Signals Signposts

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Se Eeg Sceaos to 2050


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Se Eeg Sceaos to 2050

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An era o volatile transitions


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CotetsAckoegemets

Our thanks go to Shell colleagues and the man external experts who havecontributed to the development o Signals and Signposts and the previouslpublished Shell energ scenarios.

Other Shell scenario material can be ound at www.shell.com/scenarios

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Foreword and Introduction

1 Economic Environment

2 Energ Developments

3 Choices

4 Climate & Environment

5 Technolog & Innovation

6 Recognising Sb& Bs

2011 Shell International BV

All rights reserved. No part o this publication ma be reproduced, stored in a retrieval sstem, published

or transmitted, in an orm or b an means, without the prior written permission o Shell International BV.

71Closing Comments and Appendices


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Fo amost a a cet, Se sceaos ave epe s to ga a eepe

estag o goba eveopmets a te os eeg spp,

se a ees. Te ep s to make cca coces ceta tmes as

e gappe t tog eeg a evometa sses.

Three ears ago, we made public our Shell Energy Scenarios to 2050. These scenariosaddressed the challenges acing the world and inuenced our own strategic direction.To ensure we continue plaing a constructive and responsible role in the global energand environmental debate, we must listen to others. We must also continue to share ourbest understanding o what we believe the uture holds.

Our energ scenarios Scrambleand Blueprints -- remain a credible vision owhat ma lie ahead. This new booklet -- Signals & Signposts -- updates our thinkingb taking into account the impact o the global economic and fnancial crisis.Over the next our decades, the worlds energ sstem will see proound developments.Heightened collaboration between civil societ and the public and private sectors isvital i we want to address economic, energ and environmental challenges.

Partnerships must be grounded in commercial realit, but energ and environmentaldevelopments have to accelerate in the right direction. We must widen and deepen thedebate across industr and geographical boundaries. With polic drit and increasingchallenges to market-based solutions, we must ocus on policies that deliver aordable

solutions now and technological advances or the uture. Some preerred energsolutions will onl be aordable and available at scale tomorrow. Others are availablenow and will remain attractive. For example, I frml believe that natural gas must makea growing contribution. The global suppl picture or this low-carbon uel has improvedconsiderabl over the past ew ears.

I trust ou will fnd Signals & Signposts stimulating, thought-provoking and useul.I hope it will help ou seek collaborative opportunities. I hope it will also help ouembrace, rather than sh awa rom, the challenges which lie ahead.

Pete Vose, CEO

Februar 2011

Foeo

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Fo 40 eas, Se as a o ts sceaos to eace bsess

ecsos a ts abt to espo to cage. O most ecet

sceaos aso cotbte postve to te goba pbc ebate o

eeg a te evomet.

But the fnancial crash, the deepest economic slump in 70 ears, and a patch andragile recover have changed the world dramaticall. We must consider how theseevents ma or ma not have altered our energ outlooks. Signals & Signposts oersour best understanding about the changes brought b the global fnancial andeconomic crisis.

Internall, we have been using Recession & Recoveryscenarios since September2008. The two outlooks -- Severe-yet-Sharp and Deeper-and-Longer have, so ar,bracketed actual developments. We have also drawn on a supplementar butunlikel scenario, Depression 2.0. These scenarios continue to provide useulinsights and we draw on them in this booklet.

Despite the economic turbulence, the undamental drivers and uncertainties exploredin our Shell Energy Scenarios to 2050remain ull relevant.

Signals & Signposts highlights signifcant additional actors and should be read as

a companion to our Scrambleand Blueprints energ scenarios, which can bedownloaded rom www.shell.com/scenarios. An overview is in the Appendix.

POPulATiOn And PrOSPEriTy

The ke driver in our scenarios outlook remains growth in global populationand prosperit as emerging nations enter their most energ-intensive phase oeconomic development. Millions are escaping povert. The are gaining access tocommercial energ in the home and beneftting rom the industrialised productiono household goods and inrastructure.

itocto

8 9

Energy drivers and the zone of uncertainty

Underlyingdemandpotential

2050

Zone ofextraordinaryopportunityor misery

Ordinarydemandmoderation

Ordinarysupplydevelopments

Energy supply/demand balance

2000


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The energ sstem will struggle to match this surging demand or easil accessibleenerg. Suppl, demand and environmental tensions will swell and spread.Political, industrial and individual choices will determine whether these tensions canbe resolved and whether the solutions will be benign or harmul to us.

ZOnE OF unCErTAinTy

Underling global demand or energ b 2050 could triple rom its 2000 level iemerging economies ollow historical patterns o development.

In broad-brush terms, natural innovation and competition could spur improvementsin energ efcienc to moderate underling demand b about 20% over thistime. Ordinar rates o suppl growth -- taking into account technological,geological, competitive, fnancial and political realities -- could naturall boostenerg production b about 50%. But this still leaves a gap between business-as-usual suppl and business-as-usual demand o around 400 EJ/a the size othe whole industr in 2000.

This gap this Zone o Uncertainty will have to be bridged b some combination oextraordinar demand moderation and extraordinar production acceleration. So, wemust ask: Is this a Zone o Extraordinary Opportunityor Extraordinary Misery?>>Smart urban development, sustained polic encouragement and commercial andtechnological innovation can all result in some demand moderation. But so canprice-shocks, knee-jerk policies and rustrated aspirations.

Timescales are a ke actor. Buildings, inrastructure and power stations lastseveral decades. The stock o vehicles can last twent ears. New energtechnologies must be demonstrated at commercial scale and require thirt ears o

sustained double-digit growth to build industrial capacit and grow sufcientl toeature at even 1-2% o the energ sstem.

The policies in place in the next fve ears shape investment or the next ten ears,which largel shape the global energ picture out to 2050. Speed and direction aresignifcant. How ast will tensions rise? How ast can we make the right choices? Andhow quickl can positive developments happen?

KEy nEw FACTOrS SinCE ThE FinAnCiAl CrASh:

n Geate ecoomc voatt a cccat. Balance sheets, risk appetitesand credit ows are adjusting. We will see global trend growth somewhat lessthan pre-recession. The good polic, good practices and good luck thatunderpinned the last two decades o the Great Moderation period are unlikel tocontinue as beore. We will see greater economic volatilit and cclicalit,driving political volatilit and perceived investment risk. All this could limitdevelopments needed to bridge the vast Zone o Uncertainty.

n Moe cetat a sk. Regulator uncertaint around greenhouse gasemissions have grown since the Copenhagen climate summit. Developing aregionall dierentiated and politicall easible patchwork o measures seemsthe most likel path orward. Tensions are increasing as the majorit scientifcview becomes increasingl pessimistic and et public opinion weakens. Thisdivergence is not sustainable indefnitel.

Similarl, the Macondo well disaster in the Gul o Mexico has increasedregulator uncertaint and investment risk. The broader, longer-term andinternational ramifcations o this tragic event remain to be seen.

n nata gas eveopmets. The suppl picture or natural gas has improvedspectacularl in the past ew ears, driven b the boom in tight and shale gas inNorth America and coalbed methane in Australia. The unconventional gasbooms echoes are heard ar beond North American shores: it has reed upsupplies o liquefed natural gas (LNG) destined or the US or other partso the world and it has inspired other nations to search or new gas resourcesthemselves. But it is still uncertain how confdent other regions will be toaccelerate building or extend gas inrastructure and power-generation capacit.

n iaq eeg st. The opening up o investment into the Iraqi energindustr brings signifcant resources into pla, alongside uncertaint on howOPEC will accommodate this and how the obvious securit challenges will beaddressed.

ScramBleOr BlueprintS?

Taking these new Signals & Signposts into account, do we see the world heading ona pathwa that looks more like Scrambleor Blueprints?

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Like Scramble, bilateral state-sponsored energ deals continue to pepper theheadlines and the use o cheap coal continues to surge. But, like Blueprints,recognition o new mutual interests is driving new cross-border collaborations,as demonstrated b central banks during the fnancial crisis. Public-privatecoalitions like that o Chinese businesses targeted at developing electricvehicles, markets and inrastructure are also emerging.

The Copenhagen and Cancun summits can be interpreted through both aScrambleand a Blueprints lens: nation-states scrambling to protect narrow interestsor the emergence o a new coalition o the most critical plaers or politicalleasible progress.

The signals are mixed. Blueprints sees the emergence o a patchwork o incentivesover the next fve ears to moderate the energ and carbon dioxide intensit oeconomic development. While it is clear that extending the scope o internationalltransparent emissions pricing remains a distant p rospect, more limited schemesand less transparent regulator means are developing. China, or example, masupplement its strong ocus on energ efcienc targets with a limited domesticemissions cap-and-trade sstem within its next polic planning ccle. Man busi-nesses worldwide are alread actoring additional regulator action into decisionson long-term investments.

