The world is facing a series of trilemmas in relation to energy, all of which will have an impact on Australia in the coming decades.

With world energy demand soaring, and global supply increasing but potentially not at the same pace, the world may face a significant gap between demand and supply. Policy decisions made in the next few years will determine where demand and supply meet within this ‘zone of uncertainty’.

Meanwhile, environmental stresses continue to grow. This will open up new opportunities for cleaner fuels like natural gas, but may also mean increasing pressure on freshwater supplies. In this speech, Ann Pickard, Country Chair of Shell in Australia, explores what this might mean for Australia, and Shell’s views on the range of policy decision that Australia may need to take to ensure Australia’s prosperity in this new energy future.


Good evening, and thank you for the invitation to address you tonight.

I understand that the aim of the Lowy Institute is to generate new ideas and dialogue on international developments and Australia’s role in the world, and that one of your core tasks is to promote wide discussion of Australia’s role in the world. Given that the energy industry is a truly global industry, hopefully, there are some areas of mutual interest. So I’m looking forward to a good discussion tonight about what we see as the new energy future, and what Australia’s role might be in that.

To set the scene for our discussion, let me share some thoughts on the energy landscape in the decades ahead, and some of the challenges we have to tackle together. I will highlight three of these for you to ponder. I call these “trilemmas” - not just dilemmas - as there is a triangle of inter-related concerns. We can’t just address one part of the triangle, and ignore the others, without some serious consequences. And as there are three of these trilemmas, you might say we face a “triple trilemma” in grappling with our future energy needs.

These are: the 3 Es - economy, energy and environment; the 3 As – availability, accessibility, and acceptability; and finally the interconnection between energy, water and food.

Economy, Energy and Environment

Let me begin with the 3Es – economy, energy and environment. The recent financial crisis made plain that we cannot take continuous economic growth for granted, both in the developed and the developing world. Nor can we expect those in the developing world, who are just getting their first glimpse of a modern lifestyle, not to want the same things that we have. All people want jobs and better lives.

So leaders everywhere want to grow their economies. This means more energy demand, and also greater environmental concerns. This is our first trilemma.

Several driving forces are now at play. By 2050, there will be about nine billion people on the planet, up from just under seven billion today. This trend is now unavoidable. Every second, five new babies are born - many of them in the developing world, in Asia and Africa especially. Adding two billion more people is like having another China and India on the planet, with basic needs that will have to be met.

On top of this, more people are now enjoying a modern lifestyle - buying their first fridge, computer, or car - things that their parents or grandparents could only dream about.

The upshot of this is clear - energy demand will shoot up and you may have read that across the board, energy increased more in 2010 in almost every sector that it ever had in the past.

As you may be aware, Shell does quite a bit of work on future scenarios. Our Scenarios team recently published an update of the two long term energy scenarios we developed in 2008, which we called Scramble and Blueprints – you can find more information about each of the scenarios in the little blue booklets on your table.

This new work is called Signals and Signposts, and it takes a fresh look at the scenarios in light of the global financial crisis. Despite some short term economic slowdown in developed countries, Signals and Signposts confirmed our thinking about the longer term trends.

For example, Signals & Signposts confirms that by 2050, global energy demand could triple from its level in 2000 if we just continued business as usual. Not that we think that a tripling of demand is likely, as innovation is likely to boost energy efficiency, moderating energy demand by about 20% compared to business as usual over this time. But it’s still a huge increase on energy demand today.

Energy supplies might also grow by about 50 per cent, taking into account technological, geological, competitive, financial and political realities. This, however, still leaves a big gap between supply and demand. To give you some idea of the scale of the issue, this big gap is approximately the same size as the whole global energy industry in 2000!

This gap will have to be bridged by an extraordinary moderation of demand, a significant jump in energy supply, or some combination of the two. Our Scenario planners call this the “zone of uncertainty”. They noted that this has the potential to be either a zone of extraordinary misery or of extraordinary opportunity, depending on how we respond. In any case, it signals that we are entering an era of major transitions, some of which could be volatile.

One key transition will be the shifting of energy demand to the developing world, especially Asia. According to the International Energy Agency (IEA), by 2035 energy consumption in the developing world could rise by 64% from 2008 levels, compared with 3% in developed countries. China and India lead the way. By 2035, China’s energy consumption is expected to rise by 75%, while India’s will more than double.

That growth will also have a big impact on the third E we are talking about - the environment. We must tackle greenhouse gas emissions. The general consensus suggests that CO2 concentrations in the atmosphere should be limited to 450 parts per million to avoid levels of global warming with significant negative consequences. Latest estimates from the tracking station at Cape Grim in Tasmania put atmospheric concentrations of CO2 at about 385 parts per million. So just 65 ppm to go. And concentrations continue to rise at an annual rate of 2 ppm.

