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The Integration Challenge

Speech by Upstream Americas Director Marvin Odum at the World Energy Council Houston Business Forum; Houston, Texas; on October 31, 2011.
Marvin Odum, Director, Upstream Americas

Marvin Odum, Director, Upstream Americas

By 2050, the world’s population is expected to hit 9 billion people, up from nearly 7 billion today. As the world’s population grows, as wealth increases and more people escape poverty, and as more and more people move into rapidly expanding cities, there will be increased stress on our energy, water and food resources.

In this speech, Marvin Odum discusses the world’s energy challenge calls for collaboration between the public and private spheres to turn these challenges into opportunities.

Good morning, and thank you very much for the opportunity to join you. 

I want to offer a special thanks to the hosts of this program:  The Energy Council of Canada, the Mexico Association for Energy & Sustainable Development, and the U.S. Energy Association. 

I also want to congratulate the World Energy Council for bringing together such an important and diverse group of leaders from government, industry, academia, the media and civil society, not least because the challenges and opportunities we’re tackling are important and diverse.

In fact, they are so important, and they are so diverse, that I’m going to do something a little out of character this morning.  Like many of my colleagues, I am an engineer by training.  And we engineers are programmed to come up with answers and solutions, not questions and problems.

As engineers we are trained to break big challenges down into manageable chunks, not complicate them with bigger issues.  But today I’m going against the grain.  I’ll pose some pretty heavy questions, and I’ll invoke some pretty big issues. 

Specifically, for the next 20 minutes or so I’d like to offer a view of the context we’re operating in.  I’m going to suggest a way of looking at how our issues in the energy business integrate with the world around us.

I’m going to pose some questions about the roles the people in this room could play – perhaps even must play – in  this complex, integrated world.

And then I’ll throw the floor open to dialogue, questions, challenges or views you may have.

Let me first frame today’s conversation by suggesting that a global energy company like Shell shapes – and is shaped by – the world around us in three dimensions:

  • The market place, that is supply and demand 
  • The globe’s finite natural resources
  • The expectations of society – of individuals, families and communities. 

Energy demand and the Zone of Uncertainty

The economic dimension is pretty obvious.  Of course energy companies create wealth and jobs -- close to 8 percent of GDP and over 9 million jobs in the U.S. alone.  That’s more than 1 job in every 20 supported by companies that produce oil and natural gas.

But beyond the direct effect we have on the economy in jobs and revenue, there is the role that energy plays making every other sector of the economy possible:

  • the power for assembly lines
  • the fuel for cars, planes, trains and ships
  • the energy needed to do everything from inventing new medicine
  • to moving funds around the banking industry
  • to creating the next Hollywood blockbuster
  • to serving meals and running hotels
  • to pushing trillions of bytes of information through millions of electronic channels

And that’s just about maintaining the health and growth in developed economies.  

Just think about economic aspirations in other parts of the world – where most of the globe’s 2 billion new people will appear over the next half century, where people are just now buying their first new washing machines, computers, cars, homes and packaged foods. 

Think even about the very bottom of the pyramid where communities may just now be starting to light up their schools, sanitize their water supplies, cook on clean stoves, and equip medical clinics -- all part of the infrastructure required to get even a rudimentary economy off the ground. 

And all of this needs energy.  Energy is the oxygen that runs economies everywhere.  Without it, economies suffocate, which is why the energy supply and demand picture over the next few decades should focus our minds so acutely.   

Thanks to growing population compounded by growing energy demand, we could be seeing an unsustainable supply gap by 2050.  And I don’t mean a small one.  On a “business as usual” basis that gap by itself could be as large as the entire world energy supply in the year 2000.

At Shell we call this gap the “Zone of Uncertainty”, because depending on the decisions the world makes today we could see that gap filled with dangerous competition for resources, reduced standards of living, a rapidly degrading environment and economic contraction… 

OR

we could see that gap filled with innovative international collaboration, new wealth based on better, more prolific ways of producing energy, industry practices and government regulations that reliably protect the environment and capital investments, and healthy, expanding economies.

So the question we need to ask ourselves is how do we resolve the Zone of Uncertainty in ways that favor that second outcome?

That’s why you see companies like Shell investing so much capital – in our case alone some 100 billion dollars over the next five years – on new projects, on innovative ways to develop new sources of energy like shale gas, oil sands and biofuels.

It’s why we’re developing new, safer and more sophisticated drilling techniques that allow us to get to hydrocarbons in harder-to-reach places in deep water and remote regions. 

It’s why we’re pioneering new ways to commercialize previously unusable energy, for example, by converting stranded gas in Qatar into high performance liquids that can be used anywhere in the world. 

It’s why our scientists and engineers are working with car companies and entrepreneurs and leading universities on fuels for tomorrow – like hydrogen and next-generation biofuels.  

And we’re not just working the supply side.  None of us should imagine that the Zone of Uncertainty can be resolved just by producing more energy. 

That’s why at Shell we’re also introducing ways to reduce demand – for example, through more energy-efficient fuels and lubricant products from our downstream businesses, more efficient ways to produce and refine oil and gas, and promoting more fuel efficient driving among the 10 million retail customers who buy from us every day.