Still, even the enormous transormations highlighted in Blueprints result in anatmospheric concentration o greenhouse gases that remains greater than the levelthe majorit o climate scientists would consider responsible. And we are currentlchanging more slowl than the Blueprints scenario. Is it possible to move even asterthan Blueprints? Or are we more likel to move as slowl as Scramble?

In publishing Shell Energy Scenarios to 2050we broke a long tradition o neutralit.

We declared that, while we aim to be responsible and commerciall successulregardless o the uture, the accelerated pace o change described in Blueprintspromises the best hope or a sustainable uture or all o us.

We now oer Signals & Signposts or our consideration. There is great opportunitto be realised through eective combinations o polic, technolog, and commitment.With our partners, and those who will partner with us in the uture, we aim to realisea share o that opportunit. We hope this material can help ou do likewise.

Jeem BetamVP Business EnvironmentFebruar 2011

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1

The all in consumer and business demand triggered b the 2008 fnancial crisisand its spread through trade and fnancial sstems was ar greater than maneconomists expected. This downturn ma have been accelerated in part b mediaand inormation technolog rapidl spreading the collapse in confdence andaccelerating output cuts b producers.

But the global recover has been stronger than expected lacklustre in manadvanced economies, but robust in most emerging and developing countries.Monetar polic has been highl accommodative and supported bunconventional asset purchases b central banks. Fiscal polic also provided amajor stimulus in response to the deep downturn, but at the expense o fscalsustainabilit in some countries.

Financial conditions have stabilised but remain much more difcult than beore thecrisis. Credit growth will be constrained as banks rebuild their balance sheets andsome sectors still struggle to access credit. Consumers and small and medium-sizeenterprises ace tight borrowing conditions. In advanced economies, high publicdefcits and debt have pushed some sovereign risk premiums sharpl higher, raisingconcerns o a new round o fnancial sector losses.

Financial ows rom advanced to emerging economies have recovered. This islargel due to their relativel rapid growth, large ield dierentials in their avourand returning appetite or risk. But this is putting upward pressure on someemerging market currencies and creating new stress in the global econom.

The polic responses b governments and central banks have achieved signifcantsuccess. But the high fnancial cost and polic risks associated with these responsescontinue to loom large on the horizon, with those related to high public debts inadvanced economies having become sharpl more evident over the course o2010.

EcoomcEvomet

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Room or polic manoeuvre in man advanced economies is now much morelimited, leaving the ragile recoveries vulnerable to an new shocks. The impact othe crisis on underling global trend growth rates remains ver uncertain.

dEBT, POliCy, BAnKS And POliTiCS

The economic recover remains in the grip o substantial uncertaint. We ocus onour ke drivers o the short to medium-term economic outlook:

n debt a baace seet ajstmets. The substantial deterioration ingovernment defcits and debt in the euro area, Japan and the US will have tobe ollowed b a sustained period o fscal restraint i public debt crises areto be avoided. Overstretched household balance sheets, especiall in the USand UK, must be rebuilt through higher savings rates, holding back consumerspending. At the same time, fnancial sectors in Europe and the US must repairand strengthen their balance sheets in order to put these sectors on a much morestable ooting but this process will restrict credit growth.

n ifato vess efato. The combination o ver high government defcitsand debt, and the reaction o monetar polic to accommodate it, raises concernso impending ination in Europe and the United States. At the same time, therapid pace o fscal cuts in the euro area and the UK, high unemploment ratesand low ination rates make some central banks ver concerned about deation.Steering a course between ination and deation will require ver skilulmanagement o monetar polic, both o interest rates and the extraordinarassets purchased b central banks.

n Faca secto eakesses. While US and European fnancial institutionshave made substantial progress in dealing with the sub-prime mortgage fasco,other fnancial sector vulnerabilities remain. These include exposure to Europeansovereign risk and US commercial real estate. Reorms to deal with some o theunderling causes o these vulnerabilities have so ar been modest in the ace o

strong fnancial industr pressure to maintain the status quo.

n Geopotca eveopmets. When aced with an extraordinar collapse inthe global econom, the G20 showed a remarkable degree o cooperation instabilising the situation and achieved considerable success. But this cooperationwas short-lived and attempts to manage the wide global imbalances that havere-emerged with the global recover have so ar ailed. A return to competitiveexchange rate practices and trade protection is possible.

GrEATEr VOlATiliTy AhEAd..?

The recession has signifcantl increased macroeconomic volatilit, making marketsless efcient and business planning more difcult. This is holding back investmentand growth o individual frms. But will this volatilit be eeting or enduring?

Prior to the fnancial crash and recession, a combination o good polic, goodpractices and good luck enabled most advanced economies to enjo about 20 earso historicall low volatilit - a Great Moderation. Since the mid-1980s, centralbank independence and policies o ination targeting have enabled monetar policto stabilise output and ination more eectivel. Emerging and developing economiesalso made substantial progress in reducing their government defcits and debt.

At the same time, better inventor management -- thanks to inormation technolog helped frms to manage demand volatilit with less overshooting. Financialinnovations expanded access to credit and improved risk allocation. In theor, thishelped smooth consumption and investment in the ace o shocks to income andearnings but in practice also led to a build up o sstemic risks.

Through the mid-2000s there were strong gains in productivit with advances ininormation and computing technolog, helping economies to grow without ination.The relativel ewer and smaller oil price shocks in this period also helped reducevolatilit, along with the all in oil expenditure relative to GDP.

Some analsts sa the Great Moderation trends are permanent and will re-emergewith the eventual recover rom the global recession. But this view is too simple.While some actors will remain (central bank independence and gains in inormationtechnolog) others were either less benefcial than previousl thought (aspects ofnancial innovation) or are likel to ade (low oil price volatilit).

MOrE ShOCKS lOOM

The recession interrupted the oil and commodit price boom, but it ma return.

Emerging nations like China and India are going through materiall intensivedevelopment and a tighter market will continue to support prices. We can alsoexpect more shocks rom policies aimed at mitigating climate change and otherenvironmental stresses.

Market-based approaches to curb emissions either cap-and-trade sstems ortaxes are unlikel to deliver abrupt price shocks because o their cost transparencand political sensitivit. But command-and-control regulations - like the mandatescontemplated in recent US Senate and Environment Protection Agenc proposals -could have a negative impact on costs and prices. The longer the dela in climatepolic action, the more likel shocks become.

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This will increase the chance o knee-jerk polic steps which are not costtransparent ver Scramble-like behaviour.

The dramatic deterioration in fscal polic in most advanced economies will rendermonetar polic improvements insufcient to saeguard macroeconomic stabilit.Fiscal consolidation is happening too slowl or too late in some countries to maintaininvestor confdence in the sustainabilit o budget defcits and public debt. Withinthe euro area, the Greek and Irish governments have alread aced precipitousalls in investor confdence, and concerns remain about the public fnances oPortugal and Spain.

Investor expectations swing between ear o ination and ear o deation. Giventhe serious risks to growth and emploment rom deation, central banks are likel

to err on the side o ina tion. But an de-anchoring o ination expectations wouldincrease the volatilit o output growth.

The fnancial crash showed us that innovations can also contribute to bouts o fnancialinstabilit, particularl when fnancial markets are prone to speculative price bubblesand private incentives are distorted b inadequate fnancial regulation.

This greater uncertaint and volatilit ma ampli the behavioural trends behindboth the Scrambleand Blueprints scenarios, intensiing rather than re-directingpossibilities. While increased risk perceptions ma spur investment in transormationin regions with room to manoeuvre, overall we expect a dela which would tendtowards Scramble.

TrEndS in GdP GrOwTh MAy AlSO BE rESET

There are several other potentiall enduring impacts o the fnancial crisis andglobal recession that could lower underling economic trend growth rates.Tighter fnancial regulation and less appetite or risk are likel to lower investmentand slow innovation. A second possibilit is the recourse to competitive exchangerate practices and trade protection in the ace o persistent global imbalances andhigh unemploment in Europe and the US. A third is a shit in consumer valuesawa rom material consumption in response to a more challenging and volatileeconomic environment, making virtue rom some o the necessar adjustmentsto past excesses.

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Chart 1 shows alternative scenario outlooks or post-recession trend growth rates in theglobal econom that reect the three actors in varing combinations and intensit.The Depression 2.0scenario, which has all three coming orceull into pla, has a low

probabilit but potentiall high impact on the global econom and energ sstem.

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Fa eeg cosmpto o taspot

dEPrESSiOn driVErS

A potential driver o the Depression 2.0scenario is a breakdown in the globaleconomic order structured around ree trade and capital ows. The re-emergence oglobal macroeconomic imbalances with the recover has again brought to the oreconcerns about competitive exchange rate practices and trade protection. This showshow difcult it is to coordinate policies across countries to address undamentalproblems. But the G20 response to the crisis in March 2009 showed a strongwillingness to sustain the global econom when necessar.


