The energy company of the future

For an upstream oil and gas company, the future demands more than just managing the social and environmental impact of one’s operations. In this speech, Roxanne Decyk, Shell’s Corporate Affairs Director, identifies profound market shifts that offer opportunities for tomorrow’s winners in the energy industry. To capture value from these market shifts, companies need to develop or rediscover special skills in four key areas. These are: customer intimacy; influencing sound government policy and industry standards; technical innovation; and forming alliances.

The energy company of the future

The French writer Antoine de Saint-Exupéry once said “As for the future, your task is not to foresee it, but to enable it.”

Well, in an industry where projects are measured in tens of billions of dollars and span decades, thinking about the future is essential for our survival.

At Shell we invest a great deal of effort doing so and have just published new long-term energy scenarios – our first for seven years. They help us anticipate opportunities and challenges to our business.

Of course, we can’t foresee every detail of tomorrow’s world. But there are some certainties I think we all recognise.

The first is that global demand for energy will continue to grow, particularly in Asia. Second, supplies of conventional oil and gas will struggle to keep up. To fill the gap, society will need more unconventional fossil fuels, more renewables and more nuclear.

And finally, though their share of the energy mix will likely fall, the growing use of fossil fuels – particularly coal - means more carbon dioxide emissions at a time when climate change looms as a critical global issue.

These are tough challenges and ones the energy industry is grappling with already. Our core role, after all, remains to supply reliable energy, though now with lower CO2, at an affordable price.

So, as I am a corporate affairs director rather than head of E&P for a super major, you might expect me to spend the next 25 minutes or so emphasizing  the social  and environmental challenges the future energy company must address.

Well, difficult as it may be, reducing the social and environmental impact of one’s operations will only be the minimum table stakes required of tomorrow’s successful upstream company.

The future demands even more than that.
Profound shifts are taking place in both the demand and supply markets that will present new, unfamiliar challenges to all of us.

Tomorrow’s winners will be the ones who capture the most value from these market shifts while meeting their social and environmental responsibilities.

That will require special skills in four key areas. These are: building customer intimacy; influencing sound government policy and industry standards; rediscovering our prowess at technical innovation; and forming alliances necessary to get the job done.

Needless to say, this goes far beyond a traditional concept of Corporate Social Responsibility, with its limiting focus on the social realm and its emphasis on “responsibility” rather than “business opportunity”. At Shell, we no longer even use CSR as a conceptual framework, preferring Sustainable Development instead.

Market shifts

So, what are these profound market shifts?
In demand markets, rising fuel prices are stoking consumer anger and triggering calls for windfall profit taxes.

As we know from the 1970s, the echoes of tax hikes resound through the entire industry value chain in complicated and detrimental ways.

But taxes aren’t all. In one of the largest demand markets, the United States, individual states are taking action to reduce CO2 emissions and adopt their own low carbon fuel standards – California first among them. We applaud their goals and support the concept of reducing total well-to-wheel CO2 emissions from transport fuel. But unless governments move quickly to set a uniform standard, we will be facing a costly patchwork of differing fuel specifications.

Large consumers are starting to demand choice over the source of the hydrocarbons they buy. You may be familiar with recent legislation, also in the US, that excluded transport fuels based on oil sands production from defense department fuel purchasing.

Meanwhile, biofuel mandates in many parts of the world are creating whole new industries that will compete directly with hydrocarbon-based fuels for transport customers. That’s why Shell has decided to become a leader in biofuels.

And as battery technology improves and costs fall, plug-in vehicles in some regions and sectors may make inroads into the market for road transport liquid fuels. Plug-ins will be available in Japan as early as next year, and major auto companies are working diligently on expanding this product offer.

And how about the supply markets?
Here too, things are changing. The days are past when we could assume access to conventional opportunities under traditional PSCs.

National oil companies are increasingly sophisticated and capable of developing their own resources. And some can very capably manage the social and environmental impact of their operations – though the same is not true everywhere.

