European energy policies and their implications for the global gas trade

European energy policies and their implications for the global gas trade Are we heading for a golden age for gas? Conference, International Petroleum Week, London Dick Benschop President Director Shell Netherlands and Vice President Gas Market Development, Royal Dutch Shell plc February 19, 2014

Dick Benschop became President Director of Shell Netherlands and Vice President Gas Market Development for Shell world-wide on May 1, 2011. Born in Driebergen, Benschop studied History at the VU University in Amsterdam, and worked in various functions in the Dutch Parliament and in the Dutch Labour Party. From 1998 to 2002 he was the deputy Minister for Foreign Affairs. Benschop joined Shell in 2003 and worked in Shell Energy Europe before moving to Kuala Lumpur in 2006 overseeing the Gas & Power business in Malaysia. In 2009 he took up the role of Vice President Strategy for Royal Dutch Shell. A Dutch citizen, Benschop lives in The Hague. He is married and has three children.

European energy policies and their implications for the global gas trade The abundance and diversity of gas should provide policy makers with confidence in gas supply and with policy options they didn t have before. Options like shifting from coal to gas and increasingly from oil to gas as well. This is a blessing - especially from an environmental point of view, since gas is cleaner-burning than coal. And oil, for that matter. The Logic to Gas Today, ladies and gentlemen, I will do three things. First, I ll briefly set out the case for natural gas and why it can - and should - underpin the transition to a cleaner and more diverse energy system across the world. For many countries it offers the fastest and most cost-effective way to reduce CO2 emissions and to contribute significantly to reduce harmful air emissions. This opportunity - the abundance of gas and the advantages it provides - is increasingly well-understood. But outside the US, its full potential is not being realized. So, for the time being, there s a question mark about whether we will really see A Golden Age for Gas. Second, I ll suggest that countries around the world are at risk of failing to exploit the advantages of natural gas. The reality is that coal is enjoying a revival in Europe and Asia often at the expense of gas. Third, I ll suggest two clear priorities for government and industry against this backdrop: firm policies and continued investment and innovation by the industry, especially in Liquefied Natural Gas So, first, the case for gas. The central element is abundance abundance driven by innovations like shale gas production now and new floating LNG projects in the future. The world holds enough technically available gas resources for over 250 years of production at current rates, says the IEA. South Africa and Eastern Europe may have large tight-gas deposits. The same goes for China, Australia and the Americas. This would mean that many more countries have access to new domestic gas resources. And to imported gas from new LNG export projects both from tight gas and conventional gas developments. The Remarkable Recovery of Coal (Part I) That brings me to the second point I d like to cover. Despite the advantages of natural gas, coal use is rising in many countries - even right here in Europe Part of the reason is Europe s energy and climate policy confusion. The current policy has three separate goals for 2020. One for renewables one for energy efficiency and one for CO2 reduction. A European market for carbon allowances ETS should cut the use of high-carbon energy sources such as coal. And it should increase the affordability of expensive renewable energy.