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The fnancial crisis changed the parameters o the worlds energ sstem btriggering a signifcant drop in global oil demand. In act, the economic downturnhas set global energ demand back b about 2-3 ears and 2008 demand levelsare onl expected to be reached again during 2011. The length lead time neededor new projects means that energ suppl cannot adjust rapidl enough to weakerdemand. This increases market volatilit.

The recession has also provided governments, anxious to weather the downturn,with opportunities to take regulator measures. Concerns about emploment, debt,economic competitiveness, energ securit and climate change are now being usedto justi this. These measures are accelerating or delaing energ sstem change,depending on the political or economic circumstances. For example, investment inhigher-cost renewable energ has slowed in countries severel hit b the fnancialcrisis. However, energ efcienc measures, made beore the recession andstimulated as part o economic recover plans, will reduce the energ or carbonintensit o man advanced and developing economies.

The rapid emergence o abundant and aordable gas creates new possibilities. Butare the rameworks in place to realise its ull potential?

In a Blueprints world, natural gas will give the world an earl opportunit to reduceoverall CO2 emissions rom energ b displacing coal with gas. At the same time,

a continued strong ocus on energ efcienc and market based CO2 pricing willkeep demand growth in check.

In Scramble, the world ails to realise this because o the absence o necessarpolic rameworks. The availabilit o abundant and aordable gas would depressthe need or accelerating energ efcienc, particularl in industr and buildings.Coal would remain strong in the electricit mix. Capital-intensive renewable energdevelopments would slow to relieve pressures on government budgets, especiall incountries severel aected b the fnancial crisis. More gas production would boostthe liquid suppl profle, reducing the need or earl efcienc measures intransport.

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Eegdeveopmets


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GlOBAl dEMAnd

Oil demand is swinging rom west to east. The recession-driven drop in oil demandoccurred mainl in the OECD countries while developing economies continued theirstrong growth. In the medium term, demand will continue to all in OECD countriesas efcienc measures take eect. But how quickl will this happen?

Post-recession and post-Copenhagen polic developments in major energconsuming countries will determine investment in alternative energies and rewardconsumer behaviour towards higher efcienc solutions. But it will take time or thenew Corporate Average Fuel Econom (CAF) standards in the US to take eect bmoving consumers awa rom SUVs to (plug-in) hbrid vehicles. Likewise, it willtake time or the EU and Japan to move towards passenger transport electrifcation.

Chinas aggressive motorwa building programme and rising prosperit are ke tostrong demand growth. Demand will also remain strong in the Middle East and inother developing countries.

The net eect is that global oil demand will increase. Meeting this expected growthwill rel more and more on alternative sources o energ suppl, like natural gasliquids, biouels and unconventional oil.

Natural gas demand will grow strongl, driven b economic growth and the thrusttowards lower carbon uels. In the electricit sector, lower-cost gas fred generationwill replace coal-fred generation where possible.

Growth in renewable energ also means more gas-fred power plants are requiredto provide exibilit. The success in unconventional gas production in the US, whichma be replicated elsewhere in the world, will underpin this demand growth.

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EJ Exajoules per ear

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GlOBAl SuPPly

Two arguments can be made or recent oil suppl trends. One sas non-OPECproduction is in inevitable decline with underling decline rates in conventional oilsuppl accelerating. Another sas that normal cclical behaviour will occur withnew suppl sources exploited as costs all or prices go up.

Non-OPEC conventional crude suppl has been alling over the past fve ears andthis is likel to continue. But the all could be slowed b new discoveries like that indeep water o Brazil and reserves in existing felds being upwardl revised withthe application o new technologies, viable in higher oil price environments. Thisdecline could also be mitigated b supplementar sources like unconventional oiland biouels, as well as strong growth in OPEC Natural Gas Liquids (NGLs).

Meeting the expected growth in global demand will rel heavil upon alternativesources o energ suppl, which are, in general, more costl than conventionalsources. This will put upward pressure on oil prices in the longer term. However,the pace o new investments and o learning curves could lower the cost oalternative energ sources.

Iraq is a ke uncertaint in the oil suppl picture. I reasonable stabilit and securitcan be achieved, production will increase quickl under the new partnershipsbetween national and international oil and gas companies. The deals could doubleIraqs output to 5-6 mln b/d over the next decade. The Iraqi government is evenmore ambitious putting the countrs uture output at as much as 10-12 mln b/d.This would mean annual growth rates o 10-15% would have to be sustained or atleast 10 ears a eat unseen in recent histor.

In the medium-term, however, a balance must be struck between ramping-up

production quickl or Iraq to generate income, and avoiding over-suppl so thatOPEC can manage its spare capacit buer adequatel. Iraqi production uptakethereore has the potential both to increase or to decrease price volatilit.

Ke to price volatilit will be OPECs spare capacit levels, its adherence to agreedquotas to limit production during periods o weak demand and continued marketperception o medium to longer term suppl-demand tightness.

Saudi Arabia has recreated its spare production capacit b bringing new acilitieson-stream. This enables it to retain its OPEC leadership and consolidate itsinternational inuence. This leadership will be tested i the present OPEC spare

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capacit buer lasts well into this decade. It will depend on the pace o uptake oIraqi oil production and the competitive response o other OPEC members inmaintaining market share.

The breakthrough in natural gas suppl in North America is one o the mostimportant changes since we published the Shell Energy Scenarios to 2050. Oil andgas companies have more than doubled the discovered shale gas resource base inNorth America in the past three ears and the have scaled-up productiondramaticall. Total potential resources are now thought large enough to meetcurrent consumption levels or about a centur.

This boom reaches ar beond North American shores. Man other countries arenow inspired to search or new gas resources themselves. Unconventional gascovers a wide range o sources like tight gas, shale gas and coalbed methane.

The global unconventional gas resource base must still be proven, but with the IEAestimating a potential recover o around 13,400 trillion cubic eet (tc), it will clearlbe a game-changer. The largest addition comes rom the US, with the EnergInormation Administration (EIA) estimating some 2,000 tc. Its success will givegovernments, investors and consumers the confdence to commit to natural gas or thelong term.

FuTurE EnErGy EMiSSiOnS

Future energ emissions hinge on a patchwork o polic rameworks developing;the uptake and success o Carbon Dioxide Capture and Sequestration (CCS)projects; and the nuclear renaissance we see emerging.

We must also consider an likel acceleration or dela in renewable energ

investment, in particular in China, which is rapidl catching up in deploingrenewable energies like wind and solar, thereb reducing costs and developingmanuacturing capacit or export.

How quickl the world can make the most o available natural gas and its contributionto lower emissions will be ke, especiall i it can be used to displace coal.

Cat 5. CO2 Emssos om Eeg

There is growing discussion around the 450 ppm target (whether CO 2-onl or CO2e, covering all greenhouse gases).Some experts, like James Hansen, even advocate 350 ppm, a level below todas fgure. Dierent groups haveproposed dierent pathwas to keep within this carbon budget, but or 450 ppm, the broad conclusion is that globalemissions need to all b at least hal b 2050. For urther discussion see page 53.

Cat 6. CO2Patas

Shell estimate based oncurrent and planned policies

Scramble

Blueprints

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CHOICESThe emissions levels we can expect over the coming decade are largel determinedb investment choices made in the past 10 ears and will continue to grow ataround 2% pa. Most growth will come rom the non-OECD countries especiallChina and India - as coal-fred power generation surges. However, some countriesin the OECD, acing the imminent phase-out o older, inefcient and air-polluting,coal fred power generation, will have the opportunit to move aster and reduceemissions alread this decade.

CO2 policies adopted in the OECD over the next 10 ears will start to impact ater2020 and emissions could begin alling b about 1.5% pa. This will slow overallemissions growth but much more needs to be done in developing economies beorean overall emissions reduction is achieved.

Based on current and planned policies, the overall CO2 uture is likel to be closer tothe Scramblescenario than to Blueprints. The chie question the world must ask itselis: What more can be done now to achieve the aster than Blueprints profle that is sovital to a sustainable energ uture.


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GEOPOliTiCAl dEVElOPMEnTS

The global economic crisis has coincided with a shit in geopolitical andeconomic power rom west to east. This decisive shit is transorming the globaleconomic and political sstem. The change is gradual, but its potentialconsequences are proound. The economic crisis in the west ma acceleratethis trend. Future generations ma see 2008 as the turning point.

The world aces a period o uncertain global politics. Strategic ault lines areemerging. Rising powers are increasingl and confdentl asserting what the seeas their national interests. This is undermining global mechanisms or ensuringcollective securit.

uceta goba goveace

There is growing recognition that the pace o globalisation has not been matchedb change in the institutions o global governance. At the same time, the authoritand legitimac o established powers and multilateral institutions charged withmanaging the global econom have been damaged b the fnancial crisis.

The prominent role plaed b the G20, rather than the G8, in tackling the globaleconomic crisis is evidence o this shit in geopolitical and economic power, and

highlights concerns over the legitimac o eorts to orge global multilateral policies.