But many of tomorrow’s projects will likely take place in countries with limited capacity to provide basic public services - from infrastructure and potable water, to health care and education.

Increasingly, oil companies may be called upon to add value, not just to a country’s oil and gas sector, but to a society’s entire value chain.

And just to complicate things further, traditional supply markets are more and more becoming demand markets. From Australia to Nigeria, governments are stipulating that production – particularly of natural gas - be used to meet growing domestic demand first. And by 2015, it is expected that gas consumption in North Africa and the Middle East will be approaching EU levels.

Customer intimacy

So, how should the energy company of the future respond to these new challenges? First, we are going to have to get better at what I call “customer intimacy”.

The word “customer” is not often used in upstream gatherings. With the exception of the LNG business, we have been far more used to thinking of markets rather than customers – a wonderfully theoretical construct that suits our largely technical community.

I believe those days are over. We must start thinking in terms of the value we can offer customers. That means we need a new definition of customer.  Where once that meant mostly major resource holders – in a sense our main customers, we in the upstream must now add local communities and end-consumers to our definition.

In resource holding countries especially, needs have changed dramatically in recent years. Governments there want us not only to deliver projects but to add value more broadly to their developing societies. Our value proposition for access and the terms of our license extension bids must reflect those changes.

In Qatar for example we have established a major technology programme in the Qatar Science and Technology Park. We plan to invest up to 100 million dollars in the project over 10 years focusing on upstream GTL technologies, technical services and training.

The programme creates shared value with clear benefits for both sides. It helps Shell deliver world-class GTL technologies to our customers. It transfers technology and skills to Qatar and it allows the government to position the country as a recognised centre of excellence in education, research and development in the Middle East.

As I mentioned a moment ago though, it’s no longer enough to focus on governments. Governments ask us – and local communities want us – to work at other levels of society too.

Take local content in Brazil. Like other countries, Brazil wants the economic benefits from the industry to trickle down more deeply through the economy. As a result bid regulations have become steadily more demanding and minimum levels for local content now range from 40 to 100%.

So Shell is working with local suppliers and communities to build their capacity to meet our demanding standards. We have helped to establish centres of excellence to explain our procurement process in detail. And we co-sponsor a supplier database with local industry associations that will help Brazilian companies compete for contracts.

And it’s not just about developing countries. In Canada, we’re part of Alberta’s drive to extract value from the difficult and controversial oil sands deposits in ways that meet not only the need for more oil – but also social, environmental and climate concerns. We’re working together with local municipalities, Aboriginal groups and other stakeholders to address and mitigate the negative side-effects of rapid economic growth in their region.

But it is with end-consumers of energy – the last of my three categories of customer – where we probably have the most work to do.

They will impact our prospects for success more and more directly.  As prices have risen and fear of shortages has increased, they are exercising their rights as citizens, demanding that governments take action in ways that may not be practical or positive for our industry or for society.

Despite their critical influence over the future of the upstream, many of us forgot that these consumers are also voters. We delegated our relationship with them to the downstream. But it no longer makes sense to treat them only as fuel customers.

And by essentially taking the consumer for granted and failing to educate consumers on the basics of the energy system, we – the oil and gas industry – helped create the difficult situation we are in. A quick scan of the daily newspapers and TV channels shows just how far we’ve fallen behind.

The media is full of populist arguments by the agricultural industry extolling the virtues of ethanol, by entrepreneurs suggesting wind or solar alone can solve our energy needs overnight, arguments that fail to convey the full complexity of an energy system that is still largely based on oil and gas. Or the most frustrating of claims: advertising from the coal industry suggesting that clean coal is not only the answer but the answer now.

All of us here know that clean coal is coal with CO2 capture and storage. And we know that CCS is uniquely our industry’s technology. We alone can deliver the whole CCS value chain from capture to underground storage.
Yet how many voters and government leaders know that? We’ve let others dictate the terms of the debate. I don’t believe we can let that go on.

