Modeling the future
For over four decades, Royal Dutch Shell has been developing detailed scenarios about future global energy use. Wim Thomas, the company's Chief Energy Advisor, explains why his organization goes to such efforts, how scenarios are created, and how they inform the oil major's strategic planning.
Nobody can see into the future, but everyone wants to be ready for it. When your business involves multibillion-dollar investments in assets that may operate for decades, it pays to think hard about what the coming years might bring. For European energy giant Royal Dutch Shell, that involves deliberately challenging long-held assumptions and conventional wisdom.
Part of Shell's strategic planning process involves the development of detailed scenarios exploring the different ways energy supply and demand could evolve around the world. It's something the company has been doing since the 1970s and, for the last 14 of those years, the man in charge of energy scenario development has been Wim Thomas, the company's Chief Energy Advisor. To understand the organization's rationale, he explains, it's first necessary to recognize the difference between scenario planning and conventional forecasts or market outlooks. "A forecast is very much one person's view of the world. It will therefore have a certain limited perspective. By contrast, a scenario is a much more inclusive process. We take many more people's views into account, we recognize that people interpret signals differently, from different cultural perspectives and vantage points, and we don't dismiss those interpretations as long as they are logical and plausible.
Energy use is inexorably linked with politics and economics, so scenario creation starts, says Thomas, with "our economic and political analyst colleagues, who create a sketch of the world." Between 100 and 200 people can be involved in a fully fledged global scenario exercise, two-thirds of them from outside the company. That's vital, he notes, "because we don't have all the answers."
Combining those different perspectives into a number of coherent views of the future inevitably involves an element of judgment. "We try to ensure our perspectives are plausible, but stretching as well," explains Thomas. "Ultimately these scenarios are a communication tool, there to support our strategic decision-makers. If you say that the future will just be a case of 'business as usual,' that's not very useful for anyone. But you have to be careful not to stretch things too far. If you think the answer is 100, but your audience can only see the world to 50, it's better not to talk about your end state, it's better to talk about the halfway point. Otherwise people may never do anything because they think it's too difficult to change."
Pathways to zero
How can the relentless rise in carbon dioxide emissions be reversed? Can that be done without compromising the ambitions of billions of people to enjoy the benefits of a modern society? That's the question addressed by Shell in "A Better Life With a Healthy Planet," a supplement to its most recent set of scenarios. With aggressive steps to improve energy efficiency, Shell estimates individuals can achieve a decent quality of life with an energy budget of around 100 gigajoules per person per year. By comparison, most Europeans consume around 150 gigajoules today, Americans 300. For a world population of 10 billion people to enjoy even a modest 100 gigajoules, however, global energy production will have to double during the course of this century.
Meeting the world's appetite for energy without pushing trillions of metric tons of carbon dioxide into the atmosphere will be a tremendous social and technical challenge. But the Shell team concludes it can be done. Large-scale expansion of renewable energy technologies is part of the answer, and greater electrification of end use will be essential to make the best use of that energy. Electricity can't do everything, however. Some applications, notably heavy industrial processes such as steelmaking or cement manufacture, require so much energy that they will contintue to rely on hydrocarbon energy for the foreseeable future. To offset the emissions generated by these activities, the world will need to invest in technologies that absorb carbon dioxide. Those range from long-established techniques, like reforestation or greater use of wood in construction, to emerging technologies, like carbon capture and storage at the point of emission.
From global politics to gigajoules
Once it has created this socio-economic and political world view, the scenario team must determine the implications for energy. That's where the modeling comes in. Shell has developed a number of highly sophisticated models of the global energy system (see Modeling the global energy landscape, below). Those models, says Thomas, "are what keeps the energy scenarios plausible as the world cannot change overnight. Infrastructure takes a long time to transition, political decision-making processes can be slow and so on.
Over time, the company's models have become more elaborate. In part because there's more computing power available to crunch the numbers, but also because the global energy system is getting ever more complex. "Thirty years ago, energy was simple," says Thomas. "Eighty percent of energy came from fossil fuels. Coal was the dominant force, although oil would eventually catch up. Gas was third in line, then you had a bit of nuclear. At that time, the mathematical modeling was less important than the political and economic assumptions you made. Today, with the growth of renewable energy technologies, the situation is far more complex.
