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The energy challenge and China: By Linda Cook, Executive Director, Shell Gas & Power

Linda Cook, CEO Shell Gas & Power: Forbes image 

Linda Cook
Executive Director Gas & Power
Royal Dutch Shell plc
The Oxford Energy Seminar
5th September 2007

In the coming decades, the world must meet the challenge of producing more energy for a growing world population, while stabilising or even reducing greenhouse gas emissions. In this speech, Linda Cook discusses the link between this challenge and China’s tremendous economic and social development. The global journey to a sustainable energy future will involve choices, trade-offs and consequences; not a single energy type will emerge as a silver bullet. Fossil fuels, like oil, natural gas and coal, will continue to dominate the world energy system well into this century, despite the growth of alternative energy.

In China, it is said that “good fortune may forebode bad luck, which may in turn disguise good fortune”. That’s a good way to describe the high hopes and difficult challenges surrounding the future of energy.

Within Shell, in addition to my business accountabilities, I have regional responsibilities for our activities in the Asia Pacific region. As such, I am a regular visitor to China, a country whose development continues to amaze and who exemplifies the sustainable development challenge facing the world today.

So this morning here in Oxford, I’ll discuss the broader energy challenge, but I will also highlight the particular impact of China’s tremendous growth.

The energy challenge

The energy challenge has been a theme for Shell for quite some time, and we express it in terms of ‘hard truths’. I’ll discuss four of these today.

The first hard truth is, of course, that global demand for primary energy is growing at an accelerated rate.

The second is that fossil fuels will continue to dominate the world’s enery portfolio for decades to come. This means more oil, more natural gas, and more coal.

The third hard truth is that the days of “easy oil” are over. Given the accelerating demand picture, conventional supplies of oil – and to a certain extent natural gas – will struggle to keep up. Just when energy demand is surging, many oil provinces are going into decline.

The final hard truth is that there are consequences of all of this for the environment. In particular, CO2 emissions are likely to continue to rise, at least for some time.

These challenges are global. We will have to address them in a balanced way, bearing in mind that economic development, energy security and the environment are all inter-related.

Addressing the energy challenge will have to be a collective effort by governments, industries and consumers.

We all share an interest in developing the available energy resources in a cost efficient and environmentally and socially responsible manner, be it Saudi crude, Canadian bitumen, Chinese coal or fuel from crops.

I believe it was in that spirit that OPEC’s Secretary General, His Excellency Mr. Abdalla el-Badri, recently called for “further cooperation between national oil companies and international oil companies, particularly in exploration and enhanced oil recovery.”

I also think this is consistent with the views recently expressed by the National Petroleum Council in the United States that “there can be no U.S. energy security without global energy security.”

First, let’s look at the demand picture. Between 1971 and 2000, world demand for primary energy doubled. By the middle of this century, or perhaps sooner, world demand will double again.

The main drivers are increasing population and higher levels of prosperity, with China and India in particular entering the energy intensive phase of their economic development.

Where will this energy come from?

Today, fossil fuels make up around 80 percent of the global energy portfolio. A major part of the remainder is made up of nuclear and hydro, both of which are not free from controversy. Solar, wind and bio-fuels together provide less than half of 1 percent. Even if renewables are pushed very hard, fossil fuels will still dominate in 2030…and even in the middle of the century.

One aspect of this chart that surprises and in some ways disappoints many people is the growing reliance on coal for a large portion of the world’s energy supply. According to most estimates, global coal consumption will increase by 60% or more between now and 2030, and will continue to represent around a quarter of the entire energy market.

Coal

Coal fuelled the western industrial revolution a little over a century ago. It is relatively cheap and domestically available in large quantities in North America, Europe, India and China. In general, these big economies do not use coal because they love it, but because it is a resource they possess.

Coal invokes memories of London’s great fog in 1952. But coal’s environmental impact is not a thing of the past. Coal burning is China’s single largest source of air pollution today, generating more than 70 percent of its sulphur dioxide, nitrogen oxide and carbon dioxide emissions.

