I'm not a big ego CEO type

Q Some people assume that since you're a finance guy you'll aggressively go after costs, particularly in the current environment. Are they assuming correctly and, if so, what can people expect?

A As you will have seen, we started making clear already what the next phase in Shell’s development will look like. The strategy More Upstream, Profitable Downstream, which has been stable since its inception in 2004, includes strict management of our bottom line and places emphasis on our cash flow. And as I said recently at our Senior Executive Forum in Berlin, cost inflation in this industry and relatively lower prices mean that we need to adjust costs back down to the current oil and gas prices. That will mean a continued focus on cost discipline. Not because I’m a finance guy, but because I’m a businessperson. We will tackle cost through a combination of flatter structures, faster decision making and simpler ways of working.

We have a very intensive, high-activity investment programme, which is among the highest in the industry. We are carefully reviewing how many new investment projects we’ll take on board now that the balance between costs and oil prices is no longer in sync. In terms of operating costs we’re performing relatively well in some areas, but in others we’re more expensive than our competitors and are second- or even third-quartile in performance. That needs addressing.

Q In what areas do you want to see acceleration?

A Shell still works in a rather complex way, so we need to streamline our processes and eliminate activities that don’t generate value. Then we have to simplify these processes, standardise the remaining activities and, where possible, automate the work. That has been our philosophy and I plan to drive it further. At Shell we’re still struggling with elimination and simplification.

Q The economic recession – in particular the role banks played in bringing it about – has undermined faith in the market. Even Jack Welch recently said, “On the face of it, shareholder value is the dumbest idea in the world”. Were you surprised to hear that Welch nowadays rejects shareholder value as the leading principle for running a stock exchange quoted company?

A Quite interesting to see these remarks in relation to the books Jack Welch wrote earlier. At the end of the day, managing a company must always be aimed at creating long-term value – let’s just call it shareholder value since shareholders own companies. 

I’ve always been opposed to quick shareholder value. Ours is a long-term obligation to create value and we should optimise it along the whole value chain and time line. Shareholder value now and in the future is just as important as it has always been, but some companies and industries have overdone it. They’ve been too shortsighted. Yes, the banking industry for example.

Q And how would you rank the leading groups of stakeholders in a company: employees, customers and shareholders?

A Without successful employees you won’t generate long-term value for your shareholders. And when customers won’t buy your products you won’t have enough work for your employees and you won’t generate optimum value. A company cannot exist without employees and customers; it’s as simple as that.

Q Shell has announced a 5% dividend growth target for 2009. Why are shareholders treated differently from employees, many of whom were put on a zero wage increase diet?

A Our dividend policy is a long-term policy, based on our past, current and future earnings. Shell is also a company that has been a socially responsible employer, but it needs to take some tough decisions from time to time in order to stay a long-term value creator. We manage our remuneration policy in a competitive way that is benchmarked all the time. We are a competitive payer and will continue to be so in the longer term, even in difficult times like those we are experiencing now. We want to employ the best talent in the market and we want to be known for our professionalism.

Q Many medium-sized and small companies have already announced 15-25% investment reductions.
 
A That only heightens concerns that when demand bounces back it will soon outpace supply again. And we all know what that means: tightening markets and rising prices. Such a strategy is simply ensuring that the next oil price shock is already in the making.

Q Why is it a good idea for Shell to keep its level of spending as high as in the last boom year in 2008?

A Our strategy is unchanged: we don’t believe in a stop-and-go investment policy. So we are still on track with our plans to invest $31-32 billion this year. We are successfully negotiating better conditions from suppliers and contractors. These could have an effect in the next 12 to 18 months and could influence our investment levels in 2010 and 2011, but it’s still too early to tell at this point in time.

Q Do you think shareholders will understand you?

