A conversation with GED DAVIS, VP Global Business Environment of Royal Dutch/Shell Group, explaining Shell Scenarios to 2020 and 2050

Exclusive interview to Jorge Nascimento Rodrigues, business journalist of Expresso, portuguese weekly newspaper, and editor of www.gurusonline.tv, a portal of trends in management and technology in english

© May 2002, Gurusonline.tv

1st IDEA: Renewable energies face a difficult challenge to expand beyond NICHES over the next two decades without clear government support.

In 95 Shell long-term energy scenarios pointed out a RENEWABLES future with 50% of world primary energy being met by 2050. This approach was "dismissed"?

The 1995 scenarios postulated two worlds. One where high energy demand was met by abundant and diverse primary sources, including a range of new renewables, with their market share reaching 50% by 2050. In the other scenario much lower global energy demand, due to extraordinary efficiency advances, reduced the need for new primary energy sources. Renewables still grew rapidly but their share by 2050 was well below 50%. Since 1995 a number of changes to the energy system have occurred. While some of these changes favour renewables - societal preference, cost improvements, greater government support, CO2 constraints and "green power" markets - other factors make the competitive challenge even greater. The factors supporting renewables were generally anticipated in the previous scenarios, notably CO2 constraints. We did not anticipate how well incumbent technologies would respond to these challenges. For example, the idea of "zero emission coal", based on fuel cells and CO2 sequestration is now widely discussed. No doubt many more advances will emerge over the next two decades. Natural gas resources are also perceived to be larger than in 1995, increasing the potential role of gas in power and heat supply over the next two decades. In conjunction with slowing electricity demand growth in OECD countries and tough pricing in competitive power markets, renewables face a difficult challenge to expand beyond niches over the next two decades without government support.

We also have seven more years of experience with getting large-scale renewable projects off the ground. The challenge is immense. And it is not just about cost. There is a wide range of commercial challenges to expanding renewables including: planning approvals; standardised grid connection policies; safety regulations for embedded power generation; and creating compelling consumer packages. Integrating solar PV into building materials, for example, is a major challenge within the conservative property development and construction industry. And building the commercial infrastructure to serve new customers in rural developing countries is very costly and complex.

2nd IDEA: A nuclear future is plausible. The last three years have seen a renewed discussion of nuclear as an option to reduce CO2 emissions and mitigate supply security concerns.

But in these new recent scenarios to 2020 and 2050, Shell changed "structurely" the vision of renewables future?

Both new scenarios suggest large renewable energy shares by 2050. This has not changed since 1995. An alternative world where NUCLEAR energy emerges as the key replacement for fossil fuels was examined but considered less likely, due to societal pressures, declining R&D support and lack of competitiveness over the next two decades. However, a nuclear future is plausible. The last three years have seen a renewed discussion of nuclear as an option to reduce CO2 emissions and mitigate supply security concerns. This is partly as a result of new technologies, such as the Pebble Bed Reactor of South Africa, showing promise. If renewable energy were unable to truly prove itself over the next two decades this alternative would greatly increase in likelihood.

But the differences between the 1995 and 2000 scenarios are not just about changed perspectives. They are about what challenges we chose to highlight for our company. Scenarios are not forecasts. They are tools to help us think about the future. Simply replaying the previous scenarios would not help us. A future world of high renewables has been internalised. The new scenarios attempt to highlight where the greatest challenges exist to widespread renewable expansion and other emerging technologies. These challenges include expansion in stagnant OECD power markets, creating compelling consumer offerings (not just low environmental impacts), and creating cost-effective storage technologies to allow intermittent energy to be widely used.

3rd IDEA: In one of the Shell scenarios, OPEC's share of production gradually rises to reach 55% by 2013. OPEC will try to leverage that market share to generate stable high prices. An oil "shock" by 2015 is possible. In the other scenario, a great price volatily in the first half of the decade can generate a "shock" by 2006.

