Energy for the Generations
by Jeroen van der Veer
Chief Executive
Royal Dutch Shell plc
Reflecting on the relationship between food and energy (biofuels, to be precise) provides a good introduction to an important dilemma: how to secure energy that is clean, cheap and convenient – the three Cs – for ourselves and future generations.
Late last year, I noticed a tiny newspaper report about a Chinese government decision to limit the conversion of corn into ethanol. The reason was that ethanol production was beginning to compete too much with food production. Instead, China now intends to produce ethanol from the less tasty crops of sorghum and cassava. Another story told of a tortilla war in Mexico. Tortillas, of course, are made from corn, much of which Mexico imports from the United States. Domestic corn production suffered a decline in the 1990s, when cheaper U.S. corn flooded the Mexican market. But now the situation is reversed. The United States, in an effort to reduce oil imports, uses nearly a quarter of its corn yield for the production of ethanol. The global price of corn has risen to the highest level in 10 years, and this has translated into a higher price for tortillas. Millions of poor Mexicans are the unintended victims.
I am the first to admit these two stories are simplifications. But I believe they tell us several things about how and how not to work for a sustainable energy future.
First, in our search for clean and secure energy, we must keep an eye on the law of unintended consequences. Every solution creates a new set of problems, it is said, so why not try to think more than just one step ahead? It does not take an Einstein to figure out that one cannot turn corn into fuels and eat it too. It might take an Einstein, however, to discover ways of producing biofuels that compete less directly or not at all with food. I consider myself lucky that Shell and its partners have quite a few Einsteins working to crack the bio-code. Shell, Choren and Iogen are currently developing ways of producing second-generation biofuels from residues like straw and wood chips. We will be separating the wheat from the chaff, so to speak.
Meanwhile, there are many options to cushion the impact of first-generation biofuels on food prices. We must ensure diversity in the types of crops we use. We should grow them in parts of the world where arable land is underused, thus boosting local economies and creating a synergy between food and fuel production. And we should avoid import restrictions so that we make use of each region’s natural strengths while creating a truly global market for biofuels. If we do all of that, there will be a bright future for biofuels.
Second, the vision of a secure and clean energy future must be more than a rich man’s concern if it has any chance of succeeding. We do not want to pit 900 million car drivers against 2 billion people who have no access to modern energy services at all. Imagine you are unfortunate enough to live in a poor neighbourhood in one of the world’s mega-cities. It is of course possible that you wake up every morning worried about climate change. But it is more likely that your main concern is how to find affordable food.
Third, we need the right mix of realism and idealism. A vision may show the way forward, but the facts tell us where the journey begins. I will elaborate on some of these facts before addressing a realistic vision.
Facts
The most important fact is that energy demand is rising and will continue to rise. Another fact is that fossil fuels are and will remain the dominant source of energy for decades to come. Fossil fuels make up between 80 and 85 per cent of the world’s global energy mix. With stringent international measures, we could reduce that share to around 77 per cent by 2030.
Solar and wind energy together provide around 0.15 per cent of the world’s total primary energy consumption. Biofuels add 450,000 barrels of oil equivalent per day, or around 0.2 per cent. This is about the same as the daily consumption of Greece or Pakistan. A major part of the remainder is made up of nuclear energy. The use of alternative energy, such as solar and wind, is set to grow. If we look to 2050 and beyond, renewables could perhaps begin to make up as much as a quarter of the global energy mix. But very few people realise just how far we have to go to reach that point. For instance, if the United Kingdom would fit 20 million roofs each with four square metres of standard silicon-based solar panels, this would generate less full-time equivalent power than a typical power station fired by gas or coal, or no more than 1 per cent of U.K. electricity capacity. As we say in the Netherlands, only the sun rises for free. However, we clearly need to improve our performance in exploiting its energy.
As for wind energy, the London Array offshore windfarm in which Shell is a partner will have up to 341 wind turbines, generating the equivalent of about 1 per cent of the U.K.’s electricity demand. The project has received some positive support from nongovernmental organisations. However, compare that to China, which last year alone added conventional generating capacity roughly equivalent to the entire U.K. stock of power stations. Clearly, if we want wind energy to make a difference, we will need more commitment from all stakeholders and greater speed in realising the projects.
Another important fact is that coal is making a comeback, particularly in China and India, where it is abundant and cheap. In the United States, too, more than half the electricity is generated by coal-fired power plants. In the European Union the figure stands at 36 per cent. Anybody who is concerned about carbon emissions cannot be happy with these figures, since coal is at the dirty end of the emissions scale. However, wishing coal away will not alter the facts. A more useful approach might be to invest in a combination of “clean-coal” techniques, such as coal gasification, which turns coal into synthetic gas, and coal-to-liquids technology. I would also include the capture and underground storage of carbon dioxide (CO2) in this list, as well as techniques that convert CO2 into solids that could serve as building materials.