A Shareholders accepted our investment plans in recent years, and I’m convinced they understand that we cannot stop projects that are three-quarters or halfway through construction. The question now is how many new projects we should launch. That, of course, is a matter of concern for investors. Our answer is very clear: we want to maintain an activity level that matches our long-term business vision and provides cash flow and competitive dividend returns. But I do accept that shareholders have a somewhat shorter time horizon than the 30 or 40 years that are normal now for big oil and gas projects.

The Grand Aniva, one of the tankers that transports LNG from Sakhalin II

Q When will the world economy pick up again?

A I think we have to look to 2010 to see a recovery.

Q Do you see Shell sweating it out until the return of a growing global economy?

A We’ve always taken the long-term view and one of the ways we’ve done this is by adopting a rather conservative approach to our price assumptions, balance sheet and cash flow. We entered this downward cycle with a gearing of just 6%, which makes us well prepared for what’s coming.

Still, I think the economic recession will have a lasting effect. That makes cost and efficiency key to Shell’s success. We’re not competitive enough. We need to readjust and reducing unit costs will remain very important.

Q In the past four years Shell divested some 300,000 barrels a day in production capacity. Why is Shell selling so much capacity when it is struggling to keep production at the same level? We’re an oil and gas company, aren’t we, not an investment bank?

A The answer is clear, we are an integrated oil and gas company. But we’re also a company with active portfolio management. Assets have a certain lifetime and you may be the best operator of those assets for part of that lifetime. But someone else could be a better operator at a later stage and might be willing to pay better money for those assets than we can generate from them. We have stated before that rather than aiming exclusively for the highest production levels, we are also looking to achieve the best production quality to generate the best total profits and cash flow. If we can make more money out of our assets by selling them and investing that money in new and higher-margin production elsewhere, we are making sound business decisions that generate long-term value. And that’s what we are here for, generating long-term value.

Q Shell’s new projects tend to be in frontier areas, whether deep water, sub-Arctic or unconventionals like oil sands – all of which are technically challenging and costly to develop. Will these be profitable if energy prices stay low?

A More than 90% of our oil and gas production is conventional nowadays and we expect to remain a conventional oil and gas company for a long time. Currently we’re constructing projects that will deliver one million barrels of new oil equivalent production over the next few years. We’ve informed our investors that these new projects, including gas to liquids in Qatar and the first expansion phase of our Canadian oil sands, are actually on average generating shareholder value above an oil price of $45 per barrel. So at today’s oil prices we’re okay. 

Q But how about later phases in oil sands, or oil and gas in hostile places like the Arctic?

A These issues form part of our discussions on new projects. Yes, these unconventionals will be more expensive to develop and produce because of their complexity and the costs of carbon dioxide (CO₂). If these higher cost levels are not reflected in the market prices of oil and gas, or if we fail to reduce costs by introducing new technologies, these complex sources will temporarily not be developed. In the longer term, however, normal market dynamics will prevail. Supply will probably not be able to meet demand, so prices will rise and new production will come on-stream.

Q That is Shell’s Scramble scenario, boom and bust.

A And that’s also why we at Shell have a strong preference for our Blueprints scenario that shows a co-operating world that tries to avoid those booms and busts.

Q Shell’s announcement that it does not expect to invest big money again in wind and solar and to concentrate on biofuels and carbon capture and storage was met with great disappointment by green activists.

A We have a sizeable wind business and will continue to operate what we have. Over the coming years we will carefully analyse how the wind sector will develop, but for the moment it is quite difficult anywhere in the world to have projects that meet our expectations on profitability. We also have a solar development project in Germany, which I consider as research and development (R&D) activities. Then there are biofuels. A significant part of our R&D budget goes to biofuels. We see biofuels as the best fit with our present and future activities.

Q What are your ambitions with biofuels? Would you accept full-scale first-generation biofuels production by Shell, despite there being sustainability issues related to the food chain and bio-diversity?

A Our prime focus is on second-generation biofuels, but we also see ways of producing biofuels on a sustainable basis with first-generation technologies. I clearly see ways in which we can use first-generation technologies to accelerate the development of second-generation production. 

