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Speech

23 Feb. 2017

The Economic and Environmental Benefits of Natural Gas

Robert S. Franklin President of ExxonMobil Gas & Power Marketing Company

International Petroleum Week
London, England

Thank you, Melissa, for that introduction. It is a pleasure to be here.

This has been a productive three days. The conversations, speeches and meetings this week will help to set our industry’s agenda in the years ahead.

This morning’s sessions were dedicated to environmental topics, including the promise of technology and innovation to deliver a less-carbon-intensive future.

And for the afternoon, the conference now pivots to a focus on natural gas.

How appropriate.

It is fitting that discussions on environmental questions should lead to considerations of the fuel source well positioned to make meaningful environmental progress while underpinning global economic growth.

The energy trilemma

To understand what I mean, consider that over the next few decades the world faces something of an energy trilemma – a three-pronged challenge with parts that are interrelated but also, it might seem to some, in tension with one another.

This challenge consists of providing the energy the global economy requires, doing so in ways that are affordable to consumers, and in ways that safeguard the environment for future generations.

Let’s consider each of these three points, starting with meeting the world’s growing energy needs.

Growing energy demand

Over the next quarter century, global population will grow to over 9 billion people. Add to this the fact that billions are poised to escape poverty and join the global middle class, which is profoundly good news.

The accompanying 25 percent rise in global energy demand is an enormous figure. To appreciate the massive scale of what we are talking about, some perspective is in order.

On a daily basis, the world’s population currently consumes the energy equivalent to 275 million barrels of oil. That’s every day, consumed in the form of oil, natural gas, coal, nuclear, and renewables.

We sometimes take for granted the 24/7 availability of electricity, transportation fuels, and other sources that power our lives.

It may be cliché to describe energy as the lifeblood of the global economy, but it is no less true. Our modern world simply could not exist without the daily contributions of energy companies like ExxonMobil and many others, including those assembled here this week.

Now consider that in 2040, the world won’t need the energy equivalent to 275 million barrels per day. It will need 343 million barrels – or 68 million extra – every single day. The lion’s share of this growth is expected to come from developing economies such as China, India, and many nations in Africa.

That should give you a sense of the pressures that face our industry – every single day, today, tomorrow, and several decades from now.

Affordable energy supplies for sustainable economic growth

Turning to the second element of the energy trilemma:

We must deliver energy that is affordable to consumers.

I cannot emphasis this point enough: It is not enough for energy to be available; it must also be affordable.

If energy is too expensive, the global economy suffers. Policymakers must not overlook the necessity for energy to be affordable in order to combat poverty in the world’s developing nations. And even in the developed economies of the world, particularly in Europe, it is vital that we avoid taking steps to make energy so expensive that it stifles economic development and opportunity.

Mitigating the risk of CO2 emissions

The third part of our trilemma is that while providing affordable energy supplies to fuel global prosperity, it is imperative for our industry do so with the utmost concern for the environment. This must be part of our planning and part of our operations. And it is incumbent on us to take into account not just how energy supplies are produced, processed and distributed, but how they are used by consumers.

Make no mistake, this means we need solutions that lower CO2 emissions. The risks of climate change are real and warrant action. Governments and policymakers, working with industry and other stakeholders, should take meaningful action to mitigate those risks. What shape that should take, of course, is a matter of much discussion. One approach that has been favored by ExxonMobil is a revenue-neutral carbon tax, the merits of which I will speak to in a few minutes.

Solving the trilemma

So the question is, how to resolve the trilemma and provide the energy supplies that support economic growth, in ways that are affordable for consumers, and with proper regard for the environment?

I believe that natural gas has a vital role.

When weighing the economic and environmental benefits of energy sources, natural gas checks many boxes – it is abundant worldwide, it is available at scale, with appropriate policy it can be affordable, and it produces up to 60 percent fewer greenhouse gas emissions than coal when used for utility-scale power generation, not to mention fewer emissions of pollutants like NOx, SOx, and lead.

