All right. Good morning, ladies, gentlemen. Thank you very much for joining us this morning. My name is George Milan. I'm working in investor relations, and I take care of investors and others in Europe. The purpose of today's session is to give you an introduction to the latest work we've done on the modeling of global long-term energy supply and demands, some of our scenario thinking, but also to illustrate how we are actually including this work, leveraging this work in our actual decision-making process. That's the main purpose of today. We think it's relevant to investors for a number of reasons. One of them is that our communications at the moment are very focused, and rightfully, on short-term and mid-term performance. We want to give you a sense of assurance that this is not happening at the expense of our longer term strategic thinking.
We also want to give you a sense of how we include the complexity and uncertainty of energy transition in our decisions to actually future-proof our business. Also, through a few examples, we'll share with you some of the insights we gained through this work, for instance, on electric vehicles. This work, and we'll talk about that, is we think relevant for investors, but also very relevant to our customers, our partners, our regulators. We also leverage this work to differentiate further our interaction with these key stakeholders. It will be illustrated during the presentation. Overall, think of this presentation in the wider context of our existing communication on energy transition, portfolio resilience, but also of our support to TCFD. That's the bigger context of today's presentation.
To take us through the main story today, we will have Guy Outen, who is our Executive Vice President for Strategy and Portfolio, and Wim Thomas, who is our Chief Energy Advisor. They will take you through the main presentation for 45 minutes, followed by 45 minutes Q&A session. Following which, we will have a bit of time to mingle at the back, if you have further question to the presenters or to some of my colleagues from investor relations. Without further ado, Guy, Wim, over to you. Thank you.
Thank you very much, George, and I'm really pleased to be here today. Let me start with the usual disclaimer note. I'm certainly going to be talking about the medium and longer term, so you know how to put that in context with your investment decisions. Right. You know the context upon which Shell's talked a lot over the recent years, particularly since Ben's come in place, about our strategy for the future, all inclusive and focused on being a world-class investment. Now today, we're going to talk about some of the elements about, firstly, how we came to shaping the strategy that we're now following, inclusive of this element, and then particularly the role that scenarios play in helping us address this.
We're making good progress on the strategy, but I'm not going to cover the details of that too much today. You can see that many elements of it make good progress from the Quarter 2 results. You've seen the IR program also helping people to further understand the context that we're operating in. The LNG outlook was provided earlier this year. There'll be a chemicals event upcoming soon. As we move through the latter part of the year, we'll also be broadening and giving you more insights into another important part of our strategy that we're building on, and advised you on last year in Capital Markets Day, which we'll also talk a lot more, particularly also on our oil products and marketing businesses, which you'll hear in a minute, are a very key part of the future. That's the broader context.
Let me come to the purpose of my talk, which is about how Shell goes about thinking about the future in an increasingly uncertain world. Indeed, that's the role of my strategy and portfolio team, is to help our executives, our board, make better decisions under uncertainty. This has always been a really challenging task in our industry, given our massive scale and the long time frames that many parts of our activities relate into. How these factors interrelate with very powerful forces that shape our industry, such as government policy, the rise of technology and the changes in technology, and even customer decisions and their preferences all shape and impact on our investment and our business. We see these challenges increasing and, in fact, going to what many people call a radically uncertain future.
In today's session, we will talk about what's the decision-making framework that we use to grapple and make decisions in that context. I'll talk about the industry context to start with, and our decision framework. You'll see from that the key role that scenarios and deep understanding in energy systems under various scenarios play, and that's where Wim Thomas will take you through our, I think, peculiarly unique capabilities in this area. We'll have plenty of time for Q&A after that. Our industry has grown massively over the last 60 years. We're about four times as big as we were back 60 years ago. That's a massive change. For as much as our industry's got bigger. In many ways, it's arguably also pretty unchanged from the past.
In the 1950s, hydrocarbons, oil, gas, and coal, were about 80% of the energy system. Today, they are about 80% of the energy system. Solar PV and wind are less than 2% of the energy system today. The challenges that we faced in growing the energy system, they were challenging. We moved into deep water, we created the LNG business, and we worked out how to operationalize onshore operations. These were, in a way, focused and solvable, albeit complicated problems. This won't be the case going forward. We're going to see the energy system change significantly over time. In the next three decades, the 20% of non-oil and gas and coal will change to maybe 40%, and within that, dominated by Solar PV and by wind.
Within that time, we could see that PV and wind will be half of the source of a much bigger electrified energy system. We'll also see the other major force that we see coming. The first is that energy transition, as I just described. The second major force we see coming is the role of digitalization. Digitalization impacts not only costs and efficiency about how we more effectively produce supply and different types of supply, but more particularly, how we interact with our customers. We're able to relatively cheaply provide bespoke solutions and engage with our customers in a way that's been either expensive or prohibitive in the past.
The implication of these two forces individually, but particularly together, we see as impacting both supply, demand, which will also see changes in much deeper electrification of our system, and thirdly, and more importantly, where profits are likely to be made in this changing energy system. That's the big picture shape of the future. What's unclear is actually the endpoint and the particular pathways to that future, because the forces, again, of policy and technology and individual's choice will change the actual future path that we go on. Frankly, nobody knows what pathway we will be on. That takes the problem from being a complicated one to a complex one. A complex problem, as you would understand, is not suited to forecasts. What we know is that forecast is likely to be wrong.
What we don't know is which forecast or which future path we're going to be on, because by their nature, they are dynamic and will change. Forecast-based decision-making is not fit for purpose. Our old models of expectation basis for key decisions, I think is also too limited. Rather, we need multiple views of the future. We need to think about future in different contexts. We need to be able to understand and explore boundaries much more than we have done, needed to do before. Our decision-making processes need to be agile enough to understand and incorporate such uncertainties as we go about making decisions. This is a much more demanding basis for making decisions going forward. Frankly, it's one that's well suited and leverages Shell's strong scenario thinking of the past. For those not familiar with scenarios, they're very simple.
They are plausible and challenging descriptions of the future. They help us think about complex and uncertain problems, but also in a way which interrelate and include feedback loops and various factors. We don't start with scenarios from an energy model perspective. We think about forces that are shaping the global systems, we think about within those forces, then the energy implications that may come. Scenarios are not our forecasts and they're not our business plan. Rather, they're helpful to help stretch the thinking of our board and our executives. We use scenarios in a whole range of decisions and in our thinking processes. We do them also externally. We engage with people interested in the energy space, be it governments, stakeholders, NGOs, others that are very interested in the general uncertainty about energy.
I think one of our examples we commonly talk about is with the Chinese government's DRC, who have incorporated Shell to help them think about their changing energy system going forward. Internally, we use scenarios for then a range of activities. Firstly, in our individual decision-making of particular projects. We will have focused decision-based scenarios as to what we see as the potential forces related to that particular investment. These may be competitive forces, they may be government policy, they may be technology changes. We then use them at a higher level as well to help us think about the future in terms of shaping our portfolio. What weight of particular strategic themes we want to have? How robust are they in different futures?
Finally, we also use scenarios to help us think about the future in its broader sense, in its longer-term sense, and that has helped shape our strategy and also test it as to its resilience. As I say, in the last few years, we have used scenarios to test and refresh our strategy. They help deepen our understanding, as I say, particularly of the two forces that we've seen emerging from those scenarios with great commonality around the energy transition and on digitalization. They help shape our purpose, our aspired future, and our winning capabilities. They highlighted the key changes likely to come in value chains over time as more renewables together with digitalization become more impactful, from a relatively small part of the energy system today to something that's going to be a meaningful part over the next 20, 30 years.
Accordingly, our strategy was refreshed and seeks now to leverage our brand as we get closer to customers. We're the leading brand in the energy system, and we see the scenarios take us and the need to move closer to customers, where we offer those customers with a customer-centric approach, a way of thinking about what are the solutions that they need rather than the products we want to provide them. It also drove us to be very clear about the need to provide more and cleaner energy. The energy system will be much bigger in 2050 than it is today, maybe 40% bigger. Also, the nature of the components of that system will change.
