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The global energy challenge: the importance of human capital

Speech given by Hugh Mitchell, Chief Human Resources and Corporate Officer, Royal Dutch Shell plc, at The Johnson School, Cornell University in Ithaca, September 16, 2010.
Hugh Mitchell

In a world of rising energy demand and growing environmental stresses, energy companies like Shell must develop the advanced skills needed to deliver more energy while limiting CO2 emissions. These skills cover a range of technical disciplines, from chemical engineering to geological and drilling expertise, along with expertise in managing the social and environmental risks of energy projects. Many of today’s Cornell students will go on to develop such skills over the course of their careers, some with Shell. In this speech Hugh Mitchell, Shell’s Chief Human Resources and Corporate Officer, explains what his company is doing to recruit and nurture staff with the right capabilities, and thus drive the expansion of the world’s sustainable energy sources. He also focuses on the role played by the HR function in supporting Shell’s business, which covers 90 countries and employs around 100,000 people.

The global energy challenge: the importance of human capital

For today’s Cornell students, the task of building a secure and sustainable global energy system will be one of the defining challenges of your working lives.

Some of you will be considering a career in the energy sector. And I very much hope that Shell is prominent in your thoughts. But there’s a strong probability that sooner or later all of you will make a contribution to meeting the energy challenge – certainly as consumers, and perhaps also as business people, scientists or policy makers. 

So I’d like to talk about the importance of specialist skills and knowledge in transforming the global energy system. 

I will first explain why these skills matter, before describing what we are doing in Shell to recruit and develop them. And I will finish with a word on the role Shell’s HR function is playing in all this.

The global energy challenge

Although the economic crisis caused a slump in oil and gas demand, as economies recover we expect long-term demand to resume its steady upward path. In the first half of this century, global demand for energy could double, according to the International Energy Agency, driven by a rising global population and economic growth in the developing economies.
 
The world will need to invest heavily in all energy sources to keep pace with rising demand, from oil and natural gas, to biofuels, nuclear power, solar and wind. Indeed, the IEA estimates that cumulative energy investment of some $26 trillion will be needed between 2008 and 2030 – that’s more than $1 trillion a year.

At the same time, many consumers and governments across the world are increasingly determined to reduce the environmental cost of energy consumption. And their determination will only be strengthened by the recent incident in the Gulf of Mexico.

The consequences of failing to tackle climate change may be less immediate than the damage done by a catastrophic oil spill. But the world must also manage its greenhouse gas emissions as a matter of urgency to avoid the worst effects of climate change.

Over time, cleaner energy sources will meet a growing share of demand, as global efforts to tackle climate change gather pace. Here in the US, the government has committed to an ambitious 17% reduction in CO2 emissions by 2020 compared to 2005. That will be no easy task.
 
At Shell, we think that by 2050, renewable energy sources like biofuels, wind power and solar energy could meet as much 30% of the world’s energy needs - a shift of truly historic proportions from where we are today.
 
And over the same period cars, appliances and buildings will all become much more energy efficient. But that would also mean that fossil fuels and nuclear would supply the remaining 70% even then.Thus, a sustainable energy system will be one in which cleaner fossil fuels, as well as renewable energy sources, shoulder an increasing share of the burden.
 
That in turn will require advanced technical skills in a range of disciplines, developed over many years by energy companies like Shell.

The need for advanced technical skills

Take, for example, the recent boom in gas production here in the US, which has transformed the country’s supply outlook.
 
As the cleanest burning fossil fuel, natural gas is the quickest and cheapest way to cut CO2 emissions from the global power sector. A modern gas plant emits only half the CO2 of a modern coal plant, and 70% less than decades-old steam turbine coal plants, of which there are still hundreds in operation in North America, Europe and China.
 
Natural gas capacity is also considerably faster and cheaper to install than other new build sources of electricity. Yet for the US and other countries to take advantage of these benefits, supplies of natural gas must keep pace with rising long-term demand. And that in turn depends on advanced technical skills, carefully nurtured over many years.
 
At Shell, we use our technological expertise to produce shale gas, coal bed methane and gas trapped in tight sands safely and responsibly. These are all abundant gas sources that are trapped in geological formations which are relatively impermeable. As recently as ten years ago the industry considered them too difficult and costly to access.
 
