Shell CEO keeps foot on accelerator

Q Do the changes after the 2009 restructuring and better first-quarter results show that Shell is on the right path?

A Our competitive performance in the second half of 2009 was quite clearly not up to our standards. Some of it resulted from market conditions, but some of it showed that our competitive position was not good enough.

I’ve also seen positive developments. For instance, I was very happy with what was achieved with Transition 2009, our company-wide restructuring programme. Compared with previous exercises it was a very short period of disruption and I'm very proud the organisation was able to deliver it.

Now that doesn’t mean the culture has changed, and it doesn’t mean that all the behaviours I challenged people with last year are now embedded. By that I mean speed, transparency, external focus and so forth. That piece is still to be worked and there’s now the hard journey to embed it.

On performance, I see an improving trend. People responded to the cost challenge and we have achieved savings. We delivered the projects that we had promised to bring on stream in the past year, and they are performing better than planned. So I actually see a drive for operational excellence. And I see a lot of positive drive toward implementing our strategy. We also had a major improvement in the crucial area of safety. So, all in all, a difficult situation at the start, with a good response.

Q Where are the gaps?

A The targets we have shared externally point to our big competitive gaps. We said our oil and gas production is expected to rise by 11% from 2009 to 2012. In order to get there, at the operating level we need top performance day in and day out – with all of our assets. And when it comes to the important projects that we have now worked on for many years, our delivery must be second to none.

We also said cash from our operations would increase by about 50% to 2012, assuming oil prices at $60 a barrel, and by more than 80% with $80 oil. So we need to further improve cost-wise. That’s going to be a key focus in 2010 and 2011.

Finally, in a world where customer demands will start to change over the next few years and where access to oil and gas resources will be more difficult to obtain, we need a commercial mindset. We need to move fast and launch new, innovative products and projects that generate strong cash flow. That’s really the challenge I put to everyone in the organisation.

Q That new culture that must be embedded in the organisation. What does that mean for the individual Shell employee?

A Clearly you cannot change the DNA of a company completely and overnight. But you can, through the alignment of what a company stands for and what the people in the company stand for, change or adjust the mind-set. For me, Shell stands for technology, for innovation, plus working with customers and partners for a sustainable energy future. In order to achieve that we need an external and commercial mindset and we need speed and simplicity at all levels.

Q People often say changing the culture in a company, especially a large one, takes at least five to ten years.

A I wouldn’t accept a ten-year bracket. I’ve always said it’s two to four years at least before you see the real changes. Here too I clearly want to be fast.

Q That's more or less your personal motto: “Do it faster”?

A Yes, “do it faster”. I know this is challenging – and you don’t reach really everybody out there immediately. That’s why I place so much emphasis on this, to not just talk about it, but to actually start implementing this process and also have a clear alignment element. For me, the biggest alignment element which we have is the Shell brand itself. It is so strong.

Q Shell achieved some interesting competitive developments in the past year or so. Partnerships with leading energy companies and large resource holders. 

A Speed, external focus and a commercial mindset have indeed driven us over the last 12 months to do many interesting deals. We are back in Iraq for large projects, including one with our long-term Malaysian partner Petronas. With Cosan in Brasil we are forging a very interesting joint venture in biofuels. We negotiated a novel technical service agreement for gas developments in Kuwait.

Our Australian partner Woodside and US company Conoco Philips selected our Floating LNG technology for the Sunrise gas development. Partnering with PetroChina we are entering deeper into potentially the world’s biggest energy market, China. We also signed an agreement with PetroChina for gas developments in Australia and Qatar. We had exploration successes in the Gulf of Mexico and we gained extensive new acreage for unconventional gas exploration and production in China and North America.

It all reflects our new philosophy in which we are carefully choosing where to grow and making ourselves less dependent for our future growth on some of the areas where we have traditionally been. I think this has not yet fully been recognised by the outside world. Our innovative and technological capabilities are behind all these new partnerships and opportunities.

Q Shell is again a very interesting partner for governments and companies.

A Yes, and I’ve spent a lot of nights on airplanes for that purpose. But it’s absolutely worthwhile to meet partners and governments and get the feeling that for them Shell stands for an intelligent, capable, innovative, trustworthy long-term partner. I have to admit that they also tell us that we can be really slow from time to time.

Q Is “more upstream, profitable downstream” still the official Shell strategy? 

A For me, more upstream profitable downstream was more of a way to decide how we allocate growth capital and not per se our strategy. This capital allocation will continue. But then you need to make the bridge to the three-legged strategy, which is competitive performance, profitable growth and sharper delivery. Our strategy is more about delivering the 11% production growth for the next three years, and then delivering the next big wave of new projects that lay a solid foundation for the future. Together with realising an enhanced Downstream portfolio in the years to come.

Q But what is the long term goal for Shell?

A The detailed strategy for the very long term, let’s say 2025 and beyond, is still in the making. But I think the longer-term vision is already very clear; we want to be the most competitive and innovative energy company in the world. An energy company whose primary business area is in oil, gas and chemicals. And we will become even more gas-oriented over the next five to ten years than we already are today. This greater gas focus is one of the elements in our response to the changing needs of our customers. In this fast-changing world, Shell needs to be an energy company that powers progress together with its customers and partners. 

