Examination of Witnesses (Questions 335
- 339)
TUESDAY 1 JULY 2008
Ms Vivienne Cox and Mr James Smith
Q335 Chairman: Good
afternoon and welcome. Lord Vallance, our Chairman, cannot be
here this afternoon so I am taking the chair in his absence. Can
I thank you both very much for coming. I am asked to remind you
as usual that because this is being recorded and for the benefit
of our stenographer to speak reasonably slowly and clearly, but
I am sure you will. You have not submitted any written evidence
so I wonder whether there is anything you would like to say in
advance—I think you know the issues that we are interested
in—or would you be happy for us to just go straight into
questions?
Ms Cox: I am certainly happy to go straight
into questions.
Mr Smith: Likewise.
Q336 Chairman:
Thank you very much. Let me kick off with this question. Renewable
energy is often advocated as something we need to develop for
when oil and gas supplies become scarcer. That is one of the reasons
of course. Do you agree with this view? What are your estimates
for the totally economically recoverable reserves of conventional
oil and gas? How much is in UK waters?
Ms Cox: There are two different questions
in your first statement. The first is around scarcity and the
second is around whether renewables are substitutes for oil and
gas and what the motivation for renewables is. In terms of the
scarcity issue, I think one of the most telling statistics is
that if you look at the proven reserves-to-production ratio for
oil, in other words how much do we know we have got versus how
much we are actually using, that ratio is at about 40, so we have
40 years of oil in production terms in our proven reserves, but
interestingly that ratio has been at 40 for 40 years, so for the
last 40 years we have said oil has got 40 years of proven reserves
to go, and we keep on finding, either through technology or through
new exploration, additional reserves to make up for production.
So the figure for oil is 40 years, gas is 60 years, and coal is
130 years. In our assessment it is not a question of oil and gas
(hydrocarbon) reserves running out; we believe there are sufficient
oil and gas reserves. I think the issue is then why are we interested
in renewables, and of course there are many, many reasons why
a renewables agenda makes sense. One is to diversify and to have
diverse energy sources. There is clearly an issue of security
of supply because when you look at where those proven resources
are, they are increasingly concentrated in a very few places around
the world so there is the issue of security of supply. Clearly
there are concerns around climate change and there are issues
around development of new industries, jobs, and sustainable competitive
advantage for nations, and so I think there is a wide range of
reasons why you would be wanting to consider a renewables policy
which is not linked directly to scarcity of oil and gas.
Mr Smith: I think I would agree with
that. If you like I could maybe give a gloss from my perspective
on that. I said I did not really want to make any opening remarks
but Shell does long-term energy scenarios, and we have done some
of those recently, and we have a little booklet and I have got
copies if the Committee would like to have them. Taking up the
themes that Vivienne was talking about, in the middle of the century
we are probably going to have a global economy that is about five
times the size of today's, if you compound population and economic
growth, and to think that we can have an energy system that is
five times today's size replicating today's energy system seems
a little bit improbable. I think there needs to be a very considerable
amount of energy efficiency found in industrial processes and
transport and also in homes and in our own actions as well such
that perhaps we end up with an energy system that is delivering
twice as much energy despite the fact that the global economy
is five times the size. There is no doubt that fossil fuels will
play a role in that. Fossil fuels deliver something like 80 per
cent of the world's requirements of coal, oil and gas today. The
remainder is rather simple biomass and some nuclear and some renewables.
As we look at it, by the middle of the century we think that fossil
fuels, given what Vivienne was just saying, will still be delivering
something like 60 per cent of the global energy demand on an energy
demand that has doubled, but we think that renewable sources will
probably have got to about 35 per cent or so, with the remainder
being nuclear. The question that Vivienne was addressing and you
are talking about as well is why would that be if there is plenty
of oil and gas. I think there are some hard truths behind the
oil and gas scenarios. One is that energy demand growth is accelerating.
The conventional sources of oil and gas are getting harder to
produce so the easy oil and gas has probably been found and produced.
There are also environmental stresses particularly to do with
climate change. I think renewables would be a response both to
the need to tackle climate change but also to ensure that the
world does have enough energy because oil and gas production,
plenty though it is, will tend to get more expensive over time
whereas the renewables can come down the cost of earning curve
and can be competitive over time.
Q337 Lord Lamont of Lerwick:
Does the recent action on the price of oil this year cast any
question marks against some of these statistics like your 40 years
for 40 years?
Ms Cox: Of course my 40 years for 40
years has been through a very wide variety of pricing environments
but interestingly it is certainly the case that those countries
where there are very heavy taxes, particularly those countries
where there are very heavy taxes and no subsidies on fuel, have
seen reductions in demand. In the US gasoline demand is down three
per cent year-on-year and has seen declines month-on-month versus
the prior year for the last 12 months, so there clearly is an
impact of price on demand, but actually we have been surprised
by the inelasticity of demand given the extent of the price rises.