The global marketplace has taken notice of these attributes, evidenced by the fact that demand for natural gas has grown – and is expected to continue growing – at a faster pace than the overall demand for energy.

The beauty of natural gas is that it also provides the opportunity to make sizable near-term environmental progress.

It offers the possibility of achieving CO2 emissions reductions worldwide by substituting natural gas for coal in electricity generation. As the electrification of the global economy continues its 21st century push, the question of how power is generated will have critical implications for dealing with CO2 emissions.

And the ascendance of natural gas over the past decade provides an informative study at a time when policymakers are considering the collective steps to take with regard to climate.

In the wake of COP-21, there is opportunity that arguably did not exist five, ten or 20 years ago. The accord signed there is important as the first climate agreement to feature pledges from both developed and developing economies. It creates an opportunity to craft thoughtful, workable, and consensus-driven environmental policies that are mindful – and this part is key – mindful of the economic costs that such policies will necessarily entail.

Natural gas demand centers around the world

The possibilities natural gas affords become clear when we look at the major gas demand centers around the world and how they are dealing with their energy and environmental challenges.

United States

In the United States, the unconventionals revolution has produced one of the great economic and environmental stories of the last decade. Supplies of natural gas previously locked away in shale have been freed by technology and innovation. Thanks to the novel combination of hydraulic fracturing and horizontal drilling, energy production in the United States has soared over the last decade, with natural gas production up about 35 percent. And this occurred even under policies that constrained exports.

These new supplies are giving the American economy a tremendous boost, with households enjoying dramatically lower energy costs as natural gas prices dropped almost 70 percent between 2008 and 2015.

American manufacturing – particularly in the petrochemical industry, with gas as a feedstock – is experiencing a surge of investment and job growth tied directly to shale energy. ExxonMobil has several petrochemical expansion projects in the Gulf Coast region of Texas and Louisiana – projects that could create tens of thousands of jobs, with additional indirect job and income-boosting economic activity. Other companies are investing heavily as well.

The American shale revolution has ushered in an age of abundance that is upending conventional thinking on energy. The paradigm is shifting. The United States is now the world’s leading producer of oil and natural gas, and refined product. It is the world’s largest exporter of natural gas liquids and is on pace to become a net exporter of natural gas this year.

And we should note the significant impact that new natural gas supplies are having on the country’s emissions profile. In 2016, natural gas supplanted coal as the largest fuel source for electricity, a dramatic switch in a very short time period. Between 2010 and 2015, U.S. CO2 emissions from power generation fell by 15 percent. During this period, emissions of pollutants fell even more – NOx emissions fell more than 25 percent and SOx emissions were cut in half.

Last year, in fact, U.S. energy-related CO2 emissions were at their lowest point in a quarter century, even though electricity demand was nearly twice the levels of the early 1980s. These emissions reductions are the largest seen anywhere in the world – and occurred while power prices were falling mainly due to the contribution of natural gas.

Asia Pacific

In Asia Pacific, meanwhile, we see perhaps the world’s most dynamic natural gas region, and clearly one with the most upside.

In China, natural gas demand increased by nearly half (47 percent) over the last five years. That demand growth is expected to continue, outpacing domestic production. Count on LNG to fill that widening gap.

The potential for natural gas in China is evident from the reliance on coal today – from 2005 to 2015, coal generated more than 70 percent of China’s electricity (according to IEA statistics), while CO2 emissions rose more than 75 percent through 2013.

Economic growth in India will also drive demand for energy. ExxonMobil’s Outlook for Energy estimates that by 2040, India’s economy will have grown to roughly five times its current size. As a result, India’s share of global GDP is expected to be double what it is today.

What sources will fuel this expansion?

Recently, India increasingly has been turning to coal; its use for power generation grew by 43 percent between 2010 and 2015. Coal currently fuels close to 80 percent of India’s electricity. In parallel with that, emissions of sulfur dioxide doubled between 2005 and 2014, and CO2 emissions increased more than 65 percent.

