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October 5, 2001 


Shell Foresees the End of the "Hydrocarbon Age" 



By Jon T. Brock
Director, Strategic and Competitive Intelligence 


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[News item from Reuters] Big Oil must prepare itself for the end of the hydrocarbon age as alternative energies win over consumers in coming decades, chairman of the world's No. 2 energy firm Royal Dutch/Shell said on Wednesday. Oil giants from the last century will have to look to their laurels if they are not to be unseated as motorists move toward hydrogen-powered vehicles, and renewable energies, such as wind or solar power emerge Shell Chairman Phil Watts told reporters. 

Analysis: It seems that "Big Oil" is beginning to look at scenarios that have alternative energy sources to oil and gas. At least two of the three "Bigs" are prominently playing alternatives into their long-range planning. British Petroleum (BP) has an aggressive campaign on alternative energy sources, while others like Exxon have continued to be focused solely on oil and gas. 

Wednesday in New York, Watts spoke to reporters about Shell's scenario planning. This long-range outlook of world energy has oil shrinking from 40 percent of the world's energy source to 25 percent by 2050. Oil will still be the leader, with gas coming in at 20 percent in 2050. However, it is still quite a drop. 

From Oil to Gas 

"One thing I am convinced of is that the next 50 years is not going to be more of the same. An energy company had better make sure it has the necessary expertise and knowledge," Watts said at the launch of Shell's 'Long Term Energy Scenarios'. Referring to one of Shell's scenarios, Watts said, "We could see an evolutionary progression, the so-called carbon shift, from coal to gas, to renewables, or possibly even to nuclear." 

One could argue that the U.S. is already seeing the shift from coal to gas. The Energy Information Administration (EIA) has estimated that at the forecasted rate of electricity consumption, 1,300 new power plants will be needed over the next 20 years. The majority of these plants are fueled by natural gas. According to the energy profile of the U.S. released by the EIA in April of this year, the U.S. has proven natural-gas reserves of 167 trillion cubic feet (Tcf), 3.2 percent of world reserves, and currently consumes natural gas at a rate of 22.8 Tcf per year. From a long-term perspective, however, natural gas is very limited in supply. In the United States, the remaining natural gas resource is expected to be near depletion within 50 years. Coal is clearly the nation's greatest resource, representing approximately 90 percent of our fossil energy reserves. 

Calpine is certainly capitalizing on the near-term future of natural gas-fired generation. They announced a purchase of 35 7FB and 11 7FA gas-fired turbines from General Electric in April of this year and 27 Siemens Westinghouse steam turbines just last month. The purchase announcements are a part of Calpine's five-year strategic plan to have 70,000 megawatts of generation online by the end of 2005. 

The U.S. imports only (net) 3.6 Tcf of natural gas, largely from Canada. Natural-gas wellhead prices averaged over $6.00 per thousand cubic feet (mcf) during the first quarter of 2001, up sharply from $3.62/mcf seen in 2000 and nearly triple the 1999 average price of $2.08/mcf. The price increases are attributed to a decline in U.S. gas production during the 1990s because of low prices, the increase in demand driven by new power generation, and gas storage levels dropping below normal. Recently, gas prices returned to the $2/mcf level after a mild summer, but NYMEX futures contracts for late 2002 deliveries are trading above the $3/mcf level indicating the expectation that gas prices will rise in response to the anticipated increased demand. 

Canadian imports are also expected to expand substantially through 2020 resulting from additional gas-fired electric power plants. This anticipated increased consumption requires expansion of gas pipeline and storage capacity-$1.5 trillion over the next 15 years according to the National Petroleum Council. Duke Energy certainly has recognized this trend and has capitalized quickly by announcing the purchase of Westcoast Energy, Inc., a Canadian-based utility engaged primarily in natural-gas gathering, processing, transmission, storage, and distribution, as well as electric power generation, international, financial, information technology, and energy services businesses. 

From Gas to Renewables 

According to one of Shell's scenarios, at some point we will move from gas to renewables. Shell lists those options as solar and wind energy and has backed up its claim with a $500-million to $1-billion spending package over the next five years, focused primarily on-you guessed it-solar and wind. If a large oil company announced that it had up to $1 billion to invest in solar and wind, who would begin to show up on the radar screen? Let's take a quick look at a few likely candidates. 

