By Lech Mintowt-Czyz on Sep 30, 2020
We are only three-quarters of the way through the year, yet it already feels like we have had several years’ worth of events and landmarks. How is the company managing it?
Absolutely right. So much has happened. And I am very proud of how the company and my colleagues throughout Shell have reacted. We have had to act quickly and decisively and make some very tough financial decisions to ensure we remained resilient, including cutting the dividend. But as hard as they were, they were entirely the appropriate choices to make. And COVID-19 has hit us in another way. We have, very sadly, lost six employees and six contractor colleagues to the virus.
With that context, I am grateful that our performance on safety in our operations so far this year has been so good – remarkable, in fact – with a much-reduced incident rate. We have continued to keep things running and serve our customers in really very challenging circumstances. In fact, our people have been quick to innovate and move even further into the digital world… running orders virtually, trading virtually, even monitoring and assisting offshore facilities virtually. Everybody in Shell should be proud of what we have done this year.
The energy transition to a lower-carbon future presents a longer-term challenge to Shell. In April you said Shell wants to be a net-zero emissions energy business by 2050 or sooner. Why is Shell aiming for this?
First of all, as a society, we need to keep global warming below two degrees Celsius, and ideally below 1.5 degrees Celsius. That means society needs a net-zero emissions energy system.
In that context, a company like Shell has a choice. It can choose to produce oil and gas with the lowest possible emissions. Or it can say: “If society wants to get to net-zero emissions and we really want to be an integral part of that society, then we need to get to net zero as well.”
We, Shell, have decided to go on the second, bigger, mission. It is consistent with our strategy and it fits better with us, as the company and people we are, and with the vision we have for where we want to be.
Of course, tackling climate change is mainly about the use of energy. Currently, about 85% of our carbon footprint comes from our customers’ emissions when they use our products. That is where the real challenge is. So, we have to have a role in helping our customers decarbonise: a mission of working with society to help it get to net zero. Because it is not good enough to just wait and see what society does. No. To help, we have to shape that journey. I believe that is what our customers, and society in general, have been telling us over the last few years.
That mission does mean dramatic change for Shell – and that includes changes to our business plans over time. We have to be net zero in all our operations, which means major changes at refineries, chemicals sites, on-shore and offshore production facilities. But it also means that we have to change the type of products that we sell. You cannot do that by just having different products which still produce emissions. We will have some oil and gas in the mix of energy we sell by 2050, but it will be predominantly low-carbon electricity, low-carbon biofuels, it will be hydrogen and it will be all sorts of other solutions too.
And if, as we approach 2050, we still have customers for carbon-based energy, we are going to make sure that the emissions from these users are somehow addressed. That could be by using the technology of carbon capture, utilisation and storage – often called CCUS – on behalf of our customers. It could also be by offsetting those emissions through nature, or dealing with them in another way. That is what we mean to do and, as you can imagine, that is going to be a massive change for our company.
Can Shell actually do it?
Yes. But it will be a challenge. And it does mean that we have to work much harder with others to make that change happen: developing new types of biofuels and making them commercially viable, for example, or developing hydrogen for heavy-duty road transport in areas where nothing exists yet, not even the business model. We have to invent it, we have to build it, we have to make it happen. In some cases we will have to bring the customers with us as we develop the products, so we can actually sell the products to them.
It is a big mission, and we already have many of the relevant skills to complete it. Many people, of course, think of us as a company that is good at finding oil and gas and bringing it to the surface. But that is just one part of what we do.
We have many more people working with markets, with customers, trading around the world, seizing opportunities, developing new products, innovating together with other people on supply issues, and much more too.
And if you think, as I do, that the energy system of the future will be more democratised, with the customer pulling products through, that also helps Shell. It will be the companies with strong brands, strong global reaches – companies capable of producing a single net-zero industrial solution that works for a customer in Alabama, in India and in Japan – that have the reach and the financial muscle to make things really happen.
Where does Shell start?
We are already active in many of the areas we need to be.
For many years we have been one of the largest power traders in the largest power market in the world: the USA. We also trade power in Europe and increasingly in markets like Australia, Brazil and China.
In biofuels, we are in a venture that is one of the world’s largest sugarcane ethanol producers. In offshore wind, we have been part of winning bids to build projects. We have made inroads as a developer of solar power. And when it comes to hydrogen, it is still a very small market but we are absolutely the leader when it comes to hydrogen for transport and are active in other areas too. We are, for example, installing the world’s largest hydrogen electrolyser in Germany.
It is not enough though: it all needs to accelerate. Across our businesses, our low-carbon investments will increase significantly over time. In a company as big as Shell, even a strong rate of growth can be hard to notice, but we are accelerating.
Shell plans to undergo a major restructuring process. How will this help the company succeed?
By having a company that is fully consistent with the new strategy we are preparing to share with our investors.