Keeping the energy flowing while protecting global resources

But keeping the oxygen of energy flowing through our economy also has to be linked to the challenge of protecting other global resources.

I suggest that many people, especially in developed countries, are misled every day into thinking that the world’s resources are limitless.  

Most of us this morning woke up to enjoy a hot shower, a quick look at the news on TV, breakfast that may have included freshly shipped fruit and cooked eggs.  We drove into the city to attend this conference and probably thought nothing of the escalator that helped us get to this room.  But in fact the water, the food, and the fuel that made all that possible represent finite global resources, and they need to be nurtured and managed smartly. 

What’s more, they’re best managed as part of integrated global systems, as part of the “smarter planet” that my friends here from IBM envision, using the “eco-imagination” that my friends here from GE have been promoting.

At Shell, we’re taking an especially close look at the nexus between water, food and energy.   There is a powerful interplay between the three.

Increasingly it takes energy to produce dwindling supplies of fresh water.  It takes water – and lots of it – to produce certain kinds of energy.  And it takes both water and energy to produce food in the increasing quantities needed to support a growing population.

We could let the need for those three resources to compete with each other, or we could work with governments, partners from other industry sectors, and customers to innovate smarter ways to optimize the supply and use of water, food and energy.

That’s why at Shell we’re actively developing innovative new technologies for reducing the water we use in our drilling and production operations.  It’s why we’re developing biofuels only in places like Brazil, where they don’t compete with food and water supplies, and learning ways to produce tomorrow’s biofuels from agricultural waste. 

It’s also why we’re so focused on ways to tackle CO2 emissions, which drive climate changes that could radically affect availability water supplies, agricultural patterns, and demand for energy by the middle of the century.  

We’re doggedly working with governments, business partners and customers on ways to reduce the well-to-wheels carbon content of fuels to capture and store underground the CO2 from our operations and to encourage policies that will put a fair and predictable price on carbon that reward low-carbon investments.

Doing what we say, saying what we do

But even then, we need to be conscious of a third dimension of the complex, integrated global environment we operate in, and that’s the evolving expectations of societies – of the people, communities and governments that give us the license to do what we have to do.

And here the picture – because it involves human nature, desires, fears, expectations and aspirations – is especially complicated.

One hand, from where I sit, I see a positive picture of more globally connected cultures -- better informed consumers and voters, more awareness of the need to conserve resources, and the courage and ability of oppressed populations to push aside old school dictators.

But on the other hand it’s easy to see growing discontent and distrust -- from the failing confidence in our financial institutions, to the increasingly adversarial political contests, to demands that big business play an active role in tackling environmental and social issues at both the global and the local levels. 

It’s through this landscape that we need to carefully navigate -- shaping our strategies, investments, policies and practices in a way that acknowledges the voice of our stakeholders and customers.

Protecting brand and reputation in this industry is about acting with integrity and transparency – doing what we say and saying what we do.

It’s about recognizing that our logic may not be the same as our stakeholders’ logic, and our logic may not always be as “right” as we think it is.  It’s about integrating the needs to produce MORE energy, and SMARTER energy, and CLEANER energy to satisfy growing demand. 

This is not easy stuff.  But at Shell it’s built into our business principles and DNA, and we see it as key to our competitive success.

For example, earlier this summer, in response to the widespread concerns about gas hydro-fracking, we introduced our onshore gas principles, to be used globally. 

These principles establish how we will operate as we pursue natural gas developments, and are specifically designed to address the areas of concern with our stakeholders.

The principles include:

  • How we design, construct and operate our wells and facilities in a safe and responsible way.
  • How we will protect groundwater and reduce our water use in the process.
  • How we will protect air quality and control fugitive emissions.
  • How we will reduce the physical footprint of our operations
  • And, importantly, how we will engage with communities on the socioeconomic impacts of our operations to help them take advantage of the tremendous benefits these developments can provide.

This is a new level of transparency for our industry, and we are learning as we go. 

But experience has shown that we either acknowledge the expectations of society and make sensible changes willingly and voluntarily, or we resist those expectations and get dragged there kicking and screaming – at great cost in good will and capital and trust.

Conclusion

So global integration in the energy industry is not just about business integration, not just about partnerships and trade patterns and joint ventures. 

It’s about the integrated role we must play in the life of our economies, the management of other vital resources like food and water and climate, and the need to respect and adapt to societal expectations.  And it’s not just about us in industry.  It’s about all of us in this room, representing governments, business partners, civil society, customers and other sectors. 

Because complex, integrated, multi-lateral challenges require complex, integrated, multi-lateral solutions. 

It’s almost a cliché that we need to work together on these issues, but like most clichés it is a self-evident fact of life. I’m confident that we will find those solutions.  But I’m not complacent.  I look to organizations like WEC to continue pushing to bring people together in forums like this, to shine a light on the challenges, to promote discussion and to catalyze solutions.

And in that spirit I’d like now to open the floor to your reactions, questions and challenges.

Thank you very much.