Modeling the global energy landscape
To bring mathematical rigor to its scenario development work, Shell develops highly detailed models of the world's energy system. The company's World Energy Model combines top-down and bottom-up perspectives, considering how energy supply and demand may evolve based on factors including population growth, economic development, resource availability and technological progress. It considers how choices made by individuals, companies and governments will influence the way energy is produced, transported and consumed.
The company's work to build mathematical models of the global energy landscape stretches back to the mid-1970s. Its first attempt included 3,000 linked equations and took 20 hours to run on a mainframe computer. Today's model incorporates around 55,000 lines of code in a series of interlinked spreadsheets. It includes detailed information on 100 countries, 14 industry sectors, 18 different primary energy sources and 75 adjustable scenario parameters. Thankfully, modern computers are more than a match for the task. It takes just six minutes to run the model, producing a 55-megabyte output file predicting the evolution of the global energy system over a period of 100 years.
Innovation, impact and interdependence
The computing power available today allows the scenario team to explore the impact of many different possible changes, and to identify the factors that will have the biggest impact on the future energy landscape. It also gives them the ability to answer specific questions presented by the company's management team. "Recently, for example, there was a lot of interest in the impact of a more rapid than expected transition to electric cars," says Thomas. "There were newspaper headlines suggesting this might lead to a steep overnight decline in demand for oil." When Shell's team ran the numbers, however, they found a different story. "In our model, everything is interrelated, so we see that if you don't need so much oil in the rich West, demand is suppressed and the price goes down. But that means developing economies can afford to buy things earlier than they otherwise would. They take up the demand and the net effect is hardly any different at global level in the short term, but over time these technology shifts will have a profound effect.
Does Shell's scenario planning work genuinely inform its strategy? While he emphasizes that change in the energy industry inevitably occurs slowly, Thomas insists that it has helped put a number of big ideas on the agenda of the company's leadership over the years, including the rising importance of energy efficiency in the 1980s, environmental pollution in the 1990s and more focus on climate change in the 21st century. Shell's current leadership team takes the global transition toward a carbon-neutral energy landscape "seriously," he notes. "What matters now is how this company best positions itself in such a transition." Shell's efforts in that direction can be seen in many areas, he adds, from the increasing role of natural gas, which now makes up around half its fossil fuel portfolio, to the installation of solar panels at its facilities and the piloting of hydrogen filling stations in Germany. Between now and 2020 the company plans to invest one to two billion dollars a year in developing capabilities in new energy technologies, such as offshore wind.
While its work to transition to a net zero emission economy presents "very challenging" ideas for a fossil fuel company, says Thomas, he believes it contains much to be optimistic about. "We've shown that not only is it technically possible to reach net zero emissions, it's also affordable." A key decision for global society, however, will be the speed of that transition (see Pathways to zero, previous page). Achieving net zero emissions by the end of the century will not be enough to meet Paris Agreement aspirations, says Thomas. To keep forecast temperature increases well below 2 degrees Celsius, the goal must be to complete the energy transition largely by 2050. "2050 is tomorrow in energy terms. If you build a power station today, it will still be operating in 2055. That creates a real sense of urgency for policymakers to put frameworks in place for things like carbon pricing or the development of carbon capture and storage technologies."
Room for maneuver
It isn't just energy companies and governments that can learn from Shell's scenario work, much of which it makes publicly available. Leaders in all industries, says Thomas, should be thinking hard about the role their organizations will play in the energy transition. "The big themes are decarbonization of end use and the role of digitalization as both an enabler and a disrupter." Today, for example, less than 20 percent of energy is consumed in the form of electricity. "We think that figure can rise to around 50 percent, which is great news because all the basic renewable technologies — except for biofuels — produce their energy in the form of electrons."
Digital technologies, meanwhile, will help companies improve the overall energy efficiency of their operations in numerous ways. Opportunities in logistics, he suggests, include smarter planning to reduce journey distances and the movement of empty vehicles. Coordinating port and maintenance operations to minimize loading and offloading times, meanwhile, allows ships to travel more effectively, with significant fuel and emissions savings.
If Shell's scenario work offers one major lesson for countries, companies and individuals, concludes Thomas, it's the need to lay the groundwork today for the challenges and opportunities of tomorrow, ensuring there is "room to maneuver" in capital investments in the face of significant changes in the way energy is produced, distributed and consumed. — Jonathan Ward
Image: WIM THOMAS: The Chief Energy Advisor at Shell also heads the company's Energy Analysis practice.
Published: April 2018
Images: chagpg/Adobe Stock; Shell