Australia has a big role to play in meeting world energy demand, and right now, that role is all about gas.
Shell estimates that energy demand will triple between 2000 and 2050.
Even assuming steps to use energy more efficiently, the world will need all energy types. This means we will need to use everything from traditional fossil fuels and nuclear, to renewables like biofuels and wind.
Our research has shown that it takes around 30 years for new energy types to capture just 1% of the market. If you take LNG as an example, the first LNG plant came on-stream in 1964 in Algeria, using Shell technology. Since then, the growth of LNG has been spectacular, but nearly 50 years later, the share of LNG in the global energy mix is still only 2%. While biofuels are just now reaching 0.5% of the total energy market, after decades of development and government support.
By the middle of this century, we believe up to 30% of the world’s energy demand could come from wind, solar and other renewable sources. But this means 70% of demand will still be met by fossil fuels and nuclear energy supplies.
In a world of rising demand for energy and growing environmental stresses, natural gas, which is abundant, affordable and a clean source of electricity, deserves to play a greater role. As an industry, we haven’t been as effective as we should at promoting the advantages of gas. Now is the time, and Australia is the place. The stars are aligned.
Australia has the resources, the technology and innovation, the political and, we hope, fiscal stability, and the proximity to key markets that should see it become a world energy leader.
What began with one LNG project in 1989 – the North West Shelf Venture – has grown to become the location for mega-projects like Gorgon and Browse, and we also have the challenges and opportunities of coal seam gas in Queensland, exciting new technologies such as Floating LNG, and a raft of exploration activities on and offshore, bringing together the best our industry has to offer in terms of people, technology and expertise.
Australia’s conventional gas reserves are estimated to be around 164 tcf (Australian Energy Resource Assessment last year), and the CSIRO estimates there’s as much as 250 tcf of coal seam gas in the ground. This goes some way to explaining the level of activity and long-term investment that could come Australia’s way. There are more than $200 billion worth of gas projects on the books right now, they may not all happen, but many will.
And what is driving them? Demand. The bulk of the increase in global energy needs will come from the world’s emerging economies, and this is where there will also be the sharpest population increases. By 2050, there will be 9 billion people across the planet, up from 6.8 billion today. Increasing wealth and improving living standards will raise millions out of poverty in developing regions. As incomes grow and living standards improve, people will buy their first cars or their first refrigerators, and all of this will require energy.
To give a sense of the speed at which this is happening, Shell future energy scenarios estimate that 800 gigawatts of electricity-generating capacity will be built in Asia over the next 10 years. That’s equivalent to the entire generating capacity of Western Europe today and demonstrates just how strong demand is in the Asian region.
The impact on transport fuels will be equally dramatic. Worldwide, we expect the number of cars and trucks on the road to rise from about 900 million today to about 2 billion by 2050. In China, which overtook the US last year as the world’s largest vehicle market with sales of nearly 14 million cars and trucks, there’s still plenty of room for growth. Currently there are fewer than 30 cars for every thousand inhabitants in China, compared to more than 750 per 1,000 people in the US.
The case for gas
So, energy demand is strong, but why is gas the answer? Because it is abundant, affordable and acceptable. Gas is one of the quickest ways to start reducing CO2 emissions, given that modern gas plants emit 30% to 70% less CO2 than coal-fired plants. Gas fired power plants are also cheaper than any other new build electricity source. They are half the capital cost of coal per megawatt hour; 20% of the cost of nuclear, 15% of the cost of onshore wind, and less than 10% of the capital cost of offshore wind-power.
And gas is also a good partner to alternative energy sources, because it helps smooth out the peaks and troughs of intermittent sources like solar and wind energy. I was in Europe earlier this year, for some very cold days, and in Holland, which has a lot of wind power, only 3% of the turbines were working . . . because it was cold, sunny, and there was no wind.
But, back to this part of the world, to the big demand centre. In July last year, China officially overtook the US as the world’s largest energy consumer – well ahead of forecasts. And the key part for us here in Australia is that the Chinese 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. As a result, in 10 years’ time, China’s annual gas demand could reach a level comparable to half the current gas demand of the USA.
This is an enormous opportunity for Australia, and helps explain why China is so keen to secure gas supplies through long-term contracts.
But it’s not just about the traditional markets. The South East Asian demand for gas is now just as strong as demand from Japan, Korea and Taiwan combined, and this region is increasingly relying on imports to meet its growing needs.
Leadership in Global LNG
Finding the gas, processing it, and delivering it to market, are not small steps, of course. LNG projects are long, incredibly complex and expensive. And now that the so called ‘easy’ gas has been tapped, they require industry to harness technology in a way that hasn’t been done before – to reach harder, deeper, and more remote reserves.
