"…global uncertainty and a world in transition can in fact drive the very innovation and flexibility we need to help Australia fulfill its potential as a New Energy Frontier."

New Energy Frontiers in a Changing World

Today, we consider the future of Australian energy.

We do so against a global backdrop of new challenges, new markets and political dynamics, new technologies and a new level of scrutiny and expectations from our stakeholders.

The world today is volatile – with widespread economic and financial uncertainty, country crises, revolutionary uprisings, and the aftermath of Macondo and Montara.

The energy market is also changing – in the US, shale gas has turned the supply and demand picture on its head. In Europe, we’re seeing gas come into policy frameworks for the first time. Japan is certainly having second thoughts about nuclear. Energy prices are volatile and everyone wants flexibility in their business model - but flexibility costs money.

In Australia, we face the extra challenges of a strong dollar, a high cost environment and low productivity rates so how do we compete against the vast, low-cost gas resources coming out of the US? And how do we reap the benefits of what the International Energy Agency tells us could be a ‘Golden Age of Gas’, where use of gas rises by more than 50% from 2010 levels and accounts for more than a quarter of global energy demand by 2035.

This Golden Age assumes a number of things: first – availability of the gas (much of it unconventional) which will then lower average gas prices; second - implementation by China of an ambitious policy of gas use; third - lower growth of nuclear power; and fourth - more use of natural gas in road transport.

Australia’s aspirations in what has been dubbed the Asian Century fit neatly into this Golden scenario, because if China is to drive the anticipated increase in natural gas demand (the equivalent of going from the level of German demand in 2010 to the level of the whole European Union by 2035), there will need to be an increase in annual gas production of about three times the current production of Russia – and it has to come from somewhere! And nowhere is better placed geographically than Australia.

Conventional gas continues to make up the major slice of the IEA’s growing pie, but unconventional gas becomes increasingly important, meeting more than 40% of the increase in demand. So, how do we ensure that Australia is ready for the opportunity?

Well, we’ve already heard a lot of ideas here today. What the IEA puts it down to, is Government policy choices, technological capability, and market conditions. The IEA says that all major geographical regions have recoverable natural gas resources equal to at least 75 years of current consumption, but what sets them apart are the market, and the choices that are made on policy and technology. I have no doubt Minister Ferguson will fill us in on some of the Government’s policy choices in the next session.

And, like me, I expect many of you will have had people poring over the Energy White Paper in recent weeks and months, looking to contribute to the Government’s policy choices in crucial areas such as investment certainty and fiscal stability; a skilled and productive labour force, energy security, environmental regulation and CO2 management.

While all of these are incredibly important, the element I’d like to focus on this afternoon is technology, and the way that global uncertainty and a world in transition can in fact drive the very innovation and flexibility we need to help Australia fulfill its potential as a New Energy Frontier.

I’d like to focus on three examples –

The first involves drilling technology for unconventional gas recovery. Only 10 years ago, the oil and gas industry considered tight gas, shale gas and coal seam gas too difficult and too costly to access. But huge progress in drilling and fracturing processes now mean these resources can be tapped profitably, as well as safely.

As a result, North America has more than a century of supplies, just a few years after it was feared that long-term production decline had set in. And worldwide, recoverable gas resources are estimated at 250 years of current production, roughly half of which is tight gas, shale gas and coal seam gas.

Many countries outside the US, including China and Australia, are moving to produce their tight gas resources. This is good for many reasons, chief among them, it will help us meet surging demand for energy in a way that safeguards the environment. This is because natural gas displaces coal-fired power, offering the fastest and cheapest route to reducing CO2 emissions in the global power sector. (Modern gas plants emit half the CO2 of new coal plants, and up to 70% less CO2 than the old steam turbine coal plants).

It’s a good news story, but public concern about the safety and environmental impact of coal seam gas continues to mount. I think we all agree, we need to do better at listening and responding to concerns, and we need to be very transparent about our operations.

We also need to achieve the very highest operational and environmental standards, and this is where drilling technology plays its part. Last year, Petrochina and Shell formed a joint venture to deliver well manufacturing services for our unconventional resource developments. This JV is now working to develop asset-specific well manufacturing solutions for application in the US, China and Australia.

The system takes into account the total life of the well, and ways that gas can be extracted while still supporting the needs of other land users. Unlike traditional, manually-operated drilling rigs, these rigs are highly mobile, quiet, field specific and computer controlled.

They move easily from location to location and their specialisation means we can have one rig for preparing the top part of a well, another to extend the well to the target depth, a third for accurately intersecting the coal seams, and a fourth for completing the wells. By connecting a computer to the rig’s controls, we are able to manage the individual machines on the rig and monitor all aspects of the drilling process.

This drilling autopilot makes it possible to carry out activities that most current rigs couldn’t do. The drill bit, for example, could steer itself through the ground on the basis of real-time data measured by sensors near the bit. At the same time, we would be getting a complete and auditable record of every well delivered.

The inherent safety and environmental performance of this system will be second to none. It will revolutionise the way wells are drilled, resulting in safer, faster and more efficient progress. We hope to deploy the system here in Queensland, and if we do, and we get our stakeholder engagement right, we think that within 5 years, Queensland could be seen as a global centre of excellence for coal seam gas development, placing Australia at the forefront of unconventional gas technology.