In the 2020 Report we find two DIFFERENT scenarios for an OIL PRICE SHOCK. In page 45 the oil shock is postponed for 2015, but in page 85 this shock is expected by 2006, only for years ahead from now. This almost decade' difference in estimations is very important for its consequences in terms of price per barrel in a period of great uncertainty about the recession/recovery climate in this first decade of the 21st century. Can you comment about these two different oil shock moments?

The scenarios explore the fundamental factors underlying oil prices, and in particular how high prices could result from differing circumstances. Prism - one of the scenarios we explore - during the next decade is story of volatile prices. Periods of cohesive action by OPEC keep prices high for a year or two, but foster high investment in non-OPEC supply. This creates oversupply and periods of price weakness. Very low demand growth eventually leads to low prices after 2010. In Business Class - the other scenario we explore -, a period of relatively low prices from 2006 to 2012 makes development of new non-OPEC fields unattractive. OPEC's share of production gradually rises to reach 55% by 2013. They then try to leverage that market share to generate stable high prices. Intense political pressure forces OPEC to moderate their price expectations, meanwhile the introduction of fuel cells and renewed focus on energy efficiency eventually cause oil demand to fall and prices to weaken.

5th IDEA: Whilst it is true that oil discoveries rates peaked in the 60s, this is not the only determinant of when oil production will peak. Substantial production growth is possible simply by increasing the rate at which OPEC resources in particular are depleted, as and when demand allows it.

One of the "hot" discussions going on inside the oil community is about the OIL PEAK and the time frame for the transition from oil dominance to another energy. The Report postponed the oil production peak for 2025 and probably to 2040. The critics argue that the oil discovery peak was in the 60's (of the 20th century) and, consequently, the production peak is imminent. Why does Shell not agree?

Whilst it is true that oil discoveries rates peaked in the 60s, this is not the only determinant of when oil production will peak. Shell currently assesses the total ultimate recovery of oil at over 3.2 trillion bbl. Of this, some 0.9 trillion bbl has already been produced and a further 1 trillion has been discovered and is held as reserves. Shell estimates that future discoveries will total some 0.7 trillion bbl, and a further 0.5 trillion bbl will come from improving the recovery factor in existing fields. At expected future rates of production, which will rise from 24 billion bbl/yr today to some 35 billion bbl/yr in 2020, the point at which half the resources have been produced, when some argue production will start to decline, is not reached for at least another 20 years. Shell argues that production growth can continue beyond this point for at least another 10 years. This is because oil production today is not set by potential capacity, but by demand levels. Production by OPEC countries in particular, who have 70% of remaining resources, is presently constrained to keep prices high. OPEC countries are depleting their resources at 1.2% pa, whilst non-OPEC are depleting at 5.5% pa. Thus substantial production growth is possible simply by increasing the rate at which OPEC resources in particular are depleted, as and when demand allows it.

6th IDEA: Present Shell estimates are 27% higher than in 1998. Latest estimates for world undircovered oil is some 0,7 trillion bbl, even a little higher than the mean estimate of the USGS.

One of the mentioned DISCREPANCIES is the estimation of the world's undiscovered oil. The figures you mention (in a BBC Money Programme in Nov 8, 2000) are 1/3 of the USGS estimates. Despite this, these Shell scenarios use the USGS estimates, considered less accurate than the Shell ones. Why?

Shell's latest estimate for world undiscovered oil is some 0.7 trillion bbl, a little higher than the mean estimate of the USGS. At the time of compiling the Long Term Energy Scenarios, our resource study had not been completed but preliminary data did suggest a final outcome slightly above the USGS figure, which we therefore used. The BBC interview used data compiled in 1998, when Shell's estimate for undiscovered oil was 550 billion bbl. The figure quoted in the BBC interview of 260 billion bbl was the volume we expected to be discovered by 2020. This was based on an annual discovery rate rising from 3% pa to 4% pa of the volume remaining undiscovered at the start of each year.

7th IDEA: Shell analysis suggests that by 2010, OPEC's share of production will not have grown above today's level, and may indeed have declined if oil prices are held high, promoting non-OPEC investment and development of unconventional oil supplies.

