Delivering energy through innovation

Q What were the high points of 2010?

A 2010 was a good year in which Shell delivered on our operational and strategic goals. In the area of safety, for instance, we managed to sustain the trend of improvement of recent years. Our operational performance picked up. We’ve achieved better results due to our sharper focus, in oil and gas production, on our refining margins and in our chemicals business. We also generated higher revenue and made good progress in our marketing activities and in the way we managed costs. I’m very pleased with that and from what I see, people outside Shell recognise this progress too.

Some of our major projects came on-stream and we’ve increased our portfolio options.  But we mustn’t become complacent.  There’s still a lot to be done. One good year is no reason to think you’ve finished the job. As Shell, we must keep moving ahead, always.

Q How do current global economic conditions affect Shell’s investment strategy?

A I’m convinced we’re climbing out of the recession, even though recovery is still patchy in some parts of the world. I’m still concerned about the USA and some parts of Europe. But for the Middle East and further eastwards, I foresee strong growth.

At the beginning of the recession we took the decision at Shell to continue investing throughout the cycle. Indeed, we were one of the few companies that invested more during the recession than before. This means we're investing $25-27 billion net a year until 2014. This should enable us to continue growing until the end of the decade. For the period after that we’ve created opportunities such as new possibilities of gas production in the USA and China, and oil production in Iraq.

Q Much of that investment is in increasing natural gas resources. Is there really a gas revolution going on?

A Yes, absolutely. I talk about the three As: natural gas is abundant, acceptable and affordable. From 2012 Shell will be producing more gas than oil. In North America gas reserves are now enough to last for the next 100 years, thanks to new discoveries of gas trapped in dense rock – tight gas – and new production techniques.

Two or three years ago we were assuming that reserves were declining in that region. Add the potential of tight gas and shale gas in China and other countries, and the world has enough gas for 250 years at the current level of production.

And of course, gas is the lowest-CO₂ fossil fuel when it comes to power generation. Natural gas emits 50 to 70% less CO₂ than coal per unit of electricity produced. So it’s the energy source that will allow most countries to meet their CO₂-reduction targets in the most cost-effective way.

Natural gas resources can be also developed at a cost which makes it affordable to the consumer.

And don’t forget that generating electricity with gas is much less capital intensive than coal or nuclear energy. Or take the comparison with offshore wind. That energy source requires three to four times more capital than gas – even assuming all the technological improvements that still have to be achieved in the wind sector.

Q You want Shell to be the world’s most competitive and innovative company. Has the reorganisation that took effect on January 1, 2010, delivered what you expected?

A I’m satisfied with where we are now, but the journey isn't over yet. We have made changes, picked up speed, and people are prepared to act differently. That doesn't mean we’ve already got where we want to be – but to be honest I hadn’t expected that within 12 months. That just isn’t possible if you suddenly change ways of working that have been in place for years. A large multinational is like a supertanker: it takes some time before you can turn everything in the right direction.

On my travels I meet many different people who are involved with Shell in some way, including our partners, our customers, our staff and the contractors who work for us. From all sides I often hear the comment that we’ve become faster and more effective. Just as I often hear that it has become clearer what Shell stands for, and what Shell says it will deliver. But I’m still being told we have to go even further to get the best out of our business. We must address that.

Q And innovation is important if we are to go that extra step?

A Innovation is vital for a company like Shell. We're good at it, and I think our partners and others see us as the energy company that drives technology the most. But we must continue to drive our success in this area even further.

Technology is opening doors to new business for us in some of the emerging countries, such as China. We’ve become more open to co-operation with partners you wouldn’t immediately expect of an energy company, increasingly bringing third-party knowledge into our technology and innovation. You can already see the first successes of this. For example, we’ve recently concluded an agreement with the Massachusetts Institute of Technology for developing new sustainable energy technologies.

We’re now top of the list of innovative companies in our industry based on technology strength and the patents we hold, according to the Patent Scorecard published recently in the Wall Street Journal. This suggests that our strategy is making a real impact. Our approach to innovation is putting us on the right path for the long term.

Q The BP Deepwater Horizon oil rig accident in the Gulf of Mexico was the biggest disaster involving the energy industry for some years. Could this have happened to Shell?

A First and foremost, this was a very tragic event. We should reflect on the 11 people who died in that disaster.

The question then is what we can learn from what went wrong both in the accident and with the subsequent environmental impact. We’re studying this as closely as we can. So far this has only led to minor adjustments of our safety and technical procedures because of the high standards that were already in place within Shell. I'm proud of that.

As far as the drilling is concerned, given our technical standards and safety procedures, we would have done it differently. What obviously didn't work well was the combating of the oil spill. As a result, we and three other companies have decided to build an oil spill containment system in the USA that will cost $1 billion.

Undeniably, the Macondo incident has greatly harmed the oil industry’s reputation. Our ability to drill in deep water has been questioned, and that’s a serious matter. Nonetheless I believe that the energy sector has proved in the past that it can learn from incidents. This will help us to regain our credibility. So I’m convinced that Shell will continue to prove itself as a deep-water operator. We have to, because that’s where many of the new resources are to be found that we’ll need to meet the demand for oil.

