a revolution is under way. This natural gas supply revolution has increased energy security for North America. And it has the potential to alter the energy landscape for the world as a whole. It has the potential, but whether it will actually do so depends not only on the availability of supplies. It depends just as much on the market forces and government policies that will shape the demand for natural gas.

To see where the world is headed, let me take you through the following three themes:

  • I'll talk about the supply boom itself because I think a lot of people still haven't grasped its full scale and impact.
  • I'll discuss the main drivers for gas demand in China, the Middle East, Europe and North America.
  • And I'll review the potential of natural gas as a source of clean, affordable electricity.
The supply revolution The natural gas supply revolution itself rests on two innovation pillars:

First, improvements in production technologies that have made it economical to produce shale gas and tight gas resources that were previously considered too difficult to tap. Royal Dutch Shell is helping to drive this supply revolution with billions of dollars worth of investment in the North American natural gas sector over the past few years.

For instance, we recently acquired East Resources, with over 4,000 square kilometres of net acreage including a large position in the Marcellus shale in the north-east of the USA - which means that it's close to the largest gas market in North America.

Worldwide, there's now enough technically recoverable gas in the ground for 250 years at current production rates.

The other pillar is the diversification and globalisation of natural gas markets, driven by liquefied natural gas, or LNG, and to a lesser extent gas to liquids technology.

I want to review the two pillars underpinning the supply-side revolution in more detail.

Let's start with the North American "shale gale", as Mr Yergin likes to call it. And let's start here in Canada, in the Groundbirch area in north-east British Columbia to be precise. There, Shell is producing natural gas from a very large reservoir, consisting of tight sandstone, siltstone and shale, at a depth of about 2,500 metres.

We're currently producing enough gas to meet the needs of over 400,000 homes. This sounds easy, but it has actually taken many years of technology advances to get to the point where we could produce these complex types of fields economically and responsibly.

We've known for a long time that shale and tight gas resources were abundant.The problem is that the gas is trapped in very tight rock, from which it cannot escape in commercial quantities, unless we use special techniques.

As most of you will know, hydraulic fracturing is the technique used to stimulate gas flow. I realise that there's some public concern that fracturing could affect fresh water layers in the ground. We take that concern seriously.

At Shell, we comply with regulations and follow strict procedures to ensure that the process is safe. And we believe that we have the right skills, in fields from geology to drilling, to produce tight and shale gas safely and responsibly.

The natural gas we produce lies far below the fresh water layers. As an extra protection measure, we line the wells with steel barriers and concrete. This is not to suggest that nothing could ever go wrong. We've recently been reminded that things sometimes can and do go wrong.

But let's also remember that energy is the lifeblood of civilisation. Whether we like it or not, producing energy and delivering it to billions of customers around the world comes with certain risks.

Rather than closing our eyes to that reality, we must confront risks and manage them as effectively as we can. That requires good safety standards and well-trained people. And at Shell, we think we have both.

In our operations, local communities are key stakeholders. So we try to listen. And we try to involve them. For instance, at Groundbirch last year, we made over 40% of our expenditures to businesses in northeast British Columbia. Overall, the shale and tight gas boom is a positive story of innovation, new jobs and a massive growth of cleaner, more affordable energy supplies.

The facts speak for themselves: Only a few years ago, the assumption was that North America's gas production would decline. Today, instead of declining, production has increased dramatically.

So has the total resource base, which is now big enough to cover North America's current gas consumption for well over a century. The echo of this supply revolution is heard far beyond North American shores: It has freed up liquefied natural gas supplies for other markets. It has also inspired other nations to search for new gas resources.

For instance, in China, Shell operates the Changbei tight gas field, under a production sharing agreement with Petrochina. It supplies natural gas to Beijing and other Chinese cities. And we're currently working together with CNPC and PetroChina to appraise and hopefully produce potentially very large tight gas and shale gas resources elsewhere in the country.

In Europe, Shell holds acreage with potential to produce shale gas and coalbed methane in Germany and Sweden, and we're already drilling our first exploration wells.