The G20 is more representative than the G8, but its size makes it harder orleaders to achieve sustained progress on tough issues, to agree the rules othe game and act decisivel. How global governance will develop remainsto be seen. Despite the prominence o the G20 summits, the established majorpowers remain reluctant to share power with a wider circle o developingcountries, preerring to treat the G20 as a broad consultative orum.

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We can expect a period o disorderl globalisation. Uncer taint will grow andit will become harder or world leaders to reach global consensus on the toughchallenges that ace us.

Te uS Ca eatosp

The relationship between the US and China is pivotal to the shit in geopoliticaland economic power. There has been talk o both countries orming a G2 tocoordinate global polic. This would be unchartered waters given neither is amiliarwith cooperating with other world powers as equals. China is also reluctant toassume global responsibilities. As a developing countr it does not believe ithas the resources to do so.

A slow drawn-out economic recover could also damage US confdence.This, together with China not stepping orward, could lead to a leadership vacuumat the global level.

Sb o Bs?

In a Blueprints scenario, the US ma well remain the worlds pre-eminent politicalpower, but it aces a serious loss o structural inuence and cannot act unilaterall.The economic imbalances at the heart o the fnancial crisis helped und the politicalimbalances that underpinned US geopolitical dominance. Unwinding these economicimbalances requires the US to accept a lesser role in a more plural world. It will haveto share power with old allies, as well as with new ones like China and India.

The crisis has changed the wa emerging powers view the West. Although thedo not challenge globalisation itsel, Blueprints could see more o an Asian growthdriver emerge with the burgeoning o an Asian regional econom.

A Scramblescenario brings more dramatic political implications. Here ever state

will look to protect its own interests. Willingness to cooperate or the greater goodand or long term interests will diminish. This will increasingl call into question thetenets o the Anglo-US liberal co-operative global ramework that has hithertounderpinned the international sstem.

Scramblein the west could also result in increasing anti-globalisation, moreprotectionism and political radicalism. China has emerged in US domestic politicsas a popular scapegoat to account or its economic problems. As global orderragments, governments in developed countries will be pressured to protect theliving standards o their populations. In the extreme, the US could retreat to becomemore isolationist and protectionist.

Scramblealso troubles a China dependent on global economic cooperation.The Scrambleworld is one o antagonistic relationships, nationalistic state-drivenpolicies and growing geopolitical tensions. It sees an increasingl conrontationalUS China relationship as both take a harder line internationall. Bold leadershipis vital to steer China through these turbulent waters. Chinese leadership will needto act decisivel, which ma require signifcant political change to strengthen itslegitimac to act. Weak leadership could resort to repressive measures which coulddiminish growth.

Whatever the scenario, the world will become more interdependent and morecompetitive. Globalisation will continue to generate winners and losers, especiallamong workers. Inequalit is likel to increase despite an overall increase inwealth. The Middle East and sub-Saharan Arica where populations are gettingounger - will eel the impact o inequalit the most.

Te potcs o ecesso a ecove

The worlds established powers will remain politicall war until a sustainedrecover emerges. Global imbalances - smptomatic o the problems that sparkedthe crisis are still with us. In domestic politics there is a phone war an aware-ness o the cost o the crisis but as et no signifcant casualties. Most governmentshave weathered the recession, but at the price o huge fscal imbalances. This hasdelaed the social and political impact o the crisis, but has also made a return togrowth signifcantl more challenging. When governments begin to re-adjust theirspending, the political consequences will hit home hard.

An extended phase o below-average growth restricts governments reedom tomanoeuvre. The ke political issue will be who shoulders the burden whengovernments tighten spending and raise taxes. Adjustments will be difcult; allcountries, not just China, need economic growth to underpin political stabilit.

The economic crisis has challenged prevailing orthodoxies and has sparked asearch or polic alternatives. But we have et to see a paradigm shit.

The state has returned to pla a more active role in response to the crisis. Largedeveloping countries have become vocal advocates o industrial polic. Free marketorthodox remains deep-rooted but that orthodox gained ground onl in the last30 ears. What we consider to be business as usual ma be more transient thanwe assume. It is difcult, however, to envisage the emergence o an alternative tocapitalism. All approaches that we have exist within a broad capitalist ramework,with variants that are either more market-centric or more state-ocused.


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Societal trust in organisations is low. People demand increased transparenc inhow the are governed. Mercurialindividuals with unpredictable, unstable orextreme positions ma become prominent. Greater international connectivit andcop-cat responses could ampli such behaviour.

The more conrontational international environment o Scramblein particular, leads toan antagonistic domestic political environment. A sudden increase in insecuritcreates social resentment and a search or scapegoats. People turn on one anotherand target minorit groups. There ma be a resurgence o ar-right politics, ethnicnationalism or new undamentalist ideologies. Alread signals o change in somecountries see politicians advocating populist solutions and eeding o dissatisactionand disappointment. Political change is likel to be turbulent. Knee-jerk reactions willbe magnifed b distrust and volatile behaviour could trigger extreme responses.

BEhAViOurAl PErSPECTiVES

Behavioural economics has enhanced our abilit to understand how consumersmake choices. It has helped governments fnd was to reduce energ demandwithout losing votes. It has helped businesses develop more innovative andproftable was to serve consumers. At its heart is the notion that the architecturearound customer choices can nudge consumers towards making particular choices.In the US, the approach has been successull applied to services includingemploee participation in workplace health and benefts schemes.It has also been used to target childhood obesit b changing the laout ocaeterias and shops to encourage children to eat healthier ood.

Pesag cosmes

When it comes to energ use, these behavioural principles are graduall emergingto shape consumer behaviour. But a majorit o consumers still need to be persuadedthat cutting energ consumption is worth the bother.

The recession and a rise in energ prices in 2007-08 turned a brighter spotlighton energ efcienc as consumers tightened their belts. But the environment andclimate change were overshadowed b concerns about economic securit as thefnancial crisis deepened. Even the Gul o Mexico oil spill, while hardening publicattitude towards energ providers, did little to change the energ consumptionhabits o consumers.

A new communications boom is also creating marked shits in consumer behaviour.Communications technolog is part o dail lie, increasing our abilit to connectwith others and allowing us to access multiple inormation sources. We live at theheart o a complex and ever-expanding network o smart technologies and devices,but while connectivit accelerates the spread o inormation, it can also deepen

uncertaint. Research shows that the structure o the network connections people usecan strengthen or weaken the spread o behavioral trends in unpredictable was.

This ma explain another paradox, one which presents energ efcienc opportunities:

Despite the belie that greater connectivit increases uncertaint in a more complicatedworld, US trials on energ use in homes and transport paint a dierent picture. In act,more access to data creates gamesmanship inviting the citizen to compete.

KEy driVErS GOinG FOrwArd

n G20 goveace Can the G20 take on a meaningul role? Can it evolve into thehub o a networked sstem o global governance, bringing in other global issues suchas climate change?

n Te Ca-uS eatosp Can China and the US work cooperativel over arange o issues rom global economic recover to energ and climate change? Thiswill be crucial to achieve successul outcomes in all these areas. The evolution o theChina-US relationship also acts as a marker o the evolving longer term geopoliticaladjustment between established and emerging powers.

n Sag te bes o ajstmet How will the costs o adjustment beallocated? This will be hotl debated. In seeking to reduce their defcits, government

choices on taxation, ination and growth stimulation will determine, to a signifcantdegree, who bears the costs.

n ne poc paagm How can we reshape the capitalist model and drive newpolitical energies to move economies onto a frm recover path? The return o thestate and o industrial polic, alread evident in response to the crisis, could becomeentrenched as ke elements o government polic.


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Studies on motorists uel econom reveal a so-called Prius Eectamong drivers ohbrid vehicles. These drivers measure their uel econom through instant dashboardupdates on vehicle perormance. Toota Prius owners are even known to competeagainst one another in virtual leagues or supremac in the uel efcienc stakes.

This competitiveness is also evident in US utilit billing trials where households receivemonthl bills comparing their energ use with that o their nearest neighbours. Thishas driven down energ use as households compete to be the lowest consumer ontheir street, or risk being publicall labelled the neighbourhood energ glutton.

demas o taspaec

The recession had a major impact on behaviour. Trust in government and business notabl banks has dropped to an unprecedented low. This in turn has promptedwidespread calls or greater transparenc and checks on the market.Collectivel, people are still holding their breath. Major developed economies areemerging rom a period o fscal stimulus and now ace signifcant pressures.Severe public spending cuts are straining ties between voters and politicians. Thishas been accompanied b rising industrial action b trade unions in man countries,reecting the underling trend towards economic and political volatilit outlinedearlier in this book.

uba eveopmet sk o oppott?

B 2050, three-quarters o the worlds 9 billion people will live in cities. Accordingto the United Nations Habitat group this population rise would require develop-ment equivalent to a new cit o one million people ever week or the next 30ears. Some estimates predict that as man as hal o those could be in cit slums,with limited access to power or heat and light.