Coal forms about 70% of China’s current primary energy mix today, a much larger percentage than in other countries. According to the Chinese authorities, coal consumption by China’s power companies jumped nearly 18 percent in the first half of this year from a year ago.

In the United States, while most new power stations are fuelled by natural gas, more than 50% of electricity today is still generated from coal, and for the first time in many years, new coal-fired plants are being considered.

And in the European Union, perhaps a telling sign of things to come is that in the Netherlands, a natural gas country par excellence, the government has given permission for the construction of at least four new large coal-fired power plants.

So, King Coal is still very much alive, with signs he’ll be around for quite some time. As a result, there is an urgent need for the implementation of the latest technologies – such as coal gasification – to enable the cleaner use of this important resource.

Some facts: Power plants using coal gasification technology, officially known as Integrated Gasification Combined Cycle, or IGCC, are 10% more efficient than conventional, super-critical coal boiler plants. They consume less water, produce only half as much ash and solid waste, and have lower emissions of CO2, sulphur dioxide, nitrogen oxide and particulates. They also enable the precombustion capture of a relatively pure stream of CO2, facilitating CO2 sequestration.

IGCCs are currently, however, more expensive – increasing the cost of produced electricity by approximately 15 to 20%. Looking ahead though, it is possible that advancing technology and emissions taxes will render them economically competitive. At a CO2 tax of about $35 per tonne, IGCC with CO2 sequestration may be competitive with conventional coal-fired power.

Shell has one of only 3 coal gasification technologies in operation today. It’s been used at the Buggenum power plant in the Netherlands for almost 15 years. And it’s now in operation in five chemical plants and under construction in another ten in China. The technology has also been licensed recently in the European power sector. One of these is a license to Powerfuel, a UK company that is planning a 900 Megawatt power plant and potential sequestration of five million tonnes of CO2 per year.

I have no doubt that clean coal technology will be an important component of any credible response to the energy challenge.

Oil Sands

Earlier I referred to the end of ‘easy oil’. This is not to say that the world is running out of oil or gas.

On the contrary, estimates indicate there are roughly 20 trillion barrels of oil equivalent in place – equal to about 400 years of global oil and gas demand in 2006.

The problem is that only 5-10 trillion barrels can be recovered with existing technology – and much of it is located in remote environments such as the arctic or in deep water.

Much of it is also in what we refer to as ‘unconventional’ resources such as oil sands and oil shale.

All of this points to the need for continued technology development and, quite frankly, higher finding, development and operating costs.

Let’s take a look at one very important source for the future: the Canadian oil sands. Not so long ago, Canada was nowhere to be found on the world’s map of major resource holders. Today, most official statistics depict Canada as the second largest holder of recoverable oil resources after Saudi Arabia.

The Canadian oil sands are mostly located in the western province of Alberta. The deposits vary in depth between 2 metres to more than 500 metres. Bitumen from the shallow deposits is mined from the surface. Bitumen from the deposits deeper than 400 metres is recovered through wells and the injection of heat.

In total, the deposits contain about 175 billion barrels deemed economically recoverable with today’s technology.

With advancements in technology to improve recovery, and to lower the cost and environmental impact, the authorities in Alberta believe the resource potential of the Canadian oil sands could be as much as 300 billion barrels.

Shell’s Athabasca Oil Sands venture in Alberta is one of the largest oil sands projects. Today it supplies about 10 per cent of Canada’s oil needs, and has the capacity to produce over 500,000 barrels per day. Industry wide, the Canadian oil sands are projected to produce over 2.5 million barrels per day within the next decade. This will cement Canada’s place as a leading energy supplier to the US for decades to come.

Producing and upgrading the bitumen from the oil sands, though, is more CO2 intensive than producing conventional oil. As a result, concerned environmental groups are increasingly campaigning against these developments.

On a well to wheel basis, or in the case of oil sands, from the “mine to motorist”, the synthetic crude from oil sands produces only 5 percent more CO2 than the average barrel of imported crude oil.

