Good morning everyone and thank you David and Bruce for that introduction.
Firstly, I’d like to welcome you all to Perth, Western Australia. It is a fantastic part of the world to live in, and I hope those visiting here get some time to take in some Perth sunshine.
Today, I’m going to kick off by setting the ‘energy’ scene. This conference is geared to a very specific part of the industry, but I think it is important we look at those global factors that are driving us to ever more challenging areas for exploration and production.
I’ll also take a look at the state of play here in Australia. For those of us in the LNG business, Perth is an exciting place to be right now. LNG is a major driver of Australia’s export income, and it is set to become an even greater contributor with a number of new LNG projects coming on line in the next few years – many headquartered out of Perth. There is abundant potential here, but some sizeable challenges as well. Obviously, the LNG projects under construction will be completed, but what about the next ones in the line up?
I’ll then give an update on the Prelude Project. Since taking FID last year, the project has progressed significantly and we can see the first FLNG taking shape. Finally, I’d like to look ahead at what’s next for FLNG.
This week, the focus is on deepwater offshore technology. The reason we must continue to seek advancements in deep offshore exploration and production technologies is because the days of ‘easy’ oil and gas are gone. We must continue to move into harsher, deeper, more remote environments because bringing new supply sources to market is critical. The fact is, there is a huge gap between future supply, and the world’s growing demand for energy. This is further complicated by the fact we need to manage carbon emissions to limit the effects of climate change.
The world population is expected to grow to over 8 billion by 2030, up from 7 billion today. GDP per capita is expected to triple by 2030 in India and China. This will bring more than 2.5 billion people much higher up the energy ladder in the coming decades...so much more energy demand. Some two thirds of energy consumption in 2030 could be in non-OECD economies, compared to 56% today.
To meet this demand, the world will require the development of all forms of energy. Renewables such as wind, solar and biofuels have a major role to play, but with only thirteen per cent of the energy market currently, there is a long way to go. To ensure renewables remain on track to become a major contributor to the energy mix they must become cost competitive and not so reliant on subsidies. We must also be more efficient with the energy we do have.
Even still, hydrocarbons are going to continue to dominate the energy mix for the foreseeable future. That is, coal, oil and natural gas. The IEA estimates that we will need to spend $620 billion per year in the oil and gas sector alone to match the demand growth in the coming 20 years. And, one of the interesting things for me, is whether or not that money is going to be spent in Australia, or elsewhere in the world, given the cost challenges we see here.
Climate change is not debated in Shell. We have to work for solutions. From our perspective, gas, as the cleanest burning fossil fuel, is the fastest way to manage carbon emissions. It is also abundant, the International Energy Agency estimates there is over 250 years supply at current consumption rates. Deepwater resources are a major part of this picture. Discovered deepwater gas is already above 600tcf, and if you count the Arctic, it is more like 800tcf.
The first commercial gas production was in China in 600 BC, when bamboo pipes tapped natural gas seepages to evaporate sea water for salt production. We’ve come up the technology ladder a bit since those days with gas being used in a wide range of industries, it’s even involved in brewing beer.
Gas is also cost-competitive, and it complements the intermittency of renewable energy sources like wind and solar. Globally, we see strong growth in demand for natural gas, LNG demand has doubled to 200 million tonnes per annum in the first decade of this century. Shell expects LNG demand to double again to 400 mtpa by 2020, and potentially reach 500 mtpa by 2025.
And Shell is good at gas. We have unmatched experience from one end of the gas value chain to the other - from the wellhead to the burner. We’ve been in the LNG business since the 1960s and over the last 15 years we’ve been involved in building and bringing on stream – on average – one multi-billion dollar LNG train every year.
Taking all these factors into account, it is no coincide that our strategy is to become even more ‘gas’ focused, looking further downstream with chemicals, GTL and LNG for transportation.
Australian mineral, oil and gas resources have enabled Australia to avoid some of the economic volatility we see elsewhere with the worst global economic slump in 70 years. But we can’t take our position for granted, we need to address our productivity issues, and we need to address regulatory uncertainty so we can compete with these other nations that are eyeing off the same markets we are. Our global competitiveness is being challenged by the lagging labour productivity and heavy regulation.
Australian LNG is among the highest cost globally. New entrants to the LNG export market such as the United States and Canada are at least 20% cheaper than Australia. But the real competitor may be East Africa over time.