They also require investment on an unprecedented scale, and over the long-term. It’s 12 -15 years before we start to make a return on these investments. With the cost pressures that are being experienced across the resource sector right now, it all adds up to no mean feat.
That’s why it is good to be working for the company that pioneered the processing of LNG back in 1964 in Algeria, and still has the drive to apply the latest technology in a way that will help us meet the world’s growing energy needs going forward. Now, more than ever, innovation is critical to our competitiveness.
Here in Australia, Shell has been an active participant in the energy business for more than 100 years. We are the second largest gas resource holder in the country and involved in more LNG projects than any other company. Over the next 10 years we will be one of Australia’s biggest investors, and we don’t take that responsibility lightly.
Indeed, we hope Australia will be the location of Shell’s next technology breakthrough, with deployment of the world’s first Floating LNG facility at our Prelude project, 475km north-north east of Broome.
Meeting the energy challenge via technology
Floating LNG is designed to help access what is known as ‘stranded gas’ - small quantities, in remote locations that would otherwise be considered too hard and too expensive to reach.
By combining our expertise in LNG technology, LNG shipping, and FPSOs, we’ve been able to develop a solution where the LNG processing facility is placed at the site of the gas field, with no long pipelines to shore, no dredging, no jetties and no need for an onshore plant – a much smaller footprint, which is nice from an environmental point too.
We think this is a great solution for stranded gas, not just here in Australia where 140 tcf of gas is classified as stranded, but around the world. It won’t replace onshore development, it will complement it, by providing another way to develop gas reserves where their size and their location suits.
Best of all, this pioneering FLNG work puts Australia at the cutting edge of new technology deployment. Our recruiting strategy for the Prelude Project is quite simple: We are all about growing and developing Australian talent in this new technology. Whether they’re living locally or working in other parts of the world, our plan will be to train people over the next 5 years, giving them the experience they need in Shell operations around the world, and then bring them home to operate the facility in the waters off Australia.
In effect, Australians will be the first to master what we see as game-changing technology for the oil and gas industry. This is a great coup, and will deliver long-lasting benefits at a local level.
Having the global reach to be able to support this kind of capacity-building is a great advantage for Shell. Sharing experience worldwide accelerates learning and improves outcomes. Another area where this has come to the fore recently is in offshore operations and safety. The Macondo and Montara incidents have rightly triggered a collective reassessment of how the industry operates, and is regulated, offshore.
As an offshore pioneer, Shell is engaging with Governments around the world on regulatory development and industry approaches to improve risk management and control in our industry. Here in Australia, we are working through APPEA on its dedicated Montara taskforce and we’ll help work through the implications of the regulatory changes we anticipate, and the tough new conditions signalled by the Minister for Resources.
Also in Queensland, Shell is in a position to apply expertise gained from coal seam gas operations in other parts of the world, for the benefit of the local economy. Shell is the biggest player in unconventional gas in the world. It has been a game-changer in North America, and has the potential to be in China too. We will apply that experience as part of a joint venture with PetroChina that has acquired Queensland’s Arrow Energy, and will work towards a CSG to LNG plant on Curtis Island, off Gladstone.
This tie-up brings together Arrow’s expertise as a leading coal seam gas operator, Shell’s LNG know-how, and PetroChina’s access to the Chinese energy market. As well as contributing to the domestic energy mix in the Eastern States, we believe it will provide the foundation for a new LNG export industry and will create thousands more jobs.
Finding the people to realise our potential
Of course, creating thousands of jobs is one thing, finding the thousands of people to fill them is another, and that leads me to some of the challenges we face. I divide the challenges around labour into two areas: availability and reliability. Anyone involved in the resource sector, as well as pretty much anyone trying to run a business in Western Australia or Queensland at the moment, is at the pointy end of a labour market shortage.
And while this might be a great thing for employees, it is a nightmare for employers, with the cost of recruitment and retention skyrocketing. The Bureau of Statistics recently confirmed that the average employee in the West Australian oil and gas industry earns about triple the nation’s average salary, and the gap is growing. The recruitment industry is seeing surges 40% above pre GFC levels. It is one thing to pay first world, top prices for labour, but in doing so, we expect first world, top performance in labour output.
Addressing the availability challenge will take short-term and long-term measures, and will rely on a collaborative approach from industry and government around education and training. Short-term visas targeting specific areas of expertise are certainly part of the mix. And competency and safety training for those receiving these visas is an important element. But capacity building in the longer term has an important role to play in terms of setting Australia up for the future.
