MAK­ING THE RIGHT CHOICES

Oil and Gas - - CONTENT -

Dra­mat­i­cally cut back on emis­sions and si­mul­ta­ne­ously in­crease the pro­duc­tion of en­ergy. Jes­sica Uhl, CFO, Royal Dutch Shell plc

When it comes to cli­mate change, mak­ing the right choices is hard. Es­pe­cially since the world faces a dual chal­lenge: dra­mat­i­cally cut back on emis­sions and si­mul­ta­ne­ously in­crease the pro­duc­tion of en­ergy. Ex­cerpts of the speech given by Jes­sica Uhl, Chief Fi­nan­cial Of­fi­cer, Royal Dutch Shell plc, at the INSEAD Busi­ness School, Lon­don

Ge­orges Do­riot was the founder of INSEAD and is known as the world’s first ven­ture cap­i­tal­ist. Imag­ine a ven­ture cap­i­tal­ist in 1908. Imag­ine they were search­ing for the best op­por­tu­nity in au­to­mo­bile tech­nol­ogy. Ford would seem to have been the ob­vi­ous an­swer: Henry Ford started his assem­bly line that year and we all know what hap­pened next. This is, how­ever, with hind­sight. At the time, the in­vest­ment choice was much harder. There were hun­dreds of car com­pa­nies at the begin­ning of the 20th cen­tury. And many of these were pre­sent­ing in­no­va­tions. Take Do­riot Flan­drin…a French car com­pany that used ad­vanced alu­minium pis­tons in its mo­tors and that was founded by Au­guste Do­riot… Ge­orges Do­riot’s fa­ther. Or the Rainier Mo­tor Car com­pany that in­tro­duced the first war­ranty on a car. Or the Carter Car that used chain­less trans­mis­sion. These com­pa­nies all pre­sented in­no­va­tions that pushed the car in­dus­try for­ward. But if Ge­orge Do­riot had in­vested in his own fa­ther’s com­pany, or ei­ther of the other two, this Univer­sity would prob­a­bly not be here right now. Be­cause Do­riot Flan­drin, The Rainer Mo­tor Car Com­pany and The Carter Car all went belly-up while Ford sold 15 mil­lion Model T’s.

This brings me to the sub­ject of today: the chal­lenge of mak­ing the right choice. For in­di­vid­u­als, it can be dif­fi­cult to make the right choice. This strug­gle usu­ally gets big­ger when more peo­ple and view­points are in­volved. Let alone when it comes to cli­mate change, where ev­ery­one is in­volved and the choices are as com­pli­cated as they get. To some, this might seem an odd thing to say. Af­ter all, there is wide­spread agree­ment that the world must dras­ti­cally re­duce car­bon diox­ide emis­sions. The Paris Agree­ment, which Shell sup­ports, is clear about this: the world must stay be­low a two de­gree Cel­sius tem­per­a­ture rise. And Paris is not all… the thir­teenth of the 17 UN Sus­tain­able De­vel­op­ment goals, which were agreed in the months be­fore Paris, says the world must ‘take ur­gent ac­tion to com­bat cli­mate change and its im­pacts’.

But, as you all know, agree­ing on the out­come is much eas­ier than agree­ing on how to achieve that out­come. So it is with tack­ling cli­mate change. On that same list of UN sus­tain­able de­vel­op­ment goals, num­ber seven reads: ‘En­sure ac­cess to af­ford­able, re­li­able, sus­tain­able and modern en­ergy for all.’ In fact, it would be very hard to achieve the rest of the goals – from end­ing poverty to en­sur­ing good health­care – with­out good, ex­ten­sive ac­cess to en­ergy. En­ergy has played a role in all the sig­nif­i­cant in­no­va­tions that have shaped our way of life. Whether it is the steam en­gine, space travel or the In­ter­net of things.

DUAL CHAL­LENGE

This means there is ac­tu­ally a crit­i­cal dual chal­lenge: on the one hand, the world needs to tran­si­tion to a low-car­bon fu­ture to tackle cli­mate change. On the other hand, it needs a lot more en­ergy. De­mand for en­ergy is ex­pected to go up. In part be­cause the UN pre­dicts the world’s pop­u­la­tion will grow from 7 to 11 bil­lion peo­ple over this cen­tury. In part be­cause the liv­ing stan­dards of this grow­ing pop­u­la­tion can be ex­pected to go up… and that means higher en­ergy use. For some peo­ple that will mean some­thing as sim­ple as a first light­bulb… be­cause over a bil­lion peo­ple in the world right now have no ac­cess to modern en­ergy at all. For mil­lions of oth­ers, the choices are more sub­stan­tial. In China, be­tween 2000 and 2015, some 400 mil­lions re­frig­er­a­tors were built. And to give you some idea of what is go­ing to hap­pen over the next years: today re­frig­er­a­tion in In­dia is at about the point it was in the early 2000s in China. Last year,1.7 tril­lion dol­lar was in­vested in the world­wide en­ergy sys­tem.

