Mr Voser is CEO of Royal Dutch Shell. This is an edited version of a speech he gave at the Central Party School, the Communist Party of China, Beijing, on 20 March.

China is looking for secure and cleaner sources of energy to fuel continued growth and social development in the coming years. Indeed, China is at an important crossroad in its development, with a historic opportunity to chart a different path from the energy-intensive one western countries have followed for the past century. One that leads to a new, more sustainable energy system that will underpin continued growth. 

Global energy trends are being driven by the world’s rising population and rapid improvements in prosperity in developing countries. China is a significant contributor to these trends. Last year we welcomed the 7 billionth person to the human race. At the rate we’re going, by mid-century about 9bn of us will share the planet. At the same time, millions of people are climbing out of poverty. They are enjoying higher living standards and buying their first refrigerators and cars. This is a great achievement. It also has potentially serious implications for all of us. The world’s growing middle class is raising demand for some of the world’s basic resources, from energy to fresh water and food. 

One of humanity’s biggest challenges today is finding a sustainable means of providing for the basic needs of the world’s growing, wealthier population. Let’s look at energy. If the world continues on its current path of consumption, by 2030 global energy demand could grow by 33%. Almost all of that growth will come from the world’s developing countries, with China accounting for a significant part of the increase. One of the most important drivers of growth in energy demand in China will be transportation. In 2009, China overtook the US to become the world’s largest car market. Over the next 20 years, China’s vehicle fleet is expected to increase from 190mn to 600mn. Even assuming continued fuel efficiency improvements and increased use of alternative fuels, the growing thirst for gasoline and diesel means China’s oil demand could more than double to 24mn b/d by 2030. Most of that demand will be met through imports. 

Stepping back to look at the overall energy picture, if the current trend for growth in consumption continues, China’s primary energy consumption could double by 2030. At that point, China would account for about one-fourth of global energy needs, up from 20% today. Increased energy use will also have environmental implications. Even with rapid growth of renewable energy sources, fossil fuels like coal and oil will continue to supply most of the world’s energy. Society will continue to confront issues of local pollution, as well as rising levels of greenhouse gas in the atmosphere, which contributes to global warming.

Supply Challenges

Energy supplies will struggle to keep up with the rapid growth in global demand. That will be particularly true for oil critical for transportation. We believe global oil production will plateau at roughly 105mn b/d around 2030, up from the current 84mn b/d. Shell projects that global demand for oil could begin to bump against supply limitations sometime around 2020, assuming current trends continue. This will create a zone of uncertainty, revolving around exactly how to bring supply and demand into balance. The world will need a combination of extraordinary efforts to increase energy supplies and extraordinary measures to limit the growth in demand. 

At the same time, the pressures of rising demand and potential supply constraints are likely to impact prices. No one can accurately predict the price of oil or any other form of energy in 20 years time, but unless there is a major economic disruption, we are likely to see a long term upward trend in energy prices, as well as continued volatility. That will be especially true for oil. 

These trends could pose a particular challenge for China. Unlike many Western countries, whose development was aided for much of the last century by reliable supplies of cheap energy, China may need to chart a development path during a period of higher and rising energy prices. Likewise, China must manage growing energy use during a period of rising concern about global warming. 

China’s population will peak at about 1.4bn around 2026. By then China will be the world’s biggest economy. But many citizens will likely still live in relative poverty. A major ongoing challenge will be supporting continued economic growth to improve the standard of living for large parts of the population. For China, wise policy decisions in the next few years will be critical to ensuring sufficient energy to support China’s continued development in the coming decades. And to ensuring an appropriate response to the serious threat of global warming.

Charting A Way Forward

Given the converging forces of rapidly rising demand and increasing difficulty in unlocking new energy supplies, what can China do to chart a sustainable growth path? A three-part strategy is likely to help boost China’s energy security and support the continued path of strong growth and social development: 

• Expand and diversify China’s energy supply.
• Moderate growth in demand by increasing already significant efforts to promote energy efficiency.
• Promote new technology that helps accomplish the first two. 