Addressing the reliability challenge will mean working constructively with unions in the industrial relations space, to ensure a sustainable industry for Australia long-term. Ongoing investment requires consistent delivery, and it's a competitive market out there. If Australia is not able to guarantee the right quality at the right price, and without disruptions, we sell ourselves short. Workplace harmony is difficult, but important, and we all have a role to play in ensuring a fair and consistent approach.
Growth requires stability and global competitiveness
As I say all the time - oil and gas companies are pretty good at dealing with technical and below ground risk, but we get nervous about above ground risk, and look for predictability and certainty when it comes to governance. In that context, Federal policy settings around tax, concessions and depreciation are all critical.
The surprise announcement of the Resource Super Profit Tax last year was worrying. Shell’s view remains that changing tax regimes on existing investments is not good government policy. Remember that payback timeline for LNG projects? 12-15 years. We get real nervous when rules change. Having said that, we worked closely with the Policy Transition Group that was pulled together to consult with industry on the proposed tax reform.
We look forward to continuing engagement as the Government considers important elements such as how the market value of assets is calculated, and how State royalties will be handled going forward.
In a similar way, we seek to contribute to the discussions that will provide more certainty around the complex issue of a carbon price. It is interesting being on the Minister’s Business Round Table on Climate Change as we grapple with policy principles and energy security.
Shell’s view is that abundant gas reserves give Australia a great advantage in terms of cutting CO2 emissions relatively quickly and cheaply, but a robust carbon price is necessary. We continue to support a cap and trade system because we believe it is comprehensive, flexible, actually delivers emissions reductions, and provides long-term price support that will justify investment in the energy sector.
Putting a carbon tax on petrol, for example, doesn’t tend to reduce driving, so we see no environmental change. . . just grumpy customers. So we believe cap and trade is good for large stationary sources, while other targeted measures like renewable mandates, efficiency standards, and building codes can be applied to other sources.
Trade exposed industries, such as refineries, will need some shielding until there is no risk of significant carbon leakage to other countries.
At a State and Territory level, we also look for predictability and certainty, particularly in settings around royalties, regulation, and domestic gas. It is clear, for example, that domestic energy needs must be met, and Shell has played its part in meeting those needs since 1901, but always with the recognition that competitive markets, rather than Government intervention, provide the best mechanism to deliver energy security, reliability and efficiency.
Building local capacity
The level of activity and investment in the oil and gas sector right now provides us with a great platform to build real capacity and a positive legacy. There is of course strong desire from Governments to ensure local content, and Australian Industry Participation. The Premier left us in no doubt about his expectations in this regard at a meeting a couple of weeks ago. In Western Australia, we are helped by the Industry Capability Network and Project Connect, as well as State Agreements.
Rest assured, a win for Australia in terms of local content is a win for the industry too. The Premier said in a speech at Rice University last year that ‘the growth of the petroleum industry has been for WA the most important economic change since the Pilbara iron ore projects of the 1960s’. As one of the foundation partners in the North West Shelf Venture, and now in Australia’s largest single resource project – Gorgon – I can say it’s been a pretty significant step for Shell too.
It has to be remembered, though, that while we are loyal to Australia, we are in a global industry that requires access to specialised skills and equipment, and globally competitive firms, in order to capture growth opportunities. Capacity constraints and rising costs are a significant risk to LNG projects planned or under construction. So effort is required on both sides.
As companies, we need to build partnerships with local companies, help up-skill local contractors, and invest in human capital via training and university partnerships. As an industry, we need to work together on wide-ranging training and employment initiatives, recognising that we can achieve far more together, than individually.
Nowhere is this coordination more important than in the area of indigenous participation, where all the goodwill in the world won’t deliver a coherent, long-lasting outcome without a framework and ongoing commitment. With its Reconciliation Action Plan, Shell is just at the start of its journey to help bridge the gap, but we know it's a journey worth making, and there are many good organisations and individuals to help.
Which leads me back to where I started. It’s an exciting time to be in the oil and gas industry in Australia. You can feel the energy around it on both sides of the country. As well as the opportunities, we have some sobering challenges, but it’s important that we help people understand there is a real opportunity for Australia to step up here.
This country could have a big role to play in meeting the world’s energy demand going forward, and gas is the way we can do it. We need to be smart, and safe, and balance the needs of the wider community with the needs of a growing, world-class industry that I think, in many ways, is still invisible to some.
We have a great opportunity before us (dare I say it, it could be a win win) and we need to grab it with both hands.
I look forward to working with you.