Finally, it takes us to embrace that digitalization particularly will make this world an increasingly transparent one, and one where collaboration and how we work with communities, with governments, with our partners, with our customers will be really key going forward. That's the role scenarios has helped us on our aspired future and our capabilities, you can see. Today, we're going to talk about how scenarios help us with the key task then of shaping our portfolio, helping us to think about not only the direction, but also the pace and the timing of changes in our portfolio going forward. I'll share with you now a little bit more about how do we do this.
As I say, shaping and making major investment decisions, of which we spend a significant amount each year to keep providing more energy, has an impact and will be impacted by the energy transition. Its timing and endpoint, as I say, we don't know. The challenge then is how do we make decisions given that uncertainty? This is where we really use scenarios. We're at the moment, we've developed a number of scenarios that consider the forces of policy, of technology, and customer choice, to think about their impact on both energy demand as well as the pace and the application of new technologies, both within the hydrocarbon sector as well as in the non-hydrocarbon sector. We bring these forces together in what we call future worlds. We have a number of these future worlds which bring together these forces.
We then explore, importantly, these future worlds on the potential value chains that exist within the energy system. You can imagine the energy system will be different and driven by its shape and components under each of those different worlds. The right-hand chart is an example of, for example, as we split up the value chains of the energy system, think about them then into different potential future worlds, and think and understand or explore what are likely segments which are more vibrant or likely to attract capital and be profitable in what in some worlds, and which are the sectors which are maybe more determined or reliant on a particular future world rather than being resilient to many.
That gives us insights into which parts of the sectors in the future may be more resilient than others, which are more robust to various futures, which are heavily dependent on maybe just one future world or one particular force. How relatively impacted these sectors are, and then importantly, understanding which parts of the energy sector are more dependent on supply forces and choices, and which are more dependent on customer-driven GDP and demand choices and forces. Being detailed about this really helps our understanding in a much more operational way. Then it's a critical part of inputting to final decisions. It doesn't, of course, give us decisions in itself. That's where I come to the last slide, which is about the decision-making framework we then use.
It starts with firstly being clear about what our objectives are. Those objectives are a combination, of course, of financial and non-financial elements. At the group level, of course, our strategy sets what are the objectives for our decisions about shaping of our portfolio. When we come to individual investment opportunities, the objectives for those would typically then be set by the strategic intents we have set for each of the strategic themes, which are fitted within the overarching group strategy and aspired portfolio. Once we've With those objectives clear, relevant for the decision we want to take, we then think about the decision in terms of potentially different futures, so under different scenarios, and then understand the relevant impact on value chains of that scenario as appropriate for this decision.
This gives us insights as to how resilient and attractive that decision may be in multiple futures. We do that under a number of scenarios. That gives us multiple views about what the potential range and impacts might be. That leaves us with a challenge. What do we do with multiple outcomes? Because if we have to pick one scenario or one future, that's back to being a forecast. What we know is this basis says we shouldn't be using expectation cases as the prime basis for decision making. Importantly, we've, in addition to the multiple lenses we use, which are traditional, we've also introduced the idea of minimizing the maximum regret.
That's really about understanding both the value of a decision in terms of its upside or its potential downside. Also in cases, decisions we make, but the decisions we don't make. What if we are not to make the decision and certain futures came out? How would we be placed? How relatively competitive would we be? If we think about a simple example for you. If you're a car manufacturer and you are thinking about your next production train. You may have a view about the pace of electric vehicles coming in. Your expectation case may be, yes, they're coming, they're important, but maybe not for my next immediate train, maybe the one thereafter. Your expectation case may be, not yet. Don't change to an EV platform, keep it as an ICE platform. Combustion platform.
This process would challenge you or expand the thought process and say, "Okay, let's think about different futures as well." What if there's a scenario where you chose not to invest, but your competitors at your part of the market did invest, and there was quite an accelerated view of electric vehicle take-up? That may put you at a very significant disadvantage. You may have missed a whole generation of buyers, the first buyers into an electric vehicle. You may have ultimately even created a great risk to your brand and your reputation. Should you have moved or not? That may be a defining event if you don't. On the other hand, exploring what might be the downside of moving and being disappointed. Your expectation case may have come through. It's probably a disappointing return, but it's probably not going to be a company-threatening one.
In that case, the logic may be to at least understand that the maximum regret may be not moving to an EV platform at this stage. That would then need to go into your thinking process. On the other hand, it may well be that moving precipitously may in fact be a very significant opportunity foregone, and maybe for other decisions or some different decisions, it's better to indeed understand but wait and continue to invest in areas where there is indeed, in most worlds or many worlds in your thinking, likely to see forces that would maintain the importance of investing in that part of the business. You and I, we all do this in practice, in our normal decision-making, in our lives. I think what's important in this process is that we do that based on our own mental models.
If you're a management team thinking about such decisions, having a discussion where you've got X number of people around the table, each having a view, there's no basis for exploring what's behind the mental models leading to that decision. This process makes transparent the forces that may sit behind particular scenarios, which may be these lead to outcomes which have the maximum regret. Making it transparent we think is a really important part of the decision-making process and enabling better decision-making. We then take this hard data, these hard facts and inputs, and they're then complemented by the normal soft factors as well, the things we can't easily quantify. That goes into then the ultimate decision-making process, and of course, that's what management get paid for, making judgments based on hard and soft factors.
Every decision Shell makes does not need this degree of complexity. Certainly when we think about paces of change, of shaping our portfolio and major longer-term investments, they're really well suited to thinking about what could be the multiple future worlds we're moving into. When should we be starting to move and when should we be thinking but not yet ready to move on basis. That framework, as you can imagine, is very dependent on and leverages deep insights into the energy system under potential different futures, which on a basis to however, which understand the realities of force and counterforce on an integrated basis. That's where scenarios are really key, and the ability to not only at a high level understand scenario futures, but also go down to understand the forces within the energy system itself.
With that, I'm going to hand over to Wim, who's going to give you insight as to how Shell's thinking in this place and our capabilities, which I think in fact are probably unique in this area. Over to you, Wim.
Thanks, Guy. I'll get that. Thanks, Guy. My part of the presentation is really make that link between, okay, scenarios, giving context and frameworks for strategic decision-making. Actually, how do we make these scenarios and how we translate them for energy systems? Because that takes quite a long period to overlook. To reiterate, our story starts with these macro scenarios, this global context, how things will work over a number of decades, because energy systems are moving along very slowly. It's very well to know something about how the world works today. Also for energy modeling, you need to have a kind of idea how it is in five, 10, 15, 20, or even longer years' time. The only way to do that is really to start thinking about that macro environment.
How is the society, political, economics going to change over time? Actually bearing in mind that scenarios is all to do about forces and counterforces. You have intended consequences and inevitable unintended consequences. That, of course, gives you a new dynamic for the future when the world moves on. When you think very long term, like we do, we need to kind of view there. The other aspect, of course, that you can understand is that the world doesn't move apace in the same line. There are basically forces, counterforces. Maybe one part of the world decides to go for a CO2 policy while the other one doesn't. How does it interact on a global level in the energy system? All these dynamics are different. Countries develop at different paces, but even sectors within countries can develop at different paces.
That is really what we try to do with our modeling, because once we have our stories, we say, okay, well, let's bring some reality in from what I call the law of physics or the law of economics, or what is really realistic human behavior in different parts, et cetera. Actually, that modeling keeps us what I call on the straight and narrow in our scenario thinking, right? Is it not too wishful thinking, right? Is it really still a plausible story? That's actually how it feeds back into these stories. Of course, the good thing about this way of quantification, numbers is also a communication tool, especially for a very numerical-minded management like our management is. Give them a chart, give them a table, and they understand it much better than your story.