One more fact: Electricity generation is now responsible for 41 per cent of global energy-related carbon emissions. That could rise to 44 per cent by 2030, as electricity takes a bigger share of energy consumption. Some people say the “future is electric.” They point to initiatives in the automotive industry and Silicon Valley to promote plug-in hybrid cars. I am sympathetic to this development. But before we get electric about such future prospects, let us remember that it would require generating more power than we do already.
Vision
Now let us turn to the vision of a realist. I will try to keep it as transparent as the synthetic fuel, made from natural gas, that was added to the diesel of an Audi race car last year. The salesman in me is compelled to mention that this was the first diesel car to win the 24-hour race in Le Mans as well as the Le Mans series of eight races in the United States. (This year, the rules have changed: Diesel cars will not be allowed to carry the same volume of fuel as petrol cars.)
Two things are pretty obvious to me: One is that the most certain way to balance the three Cs is energy efficiency.
The best way to use energy is not to use it. The best way to mitigate CO2 emissions is not to emit them. Gains may be made at the well, in car engines, in manufacturing industries, or in office buildings and homes. The possibilities to save energy are legion and not restricted to the energy industry.
The other certainty is this: Yes, we need to promote renewables. But if we really care about the “C” of clean, and if we accept the argument that fossil fuels will remain dominant for at least the coming three decades, then making efficiency and CO2 gains in the fossil part of the global energy mix is the most urgent task we face.
Here is an example. Shell is investing billions of dollars in an effort to cease all continuous flaring of waste gas at oil wells, especially in Nigeria. We will turn waste gas into pipeline gas for power generation and liquefied natural gas (LNG). Ultimately, this should reduce CO2 emissions by around 30 million tonnes per year.
As the International Energy Agency has pointed out, there are several other countries where continuous flaring is still a reality. With today’s gas prices, putting a stop to flaring and gathering the gas isn’t just good for the environment, it is also a commercial opportunity. A global cap-and-trade system for CO2 emissions is a precondition to making fossil fuels cleaner and promoting renewables around the world. In any cap-and-trade system, companies that invest large sums to capture and store CO2 should receive credits for that. If carbon has a cost, then getting rid of it should bring a reward. Power generation in particular offers opportunities for limiting emissions. Since power plants are stationary, it is relatively easy to capture the carbon they emit.
Regarding the Kyoto Protocol, the post-2012 system should be based on two pillars: First, it must be global to establish a level playing field for all. Second, it should go beyond CO2 and greenhouse-gas emissions to include global energy security.
The Seventh Generation
I have been inspired by what I have read about the traditional chiefs of the Native American Iroquois nation. Before making a decision, they must weigh its impact on the welfare and well-being of the seventh generation to come.
Indeed, leadership is foresight. We, the “carbon humans” of the twenty-first century, are very advanced technologically. We know that the costs of taking action against CO2 today are much lower than they would be for future generations. That is why we should secure energy for the generations. The alternative could be an intergenerational market failure.
When I think about Shell’s role in meeting this challenge, I believe that we are well placed to make a tangible contribution and at the same time sustain our business for many years to come. With a strong resource base and a lot of good investment opportunities, we can help secure energy supplies. We are well positioned in second-generation biofuels and in renewables, one of which we will grow into a major business. And thanks to our Einsteins, we will pass exciting technologies on to future generations – including and especially to young scientists joining Shell. After all, as the Dutch humanist Erasmus would point out: For talent to bring a reputation, it needs to be visible.
Jeroen van der Veer is chief executive of Royal Dutch Shell plc. He leads the executive team and is accountable for business performance and implementing strategy. Since 2004, he has led Shell through major changes, including simplifying governance and organisation and clarifying direction and accountabilities.
He joined Shell in 1971 and worked in manufacturing and marketing in the Netherlands, Curaçao and the United Kingdom. In 1984, he returned to Shell Nederland as manager of corporate planning and then of the Pernis refinery in Rotterdam.
After an assignment coordinating Shell businesses in Africa and Canada, he became a managing director of Shell Nederland in 1992. In this post, he led major reorganisations as well as a $2 billion upgrade of the Pernis refinery. In 1995, he moved to the United States as president and chief executive of the Shell Chemical Company. He was appointed a group managing director in 1997.
Mr. van der Veer was born in Utrecht in the Netherlands in 1947 and is married with three daughters. He has a degree in mechanical engineering from Delft University and another in economics from Rotterdam University.
He is a non-executive director of Unilever, serving as a member of the Nomination and Remuneration Committees.
