The role of oil in the energy mix: today and in the future

Oil today plays a significant role in energy and in products that we have. So really a fundamental part of our daily lives. Just about everything in this room has an origination in oil. This smartphone that you have, if you have one or the tablet that you have, that wouldn't exist today with our oil. Shell and the industry, as we develop those alternative energy systems, we need to responsibly deliver the energy that we have and need today. Hi and welcome to the energy podcast from Shell, the home of conversation about the energy that powers our world. I'm Bryony. And I'm Eddie. And I have a question for you. Okay. Right off the top. What connects how planes, ships and cars move as well as clothes, medicines and your shoes. Plains, ships, cars, clothes, medicine and my shoes. Medicines and your shoes. They all have the letter S in them. No, that's not the right answer. The right answer is actually oil. So oil is the source of about 30 percent of the world's energy today. And as I've just pointed out, the basis of ingredients for lots and lots of everyday products and it's the topic of our conversation today. It's a fossil fuel that's still at the heart of how the world works today, but it's also a part of the world that's transitioning towards net zero emissions, of course. So today we're asking what the role of oil is right now and what oil's role could potentially be in the future as well. And of course, what that means for an energy company like Shell. I'm glad that you're not asking me those questions, but we've got a guest that's well positioned to answer them. We do. And I'm delighted to say that it will be joined by Shell's president of upstream Peter Costello. Can't wait. And not only that, the bonus segment that we tried last time returns. It does. But first a quick reminder that when we say Shell or we, we're talking about Shell PLC and its subsidiaries in general, the companies in which Shell PLC directly and indirectly own investments are separate legal entities. Let's get to it. Let's do it. Peter, thanks so much for joining us today. So your Shell's president of upstream. For people who may not know, tell us what upstream is. What you do is president of upstream and also intrigued really to hear how you got there. That's good to be with you. So president of upstream is a privileged role to have. And from a business perspective, I look after our deep water and conventional oil and gas business as well as providing technical support to our integrated gas business. In terms of what it covers, everything from exploration, drilling, subsurface development to facilities offshore and onshore to producing oil and gas that gets sold to markets. That's it in a very simple term what upstream is. And how did you get there? Oh, it's a long story and started a long time ago. So I actually started as an operations technician in engineering. I was fascinated by big stuff, complicated stuff. And from there, it was hands on and then I decided maybe I can do better as a manager and just had the privilege of going from opportunity to opportunity ever since then. You mentioned upstream and the oil that we produce. Maybe we start there and you talked to us about oil's place in the current energy mix. Yeah, that's a great question. So oil today plays a significant role in energy and in products that we have. If you go back to, I say the 1970s, oil was around about 50% of the energy mix. Today it's 30% approximately, but it's 30% of a bigger number. So if you look at oil, it's pretty much still growing and will plateau at some point. But plays an important role in our lives that we leave today and looking forward into growth, energy demand growth that comes from population and prosperity. So it provides energy and products and products are everything you can really see in this room. Actually, oil has got a part to play in it. And what's driving you mentioned sort of if you touched upon the trends, there what's driving those trends around oil? Population and prosperity are the two headings that I would use. If you look at prosperity around about a third of the population today, over the next 25 years, are going to embrace a higher lifestyle. That comes from people taking their first flights, driving their first car and products that we all use on a daily basis that are part of a higher income lifestyle that goes with it. Even if you consider this in Asia, there's approximately 350 million people don't have access to reliable energy today. So it goes into providing lives and livelihoods to them as well. So outside of that growth, can you maybe break down where oil is currently used right now in the economy? One backbone would be in transportation, and particularly when it comes to aviation shipping, but obviously a cars and industry as well. And in the other is in petrochemicals and what that produces, which are the products that you see in this room, that are part of everything we use on a day-by-day basis. And that's where there's a large area growth in products, which links to what I said earlier about the prosperity side of things. If you look at the geography of oil yesterday, the countries in regions, you mentioned Asia, what does that look like today? If you look at the two big usage countries that would be the US and China, but you also look at advanced economies like Europe and Japan, they pretty much have a plateauing of oil demand, but growth comes in places like Asia and specifically India. So Peter, we've talked about where we are right now with oil. Can you maybe speak to where we're going with oil and what the future of that demand looks like? Well, oil and today and into the decades ahead plays a fundamental part in the energy mix. In terms of how long, how far, that's different debates are out there, different forecasts are out there, but certainly if you take our energy security scenario, you can see oil demand increasing to the end of the decade, and then probably leveling off and then tailing off into the decades ahead. And when we say scenarios, they're not expressions of Shell's strategy and they're not Shell's business