Jeroen van der Veer talks about 2007 and the by cio18038


									      Straight talk
      on energy’S
      hard choiceS
            In an interview, Shell Chief Executive Jeroen van der Veer looks
            back at 2007 –-- and ahead towards a world in which fossil
            fuels will remain dominant, but where the hunt for renewable
            energy and CO2 solutions continues. He says the transition to
            alternative forms of energy will take longer than some people
            think, in part because present technologies remain too costly for
            consumers and are thus premature for large-scale investment.
            “We are and will remain an ordinary company and so we have
            to meet all the normal business criteria,” he says. “We’re not
            taking part in a popularity contest.”

[]   S hell World	   18 	January 	2008 	   Straight	talk	on	energy’s	hard	choices
	   Straight	talk	on	energy’s	hard	choices		   1 8	J a n u a r y	2 0 0 8 	   Shell World   []
         Q	     Shell has become a veritable moneymaking                             production and investment figures, because you’re
         machine with higher-than-expected quarterly results,                        not comparing like with like. investments in new
         but oil and gas production fell 4% over the first nine                      production from the deep gulf of Mexico or from
         months of 2007. What gives?                                                 unconventional oil in north america are more
                                                                                     expensive than for conventional oil in nigeria, for
         A	     First, i would say that we’re a responsible                          example, but the earnings potential per barrel in
         moneymaking and investment machine. after all, we                           north america is also higher. We have been making
         invest as much as we earn in future energy                                  this clear to the markets.
         production and processing. our investment level in
         2007 was approximately $2 billion a month.                                  Specifically with regard to the gulf of Mexico, last
                                                                                     autumn we secured the most concessions of all the
         Production is a complex story, impacted by specific                         companies submitting bids for acreage there. not
         factors and structural change. the security situation                       because we outbid the other parties, but because we
         in nigeria, for example, is specific and means the                          submitted bids for most of the available blocks and
         volume you can produce is below potential. the                              did so successfully. Why were we so eager? Because
         influence of the weather, such as last year’s very mild                     we wanted to secure much acreage. We are familiar
         winter in europe and north america, is also specific.                       with this area and have the expertise within the
                                                                                     company that can be used to great effect there. We
         Structural factors include the fact that Shell will                         are eager to continue to grow in the gulf of Mexico
         increasingly have oil and gas reserves that are more                        as this neatly matches up with our present strengths.
         difficult to produce. that is why we are investing                          the stable fiscal and political climate also has a role
         more and more for each new barrel. in such a                                to play. that is why we have also considerably
         situation it’s wrong to look only at our current                            expanded our acreage in australia and canada.

                                                                                                               Transporting part of a platform to tap
                                                                                                               oil in deep water in the Gulf of Mexico

[]   S hell World	   18 	January 	2008 	   Straight	talk	on	energy’s	hard	choices
    Q	      Still, production decreases from oil and gas       A	     Well, we always use a much lower oil price
    fields continue and the demand for energy is               when making our investment decisions to see whether
    increasing all the while. So the peak-oil theory would     the projects would still be profitable in that case. you
    appear to be correct.                                      can produce this “difficult oil” profitably at oil prices
                                                               that are considerably lower than $100.
    A	     the peak-oil theory, as first published by king
    hubbert, an american former Shell employee, is             this almost mythical $100 is based on the perception
    correct for easy-to-access oil, at least. But he would     of an imminent capacity shortage. the reality is that
    most certainly not have had the gulf of Mexico on his      there are no hold-ups anywhere in the entire supply
    radar screen, let alone oil sands. a peak-oil theory       chain: tankers do not have to wait for loading,
    could also be set up for oil sands, but we’re still only   refineries do not have to wait for tankers, trucks are
    at the very start of their development. and even more      not held up at the refinery and consumers do not
    unconventional sources have yet to be discovered.          have to wait at the filling station. the physical
                                                               logistics are working well.
    this will require the development of a great deal of
    knowledge and expertise and large-scale investments        i think that demand will respond at the current price,
    in unconventional oil projects. We have said that          albeit with some delay. it will, however, not result in
    around 15% of Shell’s oil production will come from        a drop in demand but in a slower rate of growth.
    unconventional sources in 2015. the oil industry is        there are also a great many psychological factors in
    already particularly capital intensive, but this will      the current price.
    only increase – it will become an enormous
    investment industry. What proof do i have? the world       Q	     Shell would appear to be less enthusiastic now
    will be using more energy in 2015 than today and           than in the past about setting up large production
    more is being invested for every new barrel.               joint ventures with other private oil companies.
    this trend will certainly not be broken in 2015.
    a growing global population and growing prosperity         A	     in the history of the oil industry it has been
    are additional “inconvenient truths”.                      commonplace to set up sometimes very complex joint
                                                               ventures. this often stemmed from a desire to spread
    Q	    So does that mean things have only just begun        the risks. But now we have reached an era in which it
    with $100 oil?                                             is becoming increasingly important to distinguish