AstroPower, Inc.
461 Wyoming Road, Solar Park
Newark, DE 19716-2000
www.astropower.com 
Technology: Photovoltaics
Start date: 1983


AstroPower produces a complete line of photovoltaic solar cells, solar modules and complete systems packages for residential, commercial and industrial applications as well as turnkey power plant solutions for utilities in the newly deregulated energy market. They originally received a $2.3-million investment from the Department of Energy (DOE) and have since IPO'd and can be found on the NASDAQ at symbol APWR. 

Big Frog Mountain
100 Cherokee Blvd., Suite 321
Chattanooga, TN 37405
www.bigfrogmountain.com 
Technology: Alternative energy sources
Start date: 1999


Big Frog Mountain is a private company that designs and supplies renewable energy equipment to businesses, industry and private residences. The alternative energy equipment supplies power using micro-hydro, solar panels and wind turbines. 

Bergey Windpower Co., Inc.
2001 Priestley Avenue
Norman, OK 73069
www.bergey.com 
Technology: Wind turbines
Start date: 1979 


Bergey Windpower is a private firm that designs and manufactures wind generators in sizes of 850, 1,500 and 10,000 watts. They claim to have seen an increase in home wind energy systems as a result of the California energy crisis. 

Worthy of noting here is the fact that Shell competitor BP has already entered into the renewable arena and has recently formed a new division known as BP Solar. Based in Linthicum, Md., they produce high-efficiency silicon cells and modules, custom-designed batteries, power control electronics and where appropriate, load equipment in the solar industry. Fueling Shell's interest may be some of the recent successes that BP Solar has enjoyed. 

In March of this year, BP Solar announced that over 400,000 residents of the Philippines would benefit from a deal signed between them and the Spanish and Philippine governments to bring solar power to 150 isolated villages in the Philippines. Led by the Philippine Department of Agrarian Reform (DAR), the $48-million contract-the largest solar energy project ever-is financed by the Spanish government and will be implemented in two phases, the first scheduled to begin just last month. 

In April of this year, BP Solar announced plans to build a solar-module assembly plant in Hamlin, Lower Saxony, Germany. With a total investment in Hamlin of $12 million, the plant will have an annual production capacity of 20 MW and create more than 100 new jobs. 

The Hamlin plant was soon surpassed by the announcement of an Australian facility in June. Opening in Homebush Bay in Sydney, the new plant will manufacture BP's high-efficiency solar panels, bringing valuable export dollars to the country with over 60 percent of the panels to be exported around the world. BP invested over $20 million to build the plant that is providing over 200 high tech jobs. The new facility houses all of BP Solar's Australian manufacturing, design and market support facilities. Cell annual output capacity will reach 25MW in 2001 and the plant has the capability for possible further expansion. 

Do Renewables Include Fuel Cells? 

Shell also mentioned multiple scenarios under their long-range planning efforts, one of which included an increase in the fuel cell industry. According to the fuel cell scenario, rapid growth in fuel cells-which produce electricity from hydrogen and cut harmful emissions-could shift the energy business dramatically away from oil long before oil becomes scarce. Today's fuel cells typically create hydrogen by reforming natural gas, so they do not fit the definition of being a renewable resource. Rather, fuel cells hold great promise to reduce air pollution emissions when compared to combustion technologies. Fuel cells produce near-zero emissions and highly pure water when converting a hydrogen-rich source into electric energy. 

I am impressed that two of the three largest oil producers are beginning to look at their mainstay business as being limited in the long run. Radical changes that are possible in the energy business means that the industry participants which dominated the last century such as Exxon, BP and Shell cannot afford to assume they will dominate for the next 100 years. In the words of Shell Chairman Phil Watts, "that would be a very complacent view. Longevity in corporations is not the norm." Chairman Watts reminds me of an exercise performed in many business schools around the country today. Look at the New York Stock Exchange 100 years ago and try to find companies that are still in the "mix." Surprisingly, it is difficult to find many. Those that are still in existence have had to change dramatically in order to survive. IBM used to be a typewriter manufacturer. Today they are the world's largest computer company. Where will the oil companies be in 50 years? Will they still be strictly oil and gas? If Watts executes his scenario plans, not a chance. 


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