Recent research puts the costs o development and operation o urban inrastructure

at $350 trillion to 2040 seven times current annual global GDP 1. But how willthat investment be deploed? I development is chaotic, we can expect cities withsprawling mobilit needs, highl inefcient energ consumption and large slums. Ismarter development is achieved, there will be more compact cities with highpopulation densit, mass-transit inrastructure and energ-efcient combined heatand power (CHP) developments. Integrating the transportation, energ, water andwaste sstems which contribute to the phsical inrastructure o modern cities isimportant. From a climate perspective, scientists predict that the management oenerg use in cities rom which almost 80% o CO 2 emissions emanate will bea decisive actor in the coming ears.

1) Booz & Co/WWF, Reinventing the City: Three Prerequisites for Greening Urban Infrastructures, March 2010

Dramatic urban growth is being most keenl observed in the rapidl expandingeconomies o the East and particularl evident in two categories o cit:

Based on historic patterns o urban development tpicall evolutionar and drivenb the demands o unmanaged economic migration ailure to plan and managecit growth will render cities powerul orces or environmental destruction throughtheir emissions and waste.

As a recent stud rom the WWF and Booz&Compan concludes, cities areimmensel diverse but the case or sustainable planning processes are common toall major urban environments. Whether Sweden, Nigeria or China, urban leadersneed to ocus inrastructure spending on three kinds o activities aggressive

energy reduction plans; investment in cutting edge technological advances;

[and]innovative fnancing.

Energ, resources and inrastructure companies ace a signifcant opportunitto innovate in new suppl chains or an increasingl urban world. But the alsoace major up-ront investment costs. Alread multinational companies like IBM andSiemens have reshaped their organisations or the urban world in an eort tocapture market demands or urban mass-transit sstems, electric mobilit, energ-

efcient heating and power schemes, and high-speed inormation technologies.

We must ask: To what extent will policies enable better management o uture citdevelopment to ensure a more stable transition? I this can be achieved and it isa bold assumption on the evidence o histor then the challenge to business willbe whether rewards or innovation oset the risks o diversiing earl.

nrap gog smae ctes population


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40 41

urBAn SPrAwl liMiTS And lOnG-TErM driVErS

Large disparities in energ consumption patterns exist or passenger road transportgloball. For example data shows that the average American motorist uses three timesas much energ as the average European.

Markets with historicall lower energ prices have tpicall evolved with a less efcienteet o larger, heavier vehicles. This trend has been exacerbated b dieringapproaches to vehicle and uel taxation rom market to market and has led to greatlvaried costs or consumers. In costlier markets these actors are maniested in loweraverage personal mobilit and proportionatel more mass transit. Latterl, policies likethe CAFE standards in the US are intended to close the gap in vehicle energ efciencover a prolonged period as the stock o vehicles turns over.

When considering distances travelled, the US again shows an average o double thedistance travelled b European drivers annuall. This is oten assumed to be due tolower average population densit, but some commentators point to urban sprawl andlow levels o public mass transit in the US. These actors have been heavil inuencedb assumptions on the long-term costs o mobilit in the period o the post-war mid-20thcentur when most urban inrastructure was being developed.

Shells analsis o 20 developed economies ound that the dierence in average traveldistance could be explained b two ke actors:

1. The decisions which lead to the development o highl dispersed urban inrastructure

- or cit sprawl - are (in part) motivated b low long-run energ prices. This accountsor 60% o miles travelled

2. Liestle choices that tend to increase the propensit to drive, explain some 40% oall miles travelled.

The dierence in population densit contributes onl ver little directl and is in act notsignifcant according to our analsis.

This result indicates that the qualit o urban mobilit inrastructure development canhard-wire either energ proigac or energ efcienc into the sstem or decades.It also highlights the pernicious impact on long-term demand o low energ prices suchas those driven b subsidies, particularl in emerging markets.

* EU15 excluding Luxembourg and Portugal

Cat 7. Cotbtos to eece vg stacebetee uS a Eu motosts*

0

2,500

5,000

7,500

Dierence in vehicle kilometre / capita

58%

40%

2%

Long-run Price

Liestle ChoicePopulation Densit


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42 43

CLIMATE &ENVIRONMENT


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44 45

The outlooks or global environmental and sustainable development issues haveshited radicall since Scrambleand Blueprints were published. The majoritscientifc view is becoming increasingl pessimistic about the potentiall devastatingeects o climate change rom greenhouse gases. Paradoxicall, the globalrecessions impact on public sentiment has diverted polic attention urther awarom the environment as a vote-winning issue.

Disillusionment at the pace o progress in the UN polic negotiating sphereculminated in the perceived ailure o the 2009 Copenhagen summit to reach newgloball binding emissions targets. This has led some experts to question the verlegitimac and relevance o the process. Meanwhile, the worst oshore oil spill inhistor in the deep waters o the Gul o Mexico has again raised concerns over thesaet o producing oil and gas in rontier environments and led to renewed callsor tough regulation and more investment in renewable energ.

ThE unEVEn rOAd FrOM COPEnhAGEn

The climate change crisis is ar rom over. The decade 2000-2010 is the hottestever recorded and data reveals each decade over the last 50 ears to be hotterthan the previous one. The planet is enduring more and more heat waves and rainlevels high and low - that test the outer bounds o meteorological stud.

The ailure o the USA, Australia and Japan to implement relevant legislation aterthe Copenhagen Accord, as well as general global inaction, might lead people toshrug o the climate issue. Man are quick to doubt the science. Amid suchambiguit a discontinuit is building as expert and public opinion diverge.

This divergence is not sustainable!

Societ continues to ace a dilemma posed in Shell Energy Scenarios to 2050:a ailure to reduce emissions now will mean considerabl greater cost in the uture.But concerted global action is still too ar o given the extreme urgenc required.

4 Cmate &Evomet


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46 47

CO2 pce taspaec eee

Some countries orge ahead with national and local measures but man aremoving awa rom market-based solutions and are punishing traditional energsources. Cap-and-trade sstems risk being discredited. The EU-Emissions TradingSstem (EU-ETS) has ailed to deliver an adequate CO2 price. Industr lobbing orree allowance allocations is driving demands or CO2 taxes to eliminate perceivedindustr windalls. In some cases this has led to political stalemate.

The transparenc o a CO2 price is central to delivering least-cost emissionreductions, but it also contributes to growing political resistance to cap-and-tradesstems. Polic makers are looking to instruments like mandates whereemissions value is opaque. This includes emission perormance standards (EPSs)or electricit plants and other large fxed sources. Unortunatel, policies aimed atbuilding renewable energ capacit are also displacing more natural gas than coalwhere the CO2 price is low or absent. This is counter-productive when it comes toreducing emissions. Sometimes the scale o renewables capacit also imposes verhigh sstem costs. At other times, polic support or specifc renewables ismaintained even ater the technolog reaches its efcient scale,as is the case in the US.

The recession has raised a signifcant issue or the EU-ETS: how to design cap-and-trade sstems in the ace o economic and technological uncertaint? Phase III othe ETS risks delivering a structurall low CO2 price due to the impact o therecession on EU emissions. A balanced resetting o the cap should be considered.It is more credible to introduce a CO2 price oor ahead o such shocks thanengage in the ad hoc recalibration o the cap in response to them. This wouldsignal to investors that unexpected shortalls in emissions would be used in part tostep-up reductions and reduce uncertaint in investments associated with the CO2price. This is an important issue or the design o Phase IV o the ETS.

Cmate too o a pot

Structural climate polic problems aside, the global recession has moved climateconcerns ar down the hierarch o government objectives. The fnancial crisis andGul o Mexico oil spill have also hurt trust in the private sector, spawning tighterregulation and leading to increased risk aversion. This hits unding and politicalsupport or new technologies, in particular Carbon Capture and Sequestration(CCS) where industr needs indemnifcation rom some risk. Recent moves b theEU and the US regarding long-term liabilities show this support is ar rom secured.Government support or technolog development ma also be hit as the work tocut defcits.

In this environment o polic drit and increasing challenge to market-basedsolutions, it is important to remain strongl ocused on least-cost solutions toda andadvances in new technologies or the uture. Even i more pragmatic polic choicesprevail, it is important that the are consistent with, and acilitate the eventualimplementation o market-based solutions.

iteepeet ecosstems appoac

Global polic around environmental sustainabilit ocuses almost exclusivel onclimate change and CO2 emissions reduction. But since 2008, an approach whichconsiders interdependent ecosstems has emerged and graduall gained inuence.

This approach argues that targeting climate change and CO2 alone is insufcient.The planet is a sstem o inextricabl inter-related environmental processes andeach must be managed in balance with the others to sustain stabilit.

Research published b the Stockholm Resilience Centre in earl 2009 consolidatesthis thinking and proposes a ramework based on biophsical environmental 2subsstems. The Nine Planetary Boundaries collectivel defne a sae operatingspace or humanit where social and economic development does not createlasting and catastrophic environmental change.

