shell mckinsey energy strategy paper

Shell’s New Human Energy Futures Strategic Paper

Strategic Paper: New Human Energy Future Project (NHEF)

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New Human Energy FuturesRedefining Energy Production, Strategic Paper

Client: Shell PLC, Linda Cook, Peter Voser Author: Michael Schmitz for McKinsey & Company Date: January 2010

1. Introduction

Our common new energy future will need diverse energy sources to meet rising demand. Managing emissions and better energy use will help safeguard the environment and conserve fossil resources. Tapping new energy sources will secure energy for decades to come. Never before has humanity faced such a challenging outlook for energy and the planet. This can be summed up in: “more energy, less fossil fuels and less emissions”. The New Human Energy Futures Project’s (NHEF) initiated by McKinsey and Shell PLC focuses on a profitable long-term energy supply beyond the costly search and recovery of oil and natural gas in ever more hostile and complex environments. The NHEF Project takes Shell’s “Unlocking new energy for the future” one step forward and considers the exponentially growing human population not as the problem but as the key to meet future energy demand. Thus, this strategic paper investigates the potential of crowd-sourced energy production.

2. Objectives

Shell is focusing on delivery and growth, expanding its strong portfolio by promoting innovative solutions, which create environmental sustainability, increased well-being and profit. No other energy supplier has adapted such radical policies before. Being a leader in sustainable development will be vital to Shell’s “More Upstream, Profitable Downstream” long-term business strategy. It creates true business value and reduces operational and financial risk, making the company more competitive and profitable even in times of climate refugees (millions in Europe by 2050 as estimated by the United Nations) and uncertain energy market conditions. You are judged by how you act – Shell’s reputation is upheld by how you live up to your core values honesty, integrity and respect for people no matter where they live. Business Principles are based on the following core values and indicate how Shell should promote trust, openness, teamwork and professionalism, and pride in what they do: Under no circumstances should we see a trade-off between being environmentally and socially responsible and economically profitable. Instead, doing business truly environmentally and socially responsible contributes to being a profitable company in the long term. By

Shell can provide services in a way to empower populations all over the planet to prosper.


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listening to and engaging with communities Shell can significantly reduce the chance of project delays and approval failures and above all provide services in an ideal way to empower populations all over the planet to prosper. Leading in sustainable development also helps Shell attract and retain staff, customers and business partners who are central to business success and future growth. In the far future, Shell hopes to join western civilisation in abandoning its dependency on oil.

3. Mission

By being aware of emerging changes to customers’ values and predictable changes in regulatory requirements, this project develops products and services before competitors that meet the customers’ needs for clean, domestic and affordable energy. By adopting new and cleaner technologies beyond the costly recovery of fossil fuels we can improve the efficiency of operations, reduce costs, avoid current and future costs of emissions, and create promising new income streams. In short, Shell has learned – sometimes most probably the hard way – that applying and acting with a sustainable development mindset is not only the right thing to do, but it is also the smart thing to do. Avoiding flawed CSR But what does it imply more precisely? Many competitors have set up departments dealing with and communicating their CSR strategies but significant change in how energy business is done very often remains unseen or does not correlate with it. As a result energy companies are often accused to greenwash their operations. The NHEF Project shall mitigate such failure and demonstrate that a sustainable method of selling energy comes from the heart of the Shell Company. Methane and Hydrogen To meet the energy challenge Shell is using advanced technologies to unlock, store and trade yet hidden but abundant natural, non-fossil gas. In this project we are developing completely novel production and refining methods to capture gas from particularly unconventional and genuine sources: we introduce cleaner-burning human and animal liquefied gas and gas-to-liquids products. Shell being already one of the world’s largest suppliers of biofuels, the NHEF Project works on advanced biofuels from livestock exhale/burp and human flatulence. Admittedly this may sound fairly unordinary but research has shown that livestock farming emissions threaten the climate just as much as emissions caused by the transportation sector. Organic exhaust is energy By capturing and refining flatulence/exhale/burp of mammal organisms Shell can improve on two sides: reducing the impact of given biological emissions on the global climate (which no company or organisation ever tackled before) and gain inexpensive, accessible and above all abundant energy, which on the other hand is

Organism exhaust gasses” contain a vast amount of energy which to date vanishes into air unused.