In Australia, in the years ahead, we plan to convert coalbed methane into liquefied natural gas for Asia's fast growing gas markets.

And in South Africa we are studying the country's shale gas potential.

Liquefied natural gas Which brings me to the second pillar of the supply revolution: the technologies that have allowed us to grow and diversify the market for natural gas, in particular liquefied natural gas.

As we have seen, North America won't have a structural need for LNG anytime soon; that doesn't leave out the possibility for cargoes of opportunity. But in other key markets, even the most optimistic supply scenarios still leave considerable room for LNG to fill.

Consider western Europe, where production of tight and shale gas and coalbed methane will not take off before 2020. Meanwhile, conventional gas production is in steady decline. To fill this gap, more gas imports will be necessary, much of which will take the form of LNG. LNG's unique flexibility allows it to follow demand as it shifts around the world. This enhances global energy security.

Traditional markets in Europe and Asia will be joined by China and a host of new countries like Thailand, Singapore and Pakistan. And who would have thought that one of the very first cargos from Sakhalin II in eastern Russia would have gone to Kuwait last year?

It's been more than 40 years since Shell technology helped start up the world's first liquefied natural gas exporting plant in Algeria. Today, we are developing Floating LNG, an innovation that will allow us to liquefy gas at sea on huge floating facilities, instead of building pipelines to the coast. That opens up offshore gas resources once considered too remote to tap.

As a result of such innovation and progress, world-wide LNG supply growth is around 6-8% per year. By 2020, LNG supplies could meet one-fifth of global gas needs. The growth of LNG and the shale and tight gas boom are two mutually reinforcing developments; they both enhance long-term gas supply security.

Both developments should give governments and investors greater confidence to support natural gas for the long term.

A brief word on gas-to-liquids, or GTL - not to be confused with liquefied natural gas.

In Qatar, we are nearing completion of our massive Pearl gas-to-liquids plant. Gas-to-liquids technology enables us to convert natural gas into products you'd normally expect us to derive from oil. For instance, we're already preparing to sell a new GTL kerosene blend to the aviation industry for commercial aircraft.

Pearl GTL will produce enough gas to liquids fuel to fill over 160,000 cars a day and enough base oils each year to make lubricants for more than 225 million cars.

GTL is one way for natural gas to play a role in the transport sector. Compressed natural gas, as a transport fuel for light passenger vehicles, is another.
As for liquefied natural gas, it is possible to imagine a future in which it helps to power ships and heavy road transport.

Another option is for natural gas to be a key source of electricity for the world's growing fleet of hybrid electric vehicles, such as the Chevrolet Volt that's about to be introduced in Detroit.

And we could talk about natural gas as a feedstock for chemicals and hydrogen, but that would require another speech.

The key message is this: the supply picture has seen a spectacular improvement in recent years. There's plenty of gas in the ground. And we have learned to create value from natural gas in many different ways.

Demand outlook Now let me say a few words about gas demand.

A key question is whether the world's appetite for natural gas will keep pace with supplies. At a global level the answer is yes - because of economic growth in emerging markets. Today's annual demand is 3.1 trillion cubic metres - or 110 trillion cubic feet. At Shell, our view is that global gas demand could rise by one-quarter by 2020, and by almost 50% by 2030. That would represent double the growth of oil during the same period in the IEA's reference case.

In the emerging economies, continued economic growth will push up gas demand across all sectors.

In China, the government wants to more than double the share of natural gas in the country's energy mix to around the 8-10% mark by 2020. Now that's a very powerful driver! As a result, in ten years' time, China's annual gas demand could reach a level comparable to half the current gas demand of the USA.

This helps to explain why China - and other Asian countries for that matter - remain keen to secure supplies through long-term contracts. As China gains confidence about the scale and accessibility of its new domestic gas resources, so the appeal of natural gas will strengthen, and the country's gas demand may continue to surge in the following decade to 2030.

In the Middle East and North Africa, the demand for natural gas is also surging - fuelled by economic growth and industrial expansion. As a result, that region's gas consumption will approach European levels by 2020.