China, like the rest of the world, must continue to develop all available energy sources to keep up with demand. No single solution will be sufficient. Strong investment will be needed in everything from oil and gas, to wind, solar, biofuels and nuclear. Clearly there will be a growing place for renewable energy, an area where China already has a leadership role. China has quickly become the world’s largest manufacturer of solar cells and wind power equipment. The 12th five-year plan has set an ambitious goal of 15% of total energy coming from non-fossil sources by 2020. But there is still room to expand use of renewable energy even further, particularly solar. 

Perhaps the greatest opportunity lies in increased development of natural gas resources. Natural gas has the potential to spark an energy revolution similar to the one already under way in North America. Over the last decade or so, Shell and other energy companies have developed technology to unlock gas from dense rock such as shale. Thanks to new technology, natural gas production reversed its decline in 2005 and surged nearly 20% by 2010. The USA may now have 100 years of natural gas supplies at current consumption rates and will likely become an LNG exporter. The dramatic increase in supplies has led to much lower prices. Natural gas in North America now costs less than $2.50/mn BTU. That compares with a 10-year average of about $6/mn BTU.

The surge in gas supplies, coupled with increased production of oil in the western hemisphere, is making the US less dependent on countries in the Middle East and West Africa for its energy supplies. By 2035, the US will import about 17% of its energy, down from 29% in 2007, with most of those imports coming from neighboring countries. 

Natural gas can also have clear environmental benefits. Using it to generate electricity typically generates 40-60% less CO₂ than coal-fired power plants. It greatly reduces local emissions of sulfur-dioxide, nitrogen oxides and other pollutants. Gas-fired generators are a natural ally of renewable energy, since they can quickly ramp up when the wind dies or the sun doesn’t shine. Finally, generating electricity with gas is less water-intensive than either coal or nuclear. 

What does all this mean for China? China is still in the early days of developing its own tight gas resources, but the potential looks promising. A recent study of tight gas resources in 32 countries by the US Energy Information Administration estimated that China has recoverable tight gas resources of more than 1,000 trillion cu ft. That is more than the US and 10 times China’s current proved natural gas reserves.

What about the role of nuclear power in the wake of last year’s tragic events in Fukushima, Japan? Countries have responded differently, with some turning away from nuclear power, such as Germany, and others continuing to embrace it, such as France and India. Overall, some development will continue. However, safety reviews are likely to delay development of new capacity. And tighter safety regulations will likely bring higher costs. If China decides to continue its strong drive to develop nuclear energy, the sector will see tremendous growth. By 2030 China will have at least double the nuclear capacity of the US. Even so, because of the size of China’s energy system, nuclear will remain a relatively small contributor to overall energy needs. By 2030 about 10% of electricity might come from nuclear power. By comparison, the US currently produces slightly less than 20% of its electricity from nuclear. 

Coal will continue to play the most important role in China’s energy system, contributing about 50% of overall energy in 2030, compared to about 70% today. But the environmental costs of its use are high and will need to be addressed. It is the country’s leading source of urban air pollution and contributes at least 70% of China’s CO₂ emissions. To reduce environmental impact of continued coal use, China will need to install equipment to clean smokestack emissions, increase use of clean coal technology and develop capability to capture CO₂ emissions and store them safely underground.

Managing Energy Demand

Developing all available sources of energy will help ensure a secure supply to continue China’s rapid development. But it won’t be enough. China will need to redouble efforts to moderate growth in demand for energy. Much progress has already been made, but there is still room for improvement. If China were able to make an extra effort and achieve leading levels of efficiency in all industrial sectors, the country’s overall energy demand could be reduced by 10% by 2030. Making such dramatic improvements would take huge effort and significant investment. But the payoff in energy security might be worth it. 

Energy efficiency can be gained in countless ways, big and small. But focusing on a few specific areas will likely produce the greatest benefit. The rapid rise in individual car ownership and increasing use of trucks to haul freight make road transport an important area for focus. Greater emphasis on developing urban mass transit can help keep personal vehicles off the road. 