Modeling is a very important part of our thinking how energy scenarios may evolve. Here you see the covers of two little publications. It's published on our website, in that publication, we just try to explain a little bit more the depth of our analysis, how we're going about it, I didn't really highlight any booklets, much different with others, we are quite distinct how we approach the problem than other people. Demand and supply is crucial to our business to understand that very well. Let me start with our World Energy Model, which has three components, demand, choice, and supply, I'd like to start off with an overview here, then I go to demand. First of all, it's quite a big model for a top-down model with a lot of detail.
There's 100 individual countries, 100 countries and 82 countries and the rest of regions, about 100 in total. It actually looks at 14 different demand sectors, like in transport, residential, chemicals, industry, services, you name it. Actually, we're not jumping straight to primary energy stuff. Well, we do. We actually say, okay, well, there are also energy carriers like electricity, heat, liquid hydrocarbon fuels, hydrogen, et cetera. We actually look at 10 different carriers first, because that's basically what customers are really going to use in their homes and in their daily lives in the industry, those kind of products. Then in the end, you have to translate it into prime energy, where these energies, these fuels, coming from which resources. That is actually how the model is constructed.
It's a global model. It's not a summation of part models of certain sectors, of certain regions. This is really one big integrated system model that looks at the whole globe as one integrated energy system. You can imagine that with economic growth and population growth, they're both going to expand. There's more energy needed. Also, like a balloon, if you squeeze here, it comes out there. For instance, if there's a resource constraint somewhere in the world emerging or a technology disruption invented somewhere, it will reverberate throughout the whole system over time. That, I think, is the nicety of that model, that you can see that, and it brings all these unintended consequences to the fore. You think, hey, how did that work? Then you can explain it.
Before I go into the demand part, I would just like to remind you quickly of what we call the six key drivers of the energy system. One is population growth, it's economic growth, environmental stresses, we call that, or feedback loops. It is technology, resource availability, and people's choices. Some of these key drivers you can imagine they are more like trends, like population growth. Well, there's some uncertainty around it, but generally, we're going to be around 10 billion people in the 2050 onwards. Same like in technology. A lot of technology we know, it's trends and it's going forward. Certain technologies, it's really still very much the question if it really is a breakthrough or not. Of course, at the moment, everyone expects that batteries will reduce its cost to around $100 per kilowatt hour or even less.
Really, will it happen? If not, what is then the alternative world? Resource availability, well, that was very much part of our previous scenarios, like would Shell Oil and Gas really take off and how fast and where, et cetera. People's choices are the most important of uncertainty. There again, you need these macroeconomic scenarios to tell you, okay, what is the world's choices going to be for energy systems? Those are the six key drivers. You see in the gray box in our model, and I'll come back to it later, we have specific scenario levers, as we call it, where we can actually bend historical trends very systematically based on new policies or aspirations or targets to the future. I'll come back to that later, how we do that. Let me first start with the demands module.
Demand, of course, is very important here. First I'd like to say is we do not model energy demand directly. We model energy service demand, and that speaks to the point Guy mentioned, right? People don't necessarily want energy. They want energy solutions. Okay, if you go in that space of thinking, you have to think, okay, what are the energy services people need? Of course, the services are that we want to travel in certain distance for commuting, for holidays. We want to cool our homes or heat our homes. We need some steel or cement on average. It's actually that kind of energy service we model first, and that's very important later on when I explain to you how we actually make energy choices in the model. That is first, energy services.
Secondly, there's a nonlinear relationship between people's incomes and people's energy needs on a macro level. You see that actually is that, well, when you are in a relatively low income bracket, so to $4,000, $5,000 per person, you don't need much that much energy there. Once thereafter you start seeing industrialization in economies starting up, energy demand is accelerating. Till around 15,000, 20,000 income, then you see at certain sectors, saturation coming in. Your house will be a certain size, and you only need certain energy to cool it or warm it. I think most people are pretty fed up after an hour's commute. They don't want to drive more. Certain sectors have saturation points built in, and we can see that from historical data sets.
Other sectors like in particularly chemicals, chemical use and transport, we haven't seen yet a decoupling with GDP growth. That's important then to start thinking about what does that mean for the emerging economies. You see on this graph is that the top lines are all the developed economies and say North America on average uses twice as much energy than Europeans for, I think a similar welfare level and comfort level. You can see that, say the emerging economies, we assume that they only will use about two-thirds of European levels of energies. Why is that? Well, first, we assume that they're going to leapfrog a technology. They're not going to take old stuff. They're going to take the best technology available now, and therefore, in a sense, they have a head start.
Also it assumes very much how they're going to organize their economies and cities in the future. Most of the population growth is in Asia, and it is actually there where a lot of large cities need to be built in the future. If these cities are compact structures and where government provides, say, alternative means of transport, which you can electrify, like metros and trains and other stuff, then you have a completely different energy system than when you go for sprawl and suburbs like Houston or Los Angeles. For instance, on personal mobility, probably it's about 2,000 kilometers a year less per person you need if you're a compact city. Again, there's a lot of uncertainty when you actually take these demand curves, how society chooses to organize itself.
Actually these curves we make for all 14 different sectors and for these 100 countries individually, and we can actually calibrate them or actually treat them on local circumstances. You can imagine a lot of permutations. This is not for the faint-hearted. If you're a modeler in my team, this is quite some work to do. Then the second module, I think we are pretty unique in with other models, is that we have a choice module. That it brings a behavioral choice element. It is not a cost optimization type of module. Which means is that if you have a very expensive technology, emerging technology, a cost optimization model will always push it out. It's not going to happen. This model assumes that there will always be early adopters. There will always people think it's a good idea.
There are always people say, "Well, I can afford it. I don't care about lowest cost, but I can afford it." Therefore, it actually brings in new technologies as well. With that effect means that actually the cost curve comes down with more capacity added, and therefore more people can afford it. All in the time steps, you see that in a natural process, even without the absence of any policies, that when you bring in new disruptive technologies, that disruptive technology will find its way in the system. Actually policy then normally accelerates that or it can also delay that in certain cases. Also say that first choice part when actually you can actually also when the societal preference, we don't like nuclear in our electricity system. Okay, you can switch it off. That's not an option for this country.
Well, in other countries it can be. We have a two-step approach in our choice in how we actually derive the energy demand in the primary energy sectors. First of all, we look at these energy service needs, and then we say, "Okay, consumers, what would be your choice on a number of ranges, not only cost of subsidies, taxes, preferences, et cetera, and technology attractiveness. Are you going to do that basically with electrons or with molecules?" That
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That's the real question in the first step. Is it electricity or is it district heat, or is it something else? Then the second choice module is actually for producers, i.e. our industry. How are you going to satisfy this fuel demand of our customers? Then of course, electricity industry, you have a lot of options. You can coal, gas, oil still, but also you have all the renewables to choose from. There again, the cost curves are very important, policies are very important. We can make these choices. Maybe I should take a pause here and where we are in the modeling. Actually I covered this demand part of the World Energy Model, and this choice part. Just to give you a kind of flavor, okay, well, what kind of outputs do you get then?
Well, it's about a 55 megabyte output file. You can slice and dice into almost anything you like. You can have the energy demand per sector as in a carrier or as a primary energy source. You can have your energy demand per country. You can have it by primary energy source, coal, oil, renewables, et cetera. Also, for instance, there an example on the right lower-hand corner is China. You can actually say, okay, the industries, so the electricity industry-
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What kind of pathways can we see there? Here you can see that in this scenario, actually coal will in the end most likely be replaced by first gas, but then very much more renewables. That has a number of policy drivers like pollution but also cost there. You can actually look at many different ways in that model and examine actually your markets in that sense. I like to put two slides just to try to bring it together on the demand side, right when you start contrasting scenarios. That's very important for the strategic decision frameworks, right? Okay, one world is not good, but what about the other world? Before I go in there, you see there two terminologies called Mountains and Oceans. Those are our scenarios we published in 2013.