According to the ramework, planetar boundaries collectivel determineecological stabilit. So ar, limits have been quantifed or seven boundaries which,i surpassed, could result in more ecological volatilit and potentiall disastrousconsequences. As Table 1 shows, three boundaries have alread been exceeded.Based on current trends, the limits o others are ast approaching.

2) Rockstrom, J et al. A Safe Operating Space for Humanity, Nature 461, 472-475 (24 September 2009)

Tabe 1. Paeta Boaes Stats

Climate Change (atmospheric CO2 concentration and change in radiative orcing) Boundar Exceeded

Rate o Biodiversit Loss Boundar Exceeded

Nitrogen Ccle - part o a boundar with the Phosphorus Ccle Boundar Exceeded

Phosphorus Ccle - part o a boundar with the Nitrogen Ccle Approaching Limit

Ocean acidifcation Approaching Limit

Global reshwater use Approaching Limit

Change in land use Approaching Limit

Stratospheric ozone depletion Not exceeded

Atmospheric aerosol loading Not et quantifed

Chemical pollution Not et quantifed


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For the energ industr, CO2 management and reduction is the chie concern andthe ocus o much research and investment. But the interdependence o the othersstems means that i one limit is reached, others come under intense pressure. Theclimate-change boundar relies on careul management o reshwater, land use,atmospheric aerosol concentration, nitrogenphosphorus, ocean and stratosphericboundaries. Continuing to pursue an environmental polic centered on climatechange will ail to preserve the planets environmental stabilit unless the otherdefned boundaries are addressed with equal vigour.

*(1)(2) World Economic Forum

G o Meco Sp

The allout rom the oil spill in BPs deepwater Macondo exploration well in the Gulo Mexico in April 2010 dominated news headlines or several months. It damagedindustr reputation and prompted a deep review o deepwater operations andregulation in the US and other oil producing nations.

The prominence o the incident, at the time, suggested a cognitive threshold hadbeen crossed and that the disaster would become an enduring reerence point inpublic and political dialogue about the industr.

As the crisis response graduall shited rom immediate environmental remediestowards long-term planning and management o oil and gas permits, demands orchange and reorm o the regulator sstem in the US concentrated opinion arounda number o ke issues. An intense debate developed about what a post-DeepwaterHorizon world meant or energ securit, the industr and public trust in a sstemthat had allowed such a disaster to happen.

Close observers o the disaster are cautious about the long-term impact. The cloudswhich gathered in the initial atermath are clearing and some clarit over the policand regulator ramework or the industr is emerging. The environmental impacton the Gul coast; costl and delaed permitting processes under a partiallrestructured regulator or the industr; and the impact o industr reputation, areseen b man as the main long-term impacts.

To consider the potential impact o the crisis over the longer-term, we haveormulated two scenarios to help explore the boundaries o a broad range oplausible outlooks. These are High Wireand Saety Net:

iS FrEShwATEr ThE nEw CriSiS?

Man consider the availabilit o reshwater a challenge as critical as CO2 andclimate change. In the coming decades, population growth and social and economicdevelopment could cause a demand, suppl and environmental crisis when it comesto water. I current water consumption trends continue, the world could ace a 40%shortall between global reshwater demand and suppl b 2030* (1).

Energ producers are amongst the largest industrial consumers o reshwater. The linkbetween energ production and water will intensi as portolio choices moveincreasingl towards more water-intensive production methods such as biouels andenhanced hdrocarbon recover methods (EOR). In the US alone, where energcurrentl accounts or 40% o all reshwater consumption, projected growth in energproduction will require an increase o 165% in reshwater withdrawal b 2025* (2).

In the energ sector, reshwater access is likel to emerge as a particularl prominentissue. The environmental signifcance o operating in water-poor countries will inevitablcreate deep operational and commercial challenges as water regulations grow and thecosts o using it escalate.

hiGh wirEA o tst/g compace o t tte cetve o stcoaboato.

n Rigid and escalating regulator responses and executive ordern Knee-jerk and politicised responsesn Sti penalties or accidents and incidents impacting all industr plaers

n Stringent fnancial risk and liabilit requirements impact number o operatorsable to participate in rontier environmentsn Low trust environment perpetuated with little motivation or operators to strive

or above industr standards

High Wire broadl represents the deault position or an entire industr judgedaccording to the standards o the worst operators. Saet Net meanwhile, can beperceived as a better industr operating model i collaboration can be achieved.


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50 51

SAFETy nETTst s eae a sstae b aoptg geate opeess ataspaec acoss opeatos a commcatos.

n Belie amongst earl adopters in a better operating modeln Recognition that high standards can be leveraged to beneft wider

industr and societn Transparenc principles underpin new approach and are rewarded

with stronger relationships with government and regulators andincreasing societal acceptance

n Collaboration on standards drives greater investment in joint industrR&D and innovation

n Graduall sel-regulation and auditing o standards becomes the norm

and a new orm o compliance emerges that does not depend exclusivelon government regulation

TECHNOLOGy &INNOVATION


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ThE POTEnTiAl FOr A GrEEnEr SCEnAriO ThAn BlueprintS

In September 2008, MIT published a paper comparing Shells energ scenarioswith those o others 3. The paper said the Blueprints scenarios energ-relatedemissions would lead to atmospheric concentrations o 540 ppm or CO2,650 ppm or all greenhouse gases and to a temperature rise o more than 3C 4.

MIT observed that Blueprints results in lower estimated levels o temperature changethan nearl all o the other scenarios analsed b MIT. This seems reasonable giventhat we pushed the plausible boundaries or how the energ sstem could evolve inthis scenario. However, man commentators, seeing the scientifc consensus on theimpacts rom greenhouse gas emissions, now increasingl talk about targets o amaximum 2C rise in temperature and 450 ppm o greenhouse gases. This led tothe observation that the Blueprints scenario still wasnt good enough when itcame to dealing with the energ and environmental challenges acing the world.

I anthing, the scenarios emphasised the enormous scale o the challenge and theunprecedented transormation required. Such a conclusion highlights uncertaint in theuture balance o energ suppl and demand and points to the even wider uncertaintover the extent o climate change damage we might expect.

Tecoog vta to eeg te

Man people advocate clear targets such as the 450 ppm or 2C maximumtemperature rise. But, in realit, the range and extent o damage or an level oconcentration, as well as the emissions required to reach that level have signifcantuncertaint ranges in the climate models. Scientifc orecasts are increasinglgloom 5. I the gloom mounts, we can expect growing tension over energ sstemmanagement despite some positive suppl developments. Technolog will pla acritical role in this uture.

5 Tecoog &iovato

3) The Infuence on Climate Change o Diering Scenarios or Future Development Analyzed Using the MIT Integrated Global System Model, MIT,

September 2008

4) This represents the central estimate at 2100. The temperature rise is above pre-industrial levels.

5) Some scientists, such as James H ansen, argue that to avoid dangerous climate change we need to look or even deeper emissions cuts than this,

and have target CO2

levels (350 ppm) below todays level (390 ppm, in mid 2010 see http://www.esrl.noaa.gov/gmd/ccgg/trends/)


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The table below shows a comparison o the latest data or growth rates since 2003against Scrambleand Blueprints. The divergence between the two scenariosbecomes greater in the long term but these earl projections show a great deal osimilarit. However, Solar PV is an interesting exception. Here the earl policsupport measures have led to growth ver much in line with Blueprints so ar.

Tabe 2. Compaso o o aa got ate b eeg esoce tpe.

2003 - 2009

CAGr

SCrAMBlE BluEPrinTS ACTuAl

1st generation biouels 25% 25% 25%

Biomass electricit 5% 4% 7%

Geothermal electricit* 10% 9% 4%

Geothermal heat 12% 11% 4%

Solar PV 16% 47% 45%

Solar thermal electricit 54% 68% 15%

Wave & Tidal 3% 11% -1%

Wind 32% 29% 28%

Oil 1% 1% 1%

Natural gas 2% 2% 2%

Coal 4% 4% 5%

Nuclear* 1% 1% 1%

Hdro-electricit* 4% 4% 4%

* based on 2003 - 2008 data

The impressive growth in photo-voltaic solar power (Solar PV) is almost exactl inline with Blueprints. However, concentrated solar power (CSP) and ocean energtechnologies have perormed more slowl than anticipated. Geothermal has alsobeen slower to develop and we ma have been too optimistic about access to

good sites. Wind and 1st generation biouels are among the larger newrenewables and projected growth or both scenarios has ared well against theactual growth. Electricit rom biomass has moved slightl aster in realit than thescenarios projected and is gaining greater prominence. This is largel due to coalpower stations alleviating their CO2 emissions b co-fring biomass with coal andalso to the recognition that negative emissions ma ultimatel be required6. Inthis case biomass electricit with Carbon Capture and Sequestration (CCS) ma becriticall positioned. Even so, coal has continued to grow ahead o expectation reminiscent o the surge envisaged in a Scramblescenario.