We need to get a lot better at talking to our customers. This isn’t about slick marketing. It’s explaining our industry honestly and factually in ways that regular people can grasp.

The good news is that we’re beginning to address this problem. There are many examples of companies trying to bring some clarity and a dose of reality to the debate about energy raging in the popular press.

At Shell we are putting more effort than ever into explaining the basic dynamics of our industry to the public. This year we sponsored a pocket-sized ‘Rough Guide’ to Energy and distributed it with magazines like Time and Fortune.

We sponsor televised energy debates on BBC and MSNBC. And in January our CEO wrote an opinion article describing Shell’s latest energy scenarios. It was republished in more than 50 newspapers in 12 languages and reached millions of readers around the world.

Influencing sound policy and standards

Better relations with customers, while crucial, isn’t enough to capture all the value we want to. We must help influence sound policy and standards – the second of the four critical skills for our future success.

To overcome global challenges like climate change and energy security, governments must steer our collective efforts in the right direction.

But the market liberalisation of the last two decades has seen a remarkable shift in the balance of power, knowledge and resources from governments to the private sector.

Politicians often struggle with the complexities of the energy market and we’ve seen what happens when they get it wrong: one moment its ‘biofuels will save the world!’ the next it’s  ‘biofuels will end the world as we know it!’

So, far from stepping back from the debate, multinational companies must step up their efforts to support policy-makers. Regulation and tax regimes must be based on a sound understanding of the energy sector and strike the right balance between responding to society’s concerns and being practical for business.

And in our deregulated world regulation isn’t enough. We must demonstrate leadership in setting the standards, alongside legislation, that will enable the sustainable, responsible growth of our businesses – both hydrocarbons and alternative energies.

A good example is the need to harmonise well-to-wheel analysis methodologies for calculating greenhouse gas emissions and other environmental impacts.

Transport accounts for a quarter of the world’s total CO2 emissions. Any international policy to tackle climate change will have to find ways to reduce emissions from this sector.

But for policy to be effective we need common ways to measure the emissions from the production, distribution, storage and end-use of all the different fuels.

So Shell is providing technical expertise and financial support to the World Conservation Union (IUCN) and the European Climate Change Foundation as they embark this month on a joint-industry project to establish agreed methods.

These standards will cover not only liquid fossil fuels – including gasoline produced from oil sands and GTL - but extend them to alternative transport fuels of the future too, like biofuels, electricity and hydrogen.

Due for completion next year, the project will help politicians make informed, transparent and effective decisions about how to reduce greenhouse gas emissions from transport.

Technology leadership

It will be no surprise when I say that technical innovation is the third skill that will determine tomorrow’s industry winners.

Yet the Financial Times recently reported that our industry has lost the plot on R&D investment – spending far less as a percentage of revenues than other industries like pharmaceuticals, IT and the automotive sector.

We need to rediscover our passion and prowess for technical innovation. Last year Shell increased our R&D budget by more than 30% to $1.2 bln. That’s the largest in the industry according to the FT. And that doesn’t include the enormous sums we spend in the field pushing back technological frontiers.

This renewed focus will, of course, help us increase energy supplies and mitigate impacts. Just as 30 years of continuous innovation in offshore exploration and production has unlocked resources that were once out of reach or too expensive, so too new technologies will come online to open up new opportunities, in the arctic, oil sands, oil shale and other heavy hydrocarbons.

But a less obvious implication is that technology will also allow the best among us to capture the value of growing environmental challenges - like CO2 emissions and water scarcity – in ways that will benefit our business and our customers.

For example, Shell is sharing our experience in developing advanced water treatment technologies - developed for our Pearl GTL plant in Qatar – with municipalities in the Netherlands to turn wastewater and sewage into a valuable resource.

From 2010, our NAM joint venture in the Netherlands will buy 10,000 tonnes a day of water treated with this technology for use in steam-assisted oil recovery.