Q The Shell target is still to have a sizeable business in biofuels in the medium term?

A It is. But it shouldn’t be seen as a stand-alone business because it’s so closely linked to our traditional value chain in downstream. Biofuels will be distributed via our existing distribution system and marketing networks.

Q The outside world says, “Hey guys, why not get on with it and build a big new alternative energy business?” How do you respond to that?

A I would like to remind everybody that we started our liquefied natural gas business some 30 years ago. At that time it was seen as unconventional, expensive and risky. We had the courage, the vision and the strength to dive into it and develop it. Today it is a world-scale business and we are now seen as world leader in liquefied gas technologies. We know how to take risks and we know that it takes technology breakthroughs to move forward. The same is true nowadays for renewables. As a business leader I don’t think it’s the right approach to try to gain scale without actually knowing what technology can do for you.

Peter Voser greets Russian President Dmitry Medvedev in Amsterdam, the Netherlands Picture: WFA

Q The general public and political leaders would say, “Then speed up these necessary technology breakthroughs.”

A We are. We’re investing now in demonstration plants in Canada and Germany where we can test the technology and ways of optimising our operating costs. Once you know these answers, you can go on to the next phase: the construction of full-size commercial plants. We also have to face another reality, namely that timescales and public agendas are usually short term while technology and R&D agendas in general are long term. Energy transition, including carbon capture and storage, is a very long-term activity. On the other hand, I do admit that putting some pressure on this transitional process can be helpful. Industry and the general public should develop a common agenda with clear rules. The challenges are simply too big and too important to be worked out in isolation.

Q You have a reputation for calmness, Swiss efficiency and being in the right place at the right time, according to one journalist. Is that an accurate observation?
 
A Yes. I see myself as a calm leader. It takes a lot for me to lose my temper. I am focused and disciplined, and want to see things delivered. I’m also keen on clear accountabilities and leadership. Leaders should be decisive. I push accountabilities as much as I can into the right areas and then expect people to accept them and deliver. What annoys me? When someone comes into my office with a problem without offering a solution; then I might lose my temper.

Q For the first time in the 101-year history of Shell the company is not under leadership of a Dutch or British person. Can some kind of cultural revolution be expected?

A I don’t like the word “revolution”. Of course there’ll be some shifts in business culture. We must become more nimble. That means reducing complexity. And shifting from a culture that debates the merits of management decisions to one that swiftly implements them. We’ve also announced changes to our structure, changes aimed at simplifying the organisation and clarifying accountability.

But in general I’ll drive this company further into a successful enterprise by building on what Jeroen van der Veer started. No revolution, just a matter of “Let’s go and perform”.

On nationality, as a Swiss I am by definition neutral, so I think I can relate well with the Dutch as well as the British and all other nationalities. Shell is a global enterprise.

Q In earlier interviews with Swiss magazines you mentioned that you share national characteristics like thoroughness, prudence and being down-to-earth.

A Yes, I love a down-to-earth mentality. I’m not a big ego CEO type. My philosophy is that any leader can only be as good as the sum of all the people in the organisation. You can never be better, that’s impossible. In my role as CEO I sit at the top and set the direction, but the delivery has to come from all the people in Shell.

Q Your hobbies are soccer, skiing and diving. Rather risky activities compared to the standard sports activity of the average Shell manager – golf.

A Soccer has become more of a spectator sport for me now. The days when I was a keen soccer player are long past. And skiing. I was almost born with skis on, so this is not going to stop. Diving is a family sport. We normally do it for one week each year, and never deeper than 40 metres. And let’s not forget hiking: I love trekking through mountains.

Q If you love mountain hiking then you’re absolutely in the right spot in Holland.

A (Laughs) That’s why I live in The Hague but will be in Switzerland at weekends as often as I can.

* Peter Voser spoke to Piet de Wit and David Woodruff

You might also be interested in:

• Read the Q & A with Jeroen van der Veer
• Going underground with greenhouse gas

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