Tough times, tough choices

Q In 2008 we saw the oil price peaking at $147 dollars, then falling to less than $40. Do you believe 2008, with the global credit crisis, was a “watershed”  year economically for the world - is this the end of the capitalist model?

A  I think that’s going way too far. There have always been crises and there always will be. Every crisis offers new insights and teaches us lessons. The lesson from this crisis is that risks must be managed differently in the financial sector. But it really doesn’t mean the end of the western economic model. After all, this never was a “laissez-faire” model. If it were, things would have been quite different now. It’s a market model that’s similar to a football pitch, with lines and rules and a referee: government.

In my opinion, the whole thing was set off by bad underwriting. Then financial products like mortgages, often bad ones, were repackaged and sold from party to party without any awareness of the risks involved. That means those people weren’t doing their jobs properly. But it’s nonsense to say now that we should abolish football. Nor should we send new referees on to the pitch. But we do have to make sure that the current referee blows the whistle more often. And maybe it would also be a good idea to introduce a few new rules for the referee to whistle for.

Q Won’t this crisis divert attention away from the energy challenge?

A The long-term energy agenda will remain firmly in place, so this short-term financial crisis shouldn’t distract us from the challenge of supplying the world’s growing energy needs during the first half of this century. But at the moment people are focusing on important short-term priorities, which clearly means less attention will be devoted to energy, climate and the environment. The crucial thing will be to get through this phase without adversely affecting the energy agenda.

Q In this phase of the crisis, it is vital for companies to have a strong cash position. The more cash they have the less dependent they are on others to pursue their business strategy. What does this mean for Shell?

A  As an energy supply surplus has been developing, we urgently need to execute our existing operations in the most efficient and effective way possible. We have to excel in terms of safety, costs and earnings, now more than ever before.

Q So could this also lead to a reduced level of investment?

A We always use conservative screening values when assessing potential investments, which means we don’t go with investments that are only profitable when oil and gas prices are very high. The important factor is not today’s oil or gas price, but the price during the life cycle of an investment, which can be dozens of years. Even in a bad business environment these projects still have to yield good returns. That’s the overall picture. But clearly, you have to finish what you started. For some time now we’ve also been looking at market expectations when assessing investment proposals, and asking ourselves questions like: What’s the chance of significantly reducing construction costs if we wait a while?

Q  Shell has decided to postpone the expansion of the second phase of  its Canadian oil sands project. Many analysts say that an oil price of $80  or more per barrel is needed in order for them to be profitable. Are they right?

A Yes and no. The first part of our project over there was much, much cheaper to build. If people are now quoting $80 or $90, they must be making assumptions about the overheated employment market of [the Canadian province of] Alberta, steel prices and future CO2 costs. But these prices are not fixed. A few years ago we built this project for considerably less than half those figures. If everyone stops building, the prices will shift, as is happening to the steel price now. Technological enhancements will also lead to lower costs in the long term.

Oil sands continue to be good projects because they guarantee a steady level of production for dozens of years. If I look at the long-term energy agenda, I’m sure the production of Canadian oil sands will happen. I’m also sure we’ll continue to expand there, but this has been postponed for now.

Q Oil sands are also criticised because they emit more carbon dioxide (CO2) than conventional oil. Won’t this become Shell’s Achilles heel?

A No, because of the growing world population and increasing prosperity, and the impending end of production growth in “easy oil and gas”, I believe the Canadian oil sands must be part of the world’s answer to the energy challenge. This is why we are setting up large-scale projects for carbon dioxide capture and storage and investing in research and development to find new solutions to our CO2 issues.

Q Will Shell continue to invest so heavily?

A We were certainly the biggest private investor in the world in 2008. This compensated in part for the ground we had lost by the end of the 1990s. But it’s clear that you can’t get way out of step with your competitors.

Even in today’s market conditions we will remain a relatively large investor. I don’t believe in a stop-and-start policy, as it’s damaging to your entire critical mass of know-how, expertise and employee motivation. Everything we’ve invested so much money in during recent years, such as quality improvement of project management, would grind to a halt. We’ve made that mistake before and learned our lesson.

Q Does that also apply to Shell’s research and development (R&D) activities?

A Our R&D activities will continue, partly because of the so-called three hard truths: two I have already mentioned, namely a rise in energy demand because of a growing world population and increasing prosperity, and the impending end of global production growth in “easy oil and gas”. The third is growing CO2 emissions. By continuing to invest in R&D we can build technology positions for the long term that can help to protect us from short-term cyclical fluctuations.

Q Some governments have introduced additional taxes in response to the high profits generated by oil companies. Do you believe such taxes could damage the oil and gas industry?

A The long-term energy agenda clearly shows the need for greater investment in new production capacity for fossil fuels. The latest World Energy Outlook from the International Energy Agency (IEA) tells the same story. If governments take away the money needed for this in taxes, companies will have less to invest. In the long term this will adversely affect our industry’s efforts to resolve this major problem for the world.

Over the past few years we’ve ploughed back just about all our profits into the business. Every barrel that’s produced needs to be replaced by a barrel in which more know-how and money has to be invested. If you remove that money in the form of taxes, your model won’t work any more.

Q So you don’t agree with people who suggest using the proceeds from additional taxes for developing sustainable energy sources?

A This would mean creating a dirigiste system instead of letting the market do its work. In theory it’s not impossible, but history has taught us that such systems don’t work very well. We have to remember that the key problem associated with alternative energy is its cost. You can subsidise it, but then you’ll create an unnecessarily expensive energy system.

Renewables and sustainable technologies are definitely coming, and Shell is actively involved in both. But it will take a long time before they’re available in significant quantities.

Q The USA is often seen as obstructing an alternative global energy policy. Do you expect Washington to change its position now?

