In this address, Jeroen discusses why the oil and gas industry should go on to put “ through the rhythm ” , despite the immediate challenges posed by the planetary economic recession. This recession, bad as it is, is a impermanent phenomenon, whereas a turning universe population and lifting energy demand is the structural tendency for the first half of this century. And without equal investing in future supplies of oil, gas and renewables, the universe could be faced with a terrible supply crunch in the following decennary. To assist forestall such a supply crunch, authoritiess should advance continued investing by seting in topographic point the right inducements in three countries: revenue enhancements and allowing, CO2 pricing, and entree to resources.
Investing through the rhythm: challenges and chances
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These are tough times that require tough picks. And for Shell like any other company, it ‘s all custodies on deck and overtime on the span. But the current economic recession is a impermanent state of affairs. The longer-term tendency is still one of turning energy demands. That ‘s why the oil & A ; gas industry needs to put through the rhythm. I ‘ll discourse:
the long-run energy tendency,
the possible impact of the economic recession, and aˆ¦
how authoritiess can assist to soften that impact.
First, the long term: Equally shortly as economic growing sketchs, the demand for energy will pick up. . . and pick up fast. That ‘s what we at Shell refer to as the first difficult truth for the period up to 2050.
The 2nd difficult truth is that even if we produce energy from all possible beginnings, it will be hard to provide these turning energy demands. The 3rd difficult truth is that higher energy usage will interpret into higher CO2 emanations.
It ‘s non hard to see why these difficult truths remain valid. In the first half of this century, around 3 billion people will be added to the universe ‘s population, at a rate of 75 million people each twelvemonth – equivalent to the full population of Turkey. And all those people will desire to hold electricity. . . and many of them drive a auto.
So, for the longer term, we do n’t anticipate a “ demand surprise ” , because the people will be at that place and they will inquire for energy. Besides, oil and gas will go on to be the universe ‘s chief “ energy suppliers ” .
It will take decennaries before other energy signifiers rank better on the three As of Affordability, Acceptability and Availability.
It will be a tough challenge to provide the universe ‘s turning energy demands with oil. This challenge is made more pressing by the rapid diminution rates of bing Fieldss.
To avoid doing a future supply scranch even more terrible, the industry should go on to put.
But that will non be easy, in visible radiation of the economic recession.
Impact of the economic crisis
The recession has had three immediate effects on our industry:
the impact on planetary energy demand ;
a bead in the oil monetary value from a extremum of 140 dollars in July last twelvemonth to below 40 dollars – less than a 3rd – in December.
and greater volatility in currency exchange rates.
If the recession were to go on for some clip, the impact on our industry could be considerable. For case:
A sustained period of really low oil monetary values could convey immense cuts in investing. This would magnify the cyclicality of our industry and injury manufacturers and consumers likewise.
Some large-scale investings in the upstream are already being delayed, as is the instance with Shell ‘s 2nd enlargement of the Athabasca oil littorals undertaking in Canada.
( In the longer term, oil littorals continue to be good undertakings because they guarantee a steady degree of production for tonss of old ages. I ‘m certain Shell will go on to spread out at that place, but non right now – we ‘ll wait until we can construct new undertakings more stingily. )
A sustained recession would besides decelerate down investings in CO2 solutions. If you have a low oil monetary value and a low CO2 monetary value in a credit-constrained market, undertakings to gaining control and shop CO2 would be delayed or cancelled. And the same would go on to weave farms and other renewables undertakings.
In the downstream, the refinement concern would go an even rougher environment than it already is. This would impact employment. And it would go more hard in future to pull good people if they believe it ‘s non a stable industry.
( In this sector, I think Shell is better protected than many other participants by our big refineries in cardinal markets, and by its strong trade name in the retail sector. )
To put or non to put
To put or non to put. . . that ‘s the inquiry.
Already, the oil and gas industry is likely the most capital-intensive industry in the universe. And Shell was the largest private investor over the past old ages. And it is going even more capital-intensive as the universe ‘s energy demands addition and supplies of “ easy oil ” become less abundant.
We need big, long-life, assets that can reliably present large supplies through different economic rhythms. So Shell has made such undertakings a precedence. But these elephantine undertakings take a long clip and a batch of money to construct.
Shell is keeping a careful balance in its investing portfolio. For case, here in North America, we ‘re puting in onshore ( unconventional ) gas undertakings that allow us to dial up and dial down the figure of boring rigs rapidly, and therefore the cost of activity. This allows us to respond quickly to a altering market environment.
( And the added advantage is that here in the US the substructure and capacity already exists, so you can bring forth the gas really rapidly. )
These are tough times for our industry. But we ‘ve seen them before. Through much of the 1980s and 1990s the oil monetary value hovered around 20 dollars a barrel, dropping to below 10 dollars in 1999.
In both the late eightiess and 1990s monetary values dropped below the fringy costs for big new supply undertakings outside OPEC, and new investings became hard to warrant.
You ‘ll retrieve in 1999 the Economist warning that monetary value might even drop to 5 dollars a barrel. Alternatively, demand and monetary value began to retrieve, as a consequence of economic growing in China and other developing markets.
The lesson we learned is that demand responds rapidly to economic conditions. . . but that demand is merely one half of the narrative. The other half is supply. And provide moves much more easy.
In today ‘s market, supply investings are under extra force per unit area because of the recognition crunch. This state of affairs is farther amplified by the cost-explosion of the past few old ages. The oil monetary value may be still approximately double the “ about $ 20 ” of the 1980s/90s, but the sum the upstream industry is passing each twelvemonth has risen quintuple, from $ 80bn in 1999, to over 400bn in 2008. Good purposes however, this makes it really hard for the industry to afford growing from a return on capital position.
