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Speeches and articles

The Annual General Meeting of Royal Dutch Shell plc

Jorma Ollila, Chairman and Peter Voser, Chief Executive Officer

The following text is based on speeches delivered by Jorma Ollila and Peter Voser at the Annual General Meeting of Royal Dutch Shell plc in The Hague and London on May 18, 2010.

Speech delivered by Jorma Ollila at the Annual General Meeting on 18 May 2010

Jorma Ollila

Jorma Ollila

Ladies and gentlemen:

Good morning to you here in The Hague, and good morning to you watching me on the video screens in London.

Firstly, please take a moment to read the disclaimer.

Macroeconomic Environment

Let me start by saying that recent events in the Gulf of Mexico have put our industry into the spotlight, with the tragic loss of life and pollution from the Deepwater Horizon incident.

You may have questions about that today, and I think we at Shell, and I think all the oil companies want to understand what went wrong there, and to make sure that we take any steps to reduce these risks in the future.

The year 2009 was characterised by weak demand for oil and gas – the result of the global recession triggered by the financial crisis in the USA and Europe. By the start of the year, oil and gas prices had dropped to levels not seen since 2004. The oil price did climb back over the year, although the average price was still considerably lower than in 2008. Natural gas prices also fell, picking up a little only towards the end of the year. Refining margins declined sharply not only because of weaker demand for oil products but also because of worldwide industrial overcapacity.

Chief Executive Officer Peter Voser will talk to you in more detail on performance and strategy in a moment.

...but let me say that overall, these were tough times for your Company. And I have to thank Shell people for the way they dealt with them in 2009.

Our earnings fell by 69% from 2008 to 2009, but we were encouraged to see that in the first quarter of 2010 earnings were 49% higher than they were in the same quarter last year.

The global economy seems to be recovering in 2010. But the recovery is expected to be slow, and market conditions are likely to remain volatile.

We are navigating your Company through some turbulent times, to set it firmly on course to growth – in terms of both production and cash flow.

Now let me make some comments on the oil and gas landscape, where there have been some substantial swings in prices in the last year.

Looking at the short term: the International Energy Agency expects 1.6 million barrels per day of oil demand growth in 2010, after a decline in 2009.

This is an improvement in the outlook after a weak 2009. But we are not relying on a recovery.

OPEC spare capacity is around 6 million barrels per day today, and OPEC will likely be managing against the downside of oil prices again this year.

Looking into the medium term: the oil market picture is positive, with demand growth driven by the development of non-OECD countries, and natural field declines.

By 2020, the world will need about 40 million barrels per day of new oil production on stream, from fields that haven’t been developed yet.

To give you some perspective, 40 million barrels per day is equivalent to about 4 times Saudi Arabia, or 10 UK and Norway North Seas.

These are not new observations. But it is a huge challenge for the industry, and an opportunity for Shell.

You can have a big debate about oil prices. For Shell, it is about long term trends, and we expect oil price averages typically in the $50-$90 per barrel range…of course with short-term peaks and troughs.

Demand erosion comes in at the top end, and replacement cost supports the bottom end.

We screen all Shell’s oil projects, including things like exploration and oil sands inside this range.

Now, on refining.

This is an industry that normally moves in 5- to 7-year cycles.

We saw about 2 million barrels per day of new refining capacity in the market in 2009, at a time when demand was under pressure. The result is the weakest refining environment for over 20 years.

It remains to be seen how quickly industry refining margins will recover. Demand is still under pressure. And we continue to reduce Shell’s refining portfolio.
Turning to natural gas.

Short-term, we see pressure on natural gas margins from weak demand globally from the recession, and a 20% increase in worldwide industry LNG capacity in 2009-10.

Nevertheless, we believe that the medium-term outlook for natural gas does remain positive and this is a strong growth theme for Shell.

From a customer perspective, which is mostly the electricity-generating public utility companies, gas has a scale and cost advantage over other types of fuel, with low CO2 emissions as well.

For these reasons, we will continue to be a significant investor in natural gas. We have activities spanning traditional gas production, liquefied natural gas, and newer technologies like tight gas and gas-to-liquids.

Natural gas has been a strong growth theme for Shell, and we expect that to continue in the coming years.

So those are some comments on the macro. Energy prices and margins under pressure, but the longer-term outlook overall positive.

Now let me say a couple things about some Board-related matters.

Shareholder Resolution
As explained in the Notice of Meeting, we will be voting today on a shareholder resolution calling for a special report on your Company’s Canadian oil-sands projects. Although we share some of the concerns that underlie the resolution, your Directors believe that they are already being comprehensively addressed by your Company. Your Company follows a policy of transparent disclosure and published a report in March disclosing relevant information on oil sands.