A I can clearly see a convergence in the way the USA and EU view energy, even though they each had different starting points. But they’re developing in the same direction.

The steep increase in gasoline price combined with the fact that Al Gore (pictured left) was awarded the Nobel Prize, has greatly raised awareness of the current energy problems among the American public. People’s attitude to energy transition is totally different from a few years ago. I presented our energy scenarios in various places in the USA this year, and the expertise reflected in their questions showed how advanced their thinking is.

And the USA could surprise us in the area of energy technology. There are lots of developments coming out of America, not only technological ones. Never write off the USA. In the past 30 years they’ve rapidly developed lots of huge innovations, and I’m sure this will continue.

Q Fatih Birol, chief economist of the IEA, has said that non-OPEC oil production will peak in two years, resulting in a new oil order in which international oil companies like BP and Shell would eventually no longer have a place due to their shrinking reserves.

A This shows that Mr Birol is a statistician. I’d agree with him if we weren’t constantly adapting our business model. But we do. That’s why we invest so much in technology and in carrying out major projects in difficult areas and improving the way we leverage our assets. If we can be successful in these three areas, we’ll still be able to invest a lot in 10 years.

Q Will Shell ever leave Nigeria? In the past year the working conditions have still not  improved.

A We’re not planning to leave Nigeria at all. There’s a lot of gas and oil in the ground there, and as long as we can work according to our own guidelines as spelled out in the Shell General Business Principles, we’ll stay. It’s been an unbelievably difficult year for our people, and I have a huge amount of respect for our staff, having to deal with problems over and over again. It’s frustrating to see how slowly improvements are being made in the areas of security and funding - the latter refers to the contribution of the Nigerian government, the majority shareholder in our joint venture, to the projects carried out by the Shell-managed exploration and production company. You wish things could go faster, but this is just the way it is.

We’ll continue our offshore operations, our liquefied natural gas plants and our investments in the Niger Delta. Gas flaring has to stop completely there. We really want this too, but first it has to be safe for our staff and contractors.

Q And now Shell is going to Iraq to set up a gas-gathering system in the vicinity of Basra, which is not exactly a tourist area either.

A The same principles apply: we have to be able to work there safely and in accordance with our  business  principles. Our work in southern Iraq is not a single huge project but will be developed step by step. We’ll start with a small group of staff and see how things go. If things go well, we’ll expand our operations.

Q In 2006 you described what Shell would look like in 2015. For example, it will always have more than 10 elephant projects on the go, be a global leader in gas to liquids and unconventional oil and a leader in cleaner fuels, and produce at least 4.5 million barrels of oil-equivalent a day. Are we well on the way already?

A At the time I used the term “elephant projects” – projects in which we invest more than $1 billion – as a criterion for determining the capacity needed in terms of engineers and project managers. As far as both capacity and potential projects are concerned, we are well on course.

But in terms of production I think I was too optimistic. During recent years we’ve qualified our thinking with regard to production targets. We’re still aiming to achieve 2-3% annual growth as from 2010, but we now devote more attention to quality. We’re focusing more sharply on questions such as: how much of our own technology can we use in projects and how profitable will projects be at different oil and gas price levels?

Q Diversity – instead of one dominant national culture – is sometimes blamed for a certain sluggishness in Shell’s operations. Is this true?

A No, it’s not true. I just read about this topic again in our competitors’ annual reports, and we’re so much further ahead than they are in terms of the number of nationalities we have among our top 100 senior people. We are a true meritocracy, a truly multinational company. When all nationalities feel they can move upwards on the corporate ladder and will only be judged on their capacities, this gives us great strength and added value. And it certainly doesn’t make us more sluggish than companies with a dominant national culture.

Q Elimination, simplification, standardisation, automation – ESSA. Isn’t this typical Jeroen van der Veer management philosophy ?

A Yes, and the E, eliminating unnecessary activities, is absolutely essential. If you don’t eliminate you run the risk of standardising and automating the wrong things, which only results in disaster. There is still a lot of scope for improving the E aspect at Shell. In offices, in jobs, in operations, everywhere.
 
Q Are you satisfied with the way that Shell is performing and how we are perceived?

A Satisfied, never. But I am unbelievably proud of what our people have achieved these past few years. And when I look at the extent to which our good name has been restored, I just want to say a loud and clear thank you to everybody. I feel that Shell people are proud of their company again and want to express this.

That’s why I give strong public support to our people when we are accused of being polluters, because that’s simply not fair. Because of the nature of our industry, our people are often more driven by environmental concerns and sustainability than many others. They deliver impressive work, often under difficult circumstances, which provides society with continuous access to energy. Even if we’re one of the most capital-intensive industries in the world, the most important aspect is people.

Q Later this year you will hand over the role of Chief Executive to Peter Voser, currently the Chief Financial Officer. In more than four years  as Chief Executive you have sometimes made it seem as if leading a major company like Shell isn’t that difficult. Is it really that simple?

A When giving presentations to senior managers I point out that in books on management everyone acts as though managing is something mysterious and incredibly difficult. I tell them I totally disagree. My basic management concept has always been: A is where you are now, and B is where you want to be. So you have to do two things. First, you have to be able to explain to everybody in two or three minutes why you want to get to position B. Then, when you’ve described B, you ask yourself: what will everyone do to get to B from Monday morning onwards?

Middle and senior managers in large companies run the risk of becoming facilitators, that is, people who say “I have a problem. Shall I quickly pass it on to the next desk or shall I request endless advice and studies?” But that isn’t a manager’s job. Sure, you have to listen, but then you have to manage with a firm hand rather than facilitate. People expect this from their managers, especially in times of uncertainty.

*Jeroen van der Veer spoke to Piet de Wit and Norbert Both

→ back to feature stories