In the longer-term, both scenarios draw heavil on 2nd generation biouels, electricvehicles (batter and hdrogen uel-cell) and CCS. The scenarios assumed that allcould be available at widespread commercial scale rom 2020. CCS and 2ndgeneration biouels developments are currentl developing too slowl to meet the scaleat which Blueprints then takes them up. Hdrogen uel cell vehicles (FCVs) ma be inline with Blueprints, with several car manuacturers preparing to release their nextgeneration o FCVs over the next ew ears. However, the development o thesupporting inrastructure remains a big question. Batter electric vehicles look to bethe one major technolog that ma be developing more quickl. Our analsissuggests that the deploment curve ma be fve ears earlier than Blueprintsenvisaged i progress continues to go well and vehicles have customer appeal.

ne tecoog epomet takes ecaes

How quickl can new energ technologies easibl be deploed? An article in Naturein 20097identifes two common laws o energ technolog success in the past:1. Establishment Phase: It takes 30 ears to span the 1000-old growth needed

to get rom pilot-plant scale up to 1-2% o the worlds total primar energ --a sustained growth rate o 26% pa.

2. Growth Phase: Ater this, the deploment rises more linearl to its ultimate sharein the energ mix, which depends on direct economic competitiveness at scale.

Most energ technolog is long-lived. Blueprints pushed the limits on replacemento end-user equipment including steel mills, cars and home heating sstems and also within the energ industr itsel, like power stations. The Blueprintsscenario alread aggressivel projects the world beating the above laws anddoing so with more simultaneous technological development than ever beore.

The primar ocus at the moment is on the establishment phase: demonstratingand deploing earl-stage technologies, like sola r PV. Polic is increasingl

using incentives targeted at technolog amilies, acknowledging the need orseveral technologies. It increasingl recognises dierent constraints or dierenttechnologies and their diering stages o development. It is also widelacknowledged that polic support will probabl be needed or decades.

6) Biomass is capable o consuming more CO2

than it emits. This means that it can be used to produce zero-carbon (or even negative carbon) energy. 7) Gert Jan Kramer and Martin Haigh, Nature 462, 568-569 (2009)


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The continued deploment phase can b no means be taken or granted. Polic willhave a ke role here in limiting cost increases to end-users, handling collaborationand intellectual propert rights, ears over picking winners and local acceptabilit.

We anticipate ocus in the next ew ears moving to the second law: what mustbe done to ensure that low carbon technologies can achieve a substantial shareo the energ mix?

So called electric renewables, like solar and wind, along with sustainable biomass,CCS and nuclear at large scale will be needed to meet growing needs whilereducing greenhouse-gas emissions.

yet the latter three are acing signifcant resistance rom environmental lobbies.Their development will also occur at a time when burgeoning demand rom thedeveloping world will pull strongl on expanding established energ sources likecoal. Priorities are thereore likel to be divided. These conventional energ sourceswill struggle to keep up with demand pressures once the hangover rom theeconomic crisis has passed.

Focs o ko e tecoog

There is a practical need to ocus major attention on developing the new technologiesthat are alread known and deploed at some scale. This is because o the time ittakes or growth to deliver a material contribution to world energ production andalso because o the speed o action required at scale to come even close to 450ppm-tpe pathwas.

O course, the energ sstem will continue to evolve ater 2050. Some earl-stagetechnologies - such as engineered geothermal sstems or nuclear usion - ma plaa signifcant role in the second hal o the centur. But or now we know the major

energ sources we have to work with or 2050 targets. We alread know whichsources governments, industr and societ will need to ocus on to acilitate thecurrent transormation o the energ sstem.

109

108

107

106

105

104

103

Terajoules/ear

Total

OilNuclearLiquid natural gasBiouels (1st generation)WindSolar photovoltaicCarbon captureand storage*Biouels (2nd generation)Laws

Cat 8. Eeg-Tecoog depomet

1960 1970 1980 1990 2000 2010 2040 2050

* Historic data: EnergyBalances of OECDCountries (IEA, 2009),Energy Balances ofNon-OECD Countries(IEA, 2009); Projections:Shell International

Materialit

201020102030


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Allowing natural gas rather than coal to grow to meet power demand is thesurest, astest and most comprehensive wa there is to reduce CO2 emissionsover the crucial next 10 ears. Strong development o CCS programmesshould help support such a strateg as part o a long-term vision or low-carbonenerg suppl.

Sometime between 2020 and 2030, we can expect the constraining actoror renewables deploment to move rom industrial capacit building toaccommodation within the energ sstem. This would impact land-use and requirenew inrastructure, such as major upgrades to grids 8, 9. These are essential orrenewables to maximise their share o the energ mix.

In conclusion, there is a need to encourage continued strong uptake o lowercarbon solutions climbing the deploment curve while establishing sstem-widesolutions that will be required or the long-run. O course, being realistic about thecost o an accelerated transormation and accepting the importance o this costwithin societs priorities are also vital to success.

8) See Sustainable Energy Without Hot Air, David MacKay. In this excellent book, MacKay has illustrated the spatial aspect, and shown what this

means or land use in Britain

9) On the inrastructural accommodation, the European Climate Foundation in 2010 and the Desertec project have pointed to the sorts o scale

necessary or an EU-wide electricity grid.

SySTEM inTEGrATiOn CruCiAl

In 2009, President Obama lauded Denmark or producing 20% o its electricitrom wind compared with Americas 3% . This sparked vigorous debate with scepticsclaiming that over hal o Denmarks wind production was exported, whilst otherssaid that onl 1% ended up outside the countr. Whatever the case, an importanteature is that Denmark exports the variabilit in suppl created b its wind arms -a variabilit balanced internationall b the large hdro-electric storage in Norwaand Sweden. German widel deplos photo-voltaic solar - nearl 14 GW in totalb late 2010 - encouraged b robust eed-in taris. This deploment has causedlarge volatilit in electricit prices. The same occurs in Texas, which has a large windpower inrastructure.

Innovative solutions like smart grids; distributed storage; and continental-scaleelectricit grids are necessar i renewables like wind and solar are to achieve alarge penetration in the energ mix. Blueprints-tpe approaches, which recognisenew mixes o mutual interests and a longer-term outlook, are likel to oster them.Smart Grids and Super Grids will both be needed. But it is too earl to tell whetherthese concepts can be rolled out at the scale and within the time required.

Other solutions will be necessar in the meantime to sustain the growth orenewables. Local generation and management ma spread. But or centrallmanaged solutions, operators will draw on hdro-electricit where the can,or increasingl, natural gas.

Gas epacg coa

Breakthroughs in shale gas technolog can oer part o the solution and are availablenow. The energ deploment curves and Blueprints suggest that other low carbonenerg options onl make a substantial dierence to the emissions pathwas ater

2030. O course, these options wont achieve aspired market shares b 2050unless the groundwork is laid beore 2030.

Going orwards, one o the largest impacts on cumulative CO2 emissionswill come rom the degree to which the new gas can replace growth in coal.Man express a ear that, i let unmanaged, the new gas will simpl be burnedin addition to the existing ossil uel suppl, leading to increased emissions.However, i policmakers can sustain the deploment o the low CO2 solutionsat the same time as activel substituting coal with gas in electricit generation,then we have the chance to ollow a lower CO2 pathwa at little extra cost.


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RECOGNISING


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The general picture o the energ landscape to 2050 described in the Scrambleand Blueprints scenarios seems to us to remain valid. So, rom the vantage pointo toda, do we see the world heading on a pathwa that looks more likeScrambleor Blueprints?

It is, o course, too earl to tell conclusivel. These scenarios represent strongpatterns o behaviour, and examples o both abound. The scenarios provide lensesor interpreting contemporar events, as well as pointing to the possibilities o theuture landscape. A number o developments are highlighted below to illustrate this.

Eampe:

SbSga - Gog tesos ove te Sot Ca Sea

US Secretar o State, Hillar Clinton, stated in Hanoi in Jul 2010 that the UnitedStates supports a collaborative diplomatic process by all claimants or resolving

the various territorial disputes [in the South China Sea] without coercion ...

[and that the US] opposes the use or threat o orce by any claimant.

ScramBleSCEnAriO

In the Scramblescenario, immediate pressures to achieve energ securit trump demandmanagement policies. National government attention alls to suppl side levers resultingin a resource scramble waged b nations and between nations. Actions to addressclimate change become subordinated until major events phsical eects like oodsand severe storms - drive responses.

Action to tackle energ demand and promote efcienc comes onl when suppliesbecome tight and continued economic growth can onl be achieved with bettermanagement o constrained resources. The energ sstem in Scrambleis characterised

b discontinuities as a result.

6 recogsgSb & Bs


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This statement brought to a head alread simmering tensions between China andthe US over the South China Sea. It led the Chinese Ministr o Deence to statethat China has indisputable sovereignty o the South Sea, and China has sufcienthistorical and legal backing [to support its claims].