In the OECD markets, the growth of gas will depend primarily on the power sector.

What needs to be done Which brings me to the third and final part of this speech: how to make sure that natural gas can live up to its potential as the cheaper source of clean electricity.

The supply will be there, provided there's a market.

The environmental credentials are also strong: modern gas plants emit between 50% and 70% less CO2 than coal plants.

New gas-fired power plants can be installed much more quickly and at much lower capital cost than it would take to build new capacity for coal, nuclear or onshore wind, not to mention offshore wind and solar.

As a result, for most countries natural gas offers the fastest, lowest-cost and easiest way to reduce carbon emissions in the coming years.

The story can be even better.

On both sides of the Atlantic, the average utilisation rate of existing gas-fired power plants has been at around 40%. This means that we can push more gas into the power system and reduce emissions essentially by making better use of what we already have.

A report by the USA's Congressional Research Service makes the case. In the USA, coal-fired power currently accounts for 80% of CO2 emissions from the power sector, and for around one-third of the country's total emissions. If the USA would double the utilisation rate of its existing natural gas turbines to around 80%, it would displace nearly one-fifth of the CO2 emissions from coal-fired power plants - at little or no additional cost.

Last year, the USA's power sector already saw significant coal-to-gas displacement. And it's expected to continue this year.

As for Europe, over the past few quarters, gas has seen more of an advantage over coal in the dispatch merit order, with coal even taking on the role of "peaking" fuel on some occasions.

In the coming years, many decades-old coal plants will have to close down, in America, Europe, as well as in China. And these will have to be replaced by new plants. So there's more room for gas to grow.

Once we have exploited the coal-to-gas displacement potential, additional measures will be necessary to drive carbon emissions further down to the required level.

We will have to fit the newer, larger coal plants with carbon capture and storage technology, or CCS. And further out, we could add CCS to natural gas plants, to bring their emissions down to nearly zero.

Policies Clearly, natural gas has many benefits that make it a highly competitive source of clean electricity. However, for natural gas to realise its full potential as the cheaper clean electricity, we need government policies that reflect these benefits.

Governments and regulators possess numerous policy instruments to help forge a clean electricity coalition between natural gas, renewables, nuclear and carbon capture and storage technology. The most important contribution would be to develop carbon markets that deliver robust carbon prices and stimulate investment in low carbon technologies. Within those markets, there are numerous ways to strengthen the price if necessary: you can reduce the number of emission allowances, or introduce a minimum price.

An alternative approach could be to introduce emission performance standards for power stations. If well designed, these standards would also stimulate low-carbon electricity generation. These types of policies would ensure that potential CO2 reduction measures are implemented efficiently, starting with those that are the lowest cost and fastest to implement.

If, by contrast, governments try to pick technology winners and losers, the cheaper solutions could get overlooked, causing higher electricity bills for the same level of emission reductions.

Separate and in parallel to the policy routes I've just described, governments could provide targeted support for new energy technologies, while they are still in their demonstration phase.

I'm thinking in particular of carbon capture and storage. That's because CCS projects of themselves don't bring in revenues.

We need to advance CCS fast, to allow it to realise its full potential in tackling CO2 emissions in the next decade. For that reason, governments need to maintain momentum and commit financial support to demonstration projects.

Conclusion At Shell, we realise that our customers want a secure, affordable, and sustainable energy future. At Shell, our people embrace that future. And they work very hard to make it happen.

Some of the cleaner energy solutions will only be available tomorrow. Other solutions are available to us today. Natural gas is the most obvious one.

We know how to produce, transport and use gas safely, responsibly and at affordable cost. In recent years, we have seen a spectacular improvement in the global gas supply outlook. And in the power sector, natural gas provides the fastest, easiest and most affordable route to cleaner electricity.

We should think of natural gas as a vital ally in the search for a sustainable energy future.

If we create space for natural gas to grow, natural gas will change the world's energy landscape - for the better.

Thank you kindly for your attention.

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