Given your Company’s approach to scrutiny and transparency, this resolution is unnecessary. Your Board unanimously recommends that you vote against it.

Directors’ Remuneration
At last year’s AGM, some of you may recall, a majority of votes were cast against the approval of the Directors’ Remuneration Report. I said then that we would reflect carefully upon the reasons for this.

We consulted major shareholders and shareholder bodies in 2009. The general feedback was that our overall remuneration policy was satisfactory, but some of its elements had to be modified to align them better with shareholder interest and Shell’s long-term strategy. It also became apparent that the Remuneration Committee – or REMCO – should consult with shareholders if it intends to exercise its prerogative to use upwards discretion.

Under the new chairmanship of Hans Wijers, REMCO took on those comments and took on external specialist input. And the Committee has come up with changes, which are explained in detail in the 2009 Annual Report.

Hans, who is here with us today, can answer any questions related to directors’ remuneration at this AGM.

Dividends
We have also revisited your Company’s policy regarding payouts to shareholders. Until this year, our policy had been to grow the dividend at least in line with inflation. We now aim to grow the dividend in line with the financial performance of your Company. In addition, subject to your support and regulatory approvals, we intend to give investors the option of receiving their dividends in the form of new shares rather than cash.

These changes will enhance Shell’s financial flexibility and allow the dividend payout to be more closely linked to Shell’s profitability.

Nomination & Succession of Directors
Finally, I have some changes to report in the composition of your Company’s Board.

After nine years of service as Non-executive Directors, Sir Peter Job and Lawrence Ricciardi are both standing down from the Board. I thank them for their contributions during those years.

The Board has nominated Charles Holliday to be elected a Non-executive Director, with effect from the September 1st, 2010. Chad, as he prefers to be called, was CEO and chairman of the board of DuPont, and I am looking forward to having him on the Board.

Let me now give the floor to your Company’s Chief Executive Officer: Peter Voser.

Speech delivered by Peter Voser at the Annual General Meeting on 18 May 2010

Peter Voser

Peter Voser

Ladies and gentlemen

I am very pleased to be here today at my first AGM as the Chief Executive Officer of Shell. I’d also like to welcome Simon Henry, who is our Chief Financial Officer, and he joins us here for the first time in his new role.

Financial performance and strategy

Let me start with the operating and safety performance in the company.

Over the last 5 years we have almost halved our recordable injury rate per million hours worked, we have more than halved our injury rate leading to time off work, and we have halved our rate of fatalities per hundred million hours worked.  This has been achieved through relentless focus on key areas including process safety, road safety, and contractor safety. 

However, we cannot ever afford to be complacent. Every day is a new day with its own hazards and dangers. Last July we introduced a simple set of 12 Life-Saving Rules to further re-enforce a culture of compliance across all of Shell and our contractors. This touches every day some 500’000 people. 

Sustained efforts and leadership will be required in the years ahead to continue the year-on-year improvements in safety performance.

That commitment is also reflected in the way we remunerate people.

Turning to our financial performance in 2009.  As you can see, earnings fell sharply in 2009 because of the recession, which resulted in weaker energy margins 
As Jorma has mentioned, we are seeing some signs of economic recovery in the first part of 2010, although the indications are still rather mixed We certainly don’t rely on any great improvement in the economy in the near term.

As you know, we are operating in a rather long-term industry, with investment times of at least five years and assets that can run for decades.

So we took the decision last year to continue with our ambitious spending programmes through this down-cycle, to create growth for shareholders in the 2011-12 timeframe.

Also last year, we decided to maintain our dividend growth, with a 5% increase in dividends per share, measured in US dollars. No change to dividends is planned for 2010, when we expect to pay out over $10 billion to shareholders.

We look at our strategy as a set of different time layers.

In the near term it is all about raising our game on the performance side…sharper delivery…profitability…competitiveness…

….then delivering on the growth projects that we have launched over the last five years…this is growth to 2014…

…and  working on new options for the next wave of investment, that can grow the cash flow after 2014.

Performance Focus

In the first of these three themes, we are looking to improve our competitiveness, with a series of cost initiatives, disposals programmes and focus on operating performance.

Let me give you some examples.

We decided last year to reorganise the company to have a faster  implementation of our strategy, and lower costs.

This reorganisation, which we called Transition 2009, is now complete. We created a new Projects and Technology division, and an upstream organisation, divided into two regions – Americas and International.

As a result of this and other initiatives, we will reduce staff  levels by 7,000 between 2009 and 2011, and take out at least $3 billion of costs in 2009-10. In 2009 alone, we reduced costs by $2 billion.

Continuous improvement – in terms of safety, operational performance, cost and profitability – are becoming part of the way we work at Shell.

Production growth

The second of our strategic themes is all about growth. This is operational growth and financial growth.

