Interview with Shell CEO

Why is oil so expensive?

“The short answer is: nobody knows. Suffice it to say that, ten years ago, when the oil price was $10, nobody foresaw that it would be $140 today. So, even if I had any particular insight, there would still be a 50/50 chance of getting it wrong. That also explains why we have stopped to make a lot of forecasts.”

Still, what factors determine the price of oil?

“We look at fundamentals — as well as small shifts. We always ask, What’s going on in the Middle East? How many refineries are online? Is there enough gasoline in the stations?

“So beyond the fundamentals, the price of oil is determined by psychologies, tensions in the world or lack of spare capacity.”

Every power plant has got to be zero emissions. Widespread deployment of CO2 capture and storage (CCS) at power stations is crucial for that to happen.

Is the era of cheap fossil fuels coming to an end?

“I think that easy oil and easy gas — that is, fuels that are relatively cheap to produce and very easy to get to the market — will peak somewhere in the coming ten years.”

Why is that?

“Mother Nature has put enough of it out there. In other words, there’s no shortage of molecules out there. It is just that she has put it in difficult places, like the Arctic, or in the form of “difficult oil and gas”. Where before you would drill a hole in the ground and gas would come out — that is “easy” gas — now you will drill a hole in the ground and you can see the gas, but it won’t come out.”

What challenges does this pose?

“You have to invest a lot, per unit, per lot, per barrel

Ten years ago, when the oil price was $10, nobody foresaw that it would be $140 today.

of oil — and it is not just the dollars per barrel, but the brain cells per barrel that go up as well. That changes the nature of the industry completely. It becomes very technology-intensive, capital-intensive, top-expert intensive.”

How is Shell meeting these challenges?

“We have hired thousands and thousands of experts mid-career, which we have never done in the past. This is a clear indication we are sure there is an opportunity for those unconventional energy sources.”

How can international oil companies such as Shell compete with national oil companies in developing oil resources?

“If we can only do the same as national companies in producing easy

The industry has become very technology-intensive, capital-intensive and top-expert intensive.

oil, then the value proposition we can make to those governments who have a very strong agenda will be quite difficult. So for us, it is very important that we have something distinctive — such as unique technologies, large project management, operational excellences, track records of working cheaper or having access to markets.”

Why is this important?

“If we bring something to the table that others don’t have, the national oil companies will probably invite us to form joint ventures, as they have done in the past. If we don’t, they won’t.”

What must we keep in mind when planning the world’s energy future?

“One of the key things about planning the future of the energy system is to recognize the natural timeframes. If you get a car today that is of high quality, you know that it is still going to be on the road in 20 years, somewhere in the world.

“And if you build a power plant, it is going to be operating in 40 years. So, if there are any brand new technologies, they need to be out of the lab now to be of significant scale in the time period that we’re talking about.”

And what must we keep in mind when setting greenhouse gas standards?

“The world faces a rise in emissions by 25% between now and 2020, because of the surge in energy

The price of oil is determined by psychologies, tensions in the world or lack of spare capacity.

demand in Asia. To cut CO2 emissions in half by 2020 effectively means that by that time, you have got to get into place a zero-emissions power sector and a more-or-less zero-emissions transport sector. So, starting today, that means every plant today, every power plant, has got to be zero emissions. That’s what it means. But it is not going to happen that fast.

“However, we believe that if the world makes the right choices in the next few years, we could bring down energy-related emissions substantially after 2020. Widespread deployment of CO2 capture and storage (CCS) at power stations is crucial for that to happen.”

And finally, what is a specific example of how companies can reduce CO2 emissions?

“We put quite a CO2 penalty on every design we make. Why? Because many of our installations are built for decades — and if you put a high CO2 penalty on every total CO2 you emit, you will have higher efficiency units.”

How important are biofuels?

“Our aim is make transport fuels out of next-generation bio-fuels — that is, the sustainable, non-food variety. To that end, we are on the move all the time by collaborating with small companies and by doing our own research.”

Do they have potential to be an important part of the world’s energy mix?

“I think that the way that we look at next-generation biofuels is that you have to look at an integrated way: How sustainable are the biofuels? What is the CO2 footprint? Will you eat up your own biofuels? That is very much part of our thinking.”

“We have already learned from hard lessons in developing renewables — but we are very committed to developing renewables and to making them cheaper.”

Do biofuels have a future?

“Yes. In the end, the aim is to make sustainably sourced next-generation biofuels that don’t compete with foods, and are more CO2 efficient “from well to wheels” than products based on fossil fuels. And they certainly will be a lot better than transport fuels based on coal.”

How is Shell attempting to create a market for biofuels?

“The thing you have to do, is to go through the learning curves as fast as you can. That has to do with reserves, demonstrations, projects and brains.”

Where does the investment come in?

“Only if you have a value proposition for the consumers which is attractive, then you can invest a lot. And that we have already learned from hard lessons in developing renewables. We have been too early in technologies that people didn’t like to buy. But, we are very committed to developing renewables and to making them cheaper.”

How does nuclear energy fit into the mix?

“Nuclear energy is very important. However, over the next 20 years, there is such a decommissioning program under way that you have to have massive construction just to hold it steady — and then you have to build on top of that.”

Why is that such a challenge?

“How sustainable are the biofuels? What is the CO2 footprint? Will you eat up your own biofuels? That is very much part of our thinking.”

“You essentially have to recreate three industries — construction, uranium mining and waste management — that have effectively been depleted over the last 20 years. So it takes time to rebuild the industry, and then have the scope that grows. We see it growing, but we don’t see it able to be the silver bullet.”

What does the future hold for hydrogen?