Increased use of alternative fuels for transport will also help boost efficiency and reduce demand for gasoline and diesel. Indeed, China has already made electric and hybrid-electric vehicle development a priority. Over time, China’s large domestic market could help Chinese car manufacturers build world leadership in key automotive technology for the future. 

Another area of focus is smarter urban development. China is rapidly shifting from a rural to urban society. As millions of people move into cities every year, urban floor space, including residential and commercial, is doubling every seven years, with more than 1bn sq ms added every year. 

The traditional ‘big flat pie’ model of Chinese urban development has resulted in relatively high energy consumption. A study of more than 700 Chinese cities by consultant Booz & Company showed that cities with higher population density were more energy efficient. Similarly, sprawling cities in the US are more energy hungry than compact European ones. As China’s cities grow at a rapid pace, careful planning and controlled urbanization can have a significant impact on future energy use. So can improvements in construction standards. One estimate suggests that today less than 5% of new buildings in China can be characterized as energy efficient. 

A final area of focus is subsidies supporting consumption of fossil fuels. In a global survey, the International Energy Agency identified 37 countries with estimated subsidies totaling $409bn in 2010. China’s estimated subsidies totaling $21bn were the fifth highest globally, after Iran, Saudi Arabia, Russia and India. The IEA estimates that if subsidies were phased out world-wide, global energy demand would fall 4% by 2020 and nearly 5% by 2035. This is obviously a sensitive topic. Subsidies are often meant to ensure the poorest members of society have access to energy – an important goal. Yet the IEA estimates that only 8% of the $409bn in support in 2010 reached the poorest households. The agency argues that providing similar levels of financial support directly to low-income families would be far more efficient.

The Role Of Technology

Let me now focus briefly on the important role innovation and technology will play in addressing China’s energy challenges. New ideas and new technologies will be needed to support many of the objectives I have been talking about, from improving energy efficiency and diversifying energy supply, to reducing CO₂ emissions and enabling cost-effective, large scale use of renewable energy. 

Innovation has driven the natural gas revolution that began in North America and is now expanding around the globe. It will be needed for future advances, such as improving battery performance so electric vehicles are more widely acceptable to consumers. China will increase the likelihood of major breakthroughs by focusing attention on a limited number of areas that boost energy supplies, or reduce demand. On the supply side they could include advanced biofuels and technologies to convert coal to gas or liquid fuels. On the demand side they could include efficient co-generation technology and smart electricity grids. 

China should also consider increased spending on research and development. In 2008, R&D spending at large and medium sized Chinese companies averaged less than 1% of revenues. That compares with about 5% at similar companies in developed countries.

Shell’s Role

Much of what my company is doing to help address China’s energy challenges hinges on our deep and growing partnership with CNPC. We have four priorities in China. First, we are helping support growth through international cooperation with Chinese partners to bring energy supplies back to China. For instance, together with CNPC we acquired Arrow Energy in Australia to develop coal bed methane and turn it into LNG for shipment to customers. We are also jointly exploring for gas in Qatar. And CNPC has taken a 20% interest in our Groundbirch tight gas project in Canada, where we are looking at the potential for producing LNG for export. Here in China, we are developing tight gas resources with CNPC, helping to expand supplies of this cleaner-burning fuel. Together we are pursuing the Changbei project, exploring for gas in Sichuan Province and working on a coal bed methane project in Shanxi Province. We are looking for other opportunities. We are also cooperating on R&D and technology. That includes development of advanced seismic technology and a joint venture to develop an innovative, highly automated well manufacturing system to boost gas production. Finally, we are helping Chinese oil and gas service companies gain access to business worldwide. Our priorities help support China’s overall energy priorities.

Conclusion

To summarize, fuelling China’s continued rapid growth and social development presents significant challenges. They include ensuring a secure supply of energy, addressing environmental stresses from energy production and use, and dealing with the related stresses on other vital resources such as water. But China’s tremendous dynamism and enduring spirit make me optimistic that these challenges will be overcome. The critical elements for building a secure and sustainable energy system for the future will include expanding all available sources of energy, with special emphasis on natural gas; and aggressively promoting energy efficiency to moderate growth in demand. The right mix of policies and incentives can help make that happen.