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Speeches and webcasts

The global context: the importance of innovation

Speech given by Jorma Ollila, Chairman, Royal Dutch Shell plc, at the China Executive Leadership Forum at Cambridge University on July 12, 2010.
Jorma Ollila

As the global economy embarks on a fragile recovery, businesses in all sectors are under great pressure to innovate.  Sharp growth in China and the developing economies, a growing world population and the lightning  pace of technological change are three of the trends reshaping the global business environment, raising the importance of innovation. In this speech, Jorma Ollila, Royal Dutch Shell’s Chairman, explains why Shell, too, must innovate to help satisfy rising global energy demand and expand the world’s sources of sustainable energy. To this end, Shell has adopted a new innovation strategy, which has three main elements: maintaining strong investment in research and development, speeding up the commercialization of its ideas and working more closely with external partners, including customers and universities.

Introduction – The growing importance of innovation

It’s a great honour for me to start off the Cambridge Executive Leadership programme. And I’m delighted to welcome you to the UK and Europe. As Chairman of both Shell and Nokia, today I want to discuss one aspect of the global context: innovation. I will explain why this matters more than ever, before focussing on Shell’s current innovation plans. 

The global business environment is changing rapidly, thanks to a number of trends. One is sharp economic growth in China and other developing economies. For overseas companies, these markets are a potent source of creative energy and innovation. They call for new, often lower-cost products and different production and distribution processes.

Of course, China is also an increasingly important centre for research and development. And Shell has established research agreements with Chinese universities and institutes in a number of areas, including biofuels on which we are working, for example, with the Qiangdao Institute of Bioenergy and Bioprocess Technology at the Chinese Academy of Sciences.  

At the same time, world-class Chinese companies are expanding rapidly overseas, shaking the ground under existing markets.  Take, for example, Haier and the popularity of its lower cost-fridges.

Further trends reshaping the global context include the lightning pace of technological innovation and the growing world population, which is expected to reach 9 billion by the middle of the century.

To prosper in this changing world, businesses in all sectors will have to be nimble, coming up with innovative products and exploring new ways of working.  At Nokia, much of our success has been attributable to how quickly we recognized the huge potential of China, and developed the products that would give us a competitive edge there. Indeed, last year China and India were Nokia’s two biggest markets.

But what does all this mean for energy companies like Shell?

Innovation in the energy industry

Shell is first and foremost a technology company.

I’m delighted to say that, at Shell, I find myself in another innovative and stimulating environment.     
 
At first sight, you might think that large energy companies are under less pressure to innovate than their counterparts in other industries. After all, for much of the past century, demand for oil has risen steadily. And the energy industry is capital intensive, making it tough to break into for innovative newcomers.

But that is only one side of the story.

Shell is first and foremost a technology company. And, more than ever, innovation is critical to our competitiveness. 

Although the economic crisis caused a slump in oil and gas demand, as economies recover we expect long-term demand to resume its upward path. Indeed by 2050, global energy demand will double, driven by rising population levels and economic growth in the developing economies.

Innovation will be critical to satisfying all this demand.

It’s innovation that has delivered the recent boom in gas production in the US, transforming the country’s supply outlook. Thanks to technological advances over the past decade, tight gas, shale gas and coal bed methane have become economically viable.

These are all abundant gas sources that are trapped in relatively impermeable geological formations, which makes them hard to tap. Tight gas, for example, is natural gas trapped in reservoirs amid tightly packed rock grains – so tightly packed that the gas must travel through passages as narrow as one-hundredth the width of a human hair.

As a result of these advances, the US may now have 100 years’ worth of natural gas supplies at current consumption rates, allowing the country to exploit the huge advantages of gas, the cleanest burning fossil fuel.

Gas is the quickest and cheapest way to cut CO2 emissions from the global power sector. Gas plants emit between 50-70% less CO2 than coal plants. And natural gas capacity is considerably faster and cheaper to install than other new build sources of electricity.

The race is now on to unlock new gas resources in other parts of the world. Take China, for example, where gas demand is likely to double, and could even triple by 2020, as the government tries to increase its share of the energy mix.

To meet this demand, Shell will tap all manner of new gas sources, using an array of innovative drilling techniques and production methods.

Over the next decade, we will unlock shale gas, coal bed methane and tight gas resources in new locations in China and beyond, including Australia.

The need to innovate stretches far beyond the purely technological. We will also have to employ innovative business models. By way of example, Shell announced in March an agreement with CNPC to buy Arrow Energy in Australia in a $3.2 billion deal, which we expect to close later this year. The joint venture will supply liquefied natural gas to Asia’s fast-growing markets.

Partnerships between independent oil companies and national oil companies are nothing new. What is novel is two of them coming together to purchase an entire public company in a third country in this way.

Reducing the environmental impact of energy

The catastrophe in the Gulf of Mexico is a powerful reminder that the energy industry must manage the most extreme environmental risks on a day-to-day basis.