Just for a very quick refresher, Mountains is very much a top-down government-driven world where social stability is paramount. Maybe you're not so keen to have institutional reform in your country, so therefore, economic growth is maybe not at maximum potential as economists would mention. Governments are actually big providers, so they can make really choices. This world, for instance, chooses compact cities, which reduces the personal mobility demand. It also chooses, in this case, to go for electrifying the transportation system. It is actually a big government with vested interest to protect in that sense. While Oceans, the other scenario, is very much a market-driven world, what I call live now world. Actually, we've continued using what we have till we actually get other constraints. Let's say in sometimes resource constraints, pick price signals, and then you move to another system.
Two different type 2 mechanisms of decision making, say, broadly over the world. You see actually in these 15 years time steps I present, that between the two scenarios, even if the world operates significantly different decision making, that by 2030, you don't see that much difference still, right? It's about the bluest electricity, well, and the rest is oil and gas and a bit of coal. It's not so much different. That is because inertia in our energy system, it takes a long time before it works through. The reason being, of course, that power stations last at least 40 years, cars 15 years, houses probably refurbished every 40 years. Although we make our headline decisions you read in the paper, actually, when you look at a global scale, it takes a while to come through.
Actually when you take then go 30 or 45 years forward, you start seeing distinctly different energy systems coming up. This is really, the dark blue is electricity. You can already see this, that the trend or actually a common factor between the scenarios within the ranges is that electrification will continue to gain market share. That's over the last 50 years, that happened continuously. We need to use more and more electricity, and that will continue and probably to accelerate. Why is that? Well, if you want a higher efficient world and a decarbonizing world, you need more electrical appliances. With these two key drivers, right? One almost say a certain point of energy transitions is that we will electrify the system much faster. The second example I like to give is the, what is it? The primary energy sources.
Again, not much that much difference by 2030, but you really see very much different worlds between oil and gas and renewables, a couple of years, say 30 or 45 years. That is the uncertainty ranges we need to think about because we don't give any chance factor to these scenarios. We think it's equally plausible. We say both could be happening. We don't really know. Right. Back to the World Energy Model. Before I go to the supply side, I would like just to mention that we have published our energy resource database on our website. We believe it's the first time, the first attempt to bring a concise overview of energy resources and available for everyone. We do that to bring, A, transparency so that you can see what we use.
Also actually we hope that it is a useful reference for other people doing this kind of analysis, be it academics or elsewhere, to use for their own analysis. The headline is very simple, is that there is enough renewable energies for 10 billion people. That actually the resource is unequally distributed over the world. There's some kind of problem-solving around how do you transport it and store it, et cetera. Also when you look at the fossil side, right? There's enough fossil fuels left for an energy efficient and carbon efficient world. In that sense, there's no real resource constraint. There may be an accessibility issue around that. Well, if you go on that website, it's quite nice. It has a kind of quiz to it, right? Did you know that there are only four countries will have 85% of all fossil resources?
Australia is the biggest renewable resource holder in the world, et cetera. It's very good for the pub quiz as well too, if you have to decide one there. All right. Very briefly then on the supply side. The third part is the supply module, and I'd just like to highlight the oil and gas because that is a particular problem because, A, we have statistical volumes available, but we haven't found them all yet. First you need to invest and find them. You have a kind of stock of scope for recovery. At a certain algorithm, it's called creaming curves, right? These found resources are matured into developed resources and later on in production. Production is another problem in our industry because once you have production, it depletes, and you have to replenish the whole time to stand still.
For that also we have some algorithms. In this case the R/P is reserves of production one, and this actually gives a good estimate how existing basins can deplete. This model is also quite detailed. Again, 100 individual countries and regions covered, 8 different resource categories like conventional oil, shale oil, sorry, NGLs, et cetera. Also have 5 different locations, onshore, offshore, Arctic, and other frontier, and it has these 5 maturation stages there. I don't want to dwell too much on that, but happy to take questions later on. Just to give you, again, a flavor of what kind of outputs we can expect from a model like this, well, of course, you get it per resource category, I mentioned. You can get it per country. You can see is it associated with non-associated gases or fluids and where it comes from.
That, again, is important for the slate, for refinery mixes, et cetera. You can see actually which locations they come from. You can also home in, for instance, say, okay, what's the future production ranges of deep water, right? Do we see in the certain scenario drivers, continuous growth, or is it actually flattening off? That may be handy for your procurement strategies for rigs and other services there. You can use it also for that kind of stuff. Right. Two slides just to round this presentation off, and that's actually to bring the supply and demand together. I'd just like to touch upon a very topical subject at the moment, and that is electric vehicles. We have assumed here a very aggressive uptake of electric vehicles.
At the moment, it's less than 1% of global sales, but we postulate 10% by 2025 and 35% of new sales worldwide by 2035. That is actually, I think, really pushing the boundaries when you think about it, of course, that leading economies is one thing, but actually following economies there are probably a decade behind others. The headlines is then, "Oh my God, it's growing very fast." Actually, you look on the right-hand side of the picture, when you look at the fleet total, you see that internal combustion engine is still continuing to grow till about 2030, 2035. That is especially because developing economies probably will still be very much ICE-based. That's one thing. The headline sales are the same as the fleet average.
When you look at the effect of oil demand and the bright blue bars on the left-hand side of the picture is actually passenger transport. Here you can see is that even, say, with a significant uptake in electric vehicles, is that we still see continued oil demand growth in passenger transport till around 2030, 2035, around that range. Also it's only about a third of total energy demand. If you talk about oil demand, therefore also when you think about total overall oil demand, actually you have to look at the other sectors as well. Here I'd like to remind again on how our World Energy Model works.
If you actually don't need it in one certain sector, the oil, or in a certain country, therefore, say, the prices will drop in the model, then other parts of the world says, "Hey, it becomes more affordable. I'm going to use that supply available and maybe I'm doing a bit less on energy efficiency uptake," for instance. It's really dynamic there. See, really in this aggressive case, you see that overall oil demand is still to continue to grow till the early 2030s in our analysis in this scenario. The right-hand side of the picture is the oil demand per country. You see that the pink and the blue on the bottom, that's actually North America and Europe. Actually, there is a trend that we see less and less oil demand over time coming up.
The peak oil demand was probably already in 2005 or something like that. You see the other colors, red China and orange India and the other Asian countries above that. You see actually is that China still is to continue oil demand growth, and India is following, but at a much smaller scale, it looks like, while they have more people there. Again, I'd like to emphasize the origin, the latter picture, where we assume that these emerging economies are going to take the best technology available and do not make sprawling suburbs and be much more efficient. Of course, if that doesn't happen, there's much more upside to oil demand than we show in this case. Again, that's that communication between one and the other. Right. With that, I'd like to conclude my presentation.
I hope I've given you a good overview how we use our modeling to actually quantify the scenarios we have and actually how they interact in the strategic decision making. For instance, this very aggressive electric vehicle case is still more or less a model scenario where we explored the electrification theme. We published that scenario more than four years ago. Once again to say is that once you have that scenario range work, we have probably been thinking about these possibilities hopefully a couple of years earlier than maybe mainstream. With that, I'd like to hand over to Guy.
Thank you, Wim. Back for questions. Let me summarize. What have we said today? The key messages are as follows. We've moved from a long history of what's been an increasingly complicated challenge that we've faced now into one that's complex. That requires different approaches to decision making. That really draws heavily on needing to understand multiple futures in helping to frame our decision making in that context. Here, scenario framework thinking, holistic ability to understand different futures and how they may play out in the energy system are absolutely key. Fourthly, we need multiple lenses into thinking about those different potential futures, and that requires the additional element, as I say, of thinking about and understanding the maximum regrets potentially of decisions made.