Intentions are good, results are not. The economic downturn has reduced the demand for allowances. And the three targets are competing with each other. This has led to a surplus of allowances and a collapse in their value. At the same time, the shale gas boom in the US has triggered a massive influx of cheap American coal. German imports went up from around 41 million tons in 2012 to almost 44 in 2013 UK imports from 37 to 41. So coal-fired plants are working overtime in Europe and efficient gas plants are dismantled. Please allow me to give you an impression of the scale. According to GDF Suez, 30 gigawatts of gas-fired capacity in Europe is mothballed. The company took a write-down on the value of gas-fired power plants across northwest Europe. The energy strategists of IHS CERA identify a further 110 gigawatts of gas-fired capacity at risk of closure in Europe with 25 gigawatts likely to close by 2014. They expect gas to remain out of the merit order throughout this decade. And, at Shell, we see 11 gigawatts of new coal capacity potentially coming online in Europe between 2014 and 2018. Meanwhile, ladies and gentlemen, the EU does an outstanding job in promoting wind turbines and solar panels. The stand-alone target for renewables is driving rapid but uncontrolled growth their share of electricity supply could increase to 35% by 2020. Essentially, this is good news. Renewables are crucial to the energy system of the future. But renewables still depend on flexible back-up when the sun doesn t shine or the wind doesn t blow. They also depend on strong government support. In 2012 alone, support for renewables across the EU amounted to around 30 billion Euros. And governments are expected to give another 330 billion until 2020 with costs passed on to consumers and the industry. So the global downturn, the influx of American coal, and EU policies aren t doing Europe much good. Clean but costly renewables grow, at the expense of business and taxpayers. More and more countries use polluting coal plants as a back-up, at the expense of cleaner gas. The adverse effects are already visible. CO 2 emissions in Germany and the UK in 2012 actually increased, says Eurostat. At Shell, we call this the European Energy Paradox. But maybe that s an understatement. It s an European Energy Crisis. Europe is not alone. Other countries around the world are using more coal. Of course, this is unavoidable in many countries where coal is cheap and economic growth rapid. But it may surprise you to hear that South Korea and Japan - Asia s traditional gas importers - are also poised to increase their reliance on coal. Let me start with the latter. Japan is at a crossroads in its energy policy. The future of nuclear power is one of the most pressing issues for the Japanese government and the role of nuclear in the energy mix remains uncertain. In addition, the Japanese government is pressing ahead with power and gas market reform. Whilst the Japanese government considers the 3E&S Energy Security, Economic Growth, Environmental conservation and Safety, to be the foundation of energy policy, there are government proposals to speed up the planning process for coal plants to meet with industry needs. This looks familiar. What also looks familiar are the consequences. Consequences for air quality and CO 2 reduction. But also for competitiveness. To use coal, they will have to build new infrastructure. This comes at a price. And the coal will also have to be imported. The second example, ladies and gentlemen, is South Korea. Its sixth Basic Plan for Electricity Demand and Supply was released in February last year. It calls for a significant growth in coal, renewable, and nuclear capacity. This is a plan which may lead to an unreliable and unstable energy supply system to the country that needs to import its 97% energy requirement. Protests against nuclear plants and coal plants may well lead to significant delay. The construction of long transmission lines for the new plants is likely to be significantly delayed or facing huge challenges either because of protests or financial problems.

Also, the renewable energy target is extremely ambitious especially seeing the current state of affairs in South Korea. And last but not least the plan falls short of the country s CO 2 emission target for 2020. We suggest the Japanese and South Korean governments take a close look at the European example. This should prevent them from going down the same road. Also, we - the industry - have to make a case for the affordability of gas fired power generation. Here s what he European Gas Forum has to say about affordability. Continuing with the current approach in Europe a combination of coal and renewables amid low CO 2 prices would be no cheaper than shifting to gas and renewables, and reforming the European emissions trading scheme to boost the CO 2 price. The Forum also shows that reforming the ETS is a cost effective measure. And that it would enable meeting the CO 2 reduction ambition, improving the load factor of highly efficient gas power plants while supporting the use of renewables. Moreover, BP estimates that a 1% switch of electricity generation from coal to gas worldwide, would save as much carbon as an 11% growth in output from renewable sources. So, clearly, we should argue that gas is affordable. reasons. In Europe, because of mixed policy signals among Asia s traditional gas importers, because of concerns about the competitiveness and abundance of natural gas What s the best way ahead? One priority must be firm and effective energy and environmental policies. And here Europe s leadership can be critical. That s why recent moves by the European Commission have been encouraging. Just last month, the European Commission proposed a new 2030 framework for climate and energy policies. The framework needs unanimous approval by heads of governments in 28 member states. They will probably discuss it next month. The proposal brings three major changes. First, a reform of the European market for carbon allowances known as ETS. Second: a binding greenhouse reduction target of 40%. Third: a renewable energy target of 27% binding for the EU as a whole, not for individual member states. The new framework is a step in the right direction. For starters, it appears to be moving towards a single target to combat climate change and air pollution, in place of three separate targets. A single target should give the industry confidence to invest in cleaner energy push Europe towards lowering CO 2 emissions and help curb the growth of coal at the expense of gas. Also, the framework rightly holds on to safeguards for energy intensive industries. An ETS reform, at least to a certain degree, is done. And the proposal gives non-binding recommendations for the exploration and production of shale gas. But at least two critical issues remain. The Remarkable Recovery of Coal (Part II) Today, ladies and gentlemen, the position of gas is uncertain in some countries. But for different The first one is the word binding that comes with the renewable energy target. As you may remember: the 27% target is said to be binding for