It would cost tens of tril­lions of dol­lars to re­build this sys­tem. These two fac­tors – a ris­ing pop­u­la­tion and ris­ing liv­ing stan­dards, mean the amount of en­ergy the world uses could dou­ble – at least - in size over the course of the cen­tury.

So the world agrees… it must dra­mat­i­cally cut back on emis­sions and si­mul­ta­ne­ously in­crease the pro­duc­tion of en­ergy. But does the world, in fact, need to choose one or the other? Per­son­ally, I think the fu­ture is brighter than that. I be­lieve the world can man­age to achieve both. But there will be a lot of other choices along the way. I think those choices can be broadly grouped into three sets: choices linked to per­spec­tive, oth­ers about so­lu­tions… and choices about our ap­proach to the chal­lenges fac­ing the world.

PER­SPEC­TIVE

Firstly, per­spec­tive. It is nat­u­ral to view a chal­lenge from your own per­spec­tive, based on your own ex­pe­ri­ence. But with a global chal­lenge like the en­ergy tran­si­tion, this can mis­lead. It can even lead to an in­for­ma­tion bub­ble, in which peo­ple never see any­thing that con­flicts with their own view­point. I do not be­lieve that is a healthy place to be.

Con­sider the bat­tery elec­tric car, for ex­am­ple. There are cur­rently 1 bil­lion pas­sen­ger cars on the road in the world. Only 2,5 mil­lion of these are elec­tric. So we see ini­tia­tives to speed elec­tri­fi­ca­tion up. Bri­tain wants to ban new cars that are con­ven­tion­ally pow­ered from

It is nat­u­ral to view a chal­lenge from your own per­spec­tive, based on your own ex­pe­ri­ence. But with a global chal­lenge like the en­ergy tran­si­tion, this can mis­lead. It can even lead to an in­for­ma­tion bub­ble, in which peo­ple never see any­thing that con­flicts with their own view­point

2040. France too. If you walk around the streets of Lon­don these days it is be­com­ing more com­mon to see bat­tery­pow­ered ve­hi­cles amongst the traf­fic, or plugged in at the side of the road. In a few months’ time [Jan 2018] all new black cabs in Lon­don have to run on elec­tric­ity. From the per­spec­tive of a Bri­tish car driver… from the per­spec­tive of a Euro­pean car driver… the fu­ture of trans­port looks like it is bat­tery pow­ered. But it is a mis­lead­ing per­spec­tive. It for­gets that heavy trucks can­not yet be pow­ered by a bat­tery – it would need to be far too big – and that both ships and planes still need liq­uid fu­els. While we may well see some short haul com­muter planes us­ing elec­tric­ity by 2040, that isn’t re­motely likely to be the case for

an A380 from Paris to Hong Kong. Nor does it con­sider the scale-up in var­i­ous min­ing in­dus­tries to sup­ply the ma­te­ri­als for the bat­ter­ies such as lithium, cobalt, nickel and man­ganese. It also does not take into ac­count large parts of the world in which the bat­tery elec­tric car is not so suit­able for rea­sons of ge­og­ra­phy, in­fra­struc­ture or rel­a­tive poverty.Bat­tery elec­tric cars are cer­tainly part of the so­lu­tion for densely pop­u­lated ur­ban ar­eas, but if the world is to find a com­plete so­lu­tion, it needs to take a broader per­spec­tive… one that in­cludes all play­ers and all cir­cum­stances. It needs to start off with the per­spec­tive that the en­ergy tran­si­tion will move at dif­fer­ent paces and pro­duce dif­fer­ent out­comes in dif­fer­ent coun­tries.

SO­LU­TIONS

That brings me to the se­cond group of choices be­fore the world… the choices around so­lu­tions. Just as with trans­port, the pic­ture is more com­plex than it might ini­tially ap­pear. Take re­new­ables as an ex­am­ple. Un­doubt­edly, so­lar and wind power are in­dis­pens­able and the world needs much more en­ergy to come from these sources. But they are not the sim­ple so­lu­tion to ev­ery­thing many peo­ple think. Re­new­ables chiefly pro­duce elec­tric­ity. Today, elec­tric­ity meets nearly 20% of global fi­nal en­ergy de­mand. If the world was to meet the en­tire planet’s cur­rent elec­tric­ity needs through wind and so­lar… it would still have some 80% of fi­nal en­ergy de­mand to deal with.

