Energy demand, supply and the downstream infrastructure challenge 13th International Oil Summit Paris, France Mark Williams Downstream Director, Royal Dutch Shell plc May 3, 2012
Mark Williams was appointed Director Downstream onjanuary 1, 2009. Prior to this, Mark was Executive Vice President (EVP) Supply & Distribution (S&D), where he had responsibility for crude oil and refined products supply for Shell s global refining and marketing businesses. Mark s other previous positions have been EVP, Global Businesses, Vice President of Strategy, Portfolio and Environment for Oil Products. Mark was born in 1951 in Houston, Texas. His qualifications include a Masters Degree in Theoretical Physics from Oxford University (1975) and a Doctorate & Masters Degree in Physics from Stanford University (1979). He joined Shell in 1979 as a research physicist for Shell Oil Exploration and Production. Highlights of his career include being Engineering Manager for the U.S. Gulf of Mexico during the early days of Deep Water, working as Operations Manager for Shell Oil Western EP Operations, being Head of Staff Planning for Shell Oil Exploration and Production, Head of Downstream Strategy for Shell Oil during the merger with Texaco, and Head of Transportation (pipelines and distribution) for Equilon Enterprises LLC, the Shell and Texaco joint venture in the United States. Mark and his wife, Candace, have two children. His interests include amateur astronomy and astro-imaging, yacht racing, mountaineering, cycling and weight training.
Rising energy demand and an increasing reliance on complex energy resources such as oil sands are creating significant challenges for the energy industry. These include shortages of refining and distribution capacity in some countries. In this speech to the 13th International Oil Summit, Mark Williams outlines how the industry can address these challenges by increasing and diversifying energy supplies and by building a more flexible and efficient downstream sector. He also explains how integrated international energy companies are already playing a critical role in bringing these changes about, thanks to their global scale, integrated capabilities and ability to bring diverse partners together. Good morning. It s a pleasure to be here, at one of the most important annual events for the energy industry. Today I m going to discuss some seismic changes in energy supply and demand, and the challenges that these are creating for the industry. Drawing on both my current role as Shell s Downstream Director and my experience in the upstream, I ll then discuss how the industry can address these challenges by raising and diversifying output, and by reshaping the downstream sector. Finally, I ll discuss how integrated International Oil Companies (IOCs) can leverage their combined upstream and downstream capabilities to help achieve this. Energy demand and supply Since last year s summit it s been another turbulent 12 months for the industry, with ongoing tensions in the Middle East and economic uncertainty. However, there are tentative signs that the outlook may be improving. Although there are still some serious risks, especially in Europe, it seems global economic activity rebounded somewhat in the first quarter of 2012. And over the longer term, energy demand is resuming its strong upward trajectory. Worldwide energy demand could double in the first half of this century, driven by a rising population and economic growth. With millions of drivers taking to the road, demand for liquid transport fuels will grow particularly strongly, even as vehicle efficiency improves. According to the IEA, global liquid fuels demand could rise by 26% in the next 25 years, to over 110 million barrels a day. Growth will be particularly strong in Asia s emerging economies. In China, for example, the vehicle fleet could more than triple in the next 20 years to around 600 million vehicles. As a result, China s oil demand could more than double by 2030, reaching nearly 1.5 times the current US level. Globally, oil supply will struggle to keep pace with demand. This is partly due to declining output from mature fields - perhaps by 80% by 2035. Just to replace this lost output, the world needs new production capacity equivalent to one Saudi Arabia every three years. In many regions, much of the easily accessible oil has been tapped, and supply increasingly comes from challenging and remote locations with high oil prices necessary to incentivise the required investments. According to the International Energy Agency (IEA), output from resources like oil sands and other heavy oils has increased tenfold since 1980, and is set to quadruple again by 2035. The rapid development of liquid-rich shales using the same hydraulic fracturing technologies as shale gas holds With millions of drivers taking to the road, demand for liquid transport fuels will grow particularly strongly. In many regions, much of the easily accessible oil has been tapped, and supply increasingly comes from challenging and remote locations.