Q Even more gas than today, when we are already heading for a 50/50 production split between oil and gas?

A Take, for instance, our resource additions in 2009. Of a grand total of 2.4 billion barrels of oil equivalent, some 80% was gas. But we will also be a company that delivers technical and product solutions, including innovation, to energy users in a wider field. What does that mean? Clearly, we see a role in delivering electricity. Not the electricity itself, but the components that go into it. This will be driven by the increased demand from the emerging economies. The big challenge is to produce power at a socially, economically and environmentally affordable price. Therefore we also look at carbon capture and storage, at energy efficiency and at alternative fuels.

Q Alternative energy will be foremost Brazilian ethanol?

A To start with. We’re primarily talking biofuels, with a strong component of first and second generation coming out of Brazil, first in the Brazilian market, then going further. But we also look at novel ways of converting sugars from biomass straight into gasoline and diesel, rather than ethanol. So it is gas, it is biofuels, it is wind, it is carbon capture and storage. And it is increased energy efficiency. Our total approach will be the delivery of low-carbon fuels; our contribution to lowering the actual CO2 content of the world. That’s how we can make a difference.

Q So Shell wants to compete head-on with coal?

A A gas fired power plant emits 50%-70% less CO2 than a coal fired equivalent. That gives gas an environmentally strong position over coal.

Q At present gas is selling for a discount compared to oil.

A It is our expectation that for the foreseeable future, you will have three gas markets: a European market, an American market, and a Middle-East/Asia-Pacific gas market. The Asia-Pacific gas market will be predominantly based on oil-price linked, long-term contracts. Hence, you are in a market that drives the gas earnings in line with the oil price, with a three- to nine-month time lapse.

The European market will be a mixture. There will be spot trading but I think the majority will still be oil-price related, with long-term contracts. In a recession you have less demand, and more or less the same supply – or even, as we saw last year, more supply. In that situation, gas consumers go into spot markets because they want to take the full advantage. As soon as you have a cold winter and the demand comes up, I can tell you the world cries foul because the spot markets just go through the roof. So we will see a return of more normal behaviour in the gas market at some point.

In the American market, natural gas will traditionally be priced on spot-dominated markets. They have large volumes of domestic gas. Still we can be highly profitable in that market because we are operating here in a different environment. You don’t invest upfront for 20 years or so like we do in huge LNG projects. In the North American unconventional gas play, you continuously invest and drill. That gives you more flexibility. And since you drill so much, you can bring your costs down over time. When you think long-term, you see that the volatility and the cyclicality of natural gas is not going to be that much different to what we have today.

Q Do you think that the Deepwater Horizon incident will have significant long-term implications for the whole industry?

A An incident like this is a very stark reminder of how important operational excellence, and therefore safety and environment, is for all of us. I don’t want to draw conclusions yet, because I first want to see what really went wrong. But quite clearly this will have a significant impact, at least in the offshore environment. We can expect more regulation and therefore more costs. 

Q This spring you announced that the Downstream business will reduce its global refining capacity by 15% and is looking for an exit in over one-third of  Downstream markets. Are you heading for an upstream-only Shell?

A Absolutely not. I am a full believer of integration, more and more so. If you think of technologies that help us to connect our upstream production of oil, gas and chemicals directly with the end-users, such as liquefied natural gas, gas to liquids, and gas to chemicals, then it is clear that we are talking of an integrated play. I am a value-chain person. I look at the whole chain and I don’t want people to eat into my chain. I will never forget that the biggest brand value of Shell is not generated in our Upstream activities but in the Downstream sector.

Q Still you want to get rid of some 35% of Shell’s Downstream markets and many refineries have to go.

A Manufacturing is a 20-year plus cyclical business. I don’t get too nervous if we’re in a down cycle. I get nervous if our assets are too small and cannot manage the down cycle because of their lack of scale, complexity and flexibility. That is what we are correcting now. We are going to bigger complexes, fully integrated with our chemical activities, that can yield the optimum of heavy and light oil differentials plus economies of scale. By doing that we can stay cash-positive even in the downside of the cycle. And let us not forget that while refining was losing money in this first quarter, chemicals, trading and marketing were actually making money.

Q On a personal level, is this is a job eating into your skiing and hiking time?

A This is all manageable. It is fun, I have to say. I feel the challenge, quite clearly. It is stretching, but I absolutely enjoy it from a business and from a societal perspective. As CEO of a company like Shell, you are much more visible. But you’re also involved in not just the economic but also in the social and the environmental discussion. And I like that. I feel a lot of trust, given by our own Shell people, but also by the investors and by others.

There is no doubt that I have less private time. But I am proud of the fact that I can actually carve out enough time so that I still have my skiing days, my hiking days and my diving days. You need to have enough recovery time to deliver.

* Peter Voser spoke to David Woodruff and Piet de Wit

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