So for re­new­ables to have a big­ger im­pact, the use of elec­tric­ity needs to be ex­tended. Ac­cord­ing to the En­ergy Tran­si­tion Com­mis­sion even­tu­ally half of all world­wide en­ergy con­sump­tion can be elec­tri­fied. This would be a nec­es­sary - and for­mi­da­ble - ac­com­plish­ment, but that still leaves the other half. Why is that? It is be­cause some sec­tors of the econ­omy can­not be elec­tri­fied to the full ex­tent. I have al­ready men­tioned heavy freight, ship­ping and avi­a­tion. But as the In­ter­na­tional En­ergy Agency shows, trans­port ac­counts for only 28% of the en­ergy use. 23 % is used in and around our houses for heat­ing, cook­ing and us­ing ap­pli­ances. 49% is used by in­dus­try and ser­vices. Part of these in­dus­tries can also not be elec­tri­fied. Be­cause they need ex­tremely high tem­per­a­tures, chem­i­cal re­ac­tions or dense en­ergy stor­age, such as the man­u­fac­tur­ing of iron, steel, ce­ment, plas­tic and chem­i­cals. As much as the world needs re­new­ables, they are not the uni­ver­sal so­lu­tion to bring­ing down emis­sions.

The en­ergy tran­si­tion en­com­passes a mul­ti­tude of dif­fer­ent chal­lenges and re­quires many dif­fer­ent so­lu­tions. To re­turn to trans­port briefly. Bat­tery elec­tric cars are com­ing, but we also need to do bet­ter with what we al­ready have… with more ef­fi­cient, cleaner en­gines… to keep emis­sions as low as pos­si­ble as new tech­nol­ogy spreads. And bat­tery elec­tric is not al­ways the an­swer for ev­ery class of ve­hi­cle. The cur­rent lim­ited range of bat­ter­ies, and the time taken to recharge, means that cars pow­ered by hy­dro­gen – which have longer range and fast re­fu­elling – may also have a role in the fu­ture. Liq­ue­fied nat­u­ral gas can re­duce pol­lu­tion from ship­ping and freight … While the next gen­er­a­tion of low-car­bon bio­fu­els can play a role in avi­a­tion. Just as the world’s per­spec­tive should be broad, so it should take a broad ap­proach to so­lu­tions.

NEW EN­ERGIES

Shell is also work­ing on many so­lu­tions it­self. We have re­cently es­tab­lished our New En­ergies busi­ness, to fo­cus on cre­at­ing fresh com­mer­cially sound op­por­tu­ni­ties in the en­ergy tran­si­tion. It is a busi­ness tasked with work­ing out how Shell’s ex­per­tise can be valu­able through the en­ergy tran­si­tion. For ex­am­ple, Shell has in­ter­ests in wind­farms and through its joint ven­ture Raízen, Shell is al­ready one of the world’s big­gest pro­duc­ers of sugar-cane ethanol.

The cur­rent lim­ited range of bat­ter­ies, and the time taken to recharge, means that cars pow­ered by hy­dro­gen – which have longer range and fast re­fu­elling – may also have a role in the fu­ture. Liq­ue­fied nat­u­ral gas can re­duce pol­lu­tion from ship­ping and freight… While the next gen­er­a­tion of low-car­bon bio­fu­els can play a role in avi­a­tion. Just as the world’s per­spec­tive should be broad, so it should take a broad ap­proach to so­lu­tions

Shell is also de­vel­op­ing hy­dro­gen as a trans­port fuel, for ex­am­ple by help­ing to build a na­tion­wide net­work of hy­dro­gen fill­ing sta­tions in Ger­many. And Shell is in­volved with bat­tery elec­tric ve­hi­cles too. We have de­vel­oped a sys­tem to help the grid han­dle the com­ing in­flux of elec­tric ve­hi­cles, for ex­am­ple. At a lo­cal level, the grid can­not yet cope with too many driv­ers plug­ging in their cars at the same time. The charg­ing sys­tem com­mu­ni­cates with the grid so cars take en­ergy when there is plenty of it. That saves our cus­tomers money too.

Be­sides our New En­ergies so­lu­tions, car­bon cap­ture and stor­age, or CCS, is an­other es­sen­tial part of the so­lu­tion to

meet the chal­lenge of cli­mate change. That’s not just my view, it is the view of the In­ter­na­tional En­ergy Agency and the In­ter­gov­ern­men­tal Panel on Cli­mate Change. This last or­gan­i­sa­tion has cal­cu­lated that keep­ing a 2 de­gree Cel­sius path­way would cost global so­ci­ety 140% more with­out CCS. Be­cause the Paris Agree­ment sets out a for­mi­da­ble task for the world – to go from 40 bil­lion tonnes of car­bon diox­ide added to the at­mos­phere ev­ery year, to an ef­fec­tive state of zero – and to do this in about 50 years. As I have ex­plained, we can­not have a world of zero emis­sions in 50 years, but a net-zero emis­sions world is a dif­fer­ent ob­jec­tive. And it can be achieved.

