Oil’s Futures…And Beyond (Part I)

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.”

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 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 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 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.”

Editor’s Note: Part II of this interview will be published on The Globalist tomorrow.