Australia needs to find a solution to the cost pressures and productivity challenges if we are to become the major gas player we wish to be. I think it’s possible Australia could rival Qatar as the biggest LNG producer globally, but we need to find effective solutions to the major hurdles we face.
From our perspective, among other things, innovation will be key in keeping Australia competitive. For Shell, we plan to invest around $30 billion dollars in Australia over the next five years. This part of the world is key to our growth strategy. Shell has 22 mtpa of LNG on stream today, and is building 7 mtpa of new LNG capacity here in Australia through Prelude and our non-operated interests. We need to innovate to ensure our Australian interests remain viable. This includes the utilisation of FLNG on the Prelude site, but it also includes being innovative about the way we phase our projects, as well as in our contracting and purchasing agreements.
Since we are now on the topic of innovation, it is probably a good time to talk about the Prelude Project, Shell’s (and maybe the world’s) first floating LNG project. Here in Shell Australia, we are immensely proud to be the first operators of this revolutionary technology.
We reached the final investment decision on Prelude in May last year, and the project has powered ahead.
Steel has been cut for the project all around the world, beginning in Malaysia, where the first steel was cut for the Prelude well heads in September last year. The first steel was cut for the turret in Dubai in May 2012. Just last month we celebrated the first steel cut of the Prelude substructure in the Samsung Heavy Industries shipyard in Geoje, South Korea – one of the few places in the world with a dry dock big enough and with the expertise, to construct a facility of this size and calibre.
The project is making excellent progress and FLNG is coming to life. It will take around 5,000 people to construct the facility; plus 1,000 on the Turret Mooring System, subsea and wells equipment; and another 250 Shell and contractor staff. That is no surprise when you think about the sheer size of this thing. From bow to stern, it will be 488 meters long, or for the Australians in the room – the length of three MCGs. It will be 74 metres wide, and when fully ballasted, it will weigh around 600,000 tonnes – roughly six times as much as the largest aircraft carrier. In fact, it will be the largest floating offshore facility in the world.
The drilling of the development wells remains on track for the new year, with the Noble Clyde Boudreaux all set to work on seven of them.
Safety has been the number one priority at all stages. To date, we have no ‘lost time incidents’ – a good start at over 5 million man-hours, but the tough hours are ahead.
This year, new participants Inpex and Kogas joined the Prelude FLNG project. The commitment of these joint venture partners is another sign of the industry’s confidence in the sound Prelude fundamentals, and in our ability to not just deliver the facility on time, but to be a reliable supplier of LNG to our customers.
The question often gets asked – what does FLNG do for Australia? I can understand why people ask the question since they see construction offshore – the answer often surprises them.
First of all, without Prelude there was no prospect of these fields being developed – at least in the short to medium term and especially at the costs we are seeing across Australian projects. Prelude will produce around 3.5 to 4 million tonnes of LNG per year and government revenue will start flowing from when we start-up.
An independent analysis by ACIL Tasman found that Prelude will create 1000 full time jobs for the 25 year life of the project. There is no boom and bust construction work, but long time employment. Most of the people who work on the Floating LNG facility will be Australians. By 2015, I expect to double the workforce in Shell Australia’s Perth office from 400 to 800 – and many of these new people will be working on Prelude.
We also expect that floating LNG can be developed at lower cost, and these savings will be shared with the community through higher taxation. Prelude is a good example of this. We estimate that Prelude will bring benefits to Australia of some $45billion over the life of that project, of which taxes would be around $12billion.
Through Prelude we will also spend AU$12 billion on Australian goods and services; and improve Australia’s balance of trade by more than AU$18 billion through the export of LNG, LPG and condensate.
Of course, there’ll be no benefits to the community at all if the costs are too high and the project can’t be developed. Floating LNG has the potential to help get costs down so that projects can compete with our competitors, like North America or East Africa. As I mentioned, their costs are lower than ours, so we’ve got to find a way to get our costs down so that we can compete with them.
We need a strong local workforce to support our FLNG operations, but we also recognise that this is new technology and we will need new skills to operate it. That’s why Shell is partnering with Curtin University and the Challenger Institute to take our operators through a unique, multi-year training program to become the world’s first FLNG operators.