In practical terms that means our traditional business will be more focused. That means Upstream – the part of Shell that deals with exploring for and producing oil and gas – will be run to ensure a strong flow of cash to Shell. We will continue to invest, but it will not be about how many barrels of oil, or cubic feet of gas, Upstream produces, but how much it adds to the bottom line. The projects we invest in will be highly valuable. Upstream will be critical to Shell as we change – we need it to be very successful, so we have the financial strength to invest further in our lower-carbon products.
Refining is another business that we will refocus. It will be smaller but smarter. We will keep only what is strategically essential to us and integrate those refineries with our chemicals business, which we plan to grow. We will keep sites in key locations which have the flexibility to adapt. It is also worth noting that, if we want to be a large player in biofuels, a lot of the biofuel capability will be built within our refining infrastructure. We will end up with fewer than 10 refineries, compared to 55 around 15 years ago, but they will be set up to serve the changing needs of society.
Integrated Gas will have a bigger focus on unlocking markets and focusing on the customers’ specific needs. We plan to grow the Integrated Gas business as the market grows.
Away from the traditional businesses, I talked earlier about the need to work with others and, in some cases, to create new business models, new markets, new customers for the low-carbon products we want to sell. So the new, reshaped Shell will be set up to do that, with a strong focus on helping customers decarbonise and organised around the sectors in which we have customers, like aviation, like shipping, like heavy-duty road transport.
“We have to change the type of products that we sell”Ben van Beurden
I think it is fair to say that we already have one of the strongest customer-facing businesses in the industry, and we definitely have the strongest brand and the largest and most successful retail network. But we must evolve those strengths into a much more targeted way of serving the sectors of the future. We want to be able to say: “You want to decarbonise, and this is the way you can do it, and this is what we can do for you.” On aviation, for example, how are we going to make biofuels a reality for them? Because they cost too much today. Our aviation business will be set up to work with the players in and around that sector to find those answers and deliver those products.
Finally, we simply have to be better at making decarbonisation a reality in society and that means having a loud, clear voice. If we want to make hydrogen happen, for example, it is not going to be by just building the infrastructure and seeing what happens next. It is going to be by working with decision makers and policy makers so we can find ways forward: what legislation and standards need to be put in place, what bottlenecks need to be cleared. We cannot just be quiet. If we stay quiet we risk ending up saying: “Well, I am sorry, it didn’t happen because we failed to speak up.” We have to be proactive and help things happen.
Will the restructuring mean job cuts?
Yes, it will, and make no mistake: this is an extremely tough process. It is very painful to know that you will end up saying goodbye to quite a few good people. I know I, and many others in Shell, will be saying goodbye to people we know well and really like and who have great loyalty to the company. But we are doing this because we have to, because it is the right thing to do for the future of the company.
We have to be a simpler, more streamlined, more competitive organisation that is more nimble and able to respond to customers.
To be more nimble, we have to remove a certain amount of organisational complexity. In addition, we have to make sure we are making the best of the core capabilities we need to succeed. So, if we really want to be the best asset operators in the world, how are we going to organise the technical support for that? At the moment our staff are dispersed through the company’s organisational structure, so we will bring them all into one place. That same is true for the whole deal-making capability, or the way we make our voice heard: we will bring our people with those skills together in one structure.
Now, if you work your way through all of this, you do come across many opportunities to just do things more simply, and that brings cost savings too. Reducing cost is essential. We have to be competitive.
We have looked closely at how we are organised and we feel that, in many places, we have too many layers in the company: too many levels between me, as the CEO, and the operators and technicians at our locations. We have also found that there are many people in the middle of our organisation who have a relatively small number of people reporting to them. In some cases there are good reasons for that, but as a principle we are looking to remove that complexity, and cost, so we can be the nimble, efficient and customer-focused company we need to be.
We are looking at other costs too, of course, like travel and the use of contractors. And we are looking at other opportunities, like virtual working. COVID-19 has shown we can work very effectively in ways we did not think we were ready for yet. But a large part of the cost saving for Shell will come from having fewer people.
We do not have an exact figure because the details are still being worked out, and we have never had a target to reduce a particular number of jobs. But we can say that, because of the efficiencies we expect to gain, we will reduce between 7,000 and 9,000 jobs by the end of 2022. This includes around 1,500 people who have already agreed to take voluntary redundancy this year, but excludes any who may leave Shell because of divestments. Along with the other measures we will take, we should achieve a sustainable annual cost saving of between $2-2.5 billion.
None of this changes our values as a company, and we will do what we have to do with honesty, integrity and respect for people. We will be as fast as we can and we will show care for all those who lose their roles or who are negatively affected. But I also believe that, once the reorganisation is complete, many more people will be positively affected: working in a quicker, more customer-focused organisation and enabled to take the decisions that really make a difference.
How would you characterise this reorganisation?
Well, we have not started with a blank sheet of paper. We did not start all over again, simply because that was not needed. It is an evolution, an evolution that affects tens of thousands of people in one way or another.
To put it another way, we have been on this road to a lower-carbon future for some time. We have come a long way in this direction, and now we have set ourselves the aim of being a net-zero emissions energy business by 2050. If we want to get there, if we want to succeed as an integral part of a society heading towards net-zero emissions, now is the time to accelerate. That is what we are doing.