Having mastered advanced techniques in drilling and fracturing we can now increase the permeability of the rocks. That boosts the volume of gas produced by each well, making them economically viable.
 
As a consequence, the total gas resource base in North America is now large enough to meet its current gas consumption for well over a century. But right now, there is public concern in some regions in the US that hydraulic fracturing could affect drinking water.
 
At Shell, we understand the concern, but also we know that if wells are designed and executed properly, there’s no problem. The natural gas we produce lies far below the fresh water layers. As an extra protection measure, we line the wells with steel barriers and concrete.

Studies conducted by the Environmental Protection Agency, the Groundwater Protection Council and others have concluded that hydraulic fracturing is a safe process, and does not pose a public health concern. And studies continue.
 
At Shell, we’ve put in place a rigorous training programme for our young engineers to ensure they have the skills – in fields from geology to drilling – to produce these gas sources safely and responsibly.

As a first step they undergo an initial training period of between three and five years, spent gaining experience on projects in the field. After this, some go on to acquire a specialisation, which takes around another five years. 
 
Thus, after a decade, an engineer could, for example, be an expert in reservoir and development technology, which helps us to decide where to drill the wells and how to fracture the rocks.
 
In the training programme we place great emphasis on the management of social and environmental risks.
 
Local communities are key stakeholders in our operations. We must listen to them and involve them in our work. That makes the ability of our project managers and engineers to win their trust and confidence an invaluable skill.
 
A number of countries around the world hold potentially significant reserves of unconventional gas, including China. That’s one reason why we are setting up an unconventional gas centre of excellence in the US.
 
At any one time, it will provide some fifteen engineers from outside the US with on-the-ground training. This will help to ensure that Shell is prepared to drive the expected expansion in unconventional gas production in locations beyond the US.

Renewable energy and advanced technical skills

Advanced technical skills will also drive the expansion of the world’s renewable energy sources. Biofuels are a great example.
 
Around a quarter of energy-related CO2 emissions come from the transport sector. And of all the low-carbon transport fuels, biofuels can make the biggest contribution to tackling them over the next twenty years. For example, ethanol derived from Brazilian sugar cane emits between 70% and 90% less CO2 than conventional fossil fuels.
 
At Shell, we are already one of the world’s largest distributors of biofuels. And we are now moving into the production of Brazilian sugarcane ethanol through a joint venture with Cosan, Brazil’s biggest producer of biofuels. Together, we will produce and distribute ethanol through a network of 4,500 retail outlets. I should add that final regulatory approval for the deal is pending.
 
From 2020 onwards, advanced biofuels could strengthen the contribution of biofuels. These are biofuels which scientists are currently attempting to derive from new and unconventional sources, including non-food biomass.
 
For example, with Virent, a US company, we are striving to convert plant sugars directly into gasoline and diesel for use in standard engines. The advantage is that the fuel could then be blended with traditional fuel in high concentrations and used in existing engines.
 
At the moment, it’s necessary to fit cars with special “flex fuel engines” before they can run on high concentrations of ethanol.
 
But it will take years of research and development to overcome the technical challenges of producing advanced biofuels. This places a premium on the skills of the leading experts in fields such as chemical engineering.
 
At Shell, we must also deepen our understanding of how to bring these nascent technologies to the marketplace. This is a skill that we will only acquire by working successfully with partners like Virent for prolonged periods.

Human capital: a driver of competitive advantage

For Shell, another reason why our human capital is so important is intensifying competition. In part, this is driven by the emergence of the government owned national oil companies, who are developing their own technical capacity. For Shell, that raises the bar higher.After all, our ability to develop productive relationships with these resource holders, and thus to win important business opportunities, is rooted in our technical knowhow. That’s one reason why we have maintained heavy investment in research and development and specialists skills in recent years.
 
In fact, at $1.1 billion, our R&D investment in 2009 was the largest of any international oil company.
 
That brings important benefits. We are building strong partnerships with Chinese energy companies, keen to draw on our knowledge of gas production and distribution. Shell is the operator of the Changbei tight gas field in Shaanxi Province, under a production sharing agreement with China National Petroleum Corporation. It supplies natural gas to Beijing and other cities in eastern China.
 
Our relationship with CNPC is growing more ambitious, extending beyond China’s borders. This year, we announced the joint purchase of Arrow Energy, an Australian gas company, in a $3.2 billion deal. The joint venture will supply liquefied natural gas to Asia’s fast-growing markets.
 