Q338 Lord Lamont of Lerwick:
Turning to unconventional sources, of which one example is tar
sands, how much more expensive are those to extract compared with
conventional oil? How large are the emissions involved in extracting
oil in that way as opposed to conventional oil? Are there other
environmental costs involved?
Mr Smith: Shell, as you may know, has
fairly substantial interests in oil sands in Alberta. The Albertan
oil sands for Canada as a whole, not just Shell's share but the
entire interest there, has recoverable reserves of something like
175 billion barrels. That makes Canada second to Saudi Arabia
in terms of global oil resources so it is a very significant hydrocarbon
resource and important for energy security (if we think about
energy security and price and climate change as some of the factors
that are important) in that part of the world. You rightly imply
that it is more expensive than conventional oil and gas so there
are some fairly energy-intensive steps upstream, there are some
very large trucks, you may have seen pictures of these 400-tonne
trucks and big shovels, and quite a lot of work that then needs
to be done to take the bitumen, dilute it, transport it and then
upgrade it, as it is called, near Edmonton. It is more expensive.
We and others in the industry of course are continuing to try
to find new technologies and new ways of reducing the cost. The
other thing of course is so-called easy oil, as I have said, is
becoming less easy to find and alongside oil sands we are looking
at putting production facilities in 8,000 feet of water in the
Gulf of Mexico, for example at a very complex energy plant at
Sakhalin, so in the available portfolio of oil and gas production
it is not widely out of line because the costs generally are getting
higher so it is an economically produceable resource, albeit at
the higher end. On carbon emissions, it is sometimes said that
it is two or three times as high. Of course you can find steps
in the up-stream production where that is so, but the important
measure, I would suggest, is to look at it well-to-wheel so once
the product (which is essentially gasoline) is burnt in the vehicle,
and to compare that with the alternatives and the alternatives
are gasoline either indigenously produced or from imported oil,
and on that basis it is about 15 per cent on a well-to-wheel basis.
The other thing to note is that some of the old fields in the
North Sea off Shetland for example when they get to the end of
their life they become pretty energy intensive as well, so what
I am trying to suggest is oil sands should not be seen as something
quite different, it should be seen on a continuum for oil production
at the heavier end, at the more expensive end. Yes, there is more
CO2 produced but it is not the very substantial figures that sometimes
people talk about, and we have made commitments to reduce the
CO2 that comes from the production of oil sands. We are looking
at a carbon capture and storage project beside what we call the
upgrader near Edmonton, improving energy efficiency for later
phases and also supporting the actions that the Albertan Government
and the federal government in Canada are taking to see carbon
mitigated, because we recognise that it is necessary that the
fossil fuels produced from the oil sands will have to find their
place in the carbon mitigation world with carbon prices. You mentioned
other environmental factors as well. The oil sands use water in
order to separate them from the sand and there is a call on water
from the Athabasca River and that is a concern. We estimate 2.5
million barrels a day, or say three million barrels a day production,
which is where the industry may get in time over 15 to 20 years.
The call on the water from the Athabasca River might be 2.5 per
cent of the water from the river so it is not huge and there is
a statutory cap on calling for more than five per cent at any
time as the water level changes over time. We use a closed loop
system so we do not actually discharge any water back into the
river. The arboreal forest is another matter. The arboreal forest
is very large and although the mines are big, relative to the
scale of the arboreal forest it is really quite small. There are
obligations which we and the others are happy to fulfil to store
the topsoil when you dig the mines out and once you have mined
the oil sands to go back and remediate and put the topsoil back
so the arboreal forests can be reinstated. It takes a while, I
should say, it is probably about a 15-year cycle to do that but
it is an obligation on the industry that we are happy to fulfil.
Q339 Baroness Hamwee:
Just to follow that up briefly if I may, are there costs associated
with the distances involved from fields? I heard a comment recently
about a likely battle over the Arctic and that as the ice melts
Canada and Russia are going to be fighting over that, and presumably
the fields there will be expensive in all sorts of ways to extract?
Mr Smith: Yes, I think that probably
Vivienne has some comments there about gas pipelines across Alaska
as well from the Mackenzie River delta. That is what we are finding
of course and that is what the industry is confronting. I go back
to this phrase "easy oil", in easy-to-access places
offshore where we are, which seemed pretty unconventional at one
time and is more straightforward today. It is in more complex
reservoirs, in deeper waters, in more difficult places, further
away from the market and therefore, generally speaking, the resource
cost of producing it gets higher and you have to find new ways
of getting it to market, for example liquefying natural gas. But
there is a substantial pipeline system from Canada into the United
States already and we would envisage that pipeline system that
has been used perhaps extended.
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