I’m open to critics, but I have a business to run

Q You seem quite sceptical about the global economic recovery?

A Yes, I am. There are early signs of a recovery, but it’s still very fragile. Much of the current growth is the effect of the stimulus packages of the governments. In addition, there’s a certain “stocking up” taking place – to compensate for very heavy de-stocking of products in late 2008. Dubai and similar situations also make clear that the financial crisis is not fully behind us yet. Countries can still fail.

What I miss is real consumer confidence and spending. Here in Europe, unemployment will rise and consumer purchases will remain weak for some time. Then there’s the issue of personal debts and credit card debts. I think the trend will be for people worldwide to spend less and save more money, even in the USA. All this points to lower consumption. So the worst may be behind us but I expect 2010 to be another difficult year, before the world economy really picks up.

Q When the global economy does pick up, will there be enough energy to go round?

A We’ve seen a worldwide drop in upstream oil and gas investments of some 20%. And for alternative energies the drop is even steeper: around 40%.  Governments and industry must work together to get back to higher investment levels. Otherwise we run a risk of a supply/demand imbalance in a few years’ time.

Q OPEC leaders say that $80 a barrel is a ”good price” for them and the rest of the world – do you agree?

A Any market price should allow companies to earn a return on investment. That’s crucial if we want to keep up energy supplies for the future.

Today’s oil price of $75 to $80 is high – it’s against common market wisdom that says that when there is a surplus prices are depressed. Today there is plenty of oil. I just recently arrived by plane at Rotterdam and could see 27 tankers waiting outside the harbour, all loaded with crude and oil products. So the current price is not a reflection of strong demand, but of production cuts by OPEC and expectations in the market about a future demand recovery and tight supplies.

Q Looking ahead, do you see a volatile or a stable energy system?

A There will be elements of both. The energy markets will be driven by innovation, new technology, so there are lots of opportunities. But there will also be price volatility and perhaps even some protectionist reflexes in the early part of the recovery.

In the long term, the cost of energy is bound to go up. This is the biggest challenge politicians will face. Who will tell people that they will have to pay more for their energy, especially for green electricity? Is a long-term subsidy policy for renewables what we want? Can governments afford that kind of policy? On the positive side, rising consumer prices for energy will allow the industry to invest more in new, sustainable energy resources.

The really big and fast CO₂ reductions can be made through increased energy efficiency and conservation by consumers. We can start with cars and buildings. We need political will to make progress on this front.

Q How fast do you think the world can transition to a renewable energy system?

A To understand the future, history offers a few important clues. Two of our scientists have done research into the history of energy technology deployment and published a paper on that theme in Nature magazine.¹ They argue – to my mind convincingly –that all energy types have taken 30 years to obtain a 1% market share following commercial introduction. And this doesn’t even include the time that has gone into making a commercial introduction possible in the first place.

We also know that an alternative energy system, with more electricity, would use more mineral resources like iron ore, copper, nickel, lithium and rare earth metals like neodymium. For instance, a wind farm uses twice the amount of steel compared to a natural gas plant to produce the same amount of energy. Clearly, there isn’t a silver bullet. And clearly, sustainability goes well beyond oil and gas.

Q Electric mobility is the talk of the global town today. What’s your assessment – how fast will electrification take place?

A Currently there are one billion vehicles on our planet. We will go to two billion vehicles or so in 2050. So we’ll see a mosaic of fuels, including diesel and petrol, natural gas, electricity, biofuels and maybe hydrogen.
 
My view of the future of mobility is that there will be a market for hybrid and full-electric cars for urban environments and short distances. And a separate market for hybrid and internal combustion vehicles with liquid fuels for longer distances.

As regards electricity, much will depend on how it is generated. If it is generated by conventional coal-fired power stations, we will not be reducing CO₂ emissions as much as we would like to. For the foreseeable future coal is likely to be the main source of electricity for cars. This is another example of high expectations that require careful political management.

Q How can Shell participate in the growth in demand for transport fuel in the East, given that many of the Asian markets are controlled by national oil companies, and their transport fuels often subsided by the government?

A At Shell we take the long view. Markets go through evolutions. Many markets start with subsidies and over time become free and open. China is a good example – here certain subsidies are disappearing.

Consumers in Asia are very brand-oriented. So Shell needs to make sure that our brand continues to be strong, and we must offer our differentiated, high-quality products as the foundation for our marketing efforts. That way, we can grow our market shares in these economies. We already do this successfully in China in lubricants and bitumen. And in India and Indonesia we now can get high volume growth  at our retail stations. So a lot depends on the strength of our brand.

Q You speak of Shell as a company of technology firsts. What does that mean?

A Innovation and technology are the key differentiators in our industry, for current operations and future projects. All improvements, small or large, will contribute to maintaining our competitive leadership. I want us to use smarter and more innovative technology not just tomorrow, but right now, in today’s projects.

Just look at our deepwater BC-10 (Parque das Conchas) project in Brazil, which came on stream in the summer of 2009, and where we deployed a whole host of new and advanced technologies to deal with the depth of the water and viscosity of the oil. For instance, to keep the oil flowing, we use subsea high pressure pumping systems that are fed by a 68-megawatt generator on the surface through huge electrical umbilical cables. We avoid flaring and reduce CO₂ emissions by pumping back the natural gas into one of the fields until a gas export pipeline system is complete and the gas can be produced commercially.

Q According to its critics, Shell focuses too heavily on fossil fuels, which they say are dirty and finite. What’s your response to that?