Finally, our decision-making needs to be much more agile and more thoughtful about the relevant and potential implications and boundaries that we might be facing in our decision-making going forward. With that, I'm pleased to say we've now got, firstly, the booklets are available from the website, downloadable today, the database is on an app on your phone that'll work, as I say, as Wim says, for pub quizzes or professional purposes, to help people, again, further engage in the realities and the challenges that the energy system is facing and going through, because they're fundamental and demanding. The more we understand about them, the better outcomes we're going to get. Those things are available from today, we've got about 45 minutes for Q&A. We're looking forward to your questions.
The process, it's a hand up, then there's a couple of mics that'll be brought around. Why don't we come to the lady on the end?
Good afternoon. Terry Price. I have a question on page 17. I was curious in general how much chemical demand driven by petrochemicals figures into this calculation. Two questions on it. What is the outlook for the future? Because there seems to be a lot of sentiment around how consumers will just demand a lot less of this than they did in the past. Secondly, you see the U.S. really drop off and a lot of the European markets. To what extent has that just production moved to other parts of the world? The demand is elsewhere.
Yeah. The latter part of the question, this is a cumulative graph of all the sectors added up, so there's a cumulative effect. On the chemical side, it is really an enigma in a sense that there's a lot of demand for products these kinds. Actually, one of the things when you look at, say, purely econometric sense, the past can't be the future. We cannot assume that the emerging economies use the same amount of chemicals than we have used in the West. We must assume dematerialization in that sense in the world at large. That's, for instance, also a story of future mobility, where it's lightweighting, it's different components. There, then the question is, okay, actually, are going to use even more chemicals because of this lightweight car components. There's some forces and another force.
In that sense, you have to take a judgment with and having a lot of chemical specialists in the room and manufacturer specialists in the room and say, "Well, what makes sense for a future projection of that energy demand in levels?" Again, we sometimes have just a sensitivity on high and a low level in that sense, because I think it's really uncertain what is the real level of chemical use per person in the future on a global scale.
It's fair to say in summary, though, most of the Worlds we investigate, we see chemical demand being quite robust and resilient in most of those futures.
Yeah. In all Worlds. Yeah.
Yeah.
Is that assumption dematerialization of demand in both scenarios?
To a great extent, that will be required. Otherwise, we probably go into the other scenario where we explore resource constraints. Yeah.
Indeed. I think as Wim summarized before, we've built in a lot of efficiency, the future development paths of new industrializing countries are following will not be the same resource intensity and even product intensity that the West has gone through.
Yeah.
Maybe just straight behind then.
Hi there. Thanks for the presentation. Chris Cooper from Bank of America. Just considering your history in modeling scenarios over the years and decades, maybe you can tell us a little bit about how you've changed your approach in terms of what lessons you've learned, what scenarios were spot on, and which trends you failed to pick up on. I suppose that is the second question, how do you deal with those challenges, i.e., where was the shale technology scenario in the '90s? How do you try and even can include that in your outlook?
Yeah. I think the scenarios they explored broad developments. In energy terms, I would say is that in the '80s, for instance, we explored what we called business as usual and dematerialization. That was called the two scenarios. Actually, we showed that actually business as usual, actually continuous growth in energy would probably be very unlikely. The world had to go for dematerialization, which means higher efficiencies. Actually, you see then all scenarios has followed, in a sense, a dematerialization pathway. Now, in the '90s, it was actually pollution. It was environmental constraints. We made two iconic scenarios then. Actually, when you look at it, all our future scenarios was actually, well, we're going to do something about environment, et cetera. In the last decade, the fork in the road was, what about CO2? Is the world serious about reducing CO2?
That was actually the Scramble and Blueprints scenario. Since actually we make really one form or another of a decarbonization scenario. I think on a very broad line, I think we capture the major forks in the roads at least. Then how do we model that? Well, in the broadest sense, when we look actually back As we don't give a forecast that one is the other. The answer is good. We did do an exercise recently and say, well, we made these scenarios, Mountains and Oceans in 2012, so published in 2013. Actually, how is the world moving on there? These scenarios actually really had a big question mark. Well, are we really having a peak oil supply?
If it is today, is it not that bad because we have this new resource we don't seem to understand called shale oil and shale gas, and actually, is it really the game changer? Well, Mountains actually deals with that, game changer, and Oceans was the other way around. When we plot that, you can see it actually on the gas side, the world follows very much the Mountains scenario, while on the renewable side, the world follows very much more towards the Oceans scenario. In that sense, we are within the ranges where these last couple of years we can do a kind of sense check, if that's what you mean.
Across from the middle.
Hi, it's Matthias Bier from BMO Global Asset Management. Thank you for the presentation. Building a bit on the previous question here. You started off the presentation talking about the energy transition, digitization as sort of potential radical disruptors. Looking then at the presentation you've given and the kind of examples you highlighted, including the aggressive EV adoption scenario, it sort of came away with a sense of not really such a big disruption modeling forward to 2025, 2035, 2040. If you could give us a sense, where in your different future mappings are these radical disruptions likely to occur? If it's not EV, what are the factors on the supply side or demand side are you modeling more aggressively, and they lead to these very different futures?
What kind of sensitivity is built in terms of demand for oil and gas in particular, given that a disruption, as we've seen in the previous years, of 2 million barrels per day in the sort of supply-demand equation can have a major impact medium term. Give us a sense of the sensitivity and the major disruption you're forecasting or you're modeling.
Okay. Yes, I'm happy to give that example. For example, digitalization theme is very much the, in, say, global amount on logistics. You can, of course, make a more efficient internal combustion engine, but actually by changing the logistics of trucks, you can actually make an enormous efficiency chain. For instance, on the passenger transport, if you look at the last 25 years, we have 15% overall fleet efficiency improvements, only 15%. In the future when we actually look at the targets, we have to assume 50%, three times more efficiency improvement the next 25 years. We work with that. When we actually put it in our scenarios, we had actually about a moderate EV uptake, electric vehicle uptake. This scenario actually has a much, well, twice as strong electric vehicle uptake.
You have to ask yourself the question, well, hang on, these OEMs, are they going to spend their technology, their R&D money on both, on electric vehicles and on ICEs? Or actually is ICEs going to be on the back burner, and therefore we are not going to make the 50% increase as we assume here. If you would then take that sensitivity, actually the one with more moderate uptake of EVs, and therefore carbon standards have to be achieved with higher combustion engine efficiencies, you would actually see flat oil demand in that sense over a period, say, between now and 2030.
If it's the other way around, you have a higher EV uptake, and they don't do so much on internal combustion efficiency, actually, the overall effect is that we might well see higher oil demand by 2030, because the dominant effect of this flattening oil demand for personal transport is really the efficiency improvements in ICEs. When we have taken, in this example, when you take it between now and 2040, we have about this, about 25 million barrels demand today and probably would add another 24, 25 in that period because of economic growth. Then actually when we take the reduction of two-thirds will be by high efficiency uptake in internal combustion engines, and then one-third will be covered by EVs, then you have a flat oil profile between now and 2040. That's what's shown in that picture.
Mark, maybe then expand on that into maybe a bit more of the commercial space, because physical changes may be, by their nature of legacy and history and just scale, taking time to work through, doesn't mean that they need to be at 40% of the energy system to start to disrupt how market and value may change. Again, that's why we go into value chains and start to think about where might that start to shift. When you've then got today an immaterial level, frankly, of in general renewable energy sources coming in. Once they start to become an important part of an energy system for a city or a country, then that may well lead to quite different and important changes, disruptive changes of the commercial issues around energy supply then.
It's not just about volumes, it's about how these quite different, one dispatches basically when it's free. Wind and PV, when they dispatch, basically those electrons are free as opposed to a hydrocarbon system, which is the other way. How are those two going to work? How are government policy going to set up storage, reliability, those sort of systems? That indeed could well be earlier in terms of disruptive forces than the physical volumes that we maybe traditionally think about. We might come down to this side now. Thanks.