Cap­tur­ing and ge­o­log­i­cally stor­ing car­bon diox­ide kilo­me­tres be­low the sur­face is a key so­lu­tion. Shell has built and runs a CCS fa­cil­ity in Canada that pre­vented over a mil­lion tonnes of CO2 from en­ter­ing the at­mos­phere last year. It is do­ing the same this year too. The world will even­tu­ally need thou­sands of such fa­cil­i­ties, an­other rea­son to fo­cus more broadly on a so­lu­tion that ac­tu­ally solves the prob­lem.

All of this work I have men­tioned, and more that I don’t have time to tell you about, can con­trib­ute to the global ef­fort to tackle cli­mate change. But the big­gest con­tri­bu­tion Shell can make to this ef­fort right now, how­ever, is through its gas busi­ness. Gas is the clean­est-burn­ing hy­dro­car­bon, pro­duc­ing around half the green­house gas emis­sions and less than one-tenth of the air pol­lu­tants that coal does when burnt to gen­er­ate elec­tric­ity. This gives gas an ad­van­tage when used to com­ple­ment re­new­able sources of en­ergy. En­sur­ing that the grid can sup­ply elec­tric­ity all day and ev­ery day; ir­re­spec­tive of the sea­son or the con­di­tions out­side.

Whether it is with our New En­ergies busi­ness, with car­bon cap­ture and stor­age or with gas, Shell’s ap­proach is about seek­ing dif­fer­ent so­lu­tions for dif­fer­ent chal­lenges. That is partly be­cause the com­pany can­not fore­see ex­actly how this en­ergy tran­si­tion will play out. It is also be­cause Shell sees a wide and ex­cit­ing ar­ray of op­por­tu­ni­ties be­fore us, cre­ated by this en­ergy tran­si­tion. The com­pany purpose - pro­vid­ing more and cleaner en­ergy so­lu­tions – is all about be­ing a world class in­vest­ment case that is in tune with the en­ergy tran­si­tion… and emerg­ing as a win­ner from that tran­si­tion.

AP­PROACH

And that brings me to the third choice. The choice of how we ap­proach these chal­lenges at a so­ci­etal, gov­ern­men­tal and cor­po­rate level. Do we let cli­mate change drag us down? Or do we use the chal­lenge to lift us up? As I just men­tioned, Shell sees lots of op­por­tu­nity through the en­ergy tran­si­tion. There is plenty of op­por­tu­nity avail­able for all types of busi­ness and en­ter­prise… and for you all in this room. The right in­vest­ment cli­mate is es­sen­tial if the world is to seize on the op­por­tu­ni­ties that ex­ists. Per­son­ally, I would like to see co­or­di­na­tion, con­sis­tency and a gov­ern­ment-led car­bon price for CO2.

A con­tin­u­a­tion and ex­ten­sion of the co­or­di­na­tion wit­nessed in the Paris agree­ment. Con­sis­tency of reg­u­la­tion to al­low long-term busi­ness de­ci­sions to be made. And a gov­ern­ment-led car­bon price which has the ef­fect, over time, of in­cen­tivis­ing both busi­nesses and con­sumers to choose lower-car­bon op­tions. Such a car­bon price can also al­low the mar­ket to ef­fi­ciently iden­tify the best so­lu­tion for the best cir­cum­stances with­out gov­ern­ments hav­ing to try and pick “win­ners”.

Ul­ti­mately, how­ever, this en­ergy tran­si­tion will come down to the choices made by in­di­vid­u­als. By peo­ple like you and me. The will­ing­ness of in­di­vid­u­als to em­brace change will be cru­cial: from chang­ing the car we drive or the way we heat – or cool – our home, to the type of house we live in and the prod­ucts we have in it. All of you are mak­ing these sort of choices al­ready. But all of you, with INSEAD be­hind you, have the op­por­tu­nity to make a large im­pact through the choices you make in the busi­nesses and gov­ern­ments lucky enough to have you.

In 1908 Henry Ford in­stalled his assem­bly line, which made him into one of the great in­no­va­tors in man­u­fac­tur­ing. Today, 109 years later, there are still parts of the world where peo­ple have never seen or heard of an assem­bly line. Then as now: things change dif­fer­ently in dif­fer­ent places at dif­fer­ent speeds. As much as we might like one, there is no uni­ver­sal, world­wide sin­gle so­lu­tion to deal with cli­mate change.

In­stead we must make choices. I hope the world chooses a broad per­spec­tive. I hope the world chooses to ac­cept a mul­ti­tude of so­lu­tions to the com­plex chal­lenges it faces. More than any­thing, I hope the world chooses an open-minded spirit that em­braces change.

In 1908 Henry Ford in­stalled his assem­bly line, which made him into one of the great in­no­va­tors in man­u­fac­tur­ing. Today, 109 years later, there are still parts of the world where peo­ple have never seen or heard of an assem­bly line

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