We don’t want to make the common mistake of confusing weather and climate, but the recent Climate Commission report here in Australia stated that already, with less than 1 degree of warming globally, the impacts are being felt in Australia.

So obviously, decisions taken over the next decade will be critical to determining the severity of climate change our children and grandchildren will experience. The clock is ticking.

Tackling this trilemma of the 3Es is a big challenge and must occur on many fronts. Let me touch on just one, highly relevant here in Sydney - our cities. Today, over half of the world’s population lives in cities. By 2050, this could rise to three-quarters. According to the United Nations Habitat group this would require the development of a new city of one million people every week for the next 30 years.

Many of these cities will be built here in Asia. Or to put that into an Australian context, it’s a new Adelaide being added every week, or a new Sydney every month, for the next 30 years.

Recent research estimates the world will need up to $350 trillion by 2040 to provide infrastructure for the rise in the urban population - seven times current annual global GDP. That presents many economic, energy and environmental challenges - but also opportunities. How these cities are planned and built could make a critical difference, not least since almost 80% of CO2 emissions are produced in cities.

Smaller, more compact cities tend to use energy more efficiently than sprawling ones. Better use of public transport can make a big difference to energy demand. For example, because of the way their cities are designed, the average American motorist drives twice the distance and uses three times as much energy as his European counterpart. For interest, Australia is somewhere in the middle – using twice as much energy as our European counterparts.

Much of the difference can be explained by urban sprawl in many American cities – and arguably Australian cities. When I think of cities designed for urban sprawl, I always think of Los Angeles; in fact, Sydney’s population density is lower than that of LA. Sustained low energy prices contributed to this pattern of development. And low fuel economy standards encouraged the desire for bigger cars. Over time, these habits became “hard-wired” into the lifestyles of energy consumers, who were less likely to make the most efficient use of energy.

This clearly has resonance in Australia, and I believe particularly in Sydney, which I understand already suffers from urbanisation challenges “hard wired” by decisions made years ago, such as the release of land for residential development further and further north, west and south, and failure to invest in the building and maintenance of efficient public transport.

Energy: availability, accessibility and acceptability

Let me turn next to our second trilemma. This relates to the 3As – availability, accessibility, and acceptability. As energy demand rises, not only will we have to find new sources of energy, but we also will have to develop the technology to harness them. We will also have to ensure that we do so in ways that are acceptable to consumers and communities.

I will give you an example to explain what I mean. We all know that coal plays a big role in meeting China’s energy needs, and will continue to do so. Many countries rely on coal because of its lower costs and local availability. This boosts their energy security. But the environmental impact of meeting the growing demand for electricity from coal is considerable.

The IEA believes that by 2030 the growth in C02 emissions from coal-fired power generation from just three countries – China, India and the USA – could be twice as high as the growth in emissions from all the transport worldwide. This is pretty startling when you consider that the global parking lot is expected to more than double in this period, from 750 million vehicles now to a possible 1600 million in 2030.

Giving natural gas a more prominent role in the energy mix will enable countries to reduce air pollution and greenhouse gas emissions. Natural gas is the cleanest-burning fossil fuel, emitting between 50% to 70% less CO2 than coal-fired power generation plants. Natural gas power plants also cost less and can be built faster. These plants can be switched on and off easily, making them an ideal complement to the intermittent power from wind turbines and solar panels.

In short, natural gas is the fastest and lowest cost way for countries to manage their C02 emissions, even as they meet growing energy needs.

In recent years, the world has experienced a big jump in the supply of natural gas. According to the IEA, the world now has enough technically recoverable gas resources to last 250 years. Technological advances over the past decade have made tight gas, shale gas and coal bed methane accessible and economically viable.

Only a few years ago, it looked as if North America’s domestic gas production would decline. But new methods to crack open rocks - a process called fraccing- now allows gas to flow into wells much more freely. As a result, the USA may have 100 years of natural gas supplies at current consumption rates, and could become an LNG exporter.

The race is now on to unlock new gas resources in other parts of the world, including here in Australia. The coal seam gas to LNG effort is one such example, and as the world’s largest international oil company in the LNG arena, we are there too, of course, with the purchase last year of Arrow, in partnership with PetroChina. The deal makes sense. China has a huge market, we know LNG and Arrow knows coal seam gas in Australia.

In the coming years, we are likely to see Gladstone play a major role in supplying cleaner burning gas into the booming Chinese market, which will have enormous benefits for both China and Australia.

We recognise that we may also have to work to reassure communities that the new methods for extracting natural gas are safe and won’t have major impacts on groundwater supplies and the environment. I think that this will certainly be the case in Queensland with coal seam gas and I think that we still have some way to go on this. Then this bountiful source of energy will clearly pass the 3A test – available, accessible and acceptable.