The up-and-down oil monetary value makes it hard to be after for the hereafter. It amendss the sector and harms the involvements of manufacturer and consumer states likewise. So what we ‘re looking for is a happy medium between the two extremes of a really low oil monetary value environment and a really high monetary value environment that causes the sector to overheat.
We do n’t yet experience the consequence of slower investing in the market today – because the undertakings for which a concluding investing determination ( FID ) was taken before will come on line within the following twosome of old ages. But we might get down to experience a important impact in 3-4 old ages clip. By so, an industry-wide decrease in investing would go the world of a decrease in new productive capacity.
Shell as a big investor
At Shell, we ‘re determined non to reiterate the start-stop attack to investing of the past. Alternatively, we aim to harvest the benefits of sustained investing when the planetary economic system recovers.
Start-stop policies besides damage your full critical mass of know-how, expertness and employee motive. And even for a capital-intensive company like Shell, people matter most. So we want to maintain as many good people as possible.
In 2009, Shell will stay a comparatively big investor. . . with a strong focal point on cost, and doing certain we ‘re non manner out of measure with our rivals. And we will go on to put in Research and Development ( R & A ; D ) . We believe that a strong, long-run engineering place offers some protection from short-run rhythms.
Looking back, there ‘s some grounds to propose that a lower oil monetary value can even assist engineering development. In a clip of high monetary values, a cardinal driver for oil and gas companies is velocity.
In equilibrating development cost and agenda, agenda normally wins. But in a clip of lower monetary values, cost becomes a more of import factor – and that tends to do people more imaginative.
A good illustration is our remote-controlled offshore monotowers, which Shell began to develop in a clip of low oil monetary values in the late ninetiess. These are little offshore platforms that are powered by air current and solar power and necessitate really small care – a construct that made it economical to develop little gas Fieldss in the North Sea.
How to react?
So much for the economic sciences – what about the political relations? What can authoritiess and regulators do to assist procure energy hereafter supplies?
I think authorities attempts could do a existent difference in two countries:
Taxs and allowing
CO2 policies and pricing
Entree to resources
First, on revenue enhancements. We ‘ve been speaking about the oil monetary value. But royalties and other revenue enhancements and levies besides have immense impact on our returns on investing.
Taxs are much easier to command for authoritiess than the oil monetary value or capital costs. So they are a really of import instrument for authoritiess to extenuate the up-and-down oil monetary value and the volatility of the energy sector.
We need revenue enhancement and royalty systems that encourage industry to maintain up investing at low oil monetary values. These revenue enhancement governments must be stable and predictable. So they should non all of a sudden go more punitory when the oil monetary value goes up once more. If we ‘re asked to put at low oil monetary values, we need to hold assurance that companies keep will have a just portion of the good luck at higher monetary value.
Every barrel we produce today will be replaced by a barrel that requires more know-how and money to bring forth. By raising revenue enhancements, authoritiess take money that could otherwise be re-invested in the undertakings that will present future supplies.
Permiting is an of import component of cost excessively. For large undertakings, allowing easy takes 10 old ages or more. And slow permitting peers longer lead-times peers higher costs.
Relatively straightforward permitting, in combination with a favorable revenue enhancement government for renewables undertakings, explains why the USA is the focal point of Shell ‘s air current concern.
A 2nd factor is the monetary value of CO2. Shell favours a difficult, planetary, CO2 monetary value as the fastest decrease way for CO2 emanations. A difficult CO2 monetary value would hike attempts to capture and hive away CO2 and aid to do renewables undertakings more competitory. In other words, a difficult CO2 monetary value promotes investing and reduces the cyclicality of the industry.
Cap and trade
And Shell favours cap-and-trade systems as the best manner to find the monetary value of CO2. Why is that?
In cap-and-trade, the accent lies on the cap. The cap must be met. So you have a certified environmental result. The trade provides the commercial inducement for the lowest-cost decrease undertaking to be implemented.
You will retrieve that cap-and-trade is an American construct. It has worked good in the USA in cut downing sulfur dioxide emanations.
Of class, revenue enhancements can besides play a function. For case, higher fuel revenue enhancements mostly explain why Europe ‘s vehicle fleet is more energy-efficient than its American opposite number.
Access / Arctic
A 3rd country of authorities engagement is entree to oil and gas resources.
The United States is a good illustration. The new Administration has made early statements of support for expanded domestic oil and gas production. I hope that support besides applies to Alaska.
Alaska ‘s outer continental shelf contains the most promising undeveloped hydrocarbon resources in the USA. These resources could significantly cut down US dependance on oil imports.
In opening up new frontiers, our industry must protect the environment and work closely with local communities and other stakeholders ; that goes without stating. But I think we have proven that we can accomplish that balance if given the chance. I hope and trust that staying legal issues will be resolved, so that we can assist to do these big resources available, create 1000s of occupations and generate one million millions in new grosss for the province of Alaska and local communities. . . in an environmentally and socially responsible manner.
Let ‘s summarise:
Energy demand will pick up once more. The existent uncertainness concerns future supplies.
To put or non to put. . . is the pressing inquiry our industry faces.
I believe that continued investing – within ground – is in the best involvement of our industry, and in the best involvement of the universe as a whole.
A considerable portion of that “ within ground ” depends on authorities policies. We need consistent revenue enhancement governments, faster permitting and a difficult CO2 monetary value to be able to maintain up investings through the current rhythm.
The planetary economic system will bounce and so will the demand for energy.
The challenge is to make what is necessary to avoid a terrible supply crunch of hydrocarbons once the economic system picks up once more.