At the same time, all this energy must come at a sharply reduced environmental cost. The catastrophe in the Gulf of Mexico is a powerful reminder that the energy industry must manage the most extreme environmental risks on a day-to-day basis. And, of course, the world must manage its greenhouse gas emissions.   

Here again, much hinges on our ability to innovate. At Shell, we are, for example, helping to develop carbon capture and storage technology, which holds much promise as a way to capture the CO2 emissions from coal-fired power and other industrial installations.  At the Gorgon liquefied natural gas project in Australia – in which Shell has a 25% stake – the plan is to capture some 4 million tonnes of CO2 a year. As things stood at the end of last year, it was the world’s largest confirmed full-scale CCS project.

Increasing competition

On top of all this, competition in the industry is escalating, in part because of the rise of the national oil companies, who are developing their own technological capacity.

For Shell that raises the bar higher: our ability to build thriving partnerships with resource holders is rooted in our technological knowhow. For example, our joint venture in Australia with CNPC will, over time, draw on Shell’s expertise in liquefied natural gas to convert coal bed methane to LNG for export to international markets. 

Thus, it’s clear that energy companies like Shell are under increasing pressure to innovate.

Shell’s innovation strategy

…our ability to build thriving partnerships with resource holders is rooted in our technological knowhow.

At Shell, how are we preparing our innovation processes for these challenges?

We’ve recently adopted a new technology strategy, with the explicit aim of making Shell the most competitive and innovative company in the world.  And it has three principal goals.

First, we want to come up with innovations that improve our existing business activities, or that play into existing markets. A recent example is Shell FuelSave. The most advanced fuel economy product in the market, it helps drivers save up to one litre of fuel per tank, based on a 50-litre fill-up. Since last year, we have launched Shell FuelSave in eight countries across Europe and Asia.

The second goal of the strategy is to develop more of the groundbreaking technologies that open up new markets. For example, with partner companies and universities around the world, we are working on advanced biofuels from non-food biomass like crop residue. We believe these hold much promise as a means to drive down CO2 emissions in the transport sector over the longer term.

The third area of focus is emerging technologies. These are higher risk opportunities, but which may lead to new businesses in the longer-term and allow us to adapt to major shifts in the global energy market in the coming decades.

Yet delivering our strategy in a fast-moving landscape will be tough. And I’d like to outline three priorities for successful innovation.

Investing through the cycle

First, we must maintain strong investment in research and development throughout the economic cycle.

At the end of the 1990s, when the price of oil fell to $10 per barrel we slashed our investments in R&D and cut the numbers of technical staff. When the oil price recovered we had too few technical skills to take advantage of the upturn.

But, this time, in contrast, our spending on research and development has been the largest of any international oil and gas company – some $1.1 billion in 2009. When you include the national oil companies, our R&D investment is second only to that of CNPC, further emphasizing our two companies’ shared approach.

Such heavy investment will allow Shell to carry out more fundamental research, building on our past successes.

Our research and development programme is conducted in a number of technology centres in Europe, North America, the Middle East and Asia. And we have a team of chief scientists, whose roles include helping to generate innovative ideas and to lead research into imaginative solutions.

For example, the Chief Scientist for Chemistry and Catlysis led the team that made an important contribution to the development of an advanced catalyst which made one of our biggest projects possible – Pearl, the world’s largest gas-to-liquids plant in Qatar.

When completed, it will convert natural gas into 140,000 barrels of oil-equivalent-a-day of cleaner burning synthetic oil products. And gas-to-liquids fuels will take gas into new markets, with Shell already preparing to sell a new GTL Kerosene blend to the aviation industry as a fuel for commercial aircraft.

Several of our chief scientists are also contributing to our new “emerging technologies” team, which brings together some of our most creative people to work in small groups to explore the frontiers of science and technology, in fields from the subsurface sciences to computation and modelling.

The need for speed

At Shell, we are striving to achieve faster results, spurred on by the raised expectations of consumers and governments.

Greater speed will be a second critical element in delivering successful innovation.    

Consumers and governments are increasingly anxious to make the transition to a sustainable energy system.

Yet energy technologies take much time and effort to develop and deploy. For example, following a scientific breakthrough in the R&D lab, it has often taken three more years to build a demonstration plant, one year to start it up, and two to five years to achieve a reliable operation. So, from the first demo to the first commercial plant easily takes a decade. And it can take another decade to build a dozen such plants, or obtain social and political acceptance.

At Shell, we’ve researched all current energy types and found that in the twentieth century, it took 30 years for new energy types to capture 1% of the market.

For instance, biofuels are reaching their 1% share of the oil market around now, which is equivalent to 0.5% of total energy. And wind could secure its 1% share by the middle of this decade, roughly three decades after the first large wind parks were built in Denmark and the United States.