the EU as a whole, but not for individual member states. What this implies, is unclear. This unclarity causes uncertainty. And uncertainty is exactly the opposite of what we need in a long-term investment market. The 28 heads of government should have the courage to take the word binding out and not be ashamed of it. Without it, the EU still has the most far-reaching CO 2 target in the world. And without it, the framework is more technology neutral and more market based. This offers the fastest and most cost-effective way to reduce CO 2 emissions. The second critical issue is the proposed reform of the ETS. The sad reality is that few industry experts expect it to deliver a meaningful price for carbon allowances in the short and medium-long term. The CO 2 forward market price didn t move after the announcement of the new framework. Let me quote Barbara Hendricks, the Federal Minister of the Environment in Germany. We have to fundamentally reform the EU emissions trading from head to feet as soon as possible, she said this month. There are far too many allowances, and therefore they are just too cheap. I agree. We need structural reform and backloading to get rid of the surplus. Only then the carbon price will truly reflect the externalities of coal power generation. And make no mistake: doing nothing could have damaging consequences as a new European Gas Forum report shows. The critical message is that coal s revival in Europe could rapidly become a more permanent fixture, making it all but impossible to meet Europe s CO 2 targets over the next three decades or so. The report also affirms the reform of the ETS - so that it delivers an effective CO 2 price - as the biggest step to stopping coal s revival in its tracks and to triggering clean energy investment. The German Minister Hendricks promotes changes to the system as early as 2016 - instead of post 2020, as proposed by Brussels. She s right. The heads of state and governments of the EU, in their March meeting, should indeed call for earlier and more decisive reform of the ETS. Let s join hands in convincing them that reform should begin today and that gas is a firm foundation for the energy system of the future. Countries around the world look for policies that decrease CO 2 emissions, while maintaining a competitive balance. The EU may set an example with its 2030 framework - and level the playing field for gas in the process. But, as I argued, that s not self-evident. And strong policies alone will not guarantee the place of gas at the heart of the energy mix. Our industry - the gas industry - must also meet strong demand for Liquefied Natural Gas. In Europe among Asia s traditional LNG importers, like Japan and South Korea and among the new importers around the world. That means maintaining the pace of investment and innovation in new gas supplies. LNG supplies have grown rapidly over the last decade, with Qatar to the fore. That s helped to meet growing demand, especially in Asia. Singapore and Malaysia began importing LNG last year. Before long, they could be joined by countries like Vietnam and the Philippines. Meanwhile, others are expanding their import capacity...including South Korea, Thailand, China and India. Truth to be told: that s also putting some pressure on global LNG supplies. But this should ease in the years ahead. At Shell, we see worldwide LNG supplies potentially doubling between 2010 and 2020. Australia is front and centre. It s building around half a dozen major new LNG projects. By the end of the decade, Australia could rival Qatar as the world s biggest LNG exporter. By 2020, North America may also be emerging as a significant LNG supplier. In 2013, the US government has granted several new permits for projects to export LNG worldwide. And in Canada, Shell with its partners and other industry players have announced plans to develop export facilities on the Pacific Coast. That s not all. Russia is considering plans to expand its export capacity and East Africa might

emerge as a supplier to Asia over the longer-term. So LNG supplies could grow quickly. But we must also acknowledge certain realities. None of these LNG projects are cheap or easy to build. They re major infrastructure projects. And there s competition for the human and physical resources needed to build them. Innovation is critical. An example is Shell s pioneering Prelude Floating LNG project. Work is well under way in Korea s shipyards on this project to process, store and transfer liquefied natural gas at sea. It is expected to be the largest offshore floating facility in the world. It will be used to tap the Prelude gas field, which is located more than 200 kilometres off Australia s northwest coast a field too small and remote to be economically developed with a traditional onshore facility. So...Shell and the rest of the energy industry must continue to strengthen the competitiveness of natural gas...continue to grow the market... continue to innovate. This will encourage governments to give gas a proper place in their energy mix. The Way Forward Now, ladies and gentlemen, what can we draw from this? Well that there is a logic to gas. It makes sense. It s essential for secure, competitive and low-carbon energy markets. But also that there s a real risk of gas not reaching its full potential. Our business is finding gas and bringing it to the market responsibly. But that s not enough. We should also continue to grow the market for LNG. And we should reach out to stakeholders around the globe and make a stronger case for gas. Together, as an industry. Only then a Golden Age for Gas might become reality - to the benefit of the world.