significant promise, if it can be extended globally. From an upstream perspective, these trends are a testament to rapid innovation unlocking new resources. But in the downstream, shifting demand and increasing reliance on complex oils create challenges around refining and distribution. China, for example, has roughly half the refining capacity of the United States, but its oil demand will exceed that of the US by 2035. To adapt to these changes, the IEA estimates the world needs $10 trillion of new oil infrastructure by 2035, as part of $38 trillion in energy infrastructure worldwide. Across the world s energy system, that s around $3 million of investment every single minute for almost 25 years. And for the industry, that adds up to a major challenge. Raising production of liquid fuels So how to respond? I believe the industry needs to do several things: increase liquid fuel supplies, diversify the transport fuel mix, and build greater flexibility into the downstream infrastructure. First, increasing production of liquid fuels. Thanks to rapid innovation, potentially huge new energy resources are coming online. But the industry needs to continue finding more resources: and developing the infrastructure to process and distribute them will be an enormous challenge. Output from Canada s oil sands, for example, could triple by 2035, to 4.5 million barrels per day. Making that happen requires not only the capacity to extract oil, but also to bring it to market. According to the American Petroleum Institute, oil sands output could be constrained by 2014, due to limited pipeline capacity to US refineries and markets. To unlock the true potential of Canada s oil sands, the industry and governments must ensure the right pipelines, upgraders and refineries are in place. At Shell, we ve increased capacity at our Athabasca Oil Sands Project in Alberta by 100,000 barrels per day, opening a second mine and expanding the upgrader converting bitumen into crude. But industry wide, oil sands output risks outgrowing capacity to process and export it. Similarly, the rapid rise of onshore oil production in the US typified by the Bakken development are testing the limits of the infrastructure and refining system. Diversifying the transport fuel supply Another way to meet rising demand is by diversifying the transport fuel mix. This includes increasing the contribution of biofuels. A key benefit of biofuels like sugar-cane ethanol is that they are compatible with existing infrastructure, and can be distributed at ordinary filling stations. The IEA says global demand for biofuels could triple by 2035 as public acceptance grows. At Shell, we recently launched the Raízen joint venture with Cosan in Brazil, which will produce and distribute over 2 billion litres of sugar-cane ethanol each year. Because sugar-cane ethanol emits up to 70% less CO 2 than standard petrol over the lifecycle, it can help make liquid fuels more environmentally acceptable in an era of tighter regulation. Another promising area is natural gas. The development of potentially huge new resources like shale gas continues to revolutionise the supply outlook in many regions. North America, for example, now has a century of gas supplies at current consumption rates, just a few years after it was feared production decline had set in. Many other regions offer similar prospects. So natural gas as a transport fuel will also grow, both through conversion to liquid fuel and directly into transportation. Last year s opening of Pearl GTL, the huge gas-to-liquids plant developed by Shell and Qatar Petroleum, was a significant landmark Potentially huge new energy resources are coming online. But developing the infrastructure to process and distribute them will be an enormous challenge. One way to meet rising demand is by diversifying the transport fuel mix. This includes increasing the contribution of biofuels like sugarcane ethanol.
for the industry. With a total investment of some $18-$19 billion, it illustrates the scale of infrastructure needed to meet rising demand. Pearl will produce enough GTL gasoil to fill the equivalent of over 160,000 cars a day, as well as products like chemical feedstocks and lubricants, helping generate new revenue from Qatar s abundant gas resources. LNG also holds great potential as a transport fuel, thanks partly to its ability to reduce CO 2 emissions and local air pollution. In Canada, Shell is building LNG refuelling stations along the Alberta to Vancouver trucking route, enabling truck fleets to run on natural gas instead of diesel. As technology improves, LNG could play a growing role in the transport fuel mix. So gas is likely to gain market share in transportation fuel, but refiners and marketers may gain as well: historically low prices for natural gas offer manufacturers a powerful competitive advantage, potentially stimulating economic growth and ensuring more robust oil demand in the future. Reshaping the downstream sector The third way to meet rising fuel demand is by developing a more flexible and efficient downstream sector. Of course, the downstream has not had an easy few years. The economic downturn, higher oil prices, and improving vehicle efficiency have dampened demand in mature markets. As margins have tightened, the industry has seen a spate of refinery closures. In the UK, for example, the number of refineries has fallen from 18 in the late 1970s to 8 today. Part of the problem is that some existing refineries are unsuitable for processing more difficult crudes on which supply increasingly depends. They are in the wrong places. And they make the wrong products. In China, increasing imports of highersulphur crudes from the Middle East put pressure on refineries designed to process sweeter domestic crudes. And the big petrol machines in the Atlantic Basin increasingly find demand for petrol stagnant or declining, in the face of petrolcapacity increases in the Middle East and