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Less Aloof, More Assertive

Last month, ladies and gentlemen, Barack Obama gave his State of the Union address.It took him less than two minutes to mention oil. And if he hadn’t been interrupted by applause, he would have got there even faster. This shows how important oil is to advanced economies.We all know why. Oil is an essential part of the energy mix. And energy, in turn, is the lifeblood of human existence.Without energy, our lives would be almost unrecognisable.

I’m proud to be part of an industry that truly powers economies. I’ll use this opportunity to talk about the future of our industry, both in the short and the long run.Let me start with the months ahead. Oil prices will of course be an important issue throughout the year. Since summer, the price of Brent Crude has plunged.Higher shale production in the US, an unwillingness by OPEC to cut its own production, and an energy demand slowdown in China — these are just some of the factors shaping a complex situation.

The oil market will remain volatile in 2015. But in the longer term, there will be no change to fundamental drivers such as rising demand and the need for new supplies, argued Ben van Beurden, chief executive officer (CEO), Royal Dutch Shell plc, while talking at the IP Week in London in February this year. Excerpts from his statement:

Low prices have big implications for exporting countries like Iran, Russia and Venezuela. But also for shale-producers in the US, and even the domestic budgets of producers in the Gulf states. In consuming nations, low oil prices are an economic boon stimulating growth and demand.What will happen in 2015?

I can’t predict the future, but oil demand is clearly linked to economic growth. Compared to last year, the International Monetary Fund expects the global economy to grow. So, global oil demand is expected to grow as well.But seeing today’s prices, supply will probably not keep pace with this growth. It may even decline, as prices are close to cash costs, according to consultants like Wood Mackenzie. As a result, energy companies could shut down some of their existing production.If the brighter economic outlook becomes reality, the market could tighten, and this would support higher prices. But two questions remain. Firstly: How far and how long will prices fall? Secondly: How quickly can prices recover?

A rapid recovery could occur if projects are postponed or even cancelled. This would lead to less new supply — not so much now, but in two or three years. Combined with economic growth, the market could tighten quickly in this scenario.But what if the largest supply growth engine, US shale oil, proves to be resilient in the face of falling prices and the markets remain well-supplied? In that case, with moderate economic growth, prices could stay low for longer.

Either way: The market will remain volatile in 2015, if only because for now OPEC shows no sign of wanting to resume its role as swing supplier. But for the longer term, I see no change to fundamental drivers of oil markets such as rising demand and the need for new supplies.Our New Lens Scenarios are one of the tools Shell uses to look at the future.In the two scenarios, ”Mountains” and ”Oceans”, oil demand will continue to grow for at least two decades.And then, of course,production from oil fields typically declines at a rate of at least 5 per cent a year. This means that the need for new supply could be as high as 5 million barrels a day, year after year until at least 2030.

This amount of supply cannot be delivered by OPEC or shale oil producers in the US alone. It will need to come from new and challenging areas, and has to be supported by an oil price that justifies huge investments.

While a boon to consumers, these are tough times for some producers. But at Shell, we’re determined to avoid a start-stop approach to investment.Shell will remain a large investor in 2015, with a strong focus on costs. And we will certainly continue to invest in research and development. R&D is our sector’s lifeline at a time of energy transition.2015 is an important year in that transition. At the end of the year, the UN’s Climate Change Conference will be held in Paris. In the run-up to this conference, the climate debate will rise to new heights of intensity.

The outcome of the political process is uncertain, but the trends behind it are unmistakeable. Even more than the oil price, these trends will shape the future of the industry over the coming decades. For a sustainable energy future, we need a more balanced debate. Fossil fuels out, renewables in — too often, that’s what it boils down to. Yet in my view, that’s simply naïve.Yes, climate change is real. And yes, renewables are an indispensable part of the future energy mix. But no, provoking a sudden death of fossil fuels isn’t a plausible plan.

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