plan, but they are one of the inputs used by Shell to stretch thinking whilst making decisions. The IEA. International Energy Agency. If you look at their view, they also have a similar growth path to 2030 and then plateauing and then declining, but directionally I think you can see how it fundamentally will pay a part in a critical role. The IEA, the recent forecast shows 105.5 million barrels all day as a plateau, and then falling away. That's about a two and a half million barrels a day increase. If you look and consider that there's approximately about a billion people today that's still in energy poverty, that's without looking at a third of people moving through an increase in enhanced lifestyles. So that's where demand is coming from. So where you see plateau in today is not the same as where you will see growth. Some countries will have a demand that's flat. Others will have it that's growing. Like I mentioned earlier, India could probably see a million barrels of all a day increase by 2030. But I think something that's important there is as it grows to the end of the decade and then starts to fall off, what we mean there is a gradual tapering but still a material part of the energy balance, right? Not a falls off the cliff goes away. No, absolutely right. If you look at alternative energies such as renewal was and so forth, they are not substituting oil today. They're in addition to as we try and keep up with energy demand. And when you look through the energy transition, it's important that it's balanced and adjust transition for everyone. So I'm actually surprised that we haven't already mentioned the word electrification because usually when we talk to our guests electrification comes up a lot sooner. But tell us what part is electrification playing in that decline in oil demand growth? The biggest would be electric vehicles. That plays the biggest part. Because transportation is yeah, yeah. And predominantly in cars today, harder to do with trucks and shipping and aviation, but for ordinary cars, that's where you see most of the electrification demand coming. Peter, let's look ahead just a little bit further to 2050 in the context of a world that's transitioning to a net zero future. What's oil's role in the energy balance? Well, oil will still play a critical role in the energy mix we see in all scenarios at 2050. What's important is the responsibility that comes with delivering that oil. And that comes from how we look at the carbon abatement and carbon efficiency to develop it in a responsible way. And when I talk about efficiency, that means how we design, how we operate, and even through to then abatement options, such as carbon capture, storage, in a way that reduces the intensity and emissions that come from oil. Whilst in parallel, we need to to develop the energy systems of tomorrow. So, in essence, industries such as Shells, we have a twin role, responsibly delivering the energy of today, whilst delivering the energy of tomorrow in coordination with public policy technology, carbon markets. - Thanks, Peter. So far, we've covered the role of oil today, and we've looked at what the future could look like. And in a moment, we're gonna talk about some of the challenges that could arise. And before we do that, we're gonna have a change of pace, which we'd like to do with our guests to effectively use you as a human search engine for quite a lot of the questions queries that we get asked. (upbeat music) Why don't you kick us off? - Yeah, let's do it. So, I'll start with the first one, and then we'll just jump back and forth, and just give us a factor of fiction for these. So, all oil barrels are the same. - That's fiction. Barrels differ in a couple of ways. One, they're physical components as to what makes up a barrel of oil. So you have light, you have sweet, and that goes to how what the fluid composition is of a barrel of oil. And secondly, the value of a barrel of oil. They're all valuable, but some are more valuable than others. - There's more than one oil price, factor of fiction. - True. - We have Brent, and then we have West Texas Intermediate as two examples of oil price. - There's nothing in this room made of oil. Absolute fiction. Just about everything in this room has a origination in oil. Everything, the smartphone you have, if you have one oil, the tablet that you have, that wouldn't exist today without oil. - The burn in my hand? - Oil. - The clothes you have, oil, your shoes, for sure. I'm not sure what trousers you have, but yeah. It's most, most, more than you think, comes from oil. - Maybe everything, apart from socks, basically. - No socks could have oil. Depending on what type of socks you've got. - Literally everything, okay. - No, we know. - No, we know. When oil prices go down, I still pay the same at the pump, factor of fiction. - Maybe. Now, there's a number of points that go into that, because the rice is made up of taxation in different countries. So it's not just about the raw commodity. So how that comes out of the pump would depend on which country that you're in. - Are the world's major exploration sites have been found? - No, no, I mean, when you look at big basins, such as the Gulf of America and Brazil, they just keep giving, and there's technology moves. It opens up new horizons for future development. So we've got a long way to go. - Well, you've kind of already answered this, but oil production is old school. There's no cutting edge technology involved in it today. - That is so fiction. We have more technology and cool stuff in oil production than a lot of industries I can think of. I was actually speaking to a geophysicist graduate. And I asked her, you know, why she did it? And she goes, why would I want to do anything else other than play with cool technology and be part of shaping the world energy today and tomorrow? - Good questions. Thanks, Peter. - That was really interesting. - It was. Is there any conversation? - Let's do it. - We've talked about increasing demand for oil for a while and then we talked about the plateau as well. But existing oil fields typically decline. If we're going to meet this future demand, what