Thanks very much, Guy. You started by commenting around complexity and radically different or radically difficult it is in ways to make decisions and see the future at this point. Slightly tangential maybe, but I think you've probably got solid insight. Allocation of capital-
How the work here starts to impact, and what changes you've seen in the way that the board and the people that you feed into-
Yeah
think about allocation and what financial metrics they should be using and adopting at a time when the future is so uncertain, and in an industry where you are committing very large lumps-
Yeah
for a very long time, and you will wear the consequences of that commitment-
Yeah
through history.
Yes. I think great questions. Indeed, that's what takes a lot of our focus of our Board and our Executive Committee thinking about just that. While today is 2017, if we think about frontier exploration to deep water developments, or if we think about new greenfield LNG developments, we're into the late 2020s before they're either constructed and built and starting to pay back. That's into this period where there's likely to be more uncertainty. That's how we try and use the scenarios to explain to them and show how much weight in a certain part of the portfolio is exposed to one particular world, and how impactful that could be on our financial performance, our resilience, our balance sheet, those sorts of forces. Also the different risk profiles that are by nature.
There's no such thing as a dry hole in a renewable development. That's a different risk profile of the type of exposure you've got. I would say, those are forces which increasingly we're having to make more broader in terms of the impacts and the implications of these decisions for the Board and the Executive Committee. That's part of why this work is really helpful for them. I think the decision making elements, there's not going to be a radical different way of looking at individual metrics. It's more the, how do these things fit together? What's the shape of the total portfolio? It also leads you into, what's the regret of not moving and moving too quickly? We do play those things out.
In some areas, if I think about our marketing businesses, where our futures generally tell us the shift to the customer is going to be important, the ability to differentiate. We really think that we're leading energy brand. We can start to expand and leverage our brand, particularly into growing markets where Shell has clear brand share preference number 1. It's a good thing to be starting to build those relationships, even if the nature of the products and the services we're offering in the 2030s might be different from what we've got for the next 10 years. Those are probably pretty good things to be doing. You'll hear us much more talk about in the downstream area, the marketing relationship, building brand in those areas. Which by their nature both have relatively good short-term profiles, 20% return, 3-year payback's great.
It's actually putting a marker down for what could be a very positive runway going forward as well. Great option value too. We try and set all of those forces up, both the hard data as well as the broader what-ifs and the softer forces too.
Are you actually seeing behavioral change around allocation from board?
We get a lot of questions. It's now a very active decision about these futures. It isn't just Forecast is not the basis for these major decisions. As I say, we work with our board about, just as we don't use this framework for everything, we have a framework with them about which types of decisions we'll use this, and they'd expect to see us set up these decisions in this context. Which are just do it. They're short-term paybacks. They're traditional. They don't need all this complexity. Some portfolio shaping and major investments, they definitely now use this framework. Yeah.
Are you having questions on telephone?
Oh, telephone. Sorry. Sorry, Claudia. Telephone, we have a question I understand.
Thank you, sir. For that, if you have a question, please press star one. If you wish to be removed from the queue, please press star two. Again, it is star one to ask a question.
Not many. Okay.
Just confirming, we currently have no questions on the telephone line.
Thank you. Okay. Jon?
Yes. Jon Rigby from UBS. When you think about the scenarios, is there a boundary around which you place them? You are a listed company, and you have investors who can choose to either invest in you as an energy company or not.
Yeah.
Is there scenarios which you would just exclude because, effectively you're making a decision for your stakeholders? Your stakeholders would decide if effectively the energy world that you participate in is not relevant to them. The danger is you end up effectively hedging out yourself to the point where you actually don't make a return for the investor. You're taking the investor decision.
Yeah
They can make the decision, if that makes sense.
Yeah, I think it's a good question. I started with saying we use scenarios in this broader sense of how the world, and not from just an energy point of view, but how the world may evolve. That was used to frame to our board, we have a number of choices in these different worlds. That led us to the choice of our strategy and our purpose and how we're going to play. That was a key. It isn't a given. What we do in the future is not a given activity. How do we participate? We very much set up as a broad conversation.
In answering and helping them to answer their question, as I touched on in the April SRI day materials, we looked at what are these likely forces of this future, this combination of energy transition and digitalization, and how that's likely to see an energy system which is much bigger. This is a growth industry. Energy is a growth business. It's going to change, though, likely by both the supply of its products and also how you're going to interact with customers. That in a way, risk management is going to shift from traditionally subsurface resource knowledge through to managing an increasingly complex energy system. Shell has real skills and capabilities there. Firstly, as I say, from a customer point of view, where most of the growth in energy is going to come from, developing markets, Shell is brand share preference number 1.
We give people a choice where we're cost competitive, people will disproportionately pick Shell. Secondly, the behind us, as Wim says so eloquently, people want the energy service. They want to be mobile, hot, cold, whatever. How we provide them with that ability, that energy service, that's the challenge for energy providers. That's again, where we're really well-placed to do that through our capabilities. Although thirdly, the energy system is going to, as I say, being big, is also going to require scale. The whole world's not going to be based on rooftop solar developments. So there's still a role for a major player, and we know that in the solar business today, the largest market cap of the biggest players are in the low billions of dollars. They don't have global experience. They don't know how to do things at scale.
If we think about even some of these new digital players in new industries, once they get to scale, they're struggling. They're realizing the realities of dealing with governments, other stakeholders, etc. Of course, Shell has a great legacy there. We're used to working with regulators, government policy makers and helping to influence and provide solutions at scale for 75, 70% of people will live in cities by 2050. They're the types of solutions we need to be able to provide, and we think Shell has a tremendous opportunity in that space. Finally, to summarize, the energy system and where the rents sit are likely to change over time and evolve. What we do know, though, reasonably presume, is that for that energy system to be delivered, there will need to be adequate returns and rents to enable people to invest to provide that system.
It's too big for governments to provide the energy system of a country. There must be good opportunities, and by us being selective about where we play, leveraging our skills and capabilities, we think that's the right strategy for us.
Can I just answer the question also from a scenario practitioner perspective. I think I'm in a very lucky position that my salary and that of my group is paid, and we are allowed to think freely and it may give some challenges. Research for one's research and model what we want to do, and we have really, I can say, complete freedom in doing that. Quite often we have very good discussions and people say, "Well, thank you for your opinion, Wim. We have to think about that. We have to chew over that." That's one thing. I'm very lucky that we're in a very free-thinking department indeed. Secondly, we deliberately design our scenarios such that it has positive and concerning elements for our company, or say for our industry and therefore our company.
There's no real good or bad scenario to pick for our management because they would like, if they could, they would choose a bit, but we deliberately make such that these worlds are stretching, and therefore they keep thinking about all the possibilities. All right. Sorry.
Okay. Yeah. Yeah. Okay.
Thanks. This is Jason Gammel with Jefferies. Appreciate what you were saying, Guy, about wanting to provide solutions that your customers are looking for.
Yeah.
I want to ask a question about portfolio construction. Ultimately, right now, you're still primarily a producer of primary energy. Recognizing that hydrocarbons are going to continue to play a very large role in the system, but that most of the growth is going to come from non-hydrocarbon sources. Do you continue to then put most of your investment into continued primary production of hydrocarbons? Do you start shifting more and more of investment towards the higher growth areas in renewables?
Yeah.
Maybe just one other quick one. Can you talk about how the scenario planning played into the decision to move forward with the BG acquisition?
All right. Okay. Look, I think it's for many, many years, we will continue to see the bulk of our investment go into what we do. Doing it better, so the oil and gas developments will be absolutely critical, and chemicals, I should say, as well. That will continue to draw the great bulk of our investment for some many, many years to come. That's partly because the energy system itself in these new areas are themselves trying to work out how they're going to play with governments and the economic systems around them. We will investigate, we will look for things which are commercially credible. It's unlikely that we will see this massive jump in yet, because we're not comfortable yet that we understand where is that right place for Shell at scale to be playing.