Shell will benefit from lower costs by avoiding the need to pipe in fresh water over large distances. And the local water company will earn revenues instead of simply bearing the cost of treating the water.

CCS is another promising example. As I mentioned earlier, this is a technology that only the oil & gas industry can deliver, and it’s one the world is waiting for.

It will be critical to reducing the well-to-wheel CO2 intensity of fuels. And it will help extend the life of hydrocarbons while renewable energy matures, providing a bridge to a low-carbon energy future. It’s potential is huge.

Shell is involved in a host of CCS initiatives. Here in Norway we are part of plans - together with StatoilHydro and others - to open a research centre to test and develop CO2 capture technology at the Mongstad refinery.

In Germany, Shell scientists are part of the research team at Europe’s first onshore project, CO2SINK, which began storing CO2 underground in July for demonstration and research purposes. In Canada we are co-sponsors of the International Energy Agency’s Weyburn Midale project monitoring the storage of over 1 million tonnes of CO2 a year. The list goes on.

And we are collaborating with other industries, scientists and environmental NGOs - such as Norway’s Bellona Foundation - to support the EU as it considers launching a flagship programme of 12 CCS demonstration projects. These will be essential if Europe is to meet emission reduction targets without harming economic growth.

Forming alliances

Partnerships like this will be key to the fourth and final skill we must cultivate if we are to capture value from future market shifts: forming alliances to get the job done.

While there’s much our industry can do ourselves, we can’t solve all the challenges ahead alone.

Companies, governments and NGOs have to temper the partisanship of the past and forge new partnerships of trust and deep collaboration.

Shell is already sharing our technical knowledge and understanding of the energy system directly with policy makers. We are presenting our energy scenarios to governments and international institutions. And we are working with bodies like the US Climate Change Action Partnership and the World Economic Forum’s Gleneagle’s Dialogue on Climate Change.

While these efforts will help solve large-scale challenges, local people and local governments will play an ever-more important role in defining and resolving local issues.

We need to understand the needs, values and world visions of the communities we work with early on – particularly as the frontier projects of tomorrow will bring us closer to indigenous peoples and First Nations.

At Shell, we are proud of much of what we are doing, but we also realize that we still have a lot to learn. As a global engineering company with centralised policies and an international workforce, acting locally doesn’t always come naturally.

So, we will have to draw more heavily on the skills and knowledge of others to help us get it right – particularly NGOs on the ground who can act as trusted advisors and critical friends.

For example, we have started to work with international NGO First Peoples Worldwide in a number of places including Sakhalin Island. They have advised the island’s indigenous communities on how best to work with large corporations and passed on their experience of negotiating benefit-sharing agreements.

They have brought representatives from the indigenous James Bay Cree Nation of Northern Quebec to share their experiences. And they also reviewed our plans to build capacity within these communities to improve lives and livelihoods. Together these efforts have helped build trust with the island’s indigenous people as we develop the world’s largest integrated oil and gas project with our partners.

The oil & gas industry will also have to reach out to other industries like agriculture, the automotive sector, coal producers, and the big energy users like steel and cement plants.

We will be far more effective if we cooperate than if we work at cross-purposes. And there’s a strong business case for doing so. Many of tomorrow’s game-changing energy innovations will come from outside our industry. So we need to understand and monitor developments in other sectors to respond rapidly when they occur.

Conclusion

So, back to Antoine de Saint-Exupéry. He said our task is not to foresee the future, but to enable it. Well, to be successful in the future, the energy company today must recognise the profound market shifts that lie ahead and put in place the right strategies to capture the value these shifts create.

To be truly sustainable – delivering value to our shareholders, customers and society as a whole, we will all have to sharpen our skills in building customer intimacy, influencing policy and standards, developing technology and forming alliances to enable a long and prosperous future – both for our industry and for society.

Last year Shell celebrated its centenary. And I can assure you we look forward to celebrating our next century.

Thank you.