This is a great example of harnessing new technology that gives us better safety, environmental and economic outcomes, as well as a way to address the challenges and opportunities thrown up by global uncertainty.

The second example where innovation will pay off for Australia takes us about 200km off the coast of Western Australia, where we are looking to access gas that, up till now, has been considered uneconomic to develop – too small, too difficult, or too far from land or existing infrastructure. For fields like this, the cost of laying a pipeline to shore and building onshore infrastructure, is too much to bear, but the possibility of a floating liquefied natural gas facility – or FLNG – changes the rules of the game.

Production, processing and liquefaction of the gas – as well as the storage and offloading of the products – can all take place at sea.

The notion of FLNG has long captured the imagination of the industry’s engineers. The original idea was to scale down a liquefaction plant so that it could be put on a barge – a mini-LNG plant moored near the coast. Then the concept was widened - to a floating facility not only for liquefaction but also for production and storage: one that would mean we could develop offshore gas fields that otherwise might stay in the ground.

A serious FLNG work programme began in the mid nineties and progressed to safety studies, conceptual design, feasibility studies, and detailed engineering. All in all, Shell has spent several hundred million dollars developing FLNG technology, and Australia will see the first one deployed at the Prelude gas field off Western Australia.

While conventional LNG plants require about 350,000 engineering hours for front end design, Shell’s FLNG facility for the Prelude gas field has taken 1.6 million hours – the equivalent of 730 man-years – and involved more than 600 engineers in Australia, the Netherlands, Malaysia, France, and South Korea.

After much work, the FLNG designers have managed to fit everything into an area that is around one quarter the size of a comparable conventional onshore LNG plant. Even so, the Shell FLNG facility will be a colossus. From bow to stern, it will be almost half a kilometre. When fully equipped and its storage tanks full, 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.

With size comes stability, even when buffeted by the 280km/h winds of a Category 5 cyclone. Our first priority has been safety: making sure we leave enough space, and have all the necessary protection equipment, to minimise risks. Prelude FLNG will be as safe as any other modern offshore oil and gas facility. And we don’t intend it to be a one-off. We see it as the first of several FLNGs specified in a “master” agreement we’ve signed with Technip and Samsung Heavy Industries.

The facility’s LNG production capacity is around 3.5 to 4 million tonnes per year. We estimate that Prelude FLNG will generate tens of billions of dollars in revenue and taxes over a 25-year lifetime. It will also generate a new breed of Australian FLNG expert.

So, as well as looking to Australia for excellence in CSG well drilling, we want people to look to Australia for excellence in Floating LNG technology. We’re already working with universities and training providers to establish the Global Centre for FLNG Learning & Research. We will also support research into metocean engineering and offshore foundations.

Our recruitment strategy is simple – recruit Australians, wherever they are, and train them up over the next 5 years, giving them the experience they need in Shell operations around the world. In effect, Australians will be the first to master what we see as a game-changing technology for the oil and gas industry. This is a great coup, and will deliver long-lasting benefits for the country, and its people.

The third example of finding opportunity in an uncertain world relates to the potential of natural gas as a cleaner transport fuel, one of the keys to the IEA’s Golden Age of Gas.

Over the longer-term, gas can provide a cleaner source of electricity than coal for the world’s growing feet of electric vehicles. In the nearer term, there are direct applications for gas in transport, such as the use of LNG as fuel for trucks, ships, barges and trains. It’s a smart way to reduce local emissions of sulphur oxides and particulates. And can also help tackle overall greenhouse gas emissions, depending on where and how it is used.

Shell is making LNG available this year to heavy truck fleet operators along western Canada’s busiest truck route, from Calgary to Edmonton. Drawing on local wet Canadian natural gas to produce the LNG, we think that fleets could see a reduction in greenhouse gas emissions of nearly 20% on a well-to-wheel basis.

And we’re optimistic about the potential for LNG as a competitive alternative to diesel in a range of applications in North America and elsewhere. Here in Australia, it could play a huge role in the coming decades. As a nation with abundant natural gas reserves it would be one way to quickly reduce the CO2 emissions of the transport sector.

The challenge in converting trucks to LNG is a big one. Infrastructure costs associated with supplying the product to market are high, and the costs to both large transport businesses and individual truck owners can be prohibitive. But just as the challenge is a difficult one – the rewards in the reduction of CO2 emissions are great. It is only through a collaborative approach between governments, the transport sector, engine manufacturers and energy providers that this use of a cleaner indigenous fuel source will become more common.

Cambridge Energy Research Associates (CERA) hosted its annual energy conference earlier this month in Houston. Not surprisingly, it pinpointed the value of technology and R&D in terms of unlocking hydrocarbon resources and other energy sources.

Australia has a real role to play here, and it has the Governments, IOCs and innovative local talent required to pull it off.

CERA also warned about the impacts that lack of coherent policy and over-prescriptive regulations could have on the world’s energy future, and the need for better industry engagement and transparency to ensure the tight gas opportunity was not lost.

Yes, we have a world in transition and face many challenges. But we also have an industry that is full of opportunities. Let’s harness the uncertainty of this changing world to drive the innovation and flexibility we need to meet our energy challenges.

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