We're certainly going to be participating in understanding where those value chains may be evolving and the forces around them to either make decisions to keep saying not yet or to make decisions saying, "Yes, this is why we're comfortable to move at that point at scale." Sorry, the second part of your question was
BG.
Oh, BG. BG firstly fits from two fundamental lenses. It really leverages Shell's core capabilities in obviously LNG and gas and in deep water. Those have different profiles. Gas, we see in the portfolio we have from them and in general has a multi-decade life. I think as most of the modeling that Wim has outlined today in most of our scenarios, we see gas as being a really important complementary fuel for a long time as part of the energy system. That's a great fit. The deep water part, is likely to have a shorter timeframe, just by the nature of deep water assets. What it does is has provided us the ability to leverage our skills and capabilities through a good business decision, which also, however, sets us up really well for the next 10 years.
We're very clear what the deep water business will do, how it will generate earnings and profitability for us, while allowing us to consider address our balance sheet and but then more longer term, think about that future. Deep water is going to still be an important part of the energy system also going forward because of its scale, its cost effectiveness also. Because as Wim's and others forecasting talk about, or scenarios talk about, is that even in 2040, 2050, hydrocarbons and oil will still be within range as an very important resource. As you've seen, Brazil, which is a very large resource holder, very competitive resources, is likely still to be playing an important part in that space as well. It fits. One is clearly more medium to longer term focus as part of a good business.
The other is certainly sets us up for this near to midterm, but with an option about being able to leverage that further going forward. Let's come down here.
All right, Guy. Iain Reid from Macquarie. Just to play maybe a little bit devil's advocate here. This is something which Shell is very well known for, and you've been doing it for decades, as you say. Your major competitors tend to be more kind of forecast driven in terms of all the stuff they put out. It's not clear to me that with all the effort you put into this, you can actually show that Shell is ahead of the game in terms of your competitors, in terms of missing out on some of the kind of broad trends over the last 20 years or so. I'm thinking of like the kind of mega merger era, et cetera.
When you kind of do a bit of navel gazing about the benefit of this to your business and your shareholders, what do you come up with as the kind of the key thing which you've actually achieved via this decade of scenario planning versus your competitors who don't do this in so much detail?
Thank you, Iain. It's a good challenge. I think there's two elements there. Firstly, in the past, I think it's given us the fundamental role of scenarios, it helps you think about a potential problem or issue before it happens. I think we're all better able to respond thoughtfully and sensibly to a challenge when it arises if we've thought about it before. That's the fundamental bit. That can apply to near term and midterm. I think we've often talked or other people talk about our response in the oil crises in earlier periods. We'd thought about it even back to the '70s better. We didn't knee-jerk and response. I think that's a core and therefore, how differentiated has that played out so far? Maybe there hasn't been so many radical differences where that's the case.
I would say, though, my fundamental thesis here is the past is not the future. That complication, but still within hydrocarbons being that part and it not having to have the inconvenience of different energy resources which are priced differently and how countries are going to choose to develop differently based on policy or technology disruptions. That's a world that increasingly, I think, will differentiate our thinking, our ability to think and have thought through, and then, as I say, position either early or not position yet because of various uncertainties. Ultimately, that is the purpose, though, right? That we don't do these While Wim's team is given some free rein, ultimately, it's to help us make better decisions. If they're not, then either Wim's team or our management are not doing their job. We'll just take one more on this side, and then we'll go over.
Thank you. It's Brendan Vaughan from BMO Capital Markets. Guy, I guess you mentioned the word agility a number of times. I'm not sure if the market thinks of Shell as being agile. Can you just talk organizationally what you're seeing is being done internally to be more agile? Can you also touch on just other industries we've seen the Teslas of the world be disruptors. Is there a risk Shell suffers the same fate as, say, Ford or GM?
Indeed, agile is two-pronged, if you like. There's both that I've described in this presentation about our decision-making about futures and commitments and portfolio. Then, of course, there's agile in maybe the more topical space, which is around leveraging data, ways of working, scrums, all that stuff, which we do absolutely big time. I think my context was around this decision-making framework. Are we really thoughtful? It comes back to Jon's question a bit before. It's not comfortable, and our board absolutely accept that their job isn't to turn up and simply look at a forecast and think that they're managing the company into the future. They understand that that is not the case. There are real issues.
Some of those, as I say, require us to be choosing to participate, to explore, to make sure we really understand or have our best ability to understand before making those decisions. The creation of the new energies business a couple of years ago was an example of their recognition of uncertainty. Choice, could we wait? Yes, absolutely. Was it the right decision to make in terms of understanding and uncertainty? Well, probably not. We've got real skills and capabilities to leverage. I think that's that agility in decision making. Also thinking about how do we take the strategy that we've got and how do we apply that into our businesses? Here, I'll give you an example of our retail business. You've seen our strategy and our direction about how we think the future may be playing out, what are those major forces?
What are retail doing with that? Already the world's biggest number of franchises, 43,000 sites. We service 30 million customers a day. We have more franchises than McDonald's and Starbucks. We're a big business. We could keep doing just what we're doing, but they've taken this challenge and thought about what do we need to be doing, shaping the business going forward. Firstly, they're saying, well, people are going to be mobile, but maybe differently mobile. Let's make sure how do we leverage our footprint? How do we leverage those 43,000 sites? More servicing those customers better in shops. The non-fuel retail income is a really critical part, and doubling our earnings in that space within the next seven years is a critical part of that.
Secondly, we're also going to see that electrification or non-hydrocarbons is going to be a key part of that energy system. It's all not going to be done at home, likely. Again, making renewable or new energy types of earnings from our energy sales is an important part to really improve and increase. Thirdly, our sites need to be halved in terms of their CO2 efficiency. That's not just panels on the roof, but it's the design of the fridges and all those sorts of things. That's something that we see coming, and it's something our customers also want from us. Fourthly, the welcome to Shell experience really needs to make sure we're really leveraging that not only on site, but through the digital space. You see us a leader in a number of places trying new models.
In Rotterdam, you can get your phone out and have fuel delivered to you through Tap Up. Those who live in Rotterdam, I hope you're already customers. Also the loyalty programs, we're the biggest card issuer after the banks in terms of card issuing. Finally, the shared value element of our program. Every site owner is charged and challenged with what's your community? How do you fit in that community? How your role in it and how do people value what you do? That's then overlaid with a global push on recycling and waste management. We take those strategies, those elements, we're already starting then to craft a business which is the most profitable, the best, the growing, but they're also now starting to shape about that future early rather than waiting. Want to come down to the front?
Sorry, we'll indeed go to the other side.
Yeah. Thank you. Oswald Clint at Bernstein. I wanted to ask about China. You're heavily dependent on China in a lot of your scenarios, which is obviously a bit of a black box to most of us. You say you share these scenarios, you talk with China quite a lot. Does that give you the edge? Does that give you the confidence with your view on China? Has that proved useful to you over the last years and decades to get China right, given it's such an important part of your forecast? Secondly, you show oil demand peaking at some point in these exhibits. What about the price or what about demand elasticity inherent within that? Clearly last few years, demand's coming in better than people thought. Is that a key assumption or flexibility within the model?
Well, we can talk about price in a minute. Maybe just touch on China, then Wim can also pick that up because members of his and elsewhere team are in there. With the Chinese government and other governments that we work with, our aim is to work with them to share our thought processes and just the whole approach to potential futures and scenario thinking. In the Chinese case, it wasn't necessarily our scenarios, but it was how do they think about the energy challenge that they're facing and how do they go about it. Indeed, you've then seen a number of things such as gas deregulation, access to pipeline, et cetera, which I think they've learned and seen the history of Europe, how they spur local development through people being able to develop and access pipelines.