These statements have ed concerns over a Scramble-tpe conrontation betweenthe various regional powers to secure oil and gas reserves in the South China Sea.

Chinese concerns arise or dierent strategic reasons. The spectre o anincreasingl powerul China asserting its inuence in an area it has long regardedas within its traditional sphere o interest is among these. But more direct to Chinasconcerns is US control over Chinas sea lanes or communications and supplies.This was expressed b President Hu Jintao in November 2003 as the MalaccaDilemma. Over 80% o Chinas energ imports pass through the Malacca Straitsand waters patrolled b US and South-East Asian nav vessels.

Concern over the orward deploment o US orces also drives Chinas strategicincentive to develop its air and naval power, and it is moving to do so. The US, or itspart, has long been accustomed to asserting its naval power through regional waters.

The dispute has triggered debate among South-East Asian states as to where theiruture geopolitical securit lies. Looking into the uture, the are concerned that theUS ma not be able to sustain its militar and economic commitments to the region,given its eorts to reduce its government defcit, with a possible impact on uturemilitar spending. South-east Asian governments seek a balance between the greatpowers in their region, as the begin to realise that the can no longer take UShegemon or granted.

Even though the resources themselves appear marginal or China (and indeed

Japan), the are potentiall signifcant or the development o the Seas littoralSouth-East Asian states, i the can be commerciall exploited.

OThEr ExAMPlES OFScramBleSiGnAlS:

n uS eeg poc ecto

President Obamas initial decision to open more o the Outer Continental Shel(OCS) or drilling (subsequentl reversed with the moratorium on developmentollowing the Deepwater Horizon spill in the Gul o Mexico) in order to increaseenerg suppl securit and reduce imports rom oreign states.

n Cas ps o eeg sect

China has invested heavil in oil and gas outside o its own borders, particularl inareas where IOCs are deterred rom investing (oten or humanitarian,environmental or political reasons e.g. Sudan). The practice tpicall emplosoreign polic concessions, to secure the deals, such as the $20 billion loans-or-oilagreement with Venezuela in April 2010.

n iaq o cesg os

International energ companies participated in successive bidding rounds in2009/10 or contracts to redevelop existing producing oil felds in Iraq despiteservice contract terms rather than production sharing contracts preerred b energcompanies. This was in spite o deemed high securit and non-technical risksassociated with developments.

n uS cmate egsato

Legislation to create an eective market or CO2 management in the US has losturgenc ater a period o intense economic slowdown, a difcult politicalenvironment or the Administration (ollowing unpopular plans to reorm UShealthcare) and contradictor scientifc evidence on climate change ound anaturall skeptical constituenc who sought to exploit it aggressivel.


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Eampe: BsSga - Te goba potcs o cmate cage

The global process to negotiate a multilateral agreement on climate changeto replace or extend the Koto Protocol has slowed considerabl since theUN Climate Change Conerence in Copenhagen in December 2009.While Copenhagen ailed to make progress towards achieving an overarchingglobal agreement to cut emissions, fve ke countries Brazil, the US, South Arica,India and China sketched out the Copenhagen Accord. The Accord sets noreal eective targets or emissions reductions and is not legall binding but itmarks a shit or the UN-brokered process and a potentiall more politicalleasible path orward.

As Blueprints notes, it is highl unlikel that agreement between 192 nations with a

panopl o divisions in ideolog and capacit would agree on policies sufcientlradical to contain the threat o climate change. Rather, progress is more likel tobe achieved b a smaller group o countries, which must comprise the criticaldeveloped and developing countries that matter or climate change, workingtogether to spearhead change.

The Copenhagen Accord ma set voluntar targets rather than committingnations to a binding agreement but the international communit has ew eectivesanctions to ensure compulsion in an case. What the Accord does is establish

an anchor or other possible changes. It is an example o what has been termedminilateralism

10. Like regional agreements, minilateralism is a response to agrowing recognition that large scale multilateral agreements whether overtrade liberalisation, the Milennium Development Goals or climate change haveeectivel stalled or ailed; and that more targeted approaches at collectiveproblem solving are necessar. In minilateralism, the correct number in an givenproblem area is the smallest possible number o countries needed to ensure thelargest possible impact.

While the uture o the Koto Protocol remains uncertain, global action on climatechange is not dead. The Copenhagen Accord ma be seen as a Blueprints attemptto construct a unctional approach on a wider than regional but less than globalbasis, with most critical countries, including the ke emitters, taking a leading role.What the Blueprints scenario still requires is a shit in the public mood to supportthe long-term solutions needed to deal with climate change.

OThEr ExAMPlES OF BlueprintSSiGnAlS:

n Gee ct eveopmet

Japan proposes to use its position as a world leader in sustainable habitats to buildstate-o-the-art, eco-riendl cities in India to help it industrialise and raise generalstandards or energ efcient urban planning. Firms involved in the project includeHitachi, Mitsubishi, JGC Corp and Toshiba. The cities will be built along theDedicated Freight Corridor (DFC), passing through six Indian states. Pilot projectshave alread begun in Harana, Maharashtra and Gujarat.

n Tecoog-eetate ee- tas o gee poe

A concept, frst developed in German 10 ears ago, since adopted b over50 countries, including developing nations like China, India and South Arica.

Example o a concept being mainstreamed globall.

n noa s aoest potecto

Unilateral action to und Indonesian rain orest preservation pursuant with the spirito the UN REDD+ programme. Norwa oers to provide up to $1 billion to helpreduce deorestation in Indonesia. In 2008, the committed $1 billion to Brazil toreduce Amazon deorestation. Funds have also been given to several othercountries, including Guana and Tanzania

10) Minilateralism - the magic number to get real international action, in Foreign Policy July/August 2009.

BlueprintSSCEnAriO

In the Blueprints scenario, action to manage energ use better is driven b a combinationo concerns both about the available suppl o resources but also environmental interestsand the commercial opportunities presented b a transorming energ sstem.

Alliances to drive better economic and liestle prospects are increasingl initiated bcoalitions recognising new mutual interests, then adopted at a local level andincreasingl mainstreamed across geographies where interests are shared.

A patchwork o policies drives businesses to lobb or regulator clarit and drive earladoption o new technologies and innovation.


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We hope we have helped orm a richer picture o the uture energ landscape a landscape in which volatilit and cclicalit will pla an intrinsic role and whereglobal societ will struggle to develop in a trul sustainable manner. The Scramblescenario outlines the uture consequences o pursuing the path o least resistance now.While addressing the same challenges, the Blueprints scenario indicates that signifcantl

more positive outcomes can be built up rom the distributed pursuit o individuall modestopportunities and objectives.

To put it simpl, we fnd it useul to benchmark the pace o regulator and technologicaldevelopments in the energ sstem against the scenarios. Scramblerepresents a sluggishpace o development, while Blueprints indicates the most accelerated pace we considerpoliticall, sociall, and technicall plausible.

Ma peope ope eveopmet be aste ta Bs. Bt, at

ts pot, eveopmets ae geea poceeg soe ta

Bs, espte some acevemets. lookg aea, ecoomc

voatt a cccat teate to epess te pace o cage st te.

In presenting this outlook, we hope we have brought some clarit to the pressures anduncertainties acing the world. It is vital that developments move in the right direction ata brisk pace, even i it involves onl a limited number o plaers acting within a limitedscope. Polic rameworks that release the power o the commercial engine in the

appropriate direction can still accelerate the overall pace o positive transormation.

We hope ou are as passionate about encouraging this as we are and that our workwill help ou pursue innovative opportunities and constructive partnerships.

Te Se Sceao Team,

Februar 2011

www.shell.com/scenarios

n Sb-atoa cmate cage acto

Actors ranging rom established and emerging cities, regional states and provincesto trans-regional groups like Regional Greenhouse Gas Initiative (RGGI) and theWestern Climate Initiative (WCI) in North America. Not waiting on seniorgovernment decision-making, the are entering the climate arena and wagingsocial re-design campaigns aimed at signifcantl reducing carbon ootprint.

n wamat a Cosevato iteatoa

Walmart has pledged to eliminate 20 million metric tons o greenhouse gas (GHG)emissions rom its global suppl chain b the end o 2015. This represents one anda hal times the compans estimated global carbon ootprint growth over the nextfve ears and is the equivalent o taking more than 3.8 million cars o the road ora ear.

n hg Votage not Sea dC g

A project to link oshore renewable wind energ and Norwegian hdro-electricpower (or back-up capacit) to serve large energ consumption centres (UK,Middle Europe, France/Benelux, Scandinavia).

n desetec a Tasgee

A planned network o power cables under the Mediterranean to bring solarelectricit to Europe and Arica. The project aligns a large number o companies,supported b governments o over 40 countries, ralling around a road map or auture power inrastructure over two continents.

CosgCommets


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APPENDICESA


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Te o ca o oge avo tee a tts abot eeg

spp a ema

Step cage eeg se

Developing nations, inc

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