“The energy transition presents great opportunities for oil and gas companies to develop new forms of energy and gradually move away from fossil fuels”, says Jeroen van der Veer, former CEO and Chairman of Shell in an exclusive interview for World Energy Focus, a monthly publication of the World Energy Council produced by Energy Post. But the former Shell boss rejects the idea that the oil companies are in danger of ending up with large “stranded assets”, as some investors fear. “A country like Saudi Arabia may be concerned whether they can exploit all their resources, but the assets on the balance sheets of the international oil companies are resources they will develop over the next 20 years or so.”
As Chief Executive from 2004-2009, Jeroen van der Veer (68) successfully led Royal Dutch Shell through turbulent times, overseeing the integration of the Dutch and British arms of the multinational into one company. Since his retirement in 2009, Van der Veer is, among many other things, Chairman of ING Group, one of the largest Dutch financial institutions. Because of his wide experience in both the energy and financial sectors (he was also Supervisory Board Member of the Dutch Central Bank), he was asked by the World Energy Council to become Chairman of the Project Team of the Council’s Financing Resilient Energy Infrastructure working group. This group is undertaking a series of three reports which assess new risks to energy infrastructure, in particular related to extreme weather risks, the Energy-Water-Food Nexus and cybersecurity. The reports are prepared with Swiss Re Corporate Solutions and Marsh & McLennan Companies, with insights from the European Bank for Reconstruction and Development.
The first findings of the Energy-Water-Food Nexus report, which were presented on 17 March in New Zealand, highlight that the availability of water is a key issue in energy production – and this will only become more urgent in the future. It also makes it clear that some energy production technologies do better than others when it comes to water stress. Wind, solar PV and gas tend to score better than coal, biofuels, nuclear power or CCS.
“We need to develop renewable energies that are much cheaper than they are today”
For van der Veer, the most important value of the project is that it demonstrates the importance of an integrated approach to energy issues. “Decisions often have unintended consequences that people may not always see”, he says. “Policymakers need to be aware of this, but NGO’s, too. They often push only one issue. For example, nuclear power has a very low CO2 impact, but a fairly high water footprint.”
Central Bank for CO2 allowances
Van der Veer is acutely aware of the huge investment challenges facing the energy sector today, to meet the needs of a growing global population on the one hand and reduce greenhouse gas emissons on the other. But he is convinced those challenges can be met. “Some people say there is not enough money, but I don’t agree. Investments can be spread out over many years. What is more, investment also means more business, jobs. And when I look at interest rates, I can only conclude that there is enough money available. The bottleneck is not the amount of money that’s needed, but to have enough commercial projects that companies can profitably invest in.”
According to Van der Veer, the main factor holding back investors is volatility in the market, in particular the instability of CO2 prices. “Companies are willing to invest, but if you have no idea what the CO2 price will be over the next 20 years, while this is essential for the profitability of the project, you will not commit your capital to it. Energy investments are highly capital-intensive, so it is essential to have some certainty about this from the outset.”
“That significant amounts of coal will have to stay under the ground, I can understand”
In Europe, Van der Veer would like to see the EU set up a “Central Bank” to run the EU Emission Trading Scheme (ETS). Set up in 2007, the EU ETS, the first largescale emission trading scheme in the world, has suffered from permanently low CO2-prices. As a result, the prestigious project has failed to provide incentives to energy and industrial companies to invest in carbon reduction technologies. A central bank for emission allowances could maintain a “price corridor”, says Van der Veer, reducing the number of allowances if prices become too low, and increasing them if prices become too high. “If this is done, I am convinced investment will follow.”
Industrial sectors such as steel or chemicals that could find their international competitiveness undermined, could be assisted with money from the ETS system.The rest of the world, Van der Veer adds, might follow the European example if it is successful.
Three pillars
Van der Veer’s vision of our energy future is based on three pillars: energy savings, natural gas and the increased use of low-carbon or zero-carbon electricity.
“First, the world is still not doing enough to save energy. Second, for large parts of the world, natural gas is the best transition fuel, as it is widely available and a lot of infrastructure has been created for it. It’s not perfectly clean, but it scores very reasonably on greenhouse gas emissions and on water footprint. Thirdly, as the world is using more and more electricity, we need to develop renewable energies that are much cheaper than they are today. This means we need to develop new technologies first and then build large-scale projects.”
Nuclear power has certain disadvantages now, says Van der Veer, but a move to thorium and other innovations could change that picture. Coal without CCS should be phased out, he says. “The world understands that we cannot continue to build new coal-fired power stations without CCS.”
“Most politicians are too optimistic about the speed of the transition. Most businessmen are too pessimistic”
But is all this enough to stay within the 2-degree limit that has been agreed upon at the climate summit in Paris? Van der Veer is aware that most future scenarios of the energy industry lead to outcomes that are not sufficient to prevent dangerous climate change. Within the World Economic Forum, the famous high-level platform for public-private cooperaton, he is a member of a working group that is currently developing scenarios “that stay within 2 degrees, but that the energy industry can believe in.” The results, which will be published soon, show a decline of oil in the global energy mix from 31% now to well under 20% in 2050, says Van der Veer. The share of gas will stay at slightly over 20%.
What will be the consequences for incumbent oil companies like Shell of such a scenario? “There are two schools on this topic”, he says. “The first is that as the new global business environment changes, this will offer opportunities for big energy companies to develop new forms of energy. Then you won’t produce fossil fuels anymore at some point in the future. The second school says the mission of oil and gas companies is to produce oil and gas, and if this mission ends, then the companies end too. Then you pay out the dividend to the shareholders and stop.” He adds: “I belong to the first school”.
Stranded assets
Van der Veer is well aware that most of the oil majors, including Shell, did make attempts in the past to invest in alternative energies, with little success. “I think we were too early once or twice. But the time may be ripe now.” Shell in its most recent Annual Report, published in mid-March, said – for the first time in recent years – that it would start looking for new opportunities in wind and solar power, among other things. In March the Dutch press reported that the company is planning to take part in a bid to build an offshore wind farm off the Dutch coast. This would be Shell’s first offshore wind venture since 2007, when Shell and Dutch utility company Nuon (now part of Vattenfall) started up a 108 MW offshore wind farm in the North Sea. In 2008, Shell pulled out of the 630 MW London Array project, which was inaugurated in 2013.
“There is no discussion anymore on the direction we need to move in. The big discussion now is on the speed of the change”
But the former Shell boss rejects the idea that the oil companies are in danger of ending up with large “stranded assets”, as NGOs and many investors are increasingly concerned about. “I think there are many misconceptions about the idea of stranded assets. That significant amounts of coal will have to stay under the ground, I can understand. And a country like Saudi Arabia, which has more than 100 years of oil in the ground, may also be concerned whether they can exploit all their resources. But the assets on the balance sheets of the international oil companies are resources they will develop over the next 20 years or so.”
Van der Veer believes that the climate conference in Paris may well be a turning point in energy history. “It is the first time that everybody agrees about the problem and has committed to tackle it.” There is no discussion anymore on the direction we need to move in. The big discussion now, he notes, is on the speed of the change. “Most politicians”, he adds, “are too optimistic about that. Most businessmen are too pessimistic.”
Source: Energy Post. Reproduced with permission.