So our human capital also underpins our competitiveness in an increasingly tough market.

People Management at Shell-recruitment

This leads on to my second question: at Shell, how do we recruit, retain and develop the skills we need to meet these challenges?
 
We start with a truly global approach. After all, many of the world’s growth markets are in countries, like China, in which international energy companies have traditionally lacked a strong presence.
 
Moreover, companies like Shell increasingly gain access to these countries based on our ability to boost the skills of local staff. So we assess which of our businesses will grow, which will decline and how our geographical footprint will change over time. And we then assess the demographic profile of our 100,000 employees against these changing requirements. This allows us to pursue a top-down approach to recruitment, selecting the markets, skills and schools we wish to target.
 
This matters because there is intense competition for the engineers and scientists able to deliver breakthroughs in energy production. That’s why we aim to recruit high potential employees early, developing their skills over an extended period of time. The alternative is to compete for a small pool of highly skilled employees, driving salary inflation and exposing ourselves to a shortage of essential expertise.
 
That’s also why we’ve invested heavily in graduate recruitment during the recent recession. On average we hire 1,000 graduates around the world every year, up from around 400 in 2003. And two-thirds of these recruits are in the technical disciplines.
 
Here in the US we focus our efforts on 21 universities, including Cornell, with strong reputations in those disciplines. We’ve learnt that maintaining a highly visible presence in these colleges is critical to attracting the most talented graduates. So we assign a senior Shell employee to manage our relationship with each university. And every year our engineers and scientists visit to discuss career possibilities and conduct interviews in person.
 
That’s helped to improve our standing as an employer of choice among students. According to surveys, Shell ranked as the most attractive employer in the oil and gas sector among students at these 21 colleges last year. And among the same students we were the twentieth most attractive employer across all sectors, whereas in 2003 we didn’t even feature in the top 100. 
  
Another major strength of universities like Cornell is that they are truly global institutions, attracting students from all over the world. As a result, a number of the talented graduates we recruit from leading universities in the US and Europe hail from countries like China and Malaysia, where we are striving to strengthen our pool of talent.

Skills development

We place an equally strong emphasis on developing our employees’ capabilities once we have recruited them. 
 
In fact, for decades, Shell has had a sophisticated system for nurturing our core technical, commercial and functional skills.
 
One priority is to retain close oversight of those employees possessing the most sought-after skills. This allows us to manage all aspects of their career journeys, from graduate recruitment to pay and performance management.
 
In particular, we need to ensure that our technically skilled employees are globally mobile. So we are preserving a strong pool of expatriate employees, amid fierce cost pressures across the industry.

This allows us to continue to develop our engineers on foreign assignments, while maintaining a strong global stock of skills.

Project management skills

In recent years, we’ve sharpened our focus on some critical areas of skills development. One of Shell’s main sources of competitive advantage is our ability to manage huge projects in extremely challenging environments.
 
By way of example, at our Pearl gas-to-liquids fuels project, currently nearing completion in Qatar, more than 50,000 workers from 60 nations are at work on a site the size of 350 soccer fields.
 
Yet with Shell’s projects spread out across the world, it would be all too easy for our approach to project management to lack coherence. So in 2005, we set up the Shell Project Academy, which teaches and assesses the technical and commercial skills our employees need to become first-class project managers.
 
The curriculum covers the entire career journey, giving young engineers a clear route to project management jobs in the company. All of which has helped to improve our delivery of major projects.
 
For example, the Shell Eastern Petrochemicals Complex in Singapore opened in May, having been completed on-time and on-budget. This is our largest fully integrated refinery and petrochemicals hub to-date.
 
But we are pressing for renewed momentum here. This year, and for the first time, 10% of Shell employees’ annual bonus will be determined by the company’s performance in delivering projects. 

And in 2009, we established our new Projects and Technology business, which has assumed global oversight for the technical delivery of our major projects. Through this, we are driving a culture of continuous improvement and technical excellence.

Boosting our commercial survey

When discussing Shell’s projects, our deal-making skills also come into sharp focus.
 
More than ever in the current climate, our acquisitions must be well-timed, consistent with the business’s growth strategy and financially sound.
 
Five years ago, we established the commercial academy to identify the most talented dealmakers in the company and teach important skills like negotiation and relationship management.
 