Even so, as production from the oil sands expands, so does our responsibility to manage the corresponding CO2 emissions and other environmental impacts. To reduce emissions during bitumen production, Shell is working on new technology to improve operational efficiency.

We are also looking at the longer term potential for the capture and sequestration of CO2 from the oil sands process.

However, today the cost of doing this is prohibitive – in Canada and elsewhere. Many potential CO2 sequestration projects have been identified around the world, but progress is still slow and government support will be indispensable.

Biofuels

With high oil prices and increased emphasis on energy security, Brazil and many countries are now mandating biofuel components in their transport sectors. But if pursued irresponsibly, biofuels could strain food and water resources, and affect biodiversity.

Brazil is often seen as an example, but it is also an exception. With its abundant landmass and favourable climate, the biofuels giant needs only around 3% of its agricultural land to produce 10% of its road fuel consumption. However, according to the European Commissioner for the Environment, the US would need some 30% and the European Union over 70%.

Clearly, using this amount of land would not be sustainable. The now famous case of protests in Mexico City about the rising cost of corn tortillas shows how sensitive the relationship between biofuels and food prices can be.

In China, too, food prices have surged, prompting the government to declare in December last year that food security comes first, selling some of its wheat reserves to prevent social unrest. With its massive population, and relatively low per capita amount of arable land, biofuels from grain are not a silver bullet for China either.

Shell, as one of the largest distributors of biofuels in the world, has argued that biofuels can make a meaningful and positive contribution to the world’s transport fuel mix, but only if they are sustainable. This will require a shift towards what we refer to as secondgeneration biofuels. They use crop waste or non-food crops for feedstock, reducing the pressure on the world’s food chain. Shell is involved in several promising technology pathways that could lead to commercial application in the coming years.

Natural gas

When considering the continued importance of fossil fuels and their impact on the environment, it’s not surprising that demand growth for natural gas outpaces that for oil. Natural gas is the preferred fuel in most markets for power generation because it is relatively abundant and affordable, as well as environmentally beneficial compared to oil or coal. Europe in particular, in response to environmental concerns, made an early and massive switch from coal to natural gas.

Today, Europe has a mature natural gas infrastructure and a variety of supply sources. Approximately 60% of its gas supply is produced from within Europe. The other 40% is imported; of this, more than half comes via pipeline from Russia. However, Europe’s domestic natural gas production will soon peak.

As a result, Europeans are diversifying their natural gas supply portfolio, and increasingly turning to liquefied natural gas or ‘LNG’. Europe is not alone in this regard. Global demand for LNG is growing by almost 10% per year.

Through LNG, Europe now imports natural gas supplies from the Middle East, Africa and as far away as Trinidad.

And numerous new LNG receiving terminals are under construction or planned.

Other countries and regions are following suit. The U.S. previously relied on natural gas imports from its neighbours. But Mexico and Canada are facing the twin challenges of increasing domestic demand and maturing fields.

So the US is now importing LNG from West Africa, the Middle East and spot cargos from as far away as Australia.

Even Mexico is now importing LNG, and import terminals are under development in Canada.

While Japan and Korea have long relied on LNG as their main source of natural gas, other Asian countries are now drawn to its benefits. These include India, Thailand and Pakistan … and, of course, China, who imported their first cargo of LNG last year – from Australia – and have other supplies planned in the coming years from Indonesia and Malaysia.

The next wave of new LNG supplies will come to market in the period 2012- 2015. No doubt we’ll see China as an important player in the bidding for these volumes.

China

So far, we have discussed China’s challenge in the context of a number of energy types. Let’s now bring some of these elements together. With a population of 1.3 billion people, China is on a remarkable journey of economic growth and social development, propelling hundreds of millions of people into the middle classes. Per capital GDP is forecast to rise from around 2,000 dollars today to perhaps more than 35,000 in 2050.

China’s peaceful rise benefits not only the Chinese. China is producing goods for consumers all over the world. And China’s development has led to higher growth and lower inflation for the global economy.