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significantly cleaner when burned than conventional fossil fuels. In addition, by producing the energy domestically, transportation costs decrease considerably and “costing the earth” can no longer be implied with Shell’s business activities. Meeting with intellectual influences Furthermore, intellectual voices and futurists predict a major shift in how people think about major corporations such as Shell. For many centuries society has been affected by disputes among classes and interests. Top and bottom, culture and counterculture fought against each other and food, resources and capital have been the funding body of scarcity and power. Without disregarding Shell’s past, it can’t be wrong to be prepared for the emerging power demand of people caused primarily by their unhappiness that they blame on the corporate sector in addition to Internet technologies, allowing citizens to connect and organise their rebellion straightforwardly. By investing in power production and refinery infrastructure located in individual communities and thereby creating true benefit for its members, we can scotch such developments and demonstrate that their concerns about excessive corporate power over people and planet are unjustified in the future. Moreover, we have to thoughtfully create a new brand's frame of reference so that a possible future repositioning strategy will resonate with customers.

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Chart 1.) Costs and emissions resulting from conventional energy production (fossil fuels).

Chart 2.) Costs and emissions resulting from energy production as introduced by NHEF Project


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4. Keys to Success

Surely, this venture might not entirely cover future energy demand and involved parties will be particularly critical about that bold plan but promising key figures tell their own tale. Clear keys to success are:

Research: Since organic exhaust can vary depending on organisms’ ingestion, groundbreaking research has to be funded in the fields of biochemistry, agriculture and anthropological medicine.

Infrastructure: State of the art transfer facilities in terms of function and design need to be developed ensuring that population and farmers can provide their waste gasses with no significant additional effort to their daily routine. Leading engineering bureaus and design agencies need to be briefed under strict confidentiality to come up with attractive and clever solutions.

Communication: As this project strives for actively engaging people to cooperate with in energy production, communication is a vital part of the entire venture. It is inevitable that customers have to see their benefit by being part of the scheme. Communication measures have to be defined and carried out thoroughly.

Products: in addition to making profit by selling energy, different types of flatus capturing products s.a. chairs, closed-air toilets as well as gas-storing fashion pieces emerge as promising income opportunity. Due to increasingly advanced technologies over time, capturing devices’ obsolescence may as well be planned; a good chance for Shell to continuously design, develop and sell new tools and establish another source of revenue besides energy production.

Investments: with the NHEF strategy in mind, Shell may consider investing in involved companies to guarantee that the majority of the money being made by corporations emerging with this new sector remains within the Shell Group.

It is inevitable that customers have to see their benefit of being part of the scheme.

Product development: suction-sponge chair and storage bra as proposed by London based design agency Centreline Design


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5. Proposed Services

The NHEF Project supports Shell’s decision making for shifting its core business activities from oil supply to services. Sooner or later, fossil fuel production will cease to be profitable. It is thus essential to define at this very early stage various services, which may become future income guarantees. Such services can include:

Transfer and disposal of livestock and organic human biogases: customers deliver their waste gases through different types of interfaces in exchange for money which can either be credited on their Shell customer card or paid out directly to the customer. A safe and easy to use interface ensures that no gases escape in the process of gas transfer from customer to the Shell collection site. Once the system has been adapted area-widely, pick-up-services or direct pipelines from households and farms assure a no-loss transfer.

Maintenance of privately owned gas-capture facilities: suction toilets, sponge-chairs and intermediate storage tanks need to be maintained and eventually repaired. Shell may provide this service through a subsidiary.

Refining and purifying methane and hydrogen: Once gases have been transferred to Shell collection sites, state of the art refinery processes and separates nitrogen, methane and hydrogen from the natural organic gas mixture. Due to the fact that refinery as well as disposal and distribution take place locally, appliances will have size that they fit into empty oil tanks on normal Shell fuel stop sites for example.

Managing gas-waste streams: Since not all gases of the delivered mixture can be used after separated, gas waste streams have to be managed. It will require a detailed assessment about how to deal with captured and purified carbon dioxide. Thus, CCS strategy has to be aligned accordingly.

Storing purified gases: gases are cooled to around -160ºC, which results in a shrinkage of their volume of 600 times, making it easier to store. The energy for the cooling is provided by solar cells or wind turbines on site (depending on location).

Managing distribution channels: besides conventional fuel stops, gas will also be sold to energy suppliers already maintaining gas-pipelines to households as well as to nearby industrial production sites. (See service scheme on the next page)

From Oil Supplier to Service Provider: Services will become future income guarantees.


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6. Market

6.1 Market Segmentation In the UK in 2001 Final energy consumption as shown in the chart below, was at the highest ever-measured level.

Flowchart of the proposed trading scheme. By crowd-sourcing gas capture Upstream costs can be omitted.


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Total Strengths

Total Opportunities

Total Weaknesses

Total Threats

Since 1970 Overall energy consumption has increased by 10% and by 9% since 1990. In the fuel mix, natural gas consumption has replaced coal and over the last 20 years Electricity has grown steadily at 2% a year resulting in a total increase of 74%.