A Well, I ask our critics to bear in mind that we all need energy to power and sustain our lives. Global demand for energy will double during the first half of this century. Now, unless we want to condemn over 1.5 billion people to energy poverty, we will need to develop all available energy sources to meet that growing demand. That inevitably includes oil and gas. So the key challenge for our industry is to reduce the CO₂ footprint from the energy we deliver.

One of several ways in which we will reduce our CO₂ footprint is to focus more on natural gas, the cleanest-burning fossil fuel. By 2012, more than half of our production will be natural gas. This is a major change in our production profile; and it will further increase after that.

Q Shell aims to increase its natural gas production. But the International Energy Agency warns that there will a gas glut between now and 2015. Can Shell grow in an oversupplied market with lower margins than oil?

A Shell invests for the long term, not for just today or next year. And long-term growth estimates for natural gas are sound. In addition, Shell is also the global leader in liquefied natural gas (LNG) among its competitors. We sell the majority of that LNG in the Asia-Pacific region where gas prices are actually linked to the oil price. That means our LNG business profits from the upswing in oil prices. And so we’re confidently looking for ways to further expand our LNG business through new projects in Australia and elsewhere in that region.

In North America, where the prices are lower and not linked to the oil price, the tight gas resources we are currently developing will be competitive at market prices of $4-6 Henry Hub, the main price in the North American natural gas market, which currently hovers just above $5. In other words, the prospects for our North American natural gas portfolio are very positive indeed. 

For Europe, the picture is mixed. Europe has domestic gas resources, Russian imports, potentially unconventional domestic gas and LNG import possibilities. All these areas will give Shell long-term opportunities.

Q But why would Shell get out of solar energy and freeze investments in wind power when the demand for clean electricity is growing?

A Apart from the challenges I already highlighted, we need to grow in areas that are profitable and match our core skills. I saw thousands of Dutch shareholders recently [at an annual shareholders convention] and I asked them if they wanted wind power or a financial return. The answer is clear! That’s one of the problems – I’m open to critics, but I have a business to run, and the purpose of a business is to achieve returns, to achieve long-term sustainable growth. As part of that we are prepared to invest in Research & Development, including in alternative energies. But our activities need to give us profitability. We’re a company like any other and we need to make a profit in order to exist.

Q Why is Shell growing its biofuels business despite sustainability issues?

A According to the International Energy Agency, roughly 10 or 11% of the transport fuels in 2030 will be biofuels. That’s a good prospect for us. Moreover, biofuels could make an important contribution to reducing CO₂ emissions. The challenge is to develop biofuels that are really sustainable. For now, the task is to produce and distribute the first generation responsibly. At the same time we at Shell are investing in R&D for the second generation. These are biofuels that are made from non-food biomass like straw, or even algae. We spend significant money and talent on R&D and on building and running second generation pilot plants.

But it will take close to a decade before second generation will be commercially ready. Is that disappointing? Maybe, but the technology for second generation simply isn’t ready yet.

Q How significant do you think the United Nations Climate Conference in Copenhagen will turn out to be?

A One important success Copenhagen has achieved is to trigger discussions and negotiations that have taken us many steps in the right direction already. The world now has a mental and political road map for the next phase.

Shell’s preferred outcome would include effective CO₂ pricing mechanisms and recognition of carbon capture and storage, or CCS, as an important mitigation technology.

The most effective pricing mechanism is a system that caps CO₂ emissions and allows companies to trade emission allowances, as the European Trading Scheme already does.

However, when carbon markets are still young, they may not produce a carbon price high enough to speed up the deployment of new technology. So governments may need to intervene in these early years, the way Europe did by offering companies that pioneer CCS projects bonus emission allowances.

Q Is Nigeria still a heartland for Shell?

A The government amnesty in the Niger Delta region wishing to lay down their arms seems to be making good progress. But security issues still remain. There are also uncertainties about the future of the fiscal structure, with Nigeria working on a new petroleum bill.

Shell staff in Nigeria are doing a great job in this very difficult environment. Oil production levels improved towards the end of 2009 and our LNG business is performing well. In general, during 2009 sabotage and attacks on installations of the Shell Petroleum Development Corporation of Nigeria have again reduced production levels.

We’ve also made progress with the Flares Out project during the last few years, but unfortunately security problems for our staff and government funding issues have delayed the gas gathering projects. The Nigerian government, in setting priorities for the joint venture in which it is the majority shareholder and Shell a minority shareholder, gives priority to maintaining oil production over reducing gas flares.

So, to answer your question, Nigeria is still a heartland for Shell, but we no longer depend on it for our growth aspirations. This gives us more flexibility in deciding when and how to develop oil and gas resources in Nigeria.

Q For Shell, Qatar operations will generate an extra cash flow of some $4 billion per year. Any idea how Shell will spend that money?

A It is $4 billion at a $70 oil price. We want to maintain a significant investment level in order to achieve organic growth. So the increased cash we generate in Qatar is welcome and can be used to pay dividends and fund investments elsewhere in the world.

Q Do you feel the market and credit rating agencies are confident that Shell is on the right path? 

A Our strong credit rating reflects our good operational performance, our re-organisation and cost reduction efforts, and the expected future growth through the projects that will come on stream in the period 2009-2011.

In addition, overall we have a strong cash flow and a solid balance sheet which can drive our investment portfolio and dividend policy forward.

*Peter Voser spoke to Norbert Both and Piet de Wit

^{1 Gert Jan Kramer and Martin Haigh "No quick switch to low-carbon energy" Nature,  462, 568-569 (2009)}

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