Asia. To address these challenges, the industry needs more efficient, flexible, integrated refineries. That s a big ask, given today s tough investment climate. But one example of what we could see more of is Shell and Saudi Aramco s Motiva joint venture expanding the Port Arthur Refinery on the Gulf of Mexico, from 275,000 to 600,000 barrels per day. The expansion will enable us to process heavy, sour, acid crudes from wherever they become available initially Saudi Arabia, but also other areas. It will be able to shift easily between producing petrol and diesel as demand changes. And it will have a large diesel export capacity to help meet robust global demand, while also supplying US markets with an efficient inland distribution system. This kind of flexible, integrated infrastructure is central to Shell s plans for selective downstream expansion. The role of the integrated IOC Of course, doing all this will not be easy. Finding new resources, extracting them from challenging locations, processing and distributing them represents a truly global challenge, spanning the entire value chain. In this context, I believe integrated IOCs have a critical role to play. By combining our upstream and downstream capabilities, integrated companies can drive innovation and match resources with demand on a global basis. We will increasingly do this in close collaboration with our NOC partners. This includes building triangular relationships between IOCs like Shell, major resource holders, and major demand holders. Shell s partnership with CNPC is a great example. Within China, we re working with CNPC s listed arm, Petrochina, to develop LNG also holds great potential as a transport fuel, thanks partly to its ability to reduce CO2 emissions and local air pollution. Some existing refineries are unsuitable for processing more difficult crudes on which supply increasingly depends. The industry needs more efficient, flexible refineries
tight gas resources to help meet growing domestic demand. But we re also looking beyond China s borders, even joining together to buy a company in a third country: Arrow Energy, in Australia. In a great example of tripartite co-operation, Shell and Petrochina have also joined with Qatar Petroleum to explore for natural gas onshore and offshore Qatar. And drawing on Shell s downstream expertise, Petrochina, QP and Shell are now developing plans for an integrated refinery and petrochemical complex in the eastern Chinese city of Taizhou. By linking diverse partners, we can match new resources with new demand. Linking upstream and downstream activities also means integrated companies can create commercial opportunities right along the value chain. Our Pearl GTL project with Qatar Petroleum is again a good example. Shell has been perfecting the technology behind Pearl for more than 30 years. We hold about 3,500 patents in the GTL process. To deliver Pearl, we drew on advanced technical skills from right across the company. Our upstream business helps produce 1.6 billion cubic feet of natural gas a day from Qatar s North Field. And our downstream draws on over 30 years of research and development to convert that gas into products like GTL gasoil, kerosene and baseoils. The downstream also helps market and distribute these products around the world. By fusing upstream and downstream operations, we can link resource holders with demand holders, and help NOCs realise their global ambitions. Conclusion In conclusion, recent years have seen seismic changes on both the demand and supply side of the energy industry. A combination of rising demand, a shifting global energy footprint and an increasing reliance on complex resources is creating significant challenges for the industry. But with the right projects and partnerships, IOCs and NOCs can leverage each other s strengths to bring customers and resources together. And on that note, I look forward to the discussion. By fusing upstream and downstream operations, integrated energy companies can link resource holders with demand holders, and help national oil companies realise their global ambitions.
Recent speeches by Shell s senior leadership China and the future of energy, Peter Voser Water, energy and the resource consumption puzzle, Peter Voser Growing global energy demand: a defining moment for Louisiana, Marvin Odum Shell and corporate tax, Simon Henry Meeting the needs of 9 billion people, Marvin Odum Qatar s role in the energy landscape of the future, Peter Voser New Frontier: Engineers and the global energy challenge, Malcolm Brinded The case for shale and tight gas, Malcolm Brinded The integration challenge, Marvin Odum 9 billion reasons to address the world s energy challenge now, Peter Voser Growing cities, growing responsibility, Marvin Odum Changing direction towards a new energy future, Jorma Ollila Canada: a proving ground for responsible oil and gas development, Marvin Odum An era of volatility and opportunity: the outlook for CFOs in the energy industry, Simon Henry The energy challenge and the need for new talent, Hugh Mitchell For information about Shell, including downloadable versions of these speeches and other publications, please visit www.shell shell.com.com. Shell International Limited, 2012. Permission should be sought from Shell International before any part of this publication is reproduced, stored in a retrieval system, or transmitted by any other means. Agreement will normally be given, provided the source is acknowledged. The companies in which Royal Dutch Shell plc directly and indirectly owns investments are separate entities. In this publication the expressions Shell, Group and Shell Group are sometimes used for convenience where references are made to Group companies in general. Likewise, the words we, us and our are also used to refer to Group companies in general or those who work for them. These expressions are also used where there is no purpose in identifying specific companies.