The disaster and the following moratorium on operations have cost us over $100 million so far. This reflects some loss of production but mainly our decision to keep the drilling rigs in the Gulf and continue to pay people’s salaries. I think that was the right thing to do.

Q As a result of the Gulf of Mexico incident, Shell’s record on oil spills in Nigeria came under renewed scrutiny. Will Nigeria ever be a success story for Shell?

A The operations of Shell companies in Nigeria are an important part of the portfolio and they are determined to keep improving their business there. Over the past year we’ve seen good progress in security and increased production. I feel encouraged by the support the Shell companies in Nigeria get from the local people in Nigeria and from people outside Shell who have actually been there. That’s what convinces me they’re on the right track.

But Nigeria, especially the Niger Delta, remains a challenging operational environment. We must continue to tell the story honestly. The Shell Petroleum Development Company of Nigeria Limited (SPDC) calculates that 98% of the oil spills in Nigeria in 2009 involving the joint venture it operates were due to sabotage and theft damage. Whatever the cause of the spill, SPDC is cleaning up the sites that it can access. But it can only do so if it’s safe for its people and they’re allowed in by the local community.

Q And to another country with huge problems: aren’t the risks of operating in Iraq enormous?

A For Iraq to become a stable society, the development of its oil industry is vital. From that point of view, the Iraqi government has invited national and international oil companies to play a role in the development of the sector. We have carefully analysed all the risks and have decided that we can bring in our capital, people and know-how to drive the development of one of the biggest oil fields in the world, Majnoon.

We have also negotiated the contract to form a joint venture with the South Gas Company to capture gas from oil fields near Basra – when this gets under way it will reduce flaring in a big way and help local power generation because some of this gas will be used to produce electricity. We’re awaiting final approval of this contract. But that hasn’t stopped us from going ahead and taking steps to help reduce flaring in these fields by 20% already.

Q Turning to the global environment, is climate change still high on the agenda for Shell? Or are we too focused on stepping up delivery for today?

A The way I see it is that whereas much of the world is still drawing up plans, we have taken the step of doing what we can today to make a difference. That means producing more natural gas, focusing on biofuels, helping to develop carbon capture and storage (CCS) technology and trying to improve energy efficiency in our operations.

We’re also helping our customers use less energy through more efficient fuels and lubricants. Doing all this is how we can best contribute to building a more sustainable energy system in the future, while at the same time helping to meet energy demand.

In our view, biofuels are the most commercially realistic way to reduce CO₂ in the transport fuels sector in the coming years. Another choice we have made is for natural gas in conjunction with CCS. We’re not only advocating CCS but delivering on it through our involvement with a number of projects that will help develop the technology. 

I have high hopes for our Quest CCS project in Canada that is expected to be able to store over a million tonnes of CO₂ a year from our oil sands operations there. I think it would be good for both Shell and the Canadian government if this project goes ahead.

For CCS projects to go ahead in many other parts of the world, government support will be vital. But we have some concerns about the impact of government financial cutbacks on environmental measures and CCS.

Q Does the challenge of cost you referred to spell the end for Shell's wind activities?

A No, it does not. We have a number of wind-energy projects in the USA and there are new projects we could develop in the longer term. Renewable energy will play an increasing role in the world’s energy mix in the coming decades. Solar and wind power will be further developed, I have no doubts about that. But because wind and solar can’t guarantee a constant energy supply, there has to be a back-up energy source. Natural gas is ideal for that. I see gas-generated power with renewables as the perfect combined package for the future.

Q Does the proposed joint venture with Cosan, the Brazilian producer of ethanol from sugar cane – the lowest-CO₂ biofuel – mean Shell is abandoning investment in advanced biofuels?

A The Cosan deal is a big step forward for us. It will increase our know-how of ethanol produced from sugar cane. We’ll apply this on the Brazilian market first, and eventually in export markets as well.  But we’re still involved in many partnerships to develop advanced biofuels.

In fact, we believe two advanced processes that we’re developing with Iogen and Codexis could benefit from the insights we’ll gain from the joint venture with Cosan. They’re part of the deal. Of course, in time we may have to decide that some advanced techniques won’t achieve commercial scale in the future. That’s always the risk when you put your money on a number of different options. Not all of them will get to the finishing line.

Q So it’s been a pretty successful year. What excites you most about the year to come?

A What is happening in Qatar excites me a great deal. There’s Pearl GTL, where we will convert natural gas to cleaner-burning products including diesel. It’s a complex and gigantic plant, a marvellous piece of Shell design and engineering. We’ll be starting it up in 2011, but its complexity means this will be very challenging.

Then there’s Qatargas4, the LNG plant due to start operations in which we are partners. These are excellent examples of how Shell’s technology and know-how, combined with our ability to work with partners, can help deliver much-needed cleaner energy and products to our customers.

*Peter Voser spoke to Chris Logan and Rob van ‘t Wel

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