I think it's helped them craft their own thinking, and then our role is also to bring in not just us, but real thought leaders in relevant parts of the energy system as well. In a way we're helping them in their broader thinking, which of course we debate and challenge with them as well. I think it does give us good insights as well. We're certainly not saying this is the future, but how would you go about it? This is the process of thinking and insights and different challenges that you should be thinking about in your energy system. How has that evolved elsewhere? What are the good lessons from elsewhere as well? Do you want to build on that?
Yeah. On the BSE work, the real question there is coal, gas, renewables really, and now the interaction. That's very much their choice and how they want it. Also the industrial policies and being actually in the same room with their policy advisors and their technical experts and hear directly from their brains what they really think and what are they going to say actually just helps us building our own scenarios. Say, well probably it's fair to say is that they will actually say bring more balance between coal and gas and then bring renewables as strong as possible as we have postulated here. It feeds back to us. Like I said, our role in there is basically process bringers, right? We try to bring the process but to help them helping themselves because you can't sell that too of course.
Your second part, do we have price elasticity in the model? Yes, we do. When all the supply and demand model comes together, sometimes you see price pressures because the cost of supply, you don't need the high price, so there's things. Sometimes we still see that you need price resistance to reduce demand. Basically, there's too much demand stress and therefore our model gives not prices, but it gives us price direction. Basically, it shows the stresses right where between the demand and the supply side. That is, again, an enrichment of that modeling thinking for long-term price levels or price direction, not levels, but directions.
Do we have anyone on the line? No, George? Very good. Okay. Maybe if we come down the front now.
Sir, just confirming we currently have no question from the phone line. Once again, please press star one.
Yeah. Hi, good morning. It's [Thibault] from Exane. I have two questions, actually. Firstly, just on digitization. I think the oil industry talks quite a lot about the opportunity. I think you've mentioned it-
Yeah
today. As an investor, how do we think about quantifying the opportunity and differentiating Shell against its peers?
Yeah.
The second question I had was, I think we've talked more broadly about energy, and you mentioned storage. Would entry into greater or the capacity to have more storage as an integrated energy company, is that something strategically of advantage to Shell and an opportunity for Shell? Thank you.
Okay, thanks. Digitalization, indeed, our industry is, indeed, if you look at most people, we are certainly behind a number of other industries in the application of digital technology, which is in a way a bit strange given the fantastic technology capability that our industry has. There's a lot of opportunity there. Digitalization often starts with data. I think Shell has 100 petajoules of data, and someone was telling me yesterday that a petabyte of data. One petabyte of data is the same as 20 million four-drawer filing cabinets of figures, text, data. We've got 100 of those. It's tremendous amount of information. We are just scraping the surface at having access available to us in a way that we can provide real-time deep insights.
It's going to be a multibillion-dollar impact on Shell, multibillion dollars, and it's going to go from both the doing things better, cheaper, faster, using global leverage, even from the point of probably fully automated well selection. You can imagine today, enormous data from across our industry. We've been an operator in a wide range of locations, and our data access is absolutely tremendous. The way we can think about analogs, not only in exploration then, but applying to production is going to be tremendous. Then you're into, of course, digital helping you a much more cost-effective, better solutions, uptime understanding, reliability performance. Very significant cost takeout opportunities. As I also was alluding to, it's going to change our relationship with our customers, because in the past, reading meters, sending pieces of paper, it was a pretty inefficient process.
Many parts of our industry moved to wholesale. Customers were just seen as difficult to service. That is not the case anymore. If we also think about different energy solutions, we can seamlessly, very low-cost, differentiate the offering we have. One customer may want absolutely total reliable green power. Another may have a small business that needs high-intensity heat, likely through gas during the day, and a different energy need at night. Others may say, "I simply want the cheapest at the time, all the time." We can, by the second, behind the meter, manage the combination of energy sources to enable us to service that customer. Shell being your total energy partner, be it being mobile, be it at home, being at work, is now a very credible and capable thing we can be doing.
It's going to change, I think, in our mind, how we relate with our customers, and that's therefore our core capability starts with our customer centricity. Not something you would have heard us say five years ago, and I accept that. We are, as I say, the best retailer in our industry. We touch more customers, best brand preference. We've got a tremendous ability to leverage this into customer segments where we think that that will be profitable.
We'll take one last question.
Here. I think you had your hand up most.
Hello, it's Martijn Rats. I'm with Morgan Stanley. I wanted to ask you two things, and they're actually both for Wim. The first relates to peak oil demand. You show this chart where peak oil is still quite far in the future relative to the time horizon that we typically care about. Actually, frankly, also, I guess, relatively far out in the future, relative, even your time horizons, the Shell asset base probably renews itself every sort of 10, 15 years. If this is 20, 30 years out, it's still actually quite long. It's not very long if you have somewhere between 90 to 130 years of oil in the ground, like some major resource holders in the Middle East. Actually, all of a sudden, 20 years is a relatively short period of time.
There could still be a supply response. Even if the outlook for peak oil demand is relatively benign. Maybe peak oil demand is not about demand, maybe it is all about supply. I was wondering how that factors into your scenario analysis, and whether you already see some of that. The second question that I wanted to ask you is perhaps a bit more conceptual. I am not really sure there is an answer to it, but I am going to ask it anyway. You clearly do a huge amount of work on this, which should prepare you better for the future. There are loads of other companies, and people, and institutions in this industry who are not doing this, but nevertheless will play in your industry. They may make mistakes. They may completely misread all these signals.
How robust are your conclusions and your scenario analysis and your overall effort in a world where your counter players are just doing random things and might misread all of this? Is that a risk?
Maybe the second one is more for you in the end. Let me start with the first one on the supply side and demand. In the booklet, you can see we have this cost of supply curves per resource category in it. We all know that supply is not produced on the merit order of cost. It is based on accessibility, and it is quite often political accessibility for the really low resource holders, like the Middle East. That is why we actually need the scenario stories again. In a world where people start believing peak demand, are they still going to behave like an OPEC? They say, "Oh, sorry, we are going to produce before it is too late." That kind of thinking comes back then into our scenario thinking on the supply side as well.
Certain parts of the supply model can actually run on its economic merits, because like North America, it is really that kind of system. Other major resource holders really have to have that story, what you truly believe. Then we take the range again. We look actually on societal developments, institutional developments in their country. Can they really do that? Are they going to, for instance, liberalize their markets? If not, well, probably they may want to wish it, but there is some limits to that. That was the Mountains and Oceans scenarios. They really try to explore the tension between supply and demand, and the responses of OPEC in that sense as well.
I think to add to that, too, of course, our industry declines, as Wim talked about before, four or five million barrels a day. If we go out to 2030, 2040, we're building in a way a whole new of today's industry. We've got a very efficient industry, don't we? Typically through creaming application technology, picking the best, cheapest first. We're going to have to keep seeing technology changes, et cetera, for many of the new resources that are yet also to be produced into that space, too. On your question, how do we deal with unexpected, irrational, maybe losing behavior? I think part of the strategy is fundamentally to be financially resilient.
We need to be able to deal with disruptions, either short to medium terms through a strong balance sheet to either wear out the people or to work through periods of time where maybe in hindsight, irrational actions were needing to work themselves through. Frankly, to take advantage of companies that put themselves into those situations and provide opportunities. Being resilient, that's a key part of Shell's financial strategy, our world-class investment element of having a strong, as we've always done historically, strong position to be able to invest through cycles so we don't have to turn on and off as appropriate, given our fundamental understanding, but also then have the opportunity to take advantage if should those things come up through such actions.
George.
Very good. Thank you very much, Guy. Thank you very much, Wim, for today's presentation. Thank you all for attending today in the room, on the web, and on the phone. We have now a bit of time here in the location. I'm on location in London for refreshment at the back. Also, if you have further questions, don't hesitate to call us. We'll follow up either directly or through Wim and Guy. Again, Guy, Wim, thank you very much.
My pleasure.