The following are excerpts from lecture by Linda Cook, Chief Executive Officer for Shell Gas & Power. The lecture was delivered at the World Petroleum Congress at Calgary, Canada, June 15, 2000.
We are living in a time of great political and industrial change in the natural gas business: waves of transparency and liberalization are sweeping across the globe. And new technologies promise to deliver benefits to all. The companies that will win in this environment are those that can innovate, those that can change, and those that communicate
An appreciation of just how fast global gas demand is growing is now widespread. An International Energy Agency projection of global growth in the coming two decades demonstrates that clearly. It forecasts a growth rate of 2.6 percent per annum
Pipelines and LNG tankers are the physical tools that link the various markets together, making gas a more global commodity. Over the last few decades, gas transportation has grown from simple local supply systems to international and pan-continental networks.
In Europe in 1970, the most extensive gas transport network was centered in The Netherlands, connecting supply from the Groningen field with markets in Belgium, western Germany and France.
Today, a web of pipelines spans the whole continent, including the Inter- connector between the UK and mainland Europe. The system connects major urban markets with supplies in the North Sea, Russia, and the northern part of the African continent.
We see continuing evolution in North America, where cross-border links continue to expand, with recent additions linking supply to demand at the U.S.-Mexico border, and a number of planned expansions to further connect the extensive Canadian gas resources to growing markets in the northeast U.S. Looking to Asia, where distances are even larger, it is possible to map out how a similar process could evolve there.
An increasing network of fields in places as far apart as Iran, western China and the Philippines are likely to be tapped as a pancontinental gas transport system evolves over the coming years.
The second physical tie LNG shipping has always been interregional. It is now gradually globalising and LNG trading patterns are beginning to diversify. Shell has interests in LNG projects across the world, a good illustration of this globalization.
Shell, already a leading global gas producer, is committed to rapid expansion of it gas business. Working with its greenfield power developer, InterGen, Shell is developing innovative new businesses across the globe. As e-Business evolves and a range of other new technologies from gas-to-liquids plants to hydrogen fuel cells emerge, Shell intends to continue to play a leading role. Last month, Malaysian LNG was shipped to Spain for piping to Portugal. A short-term surplus of LNG in Asia, along with an opening of the Spanish gas market, allowed the deal. The LNG carrier involved was actually from Shell’s Nigerian LNG operation. In addition, we have recently sold Malaysian and Omani LNG into the U.S. market.
We were able to facilitate these deals because of Shells global reach and our ability to link a range of businesses in which we have interests. The magnitude of interregional trade is, of course, relatively small, but it is an indicator of underlying trends. These two physical linking mechanism pipes and ships are beginning to reshape the industry. Because of the ability they provide to deliver product and a lowering of cost as a result of technological advances gas is being used in a wider variety of applications and locations, and gaining market share.
Just a half century ago, natural gas was essentially a waste by-product. To- day it is simply one of the worlds leading fuels. An industry that was once just an extension of the upstream has matured and is now one of the fastest grow- ing parts of the energy business.
If pipelines, LNG carriers and world wide marketing and trading activities are the means, the drivers for continued gas growth are more diverse. Political trends have played a very important role and, I believe, will continue to do so.
Less than a decade ago almost all markets were highly structured and tightly regulated. That position is now changing in a convincing way and on a global basis. Shell believes the current wave of liberalization is likely to continue although the pace of changes is a bit uneven and unpredictable.
Markets as diverse as Argentina, Japan, Germany and the UK have opened to competition. From March this year ( 2000) , nearly one third of all Japanese customers can choose their supplier. Even formerly closed markets, such as Korea, are now liberalizing.
But not everyone sees this as a change for the better, as recent protests have vividly demonstrated. We may not agree with the rioters in Seattle, but we cannot afford to ignore them. A dialogue is necessary and must be maintained over the long term. We must be proactive attempting to reach consensus with all stakeholders about the benefits of market development.
Public relations exercises have their role to play, but they are not enough. If we are ever to find common ground with the Seattle demonstrators, business must make a commitment to more sustainable forms of development.
In Shell, we believe this so strongly we included it in our Statement of Business Principles. Shell is committed to contributing to all three areas of sustainable development economic which we are all familiar with; social which is a relative newcomer to the business agenda; and environmental where natural gas has a key role to play.
For example, in China today most of the electricity is generated from high car- bon coal. China urban air quality is such that the government is beginning to search for solutions.
There are two ways of improving performance: clean up the existing process or substitute a cleaner fuel such as natural gas. Shell coal gasification technology offers one way of reducing emissions in coal-fired power generation and we recently entered into a joint venture with Sinopec for such an application at Dong Ting in Hunan province.
But introduction of gas-fired power plants is the obvious longer-term solution. The Chinese government is beginning to facilitate such progress by allowing foreign investment in upstream gas and LNG import projects. For example, Shell has signed a contract for the Changbei development Œ producing gas from a domestic inland resource for markets near Beijing.
On a corporate level, Shell has committed itself to meeting and exceeding the Kyoto requirements for reductions in emissions. And we are determined to meet growing demand for transparency regarding our progress in this area.
Questions about transparency and social accountability may seem a long way from the specific topic of gas globalization. But, in reality, they are not. The spirit of our times is one of opening up, accountability, and greater access to in- formation. In the energy industry, this is likely to have a variety of effects. There is little doubt the fuel slate will become more diverse. In place of government regulation, market mechanisms are expanding.