                                             We	have	reached	an	era	
                                             in	Which	it	is	becoming	
                                             increasingly	important	
                                             to	distinguish	yourself	
                                             from	the	rest	by	
                                             offering	advanced	
	                                                                Straight	talk	on	energy’s	hard	choices		   1 8	J a n u a r y	2 0 0 8 	   Shell World   []
                                                                                     it	is	impossible	to	
                                                                                     rapidly	replace	oil,	
                                                                                     gas	and	coal	With	
                                                                                     another	resource	
                                                                                     because	the	
                                                                                     development	of	
                                                                                     solar,	Wind	and	
                                                                                     biomass	is	still	at	
                                                                                     an	early	stage.

             yourself from the rest by offering advanced                               often national oil companies are quite capable of
             technology. it is also becoming more important to                         producing easy oil themselves. look at russia, for
             take our own lead in projects. our Pearl gas to                           example. We’re concentrating on things others are
             liquids project in Qatar is one example. Pearl gtl is                     incapable of doing when it comes to technology,
             Shell without other oil companies, despite the                            project management, devising commercial
             massive investment. twenty years ago, we would                            constructions and operational excellence, including
             have diluted our shareholding by working with other                       safety and environmental policies. this is what
             partners, but now we consider it more important to                        governments are inviting us to do and this is how we
             set up Pearl entirely in line with our own standards of                   derive our income. that’s the new rationale behind
             management, technology and finance.                                       our existence.

             in some cases you carry out the project together with                     the only danger would be that oil and gas prices
             a state-owned company. But that’s a completely                            would drop considerably for a prolonged period,
             different situation from one in which you form a big                      and that we would have deployed technology that
             consortium of various international oil companies.                        was too expensive. But we have no worries in that
                                                                                       regard at the present time.
             Q	       Financial analysts say Shell is investing so
             much, particularly in very expensive projects, that                       Q	     analysts also criticise Shell for being relatively
             this is leading to a higher average capital intensity in                  slow in converting new resources into proven
             future production. are they correct?                                      reserves.

             A	    yes, but that’s precisely what we’re banking                        A	     i think that things are moving rapidly at the
             on. We believe we have the technology available or                        present time. We have been the top upstream
             under development to carry out those future projects.                     investor for several years. But i also observe that

[]   S hell World	   18 	January 	2008 	   Straight	talk	on	energy’s	hard	choices
                                                                                                                 Mining oil sands in Canada

    there are several factors that extend the time needed    Q	   is that a message understood by politicians
    to get large new projects off the ground. and the        and ngos?
    further we move in the direction of unconventional oil
    the more time-consuming and expensive this will          A	      Perhaps not right now. But what people must
    become. drilling more wells in familiar oil or gas       realise is that increasing demand for energy can only
    structures is a relatively rapid means of