With many Shell employees working on deals, whether as deal leaders, lawyers or finance staff, it has helped to boost our M&A prowess.
 
That is reflected in our recent deals. A great example is our recent agreement with Cosan, which, as I mentioned earlier, is Brazil’s biggest producer of biofuels.
 
The expected increase in biofuels demand makes the timing right for our move into biofuels production. And with biofuels already commanding more than one-fifth of the Brazilian fuels market, this is an excellent location for developing our business.

Sustainable development

In the area of skills development, sustainable development is a longstanding priority.
 
Earlier, I mentioned the need for our employees to manage the social and environmental risks of unconventional gas projects. And, of course, that goes for all our activities.
  
The ability of our staff to win the trust and confidence of communities affected by our projects has never been more important. But we can only be successful if project managers and other key staff have strong skills in areas from stakeholder engagement to preserving the integrity of ecosystems.
 
To this end, we offer training opportunities to all our staff. And we run a sustainable development master class programme for project managers, commercial and technical staff.
 
This is backed up by more specific training for projects in areas of acute social and environmental sensitivity. For example, as part of a recent project in Canada (Grosmont) we required all our employees to undergo cultural and environmental awareness training. And we sent project managers on a week-long immersion programme. 
 
Voluntary initiatives also deepen our employees’ understanding of sustainable development. In 1998 volunteers from Shell set up Project Better World to offer Shell staff the chance to promote sustainable development in NGO projects around the world.
 
Over the subsequent decade, Shell employees have given tens of thousands of hours of their time and expertise to projects run by the likes of the Earthwatch Institute and United Nations Volunteers. And they in turn have learnt valuable skills that improve Shell’s management of sustainable development.

HR’s contribution: global skills management

In describing our nurturing of these critical skills, I hope that I’ve made it clear that people management in Shell is right at the core of our business.
 
I’d like to finish with a word on HR’s role in all this.
  
Over the last 10 years we have built a truly global HR function, capable of managing our talent across 100 countries.
 
We have a clear line of sight from the top to the bottom of the organisation. All 3,500 HR professionals report though the HR function, rather than the business to which they are attached. And all major HR decisions are taken by a 10 person executive leadership team.
 
We also manage our core technical skills on a global basis. Dedicated talent managers work with global business leaders to assess requirements and to ensure that the appropriate professionals can be deployed where they are needed.

HR: supporting the business in a fast moving landscape

A second and related focus of the HR function is on sharpening the support we give to the business in a fast-moving landscape.
 
A decade ago, we realised that many HR professionals lacked in-depth knowledge and understanding of Shell’s core business. So we created two one-week training programmes, one here in the US in partnership with Cornell, and the other in Europe with INSEAD and IMD, two leading business schools. These give HR employees a thorough grounding in strategy formulation, marketing, customer analysis and other aspects of the business.
 
We’ve also raised our efficiency, in part through the automation of our operations.
 
In 2002, we introduced the Shell People System, a uniform global information platform which gathers together important details about all Shell employees. This allows us to monitor key trends in recruitment, retention and career development.
 
We’ve also established offshore service centres in Poland, the Philippines and Malaysia over the past few years. Each centre covers multiple countries and businesses, reducing duplication across the company.
 
This has not only improved the efficiency of our operations. It also allows my staff and me to spend more time on the complex strategic human resourcing issues facing Shell. 
 
To see why this benefits the business, you only have to look at Shell’s response to the recession.
 
Last year, Shell carried out a major reorganisation to encourage faster and more straightforward ways of working, and to enhance accountability for key business value drivers. We reduced the number of senior leaders by one-fifth and agreed challenging targets on safety, costs, revenue and production.
 
This major restructuring was completed in less than 12 months despite effectively re-staffing the organization on a global basis, with the posting of more than 15,000 internal vacancies.

The ability of HR to provide this kind of support to the business matters more than ever.

Conclusion

That’s because the value of our human capital has shot up in recent years, thanks to the urgency of the global energy challenge.
 
Our engineers and scientists are at the forefront of the technological advances needed to produce more energy at a reduced environmental cost. As a consequence, nurturing our talent has never been more important to our competitive position.
 
To reflect this, we’ve built a truly global approach to how we acquire, develop and deploy our talent.
 
And I have no doubt that Cornell will continue to be a fertile source of this talent for many years to come.

Thank you.