Energy, water and food

I mentioned land and water, and this leads me to our third trilemma, which I will just touch on tonight. This relates to the growing nexus between the world’s energy, water and food needs, all of which will rise dramatically by mid century.

Growing populations will raise demand for food. Growing affluence will also see people consume more food, including more meat and dairy products, which require much more water to produce.

The global demand for food is expected to rise 50 % by 2030, while water demand could shoot up by 40%. If current water consumption trends continue, the world could face a 40% shortfall between global water demand and freshwater supply by 2030. We are now anticipating that freshwater could be the world’s next great environmental challenge, after CO2. This news is probably no surprise to most Australians.

Meeting the world’s water and food needs contributes to the rise in energy demand I mentioned earlier. Large amounts of energy are required to process, transport, desalinate or recycle water for consumption. Modern methods of agricultural are energy and water intensive. They require heavy use of fertilizers, which are derived from fossil fuels.

Producing this energy also requires water, which is needed for drilling, flooding wells and refining crude. So, there is a clear nexus between water, energy and food production.

The energy industry’s share of water consumption is relatively small compared to other large users, especially agriculture. But this will grow as global energy demand rises. Today, oil accounts for about a third of global primary energy production. But it uses only 10 per cent of available water consumption in energy production. However, this share could nearly double to 18 per cent by mid century as more oil comes from unconventional sources and more water-intensive production methods are used.

Still, oil and gas projects use less water than other energy sources, such as nuclear, hydro or coal for the same amount of energy produced. Studies

have shown that it takes about four times as much water to produce electricity from a nuclear power plant compared to one using natural gas.

In the years ahead, we will have to look at this nexus in a more holistic way. Not least since more countries, including Australia, face mounting pressures on water supplies. How we produce energy, or what foods we chose to grow and eat, might have to take into account the availability and cost of water. The reverse also applies: efforts to conserve water will help manage the demand for energy and reduce C02 emissions.

Implications for Australia

What then does this mean for Australia?

I think that Australia is uniquely placed to address these trilemmas. As a developed country – and a member of the powerful G20 - rich in natural resources, and geographically placed in the rapidly developing Asian region, Australia can play a significant role on the world stage.

It’s worth saying that shaping our own future by taking on such a global role would not be purely altruistic on Australia’s part. We have much to gain by smoothing out as many of these volatile transitions I spoke about earlier. For example, economic stress arising out of energy related issues, or civil unrest in energy producing countries, causes economic turbulence around our interconnected world.

You only have to look at what happened, and continues to happen in some places, in the Middle East and North Africa, or to look at the level of poverty among Australia’s neighbours. I think that that unrest can at least partly be attributed to a large young population protesting against the economic stress that they found themselves in, as a result of significant unemployment or underemployment, and rising food and energy prices.

But whatever the cause or causes of the unrest, economic turbulence is not conducive to making the long term economic investments needed to secure our long-term energy security.

This means that Australian policy makers need to take a global view of the energy security issue, and to take a whole of government view, particularly including foreign affairs and trade, when determining energy policy. What are the implications of our largest trading partner not also being a strategic ally?

So, what does Australia need to do to play its part? I will offer a couple of suggestions, and I’d be interested in your thoughts afterwards.

First, Australia needs to be an active participant in the G20 and to continue to push for that to be the primary mechanism for resolving global issues. Despite our small population size, we are 13th out of the world’s 193 sovereign states in terms of economic production. We have a real seat at the table – let’s not waste it. To use Australian language, which I am gradually learning, let’s not punch below our weight.

Second, I think Australia needs to play to its energy strengths. It has done so in the past, when much of our economic success was built on the back of the abundance of cheap coal. Now, arguably, Australia’s greatest energy strength in this world of trilemmas is its abundant supplies of natural gas. I’ve talked about the significant and rapid difference natural gas can make to resolving the environmental issues associated with energy, especially power generation.

The Australian Government needs to provide a stable and supportive regulatory regime which supports the long-term investment in natural gas by companies like mine, where we don’t see the payback for our huge upfront investment for about 12 to 15 years. This support needs to include a price on carbon, which I’ll come back to in a minute. We need fiscal stability.

I often say that my company is pretty comfortable with underground risk, but what makes us really nervous is above ground risk – like surprise changes in the tax regime. We need well thought out policies on labour and immigration that will give us the skilled, productive and stable workforce we need to get these projects up and running. With the strong A$, the labour side becomes even more important to solve.

Australia won’t be able to compete without a highly productive work force. Which raises one issue that always bothers me...Australia talks mainly about skilled immigration, but the reality is all types of skills are needed if we are to create and maintain a vibrant, dynamic economy, where everyone has the chance to achieve their potential.