At Shell, we are striving to achieve faster results, spurred on by the raised expectations of consumers and governments. To boost creativity, we’ve moved to strip out some of the complexity and layers of decision-making in our innovation processes. And we’ve brought our research and development activities together under one roof in our new Projects and Technology business.  

We are also accelerating the commercialization of our ideas. We’ve ended research and development into activities that are currently unprofitable. And our researchers and technologists will be assessed on how fast their work can make an impact on our business and lead to products that can be sold profitably.

Open innovation

Businesses must look outwards, drawing on ideas from customers, other businesses, and universities.

Some of the most promising areas of research are extremely complex, and in disciplines in which Shell has much to learn from outside experts.

For Shell, a third critical step will be a sharper focus on ‘open innovation’. The challenges we face are such that no business can rely solely on ideas from within its own four walls, important as they are. Businesses must look outwards, drawing on ideas from customers, other businesses, and universities.

Of course, this is a well-trodden path: Cisco and IBM are just two businesses that have famously benefitted hugely from open innovation. And at Shell, we, too, have had successes, not least through our GameChanger programme, which we set up in 1996.

It provides the resources and support for inventors, from inside or outside Shell, to move from a rough idea to a point where they can demonstrate its potential – the proof-of-concept stage.  And around half of these ideas come from university students and professors engaged in fundamental research.

Feasible ideas may then be developed further by one of Shell’s businesses, converted into a spin-off company or sold to third parties. Since it began, we have invested nearly $250 million in more than 2,000 GameChanger projects.

One project that Gamechanger helped to nurture in its earliest stages is Floating LNG. This is an enormous vessel, which, when built, will have the facilities to produce natural gas and turn it into LNG. This will enable us to increase our production of natural gas from offshore fields that would otherwise be too small or costly to develop.

It also avoids the need to build pipelines to the coast and on-shore processing facilities, thus reducing the environmental impact of gas production. Shell announced plans last year to develop our Prelude and Concerto gas discoveries, off the northwest coast of Western Australia, using this technology.  

Of course, Floating LNG will be the result of many years of work by scores of engineers, scientists and designers. But a programme like Gamechanger can play a small but important role in helping such projects in their infancy.  

In the years ahead, we will draw on more external ideas, and enter into more joint ventures and other forms of external partnership.

Some of the most promising areas of research are extremely complex, and in disciplines in which Shell has much to learn from outside experts.

For example, Shell recently announced a research agreement with Hewlett Packard to develop nano-sized electromagnetic sensors that could improve the quality of seismic signals we use to determine the existence of hydrocarbons underground. Although it’s early days, this could, if successful, have a far-reaching impact on our ability to find oil and gas resources.

We also need to harness the ideas and energy of smaller companies. We can apply our financial muscle and technical expertise to help take their ideas from the lab to demonstration level and then to commercial scale.

Take our work on biofuels, for example. Shell and a partner, Virent Energy Systems in the United States, recently opened a pilot plant for the production of petrol directly from plant sugars, instead of turning the sugars into ethanol for blending with gasoline.

The advantage is that the fuel could then be blended with traditional fuel in high concentrations and used in existing engines and distributed through existing networks.

We’re now expanding this partnership, and conducting research into producing diesel directly from plant sugars, instead of converting vegetable oils into biodiesel for blending with diesel.  With diesel continuing to account for around half of new car registrations in the EU, this could play an important role in the shift to sustainable mobility.

Customers are another important source of innovation. For example, a Shell employee heard from one of our customers, Heijmans, a Dutch construction company, that it had been trying to produce good quality asphalt – used in roads and pavements – from recycled materials at lower temperatures, and thus at a reduced environmental cost.

At Shell, we have been one of the first companies to produce and lay asphalt pavements at lower temperatures, through our so-called Shell WAM foam process – WAM stands for “Warm Asphalt Mixture”. It yields significant environmental benefits, including improved energy efficiency and lower emissions of CO2, dust and fumes.

However, we had not yet applied this expertise to asphalt recycled from old pavements and roads, which is what Heijmans had been attempting to do. We are now working with Heijmans to do exactly that.

Moving to commercial production over the next couple of years will be a significant step forward, not least because environmental regulations in some countries will require businesses to reduce their CO2 emissions and use more recycled asphalt.

This is just one more way in which Shell is pursuing open innovation.

Conclusion

I’m confident that our strategy will realize our aspiration to be the world’s most innovative energy company.

In the post-recession world, businesses in all sectors are under greater pressure to innovate, thanks to strong growth in the developing economies and the transition to a low-carbon economy. 

To keep pace with these changes, we, at Shell, have revamped our management of technological innovation. 

We are speeding up the commercialization of our ideas, while maintaining heavy investment in R&D.

And we are drawing on more ideas from the outside world  - from customers, commercial partners and universities.  

And I’m confident that our strategy will realize our aspiration to be the world’s most innovative energy company. 

Thank you.