We had three significant new production start-ups in 2009: the LNG plant at Sakhalin in Russia, the deep water BC-10 project in Brazil, and a new chemicals production plant in Singapore.

At BC-10 in Brazil, which came on stream in the middle of last year, we used cutting-edge technologies to deliver power and heat to produce heavy crude, under two kilometres of water. And I am very pleased that this project is now running ahead of its planned capacity, reaching over 80,000  barrels per day earlier this year.

Looking into 2010-11, we plan to bring 13 new projects on stream in upstream and downstream. Two of these projects have already come on line in the first part of 2010 – Perdido, in the deep water of the Gulf of Mexico, and new ethylene capacity in Singapore. Perdido uses many of the technologies that have been so successful at BC-10.

As these projects come on stream, so our reserves performance has improved. We increased our net reserves attributable to shareholders by 2.2 billion barrels last year, with a reserves replacement ratio of 288%.

All of this is part of a plan to increase our oil & gas production by 11% from 2009 to 2012, and to grow our cashflow from operations by some 80% from 2009 levels at a $80 per barrel oil price.

Qatar is an important part of your company now, and you will hear a lot more about this in the future.

We have two very large projects under construction there. Qatargas 4, which is LNG, and Pearl, which is gas to liquids, or GTL, as we call it.

Taking these both together, we will have invested some $21 billion in Qatar, and as these projects come on stream, with ramp-up in 2011, we expect some $4 billion per year of cash flow back to Shell, and a substantial increase in our production.

Pearl GTL is the world’s largest gas-to-liquids plant. It will apply Shell technology, tested over many years in Amsterdam and Malaysia,  to convert some 1.6 billion cubic feet per day of gas into 260,000 barrels per day of condensates, liquid transport fuel, oil products and petrochemical feedstocks.

Turning to Oil Sands.
Shell, with a 60% stake in the Athabasca Oil Sands Project or AOSP, is a middle ranking player in Oil Sands. AOSP gives around 70-80 thousand barrels per day of production, or around 2% of our total output.

This is expected to increase to around 4%, once the current expansion phase, called AOSP-1, is completed.

We have a good track record here on sustainable development and we are glad to discuss that with you later today.

Once AOSP-1 is complete in 2010-11, we expect to slow down on new investments, do some debottlenecking, and make sure we get all this running in the most efficient way possible.

New options for future growth
So, those are some of the near term growth projects.

The third layer of the strategy is all about generating new options for further growth, beyond 2012.

Let me update you on the progress we have made in 2009.

Firstly on exploration.

We spend some $3 billion per year on exploration activities, and we are all pleased with the 2009 results.

Exploration added 2.4 billion barrels of resources last year, and we are averaging over 1.5 billion barrels per year of additions, compared with about 1.1 billion barrels of production.

The main areas of exploration success were the US Gulf of Mexico, Australia, and North American tight gas.

Now turning to Downstream growth.

Here we are working on selected growth options, but at the same time are taking measures to enhance the Downstream refining and marketing portfolio.
We have a strong brand that is a key asset of our successful marketing and trading operations.

We are taking steps to refocus our downstream investments into profitable markets with growth potential. We will reduce some 15% of our refining capacity and we will exit from 35% of our retail markets.

At the same time we are investing for selective growth in Downstream for example with the construction of new refinery capacity at Port Arthur, which is a large expansion project on the Gulf Coast of the USA.

And in Biofuels, we are negotiating a joint venture in Brazil with Cosan.

Cosan is an industry leader in sustainable Biofuels and will be a good partner for us. By combining our Brazilian downstream portfolios, we will generate synergies and can capitalise on the growth potential in biofuels.

The joint venture will be an important supplier of green electricity in Brazil, with some 600 megawatts of biomass fired capacity currently, with growth potential.

We also plan to put some of our advanced biofuels technology into this joint venture, with future growth potential.

Actually, back in March, we announced that the fuel we supply to Ferrari’s team for the 2010 Formula 1 season contains cellulosic ethanol.

This is an advanced biofuel made from straw by our partner Iogen, using non-food wheat straw and advanced conversion processes.

This is the first time an advanced biofuel has been used in Formula 1 racing by Ferrari.

Let me recap the priorities. The priorities for me as CEO and everyone in Shell.

First and foremost we want to make sure we have safety in our operations and for our people.

We want to see a more competitive performance from Shell. We look at profitability, oil and gas production and sustainable development. 

Shareholders are investing in Shell for profitable growth. So are we. This is all about cash flow from operations, investment in new projects, and cash returns to shareholders.

And we want to see sharper delivery of our strategy, and a more commercial focus in everything that we do.

We have come a long way in recent years. But there is a lot more to do and I am really energized by that. We are all looking forward to talking to you about our plans today.