The fast pace and size of such economic growth brings with it a range of environmental and social challenges for China itself, and for the rest of the world. If current trends continue, by 2035 China could emit around 30% of the world’s energy-related CO2.

According to China’s State Environmental Protection Agency (SEPA), the combined health and nonhealth cost of air and water pollution for China’s economy comes to around $US 260 billion a year, or almost 10% of the country’s GDP. SEPA’s deputy head, Zhu Guangyao, recently even warned publicly that China’s industrialisation had pushed its environment “close to [the] breaking point”.

The Chinese authorities are, of course, well aware of these challenges. They have identified them as priorities in their most recent five year plan. And they are actively engaging internationally to discuss the scale of these challenges and opportunities for international collaboration to address them.

Improving energy efficiency is a key component in all of this. During the period 2006-2010, the government aims to reduce energy consumption per unit production by 20%. While it missed this target in 2006, there are signs that this year, energy efficiency is gaining momentum.

The role of energy efficiency is evident in the transport sector. In China, the vehicle population will grow from 40 million cars today to 150 million cars by 2020. This is still only 12 per 100 people, well below the European or American average. But fuelling this increase will require as much as 2-3 million barrels of oil per day.

While a challenge, there is also an opportunity – an opportunity for China to adopt the most modern fuel efficiency standards from the start, and, of course, to develop a clean and efficient public transport system. China can learn from the experiences of the U.S., for example, which has an underdeveloped public transport system and a very inefficient vehicle fleet. If the average U.S. car were as efficient as the average European car, an improvement of nearly 40%, this would reduce oil demand by over 3 million barrels per day.

China’s leaders are taking serious steps toward this, exploring the use of clean diesel and even sulphur-free Gas to Liquids fuel in city buses and taxis in mega-cities.

The rest of the world will no doubt continue to benefit from China’s economic development. Therefore we must all share the accountability to meet the growing global energy needs responsibly.

Conclusion

As we all know, there is no single solution to the world’s energy challenge. It won’t come from alternative energy alone. It won’t come from increased energy efficiency or CO2 regulations alone. And it won’t come from natural gas or coal or unconventional oil alone. All of these must be part of the solution. Speaking again of good fortunes, I believe we have reason to be optimistic about the future of the world’s energy system.

But we should also be realistic: to meet the energy challenge, we must increase coordinated action – between government, industry and consumers around the world. This is necessary if we are to progress towards a world that is – at the same time – energy secure, economically prosperous and environmentally clean.

Thank you

Linda Cook is Executive Director Gas & Power of Royal Dutch Shell plc. Her other responsibilities are Renewables, Hydrogen and Carbon Dioxide; Shell Global Solutions; Group Research; East Asia and Australasia.

She was born in Kansas City, Kansas, in 1958 and joined Shell after graduating in Petroleum Engineering from the University of Kansas. She has worked for Shell
companies in the United States, the Netherlands, and Canada.

Before becoming a Group Managing Director, Linda Cook had been President and Chief Executive Officer of Shell Canada Limited since August 2003. Prior to that she has been Chief Executive Officer of Shell Gas & Power since 2000. She is a member of the Society of Petroleum Engineers and a Director of the Boeing Company.

© Shell International BV (SI), 2007.

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2 Comments on “The energy challenge and China: By Linda Cook, Executive Director, Shell Gas & Power”

  1. #1 tim pellett
    on Oct 9th, 2007 at 08:34

    how can this cement Canadas place wit our given to the us under napta

    and among the lowest royalities in the wourld in witch means more profit to the major profits to the majors in the oil buis.

  2. #2 All Roads
    on Oct 8th, 2007 at 08:40

    Thank you for posting this. It is a fantastic overview the state of energy at this time. I have been in China for the past 6 years, have spend the last 3 working on macroeconomic trends in China, and have in the last 12 months begun looking at how China’s growth will require a different energy strategy that the one the U.S. leveraged during its growth phases.

    If possible, I would enjoy the opportunity to mete with you the next time you are in Shanghai to discuss some of the things we are seeing here.

    Hope all is well
    rich

    http://www.allroadsleadtochina.com

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