Phil Watts speech: Security in trust - Meeting Asian energy needs in the 21st century – part two

Published March 13th, 2001 - 02:00 GMT

Asian challenges: Let me turn to the particular energy challenges facing Asia. The shift in energy demand to developing countries is particularly marked in a region containing very large and rapidly developing economies.  

 

Energy consumption has grown nearly fourfold since 1970, twice the world rate. We expect it to at least double again by 2020.  

 

Gas use has grown by 10 percent a year, from a very low base . It still accounts for less than a tenth of the region's energy.  

 

Japan still uses considerably less gas than most industrialized countries. As energy markets continue to be reformed, the role of gas will be an important issue.  

 

Expanding it would make an important contribution to Japan's demand for competitive, secure and clean energy.  

Coal use has also grown strongly, reflecting its importance in China and India.  

 

But governments are anxious to tackle the major local - and regional - pollution it causes. Transporting coal is also expensive. If Chinese coal consumption grows by 2020 as some forecast, it will require over 2,000 very long trains a day to carry it to consumers.  

 

We expect coal growth to slow, while gas consumption continues expanding very strongly. Oil consumption should also grow rapidly.  

 

Alternative ways of using coal are being developed. Shell coal gasification technology offers a way of using coal more efficiently and cleanly. Our recent strategic alliance with Sinopec included plans for applying it, initially to make chemical feedstock at Dongting in Hunan.  

 

What about the resources to meet rising demand? The region contains some 30 percent of proven reserves of coal, 7 percent of gas and 4 percent of oil - none of which compare with its expected share of future consumption. However, it is well placed in relations to neighboring resources, particularly of gas.  

 

The theme of strengthening energy co-operation is particularly important, including with major resource holders such as those in the Middle East. 

 

Realizing the potential of gas: Extending gas use is perhaps the most important medium-term step we can take to tackle climate change.  

 

But realizing this potential - in Asia and elsewhere - is a considerable challenge. Let me start at the beginning, with the markets. The first challenge is to develop new markets in major emerging economies, and where liberalization of mature markets offers new opportunities.  

 

The link with power is very important. We are building our power capability through the successful independent power producer InterGen.  

 

And we are pursuing new opportunities for managing our customers' energy needs - for power, gas and oil - in liberalized and on-line markets.  

 

As the biggest private operator of gas production - as well as of oil - Shell has unique experience of developing and operating gas infrastructure around the world.  

 

We are also the leading LNG company with 30 years of experience in the design, construction and operation of LNG systems - starting with Brunei LNG which has delivered 4,000 cargoes to its Japanese customers. We are now involved in five major LNG schemes - four of them supplying Asian markets.  

 

Costs count in LNG markets. Our experience - from which we take great care to learn and share lessons - has enabled us to drive down costs.  

 

Supplying Asian gas needs has three thrusts - exploiting domestic resources, accessing regional supplies and developing relationships with major resource holders.  

 

Extending domestic gas resources is a priority for many countries. We are applying our skills in Pakistan, Bangladesh, China and the Philippines - where we are developing the deep-water Malampaya gas field.  

 

From early next year Malampaya will supply gas - through a 500 kilometer offshore pipeline - for power generation. As well as providing revenues, employment and skills, it will replace imported fuel with clean gas.  

 

Developing China's indigenous gas resources is an essential part of the drive to reduce dependence on coal. We are working with CNPC to develop the Changbei gas field for consumers in north-east China, exploring with CNPC and Sinopec in the Tarim basin, and with CNOOC offshore.  

 

We put great value on building our relationships with these important companies.  

 

The Asia-Pacific LNG trade has been a striking success. It accounts for three-quarters of the world's LNG - over half to Japan - and has a history of 30 years of reliable delivery, from diversifying sources.  

 

Additional supplies have been obtained from incremental trains in existing schemes as well as new projects. The Malaysian LNG Tiga scheme was approved last year and preliminary agreement was reached on new supplies to Japan from North West Shelf LNG in Australia. The Greenfield Oman LNG plant began delivering cargoes.  

 

The success of this trade has been built on long-term sales contracts. These have enabled investment in costly infrastructure and increasing economies of scale. Risks have been shared - suppliers accepting the price risk and customers the volume risk.  

 

This system has proved durable in volatile conditions. We expect it to continue, with growing flexibility as markets change.  

 

The Atlantic trade can develop along different lines because it supplies markets, which get most of their gas from pipelines.  

 

The US market is unique in its size, diversity, flexibility and financial sophistication.  

We think the Asia-Pacific trade will more than double by 2020 - to traditional market as well as new ones, such as China. and India.  

