In Europe, gas-fired power-plants have been mothballed or decommissioned over the last few years. Why? Well, a large amount of subsidised renewables has entered the energy system. And, from a short-term financial perspective, coal-fired power has been cheaper than gas. But a short-term financial perspective doesn’t tell the whole story. The emergence of a coal-plus-renewables energy system could see emissions in countries like Germany either reducing too slowly or even going up.
As a result, the long-term costs of tackling climate change and air pollution will grow. It’s like the approach of a car salesman: buy now, pay later – with huge interest. Hopefully, the welcome reform of the EU’s Emissions Trading System will change things for the better. Without good policies, a coal-plus-renewables system could also emerge in North-east Asia. Take Japan. Here, we see an energy market liberalisation.
We also see generous subsidies for renewables, the removal of regulatory obstacles to coal-fired plants, and uncertainty about the future of nuclear power after Fukushima. This, and the lack of a carbon pricing mechanism, sets the stage for a coal-plus-renewables future. These developments in two major gas and LNG markets… Europe and North-east Asia… again show us that we cannot take it for granted that gas will play an important role in tomorrow’s world.
So what to do? At the end of 2015, the UN’s Climate Change Conference, COP21, will be held here in Paris. Let’s take the chance it offers to engage with governments to discuss the policy instruments they will use to reduce emissions in a cost-efficient way. Recently, Shell announced a joint call to governments together with BG Group, BP, Eni, Statoil and Total. We need governments to provide clear, stable, long-term, global policy frameworks for a transition to a low-carbon economy. This would reduce uncertainty and help us to invest in the right low-carbon technologies and the right resources at the right pace.
The six companies think that an effective price on carbon should be at the centre of these frameworks. If governments act to make industrial users pay for carbon, this discourages the use of coal and other high-carbon options. It also encourages the most efficient ways of reducing emissions widely. I urge governments and the UN – at COP21 and beyond – to introduce well-implemented carbon-pricing systems where they do not yet exist at the national or regional levels. And I urge them to create an international framework that could eventually connect the national systems.
Policies, by the way, are also important with regard to opening up new markets for natural gas. It seems that our industry has been more successful at creating new supply than creating new demand. This raises a few challenging questions. How can we encourage governments in opening up to LNG? How do we seize the opportunities that local markets in countries rich in gas resources have to offer? How can we … along with innovating in liquefaction as an industry … encourage governments to adopt policies that will enable the greater use of LNG as a cleaner transport fuel for ships and heavy-duty trucks? In short, how to make sure that natural gas plays the critical role it deserves in giving more people access to energy.
LOWER COSTS
The title of this session is “natural gas as a core pillar for a sustainable future of the planet”. Environmental and social sustainability clearly also requires economic sustainability. It is of course true that effective carbon-pricing systems would level the playing field for natural gas. A downside, however, is that overall energy costs could increase. As a result, it is possible that economic growth in emerging economies will slow down.
Eventually, this would be bad news for everybody – including our sector. So cost will be critical in making natural gas a natural choice for as many countries as possible. And frankly, the cost trends our industry has experienced over the last two decades are unsustainable. So as an industry we need to get better at driving down capital costs.
The most important focus areas are design, engineering and construction. Gas plants got more expensive largely because we make them more complex … because we take more time to engineer them … and because we face lower productivity when we build them. So the core challenge is driving down cost inflation in design, construction and engineering. This won’t be easy, but it’s not impossible. Standardisation and supply chain integration are key factors.