And we need the federal and state governments to work together to make the regulatory environment as efficient and streamlined as it can be. I’d rather spend money on sub-surface engineers and gas marketers than lawyers, but that’s hard to do when faced with prescriptive and often overlapping regulation, and differences in approach between jurisdictions which can have unintended consequences. One example is the biofuels mandate here in New South Wales. Now, don’t get me wrong – we’re not against biofuels, in fact Shell sees that biofuels have a big contribution to make towards the reduction of CO2 from transport.

But we have a situation in Australia where there are only a limited number of local ethanol manufacturers, with limited capacity. Unfortunately, the federal excise regime applying to biofuels, which was designed to promote the development of a local industry, makes importing biofuels from overseas uneconomic.

For NSW to then introduce a relatively high mandate means that all available local supply has the potential to get sucked into that state, and means that we can’t offer much in the way of biofuels to our customers in other parts of the country. So I’d like to see governments really working at reducing regulatory complexity, which means we can get on with business.

Third, Australia needs to introduce a price on carbon which will drive us towards the environmental outcomes we seek, and encourage the rapid deployment of emission mitigation technologies like Carbon Capture and Storage. We believe that the most efficient way to do this is to introduce a cap and trade emissions trading scheme which covers all sectors in which a price signal will lead to behavioural change and therefore emissions reductions.

The Productivity Commission report released last week backs this up, when it found that emissions trading schemes were relatively cost effective, while policies that encouraged small-scale renewable generation and biofuels have generated little abatement for substantially higher cost. The PC reports that the EU ETS has encouraged switching from coal to gas fired generation in the UK, meaning they’ve achieved significant abatement at relatively low cost.

Contrast that with Germany, also part of the EU ETS, but which has also put in place generous subsidies for renewables. Germany’s abatement, while also considerable, has come at a much greater price per tonne of CO2 because of these renewable subsidies. Picking winners is just not an efficient use of taxpayer dollars to achieve abatement.

Of course, there will be a transition period during which we need to put in place measures to protect Australia’s emissions intensive trade exposed industries, like LNG and refining, but we believe that this can be achieved, and it should not distract us from the ultimate goal of achieving global emissions abatement.

We support action earlier rather than later – the earlier you start, the earlier you can start to reduce the total atmospheric concentration of CO2. We’ve been involved in consultation with government over the last few months to provide input on how best to achieve the right balance going forward.

To be honest, I am less worried about the short term arrangements than I am about the longer term ones – back to my comments on our investment profile and our need for long term regulatory stability.

But I do think that it’s in our interest for Australia to be an example to the rest of the world - on a per capita basis, Australia has one of the highest emissions levels in the world, second only to the UAE, and experts suggest that Australia will be more affected by the impact of climate change than many other countries. As I said before, the clock is ticking.

And lastly, I would like to think that we can find a way to channel Australia’s natural ingenuity into finding solutions for all these trilemmas I’ve talked about. Technology and innovation will be key to our future. You might have heard about our floating LNG project, Prelude, on which we have recently announced final investment decision.

This is a great example of using technology and innovation to unlock remote or small gas reserves that, until now, were uneconomic to deliver. Once operating, Prelude will contribute millions of dollars to Australia, and will boost supplies of cleaner burning gas into the region. I’d like to think that the proceeds of the resources boom will be used to develop human capital as well as physical capital, because ultimately it will be human ingenuity and resourcefulness that helps us to solve the trilemmas I’ve talked about tonight.

Again, this will require a whole of government approach, from early childhood development through to our top level universities and research institutions. This is part of the reason that we’ve recently decided to focus our Australian social investment programme solely on education – so we can play our part in fostering this human ingenuity.

In general, I think that Australia could do more in the education sphere. While we have several good universities, none are in Shanghai Ranking’s list of the top 50 academic world universities. While I know there are issues around the ranking, it is globally used and it would be good to see Australian universities moving closer to the top. If Australia is not just going to be a mining country, it needs more skilled labour.


So, in conclusion, the global energy system is entering an era of volatile transitions, filled with trilemmas: the three Es of economy, energy and environment, the three As of energy affordability, accessibility and acceptability and the energy/food/water nexus. As with any transition, there are likely to be winners and losers – you’ll remember that zone of uncertainty I talked about, which will either be a zone of opportunity or a zone of misery. Whether Australia emerges as a winner from this zone of uncertainty is likely to be determined by policy decisions to be taken within the next decade.

I think that Australia is definitely well placed to seize opportunity through this transition, provided we can capitalise on our strengths – whether they be geographic, geological or intellectual. I’ve offered some suggestions tonight on how I think we can best leverage those strengths, but I’d really welcome your thoughts and questions on what I’ve raised. Thank you again for inviting me here tonight, and I look forward to our discussion.

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