does that decline in an oil field mean? - Super question. So decline, you're right. It's around about five million barrels of oil a day, natural decline, if you don't invest. And just to make that come alive, five million barrels equates to something like 3,000 return flights from New York to London every day, enough to fuel 55 million cars a day. So that's if you don't invest. So the challenge in terms of just to stay still without any growth, significant investment is required to maintain plateau, get a lane, address any growth to it. - When you say investment, what do you mean by that? Because I think a person watching might say, well, how does an oil field decline? - So in terms of natural decline, natural reservoir properties mean that as you produce, it naturally starts to reduce and therefore not as much comes out the well bore as what it did. What if the industry just stopped investing? What happens then? If you stopped investing, you have the good old supply demand equation. So you'd be in a situation where there's demand and not enough supply. When that generally happens, prices go up. - So give us an example of that knock on effect of that price increase for the person at home. - You could see that flowing through from everything from fuel to energy home bills through to products that you buy. Everything that's touched by oil would be affected by an increase in pricing. - So we need to invest and you've painted the picture to be pretty clear on why we would need to do that. But there's so much turbulence in the industry, whether it be market prices going up and down, conflicts, trade tensions. How do you, how do we, how to show, make those investments comfortably? - Yeah, what do you've described? It is a very complex picture, which is reality of what we have today. But companies such as ourselves, we look at the long-term life cycle, view of investment. We look to, on a way that takes us through the short-term turbulence into the fundamentals of what investment thesis would generate and an investment opportunity for us. 'Cause resilience plays a part when you talk about cycles. And this is a cyclic commodity. So it's important for us to be able to have a sustainable business through the cycles over the life cycle of an investment. - So you mentioned sustainability. And we know that oil offers security and reliability. But I think people would say sustainability in oil, they don't go together. And oil does not deliver, it cannot be delivered sustainably. What'd you say to that? - Well, I think it's important to focus on the criticality of net zero. And I think as we develop oil through the decades that have, we need to do it in a responsible way so that we can bring growth and efficiency together. And certainly in Shell, we have examples of how we do that. We look through the lens of cost competitiveness and carbon competitiveness. And examples of that would be in the Gulf of America where we have our latest well facility, which was a replicant of a previous facility called Vito, 85% replicant, but 30% less emissions intensity. The next facility coming is Sparta, which is a replicant of well. And that will have reduced carbon intensity again by having all electric in terms of its facilities. So it doesn't use fuel gas or anything to power itself. It's electric. In Shell, we set ourselves a target from a baseline of 2016 to reduce our scope one and two emissions by 50%. And we're making good progress to that. We're already over 30% reduction from that. We also say that we will stop routine flaring in 2025. The Walls Bank target was 2030. We've achieved that as well. And in our products that we've produced since 2016, we've reduced the carbon intensity by 9%. So this is what we mean about developing the responsible way in line with pursuit of net zero by 2050. I think that the whole conversation has been a kind of lifting the lid, if you like, on upstream. And I think it's been really valuable. But I think to go back to you and your role, I didn't realize you've actually only been in the role for about six months, and I wonder from where you sit, obviously, in your new role as president, how you view the opportunities for a company like Shell going forward. I see the role that we play in society today as critical in how we impact lives and livelihoods is something we take seriously as a company. And I think the role of the company that Shell and the industry, we need to work together in order to achieve net zero, but at the same time, as we develop those alternative energy systems, we need to respond to the energy that we have and need today. Really appreciate it. Thanks to Peter, again, for joining us today. It was a really interesting chat, I thought. Yeah, absolutely. I think that it was really interesting to hear what he had to say about as we bring on new barrels, making sure that they're not only cost competitive, but they're competitive from a carbon standpoint. Yeah, it was really good to speak to him. Remember that you can also find Shell's cautionary note and references from today's episodes in the show notes below the episode. Also, we mentioned net carbon intensity or NCI. It's important to note that it includes our customers, carbon emissions associated with their use of the energy products we sell, something we don't control. We mentioned today that Shell has set a target to be a net zero emissions entity. business by 2050. Please note that Shell's operating plan and outlook look ahead three years and ten years respectively and are updated annually. The outlook includes our scope one, scope two and NCI targets over the next ten years. While Shell's current operating plan and outlook don't reflect the 2050 target, as society progresses towards net zero, we expect our operating plan and outlook to follow suit. If society is not net zero in 2050, as of today there would be significant risks that Shell may not meet this target. We encourage you to read our full cautionary note on our website shell.com/disclaimer. Well, that's it for the podcast. Don't forget to like, subscribe and follow. And you can also watch us on YouTube. Thanks for watching. See you next time.