 

Oman LNG will start supplying India's first LNG this year, while China will develop its first terminal in Guangdong. 

 

This is a highly competitive market, with perhaps twice as much potential supply as available demand over the next decade. Developers of new schemes must offer something special to secure sales.  

 

Let me focus on one very attractive potential scheme, Sakhalin LNG. Following the first phase oil development, the planned second phase includes a major LNG export scheme.  

 

Gas from the large Lunskoye gas field, as well as Piltun-Astokhskoye, will be piped to the south of the island for a two-train, 9.6 million tone capacity LNG plant.  

 

The project has several clear competitive advantages:  

resources for at least 20 years supply,  

the quality of the partners,  

strong political support,  

a sound commercial framework,  

proximity to key markets, and  

that it increases supply diversity. 

 

The partners are now Mitsui, Mitsubishi and Shell. Our close relationship has been built over many years in other successful LNG schemes. I believe our partners' strong commitment to the scheme is shown by their significant shareholdings.  

 

Geographical proximity will help make Sakhalin competitive. In addition, the ability to supply more LNG in winter and greater shipping flexibility are particularly attractive to Korea for meeting winter peak demand and reducing costly LNG storage.  

 

We also have a considerable record of delivering low costs. Oman was the lowest cost Greenfield scheme. It was approved on the basis of one train of record size. We expect to do the same in Sakhalin, with an even larger train.  

 

There have been suggestions that Sakhalin resources could be developed by pipeline. We think LNG provides an opportunity to reach the widest market.  

 

Once established as a reliable source of gas from Russia, LNG could pave the way for gas exports by pipeline in the longer term.  

 

Pipeline supplies are likely to be very important in the future - particularly to China from Russia and Central Asia, and to the Indian sub-continent from Middle East suppliers, such as Iran.  

 

Major Middle Eastern producers hold much of the world's hydrocarbon resources - including two-thirds of the proved oil reserves and a third of the gas.  

 

They will play an increasingly important role in meeting energy needs everywhere, particularly in fast growing Asian markets. Building close relationships with such countries will be essential for all energy companies.  

 

I have focused on the needs of gas customers. We also serve gas producers. So let me mention gas-to-liquids which we think offers a new market for their resources.  

 

Our technology is already proven in the only commercial scale plant of its type in Malaysia. A breakthrough in catalyst technology in our Amsterdam laboratory has further cut costs.  

 

We believe it now offers a competitive alternative to LNG - delivering ultra-clean, high-quality products increasingly required for rising fuel standards. We are pursuing further schemes in such countries as Indonesia and Iran.  

 

Trusted partners: How can international energy companies help meet future energy challenges, particularly in Asia? I think they need three key characteristics:  

technological leadership,  

the ability to make things happen, and  

commitment to enduring relationships. 

 

Advancing technology is at the core of the energy challenges. How to find, recover and deliver the required resources. How to harness new forms of energy.  

 

How to provide cleaner and more efficient power and mobility. Technology advances by innovation and by learning to apply and integrate existing techniques better. In Shell we pursue both systematically.  

 

A deep understanding of your value chain - from retail to reservoir - is particularly important in gas. Abstract knowledge is not enough.  

 

It must be based on real experience of managing projects to deliver results. And this cannot mean just playing with other people's money.  

 

You must have the financial strengths and willingness to back your own judgment. Unlike banks our core business is investing in energy.  

 

Business is about relationships - with partners, employees, customers. Long-term energy businesses depend on enduring relationships.  

 

Building them requires: being truly multinational - applying global experience to meet local needs,  

assured standards,  

a record of delivery, and  

being trusted. 

I think our relationships in Japan are a good example of all of these - with our partners such as Mitsui and Mitsubishi in LNG and now Japan Energy in the downstream, with our many LNG, oil and chemicals customers whom we try always to serve faithfully. We cherish all those relationships.  

 

The world faces formidable energy challenges, particularly in Asia with its rapidly expanding needs. Technological demands are growing.  

 

Markets are increasingly complex, competitive, and changeful. There are no simple solutions. But I believe that competitive markets respond to challenges and opportunities.  

 

We all need trusted partners. In Shell, we believe that our business depends more than anything else on being trusted to help meet the needs of the countries in which we operate, of our customers and those we work with, and of society as a whole.  

Phil Watts, Managing Director of The Shell Petroleum Company (The "Shell" Transport and Trading Company, plc) and Group Managing Director of the Royal Dutch/Shell Group of Companies at the Symposium on Pacific Energy Co-operation 2001, Tokyo, Japan  

Source: Shell.com 

 

© 2001 Mena Report (www.menareport.com)

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