We have also partnered with the University of Western Australia and will support a multimillion-dollar ‘Shell EMI Chair in Offshore Engineering’. Professor David White has just been appointed to this position, and we look forward to working with him to develop a new research and teaching capability in offshore engineering here.
We see a great new opportunity for Perth to become a global leader in floating LNG operations, and in partnership with these leading institutions we are putting our energy and resources into making that vision a reality.
Prelude is not the only FLNG development in the region. It is the most advanced, but we are also partners in the Abadi and Sunrise developments. As announced by INPEX last year, Shell has joined the Abadi FLNG project in Indonesia. Abadi is a little different to Prelude in the sense that this is a larger large gas field, but the planned option for the first phase of the development is a mid-sized floating LNG facility.
The Sunrise Joint Venture has selected FLNG as its preferred development concept and, with operator Woodside, we continue dialogue with both the Timor-Leste and Australia Governments to find a way forward on this resource.
FLNG was born from the growing and clear need to access energy once considered too difficult to reach. But as you’d expect with new technology like this, Shell’s understanding of FLNG’s potential is becoming more sophisticated over time. FLNG can go well beyond simply accessing ‘stranded’ gas resources.
From the start, the FLNG program has been about standardising where possible, and customising where necessary for individual gas fields. This makes it possible to process a range of different feed gas compositions without the need to redesign significant parts of the topsides. We also adopted a continuous improvement approach from the start - always looking for ways to reduce risks, improve costs and importantly, make final investment decisions faster.
Subsequent projects will benefit from the 1.6 million engineering hours spent on front end design (conventional LNG plants require about 350,000 engineering hours for front end design) but also our experience in constructing, commissioning and operating Prelude.
An example of this is FLNG lean, a concept that will help open up larger, lean, deepwater gas fields. That is, fields without condensate and LPG. Our FLNG Commercial Development Manager Mal King will talk more about this concept in his presentation on Thursday morning.
In summary, FLNG lean could mean the development of a range of deepwater gas resources – everything from clusters of smaller more remote fields, to potentially larger fields – via multiple facilities, both faster and cheaper.
This is a real example of technology unlocking new resources, which is critical if we are to meet the rapidly growing energy demands of this world in a responsible way.
We now see that FLNG not only opens up new opportunities, but it also works well in a world where we are rightly expected to deliver energy in ways that keep our people, assets, and the environment safe.
FLNG has a smaller environmental footprint than onshore LNG developments. An FLNG facility will require about 50% less materials and 95% less land and seabed disturbance when compared to an onshore development. Then, of course, there is the fact there is no need for pipelines to shore, or compression platforms, or onshore works.
FLNG also leaves less behind. There is less environmental disturbance during decommissioning because the facility can be disconnected and removed. The hull of the facility is designed to have a 50-year life. We expect to have the facility at one location for around 25 years before bringing it back to dry dock to refurbish the topsides and then redeploy it.
Again, on cost, we expect both our Prelude technology and our Lean FLNG design to have very strong fundamentals, benefiting from our design approach and commitment to continual improvement. On a per ton basis, given the costs of recent projects, FLNG will be less costly to build. And as I mentioned, it might help keep Australia competitive.
All of this is not to say that onshore and conventional LNG projects do not have their place. Clearly they do, and that is why Shell is one of the biggest investors in Australian onshore LNG projects. But we are also conscious of the need to continuously improve our cost efficiency, our environmental performance and the safety of our production facilities. And in that equation, FLNG clearly has a role to play.
So what might the future hold for FLNG technology?
If I look at the advances in technology in my career alone, I think our views on FLNG are probably modest. And rightfully so, because we need to deliver first. We are focused on the successful delivery of Prelude and we have only one aim for the project. To get it right. This means a facility that is safe, robust, reliable, acceptable and with high availability. Of course, on schedule and on budget is in the plan too!
Who knows where we will see this technology deployed next. We’re thinking about greater capacities, drier feed gas, going into harsher environmental and metocean conditions, and unlocking deeper water resources. But we are also looking to the non-technical factors that impact on projects, like cost, environmental sensitivities and the need to co-exist with communities.
We see FLNG as a major part of our gas growth aspirations, and hope to lock in many more projects via our global FLNG program. This truly is just the beginning and I have no doubt it will be an extraordinary journey for Shell, the energy industry and our stakeholders.