One of the geo-political consequences of a longer or shorter time frame for oil peak is the POWER OF MIDDLE EAST, particularly in a multipolar "prismatic" world. The Shell Scenarios have no words about "unexpected" events around this geo-political reality and the agony of oil dominance. Isn't the share of world supply by the Middle East rising again? By 2010, the critics estimate 36% world demand supplied by the 5 oil producers of the Middle East. What's your comment?

The Business Class scenario does explore the impact of an OPEC share of production of 55% reached in 2013. This is brought about partly by the Caspian States becoming a member of OPEC. Very high prices are averted by strong political pressure and by the negative impact on the performance of Saudi Arabian overseas investments in particular of a world slowdown caused by high oil prices. Our analysis suggests that by 2010, OPEC's share of production will not have grown above today's level, and may indeed have declined if oil prices are held high, promoting non-OPEC investment and development of unconventional oil supplies. The Middle Eastern share will depend on the behaviour of Nigeria, Venezuela and the North African States. Nigeria in particular is easily able to double production levels by 2010 if it so chooses.

8th IDEA: A diverse range of gas suppliers emerges making it difficult for a single country to exert excessive market power.

In one of Shell scenarios, GAS is considered the "bridge" energy of the 21st century. And in both scenarios, the growth rate of gas is important in the period 2000-2025 (between 2,4% and 3,5% a year). The geo-political consequence is the rising concerns about import dependence, mainly from EU, regarding Magreb and Russia. These two geo-political areas have 25 years to play this critical card and profit from the great gas game. What could be the "unexpected" consequences?

In one scenario large, secure supplies of gas are delivered from these regions to the EU throughout the scenario period. These countries are key participants in the "great game of gas". Significant, sustained disruptions of gas supplies and attempts to extract extraordinary high prices by these suppliers would derail the scenario, as EU customers would look for alternate energy sources. However, one of the features of the scenario is that a diverse range of gas suppliers emerges making it difficult for a single country to exert excessive market power.

9th IDEA: Shell Hydrogen will explore opportunities in the emerging hydrogen business.

If GAS SCARCITY can occur by 2025 and growth in RENEWABLES sources STALLS by the same period, the disruptive scenario of hydrogen economy is the only chance? What is Shell doing to position the company in this horizon?

Shell has created a separate company, Shell Hydrogen, to explore opportunities in the emerging hydrogen business. These potential opportunities range from hydrogen sales to technologies to support fuel cell use, such as petrol to H2 reformers and advanced hydrogen storage devices. As this is a very new industry the winning technologies and timing are highly uncertain and Shell is spreading its efforts across a number of activities in this business.

The emerging BIO-MATERIALS revolution can "disrupt" these Shell scenarios? In what sense?

In one scenario we explore the possibility that biofuels provide the long-term transition fuel from oil for the transport sector. This scenario would greatly benefit from biomaterials breakthroughs, as these technologies would likely spillover into fuel production from biofuels.

10th IDEA: It is possible that fuel cells developed to provide extended energy for portable devices such as laptops or cell phones could create technology breakthroughs that can be scaled up for use in transport.

What SIGNALS do we must pay attention in niche market fringes? Can you give examples?

This scenario highlights the fact that technology innovations often emerge from niche markets where difficult technical challenges, for example with weight or size, must be overcome to meet customer needs. In the case of fuel cells and hydrogen storage it is possible that fuel cells developed to provide extended energy for portable devices such as laptops or cell phones could create technology breakthroughs that can be scaled up for use in transport.

Scenario planning continues to have REAL impact in top management decision at Shell, as in the 70's?

Scenarios continue to be used throughout the Shell Group to address uncertainty in the business environment with the aim of improving the resilience of business strategies. We have found them particularly useful in exploring future business trends, assessing risks associated with business areas new to Shell, looking at the impact of sudden change in the business environment and in assessing risks and opportunities in individual countries.