The NHEF Project’s target is clearly to tackle oil consumption, which implies that Shell must focus on the transportation sector. As various studies (including McKinsey’s) predict, trends undoubtedly lead to a future of electric cars. It will therefore be vital to convert gas into electricity. It can be regarded as a strong advantage of our strategy that Shell’s locally produced electricity will apparently be the closest to feed the infrastructure of charging spots distributed countrywide. For that reason the NHEF Project team is confident that Shell will continue to supply cars with energy despite structural change to electric vehicles.

6.2. Market Needs The market strongly demands ever more and cheaper fuel to power future growth whereas government regulations require fewer emissions for every industrial sector. The most competitive companies in the future will have economical business models measured by emissions per return on investment and social benefit.

7. SWOT Analysis

Examining our strategy by a SWOT Analysis shows an obvious plus on the side of strengths and a distinct emphasis on threats.

Key strengths are among many others that we have adequate finance resources to implement infrastructural changes as well as that we are


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ahead on the experience curve in terms of research we performed in the last decade and that we already have proprietary technology.

Since the SWOT Analysis pronounces threats as well quite strongly let us name the key threats to our strategy: Since government funded and supported alternative energy projects such as wind farms and solar parks will be increasingly active in the market, sales of substitute products/services to our biofuels will be rising reasonably heavily. In addition, our customers and/or suppliers will consequently be enjoying growing bargaining power.

7.1 Competitive Edge The NHEF Project is probably the first project within Shell that looks more than fifty years into the future. There may not be much competitive edge in the coming years but as times goes by and fossil resources get scarcer Shell will be prepared and ahead of competitors. Moreover, the NHEF strategy allows Shell to be resilient to changes in market, economies and environments since energy is produced where it’s consumed. Energy produced as suggested by NHEF Project can be considered as high security: no longer will our energy supply be dependent on foreign assets, political stabilities or climatic conditions. On an abstract level Shell’s future Unique Selling Proposition (USP) will be formed by the following additional arguments:

Crowd-sourcing energy supply Domestically produced and abundant Adapted to local conditions (livestock gas in rural areas,

human gas in cities) Population growth as opportunity not threat Empowering people & communities to produce their own

energy Increasing energy efficiency of the human body Mitigating greenhouse gas emissions pre- and post-combustion

8. Management Summary

In times of a challenging outlook for energy and the planet new strategies must be formulated which meet with an increasing demand for more energy whereas less fossil fuels are available and less emissions should be released. The New Human Energy Futures Project’s (NHEF) initiated by McKinsey and Shell PLC strives for a profitable long-term energy supply beyond the costly search and recovery of oil and natural gas. Shell has to shift its operations from oil supply to providing services. By crowd-sourcing energy, production costs can be reduced and energy security guaranteed, which on the bottom line generates a substantial income as well. A company of the future has to have an economical business model, which measures success by resilience, emissions per return on investment and social benefit.


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9. Appendix

Domestic Market Perspective: 20% of UK livestock biogas captured Methane price model

Potential Turnover Buy Sell Net

Methane in a flatus 5%

Average exhale/burp per day litre 200.00

of which methane litre 0.45

Population 10'657'000.00 10'657'000.00

20% collected 2'131'400.00 2'131'400.00

Total animal methane per day litre 959'130.00 959'130.00

Total animal methane per year litre 350'082'450.00 350'082'450.00

Price per litre methanol GBP -0.20 0.60

Fuel cost per year GBP -70'016'490.00 210'049'470.00 140'032'980.00 Refining and infrastructure costs estimate GBP 20'000'000.00 5'000'000.00 25'000'000.00

Profit per year GBP -50'016'490.00 215'049'470.00 115'032'980.00

Domestic Market Perspective: 20% of UK human biogas captured

Methane price model

Potential Turnover Buy Sell Net

Methane in flatulence 5%

Average flatus per day litre 1.00


Population 61'113'205.00 61'113'205.00

20% collected 12'222'641.00 12'222'641.00

Total human methane per day litre 611'132.05 611'132.05

Total human methane per year litre 223'063'198.25 223'063'198.25


Fuel cost per year GBP -44'612'639.65 133'837'918.95 89'225'279.30 Refining and infrastructure costs estimate GBP 20'000'000.00 5'000'000.00 25'000'000.00



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Regional Market Perspective: 20% of human biogas captured in London Methane price model

Potential Flatus Turnover Buy Sell Net

Methane in a flatus 5%

Average flatus per day litre 1.00


Population 7'556'900.00 7'556'900.00

20% collected 1'511'380.00 1'511'380.00

Total human methane per day litre 75'569.00 75'569.00

Total human methane per year litre 27'582'685.00 27'582'685.00


Fuel cost per year GBP -5'516'537.00 16'549'611.00 11'033'074.00 Refining and infrastructure costs estimate GBP 2'500'000.00 500'000.00 3'000'000.00


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