Technological innovation, adaptability and, perhaps most importantly, business innovation, are going to be the crucial determinants of 21st century success. The pace of change is already accelerating. Let me give you a few Shell examples: In LNG, growing demand means we must accelerate the expansion of supply. In the last six months, new LNG projects in which Shell has an interest have come on stream in Nigeria and Oman and project expansions of these locations are already under consideration.
In addition, expansions are being pursued in Malaysia and Australia. And new projects are under development with partners in Venezuela and Sakhalin. On the market side, we have recently secured LNG import capacity in the U. S., and are actively pursuing regasification projects in India, China and Brasil.
Role of Technology
Technology has been major driver behind the growth LNG demand. Unit LNG production costs have been halved in the past 20 years and capital costs continue to fall. Our latest plant in Oman was not only the fastest ever LNG project from discovery to first cargo, but was also built with the lowest ever unit capital cost for a green field LNG project. One of the first, and clearest, outcomes of liberalization has been the growing convergence of the gas and power industries.
Shells green-field power developer InterGen, a joint venture with Bechtel has accelerated from a standing start to a world-class business in just a few years. Its low-cost, highly efficient plants are being rapidly brought on stream using innovative financial tools and benefiting local economies. InterGen - which is one of several growing power developers - is planning to add eight gigawatts of capacity in just the next four years.
Gas-fired power generation allows for more effective use of an abundant resource. It allows us to Mounties reserves which otherwise would have remained in the ground or added cost. It provides an entry ticket to new markets and a platform for building a trading business. Trading opportunities are expanding as liberalization progresses. This has opened up a whole new range of possibilities Œ on a global scale. Until now the various Shell trading companies have focused on different industries, products, customer and markets.
Now, we are merging these activities into a single entity. Shell Trading. It will operate across all our business from oil products, to gas, power and chemicals leveraging the many opportunities for cross product offerings, arbitrage and savings.
We are also innovating at the retail end of the value chain where opportunities for marketing energy to residential consumers are beginning to open up in many countries around the world. In Atlanta, Georgia, we have won a 23 percent market share in our residential natural gas marketing pilot. That success, combined with the global strength of the Shell brand, has led us to actively consider pursuing expanded penetration in other retail markets for gas and power.
The underlying driver creating many of the new opportunities for business innovation is, of course, rapidly developing technology. And, there are several technologies on the near horizon which could lead to significant new business patterns. One example is distributed generation - which could radically alter the power industry landscape. The analogy from recent industrial history is obvious a network of tens of millions of small computers largely displaced previously dominant mainframes. Will a network of fuel cells, microturbines and distributed storage devices al- low the development of a ‚power net which functions much like today inter- net? Instead of a few generating plants providing power to a centralized grid, will we see the development of grids linking multiple small generators?
The technologies are evolving quickly. Gas is currently the fuel of choice for stationary hydrogen fuel cells which would likely provide many of the power units for such systems. Here the favorable environmental characteristics of gas low carbon content and relatively high hydrogen content are key. Provided better storage technologies are developed, gas may also be competitive in transportation applications. Gas-powered fuel- cell cars could well be part of our future.
Gas to Liquids
Another, more immediate, technology is related to the conversion of natural gas into liquid hydrocarbon products, or ‚gas to liquids . There are a number of technologies and until now, they haven had significant impact.
That is going to change. Through the mid-90s we have continuously decreased the costs of our SMDS ( Shell Middle Distillate Synthesis ) process. We believe unit capital costs are now on par with those for LNG plants. The products liquids are cheaper to transport than gas, and will therefore be competitive across a greater range of markets. We have an operational SMDS plant at Bintulu, Malaysia, producing up to 15,000 b/d of middle distillates such as naphtha, gas oil and kerosene.
The products are virtually free of nitrogen and sulfur giving them excellent combustion properties. Gas to liquids technologies such as SMDS provide opportunities to create value from otherwise stranded natural gas resources and will play an important role in our industry in the coming years.
The area where even greater innovation is likely to develop is e-Business. We already know that e-Business will fundamentally change the relationship between business and customers. The quality of those relationships will become more critical as physical barriers to change decline. Customers in many areas are already able to change suppliers with the click of a mouse.
New Offerings Necessary
The ability to generate winning new customer offerings and services is going to become ever more important. Shell web presence began as a provider of in- formation. Now we are expanding that to functional B2B and B2C sites. These build on existing activities and strengths. Some of these, such as our B2B oil and gas industry supply site with CommerceOne, are aimed at cutting procurement costs.
Our soon-to-be- launched Inter continental Exchange will allow more efficient trading of bulk commodities. Others, such as our Coralconnect.com site in the U.S. are aimed at establishing a better customer proposition.
It is probably too early yet to pinpoint where major breakthroughs will occur. However, it is clear that trading and customer management skills will assume greater importance in the electronic world than they had in the old, regulated, asset management world. In just a few decades, natural gas has gone from being the by-product of oil, to the fuel of choice. And, in a hundred years time, when people look back at this period, I believe they’ll say the move to gas was a wise one. Ours will become a fully globalizes and highly complex industry.
Political and technological changes will result in new challenges and new opportunities. The push for transparency and liberalization will continue, as will demands for ever-higher environmental performance. Real benefits are going to be created for all. The challenges in the natural gas industry will increase Œ but so, also, will the opportunities to make a real difference.
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