“I worked in the United States in the 1990s and I picked up this idea here — I was quite enthusiastic about it. We are still enthusiastic, but it will be less and later. Everybody in the field still has to work out a lot of problems. While it is still a quite exciting fuel, you have to still figure out from what you can make the hydrogen. So, we think that there is a future — and it may compete with all kinds of alternative forms of transport, but it will not be there tomorrow.”

And finally, what will it take for renewable energy to go mainstream?

“Once the footprint of those renewables is really environmentally ok, and the technologies can compete on price without subsidies, then we are convinced you can attract capital — that is nothing new. That is what we see in those start-up companies with the new technologies.”

Taken from The

The Naked Truth of Oil Crisis

The current oil crisis that has been sweeping almost everybody who live, eat and travel using the black gold and had caused a massive setback to all people. In Malaysia itself, we have been bogged down with emotional and politicized issue regarding the oil crisis. Bulk of the argument was due to the abandonement of subsidy which have amounted around RM50 billion.
By continuously championing this issue using populist reasoning, most Malaysians will fall into the trap of the politicians who normally do not think far enough in analyzing this crisis. Hopefully the article below could serve some understand of the big picture we are facing. For sure, the Age of Oil is rapidly declining and we need to prepare a mat to land comfortably and safely.
Why are oil prices soaring so high, and will they ever return to Earth? Fatih Birol, chief economist at the International Energy Agency in Paris, explains why peak oil is real, why biofuels are indispensable, and how China determines what you pay at the pump.

Foreign Policy: The Wall Street Journal recently reported that your agency is preparing to revise its estimate of future oil supplies. Can you tell us a little bit about your preliminary findings?

Fatih Birol: We publish a book every year, World Energy Outlook (WEO), that lays out strategies related to energy and climate change. For this year’s WEO, we wanted to look at oil-supply prospects, as there are a lot of question marks. So, we are looking at 400 top oil fields, on a field-by-field basis, asking how much oil we can realistically expect to come to market. We not only look at the geological part of the issue, but also the economics. We are going to publish our study on the 12th of November, so I don’t know the results yet. What I can tell you is that what we are experiencing in the last few years—high prices, lack of investment in many areas, and the significant decline rates, especially in the North Sea, Gulf of Mexico, and elsewhere—will be considered.

We are entering a new world energy order. Today, demand for oil is dominated by China, India, and even by the Middle East countries themselves. The main actors of the recent past—namely the OECD countries, rich countries, the United States, Europe, Japan—their time is passé. It’s over.

FP: Why aren’t more new supplies coming online, given the current high prices?

FB: The bulk of the oil has in the past been produced by the international oil companies, so-called Big Oil. But their existing reserves are declining in what they have under ownership. They have no access to new reserves, the bulk of which are in Middle East countries. In most of these countries, only the national oil company can, by law, invest. So, even though the international oil companies may have the capital and the technology, they don’t have access to the reserves. Therefore, the bulk of the growth in the future needs to come from the national oil companies, and perhaps price will no longer be the main determinant when they make their [production] decisions, because for many countries, oil is their only natural endowment. And those countries legitimately value and want to leave their one and only natural endowment for future generations.

FP: Do you believe in peak oil?

FB: Of course, but the question is when? Global oil resources are limited. We have conventional oil; we have unconventional oil. We have oil in the North Sea, in the Gulf of Mexico. We have more oil in the OPEC countries. What I can tell you is that one day global conventional oil will peak. This will depend on many factors, including the role of technology, investment, and production policies. When we look at oil outside of the OPEC countries, when you put all of them together, I think it is going to peak very soon. But we have unconventional oil, and we have oil in the Middle East as well. How much will come to the market from unconventional oil?

FP: As we’re seeing at the United Nations’ food crisis meeting in Rome, biofuels are becoming a huge source of controversy. What impact would a backlash against biofuels have on energy prices? How important are biofuels to the oil market?

FB: Biofuels, in the last two years, played a crucial role. When you look at the numbers, almost one third of the growth in liquid [fuel] production came from biofuels. If we didn’t have that one third, the prices today that we are experiencing could be much higher.

FP: How much of the current oil price is explained by financial speculation? Is there an “oil bubble,” as George Soros and others are claiming?

FB: There is definitely financial speculation, but the main reason for the high prices is the growing perception in the markets that the future demand growth may not be met by the supply growth. This provides fertile ground for speculators, and they play a triggering role in increasing prices.

FP: Will prices stay at this level for the next, say, 12 months? Do you believe the Goldman Sachs estimate that oil will hit $200 a barrel next year?

FB: As the chief economist of the IEA, I cannot by law make any predictions about prices. But what I can tell you is that I expect that for the next years to come, we will have a high price trajectory. There may be zigzags, but I would be very surprised if prices go down to the levels we saw three or four years ago, in the long term.

FP: The price, or even the price trajectory of oil, is notoriously hard to predict. What are the biggest uncertainties in trying to make forecasts?

FB: On the demand side, I think the biggest uncertainty is how much the Chinese economy will grow in the next 10 to 15 years. If the Chinese economy grows at 7 percent level or 9 percent, there is a huge difference for global oil demand growth. This two percentage-point difference has implications on oil demand that are higher than all OECD countries’ oil demand growth.

On the supply side, when we look at how much money we need to invest to increase production, we mainly look at how much oil demand will grow in the future. But this is only the tip of the iceberg. The main problem here is that the existing fields, many mature fields, are declining. So we have to increase production, not only to meet the growth in demand, but also to compensate for the decline in existing mature fields outside of OPEC. These decline-rate issues are not really taken into consideration, which is much more important than demand growth when it comes to production prospects. Our book, World Energy Outlook 2008, will provide a lot of data on that.

This interview is taken from the Foreign Policy magazine website:

Fatih Birol is chief economist at the International Energy Agency.