We think that natural gas is poised to play a major role in helping grow India’s economy while helping slow the overall growth of CO2 emissions. And it will play an important role in further developing the growing economies of Indonesia, Malaysia, Pakistan, and other Asia Pacific nations.

Europe

Then there’s Europe.

The mature economies of Europe are not candidates for rapid natural gas demand growth.

Still they constitute a significant market. Opportunities exist for natural gas to make a bigger contribution than its current 22 percent share of the European energy mix.

But that will require a shift in the approach being taken by many European policymakers. Recent years have seen a number of policies that have discouraged natural gas production through high taxation and technology restrictions. Not surprisingly, natural gas imports have risen, and EU statistics indicate that dependence on non-member supplies grew from 56 percent in 2005 to nearly 70 percent by 2015.

At the same time, particularly in Germany, policymakers have encouraged renewable power generation through mandates and massive subsidies. This has indeed resulted in reductions in total CO2 emissions – about 9 percent throughout Europe between 2010 and 2015 – though it is worth pointing out these are considerably smaller than those achieved in the United States under less interventionist policies.

These reductions have come at no small expense. Both natural gas and electricity prices in Europe are about twice those in the United States. In addition, the estimated total tax burden impacting German consumers in 2017 from its government’s renewable policies – the Energiewende – is €32 billion, based on official sources [1]; which equates to around €840 per household.

By 2025, the cumulative cost of Germany’s energy transition could be equivalent to €25,000 for a typical four-person household according to a recent study [2]. In the period 2010 thru 2015 Germany has decreased its CO2 emissions by 3 percent. Different policy choices could have achieved greater CO2 reductions at lower societal cost.

The United Kingdom has taken a different approach, including a greater reliance on natural gas. The estimated cost of its renewable policies this year is about a quarter that of Germany. And between 2010 and 2015, CO2 emissions in the U.K. fell 17 percent.

I am not anticipating Europe replicating the experience in the United States. But I do think that the experiences in the U.S. and also here in the U.K. hold a number of lessons for continental policymakers to consider. We should not underestimate the challenges of implementing climate policies. The energy trilemma is unforgiving and will expose inefficiencies like the burden of overlapping policies.

The policy opportunity

In the post-Paris environment, industry and policymakers have an opportunity to craft affordable and sensible strategies for addressing climate change risks. It is an opportunity to focus on the development of solutions that can help deliver global energy security and affordability while reducing emissions.

When it comes to policies for putting a price on greenhouse gas emissions, we believe their effectiveness will be determined by how closely they hew to certain core principles:

  • Uniformity of application,
  • Reliance on markets to drive the selection of solutions,
  • Minimal regulatory complexity and maximum transparency,
  • And the flexibility to make future adjustments

In our view, a revenue-neutral carbon tax fulfills those principles.

It is an efficient means of reflecting the cost of carbon in all economic decisions made by companies and consumers. The challenge is global, so policy options must encourage and support global engagement.

Managing the balance of nature

A final thought: We are gathered in a beautiful hotel that stands on the spot of what was Grosvenor House, perhaps the finest London residence of the 19th century and home to the Dukes of Westminster, whose family name is Grosvenor.

When the sixth Duke of Westminster, Gerald Cavendish Grosvenor, passed away last year at the age of 64, his obituaries noted his abiding concern for the environment.

They also noted his belief in mankind’s obligation to protect it. He was quoted once saying “It is therefore our responsibility to manage the balance of nature, alongside the 20th century industrialization that we appear to find so necessary.”

The late Duke of Westminster remains correct on that score. The obligation to balance nature with modern society remains.

So too does our obligation to spread the benefits of affordable and reliable energy widely to raise living standards, promote economic development, and alleviate poverty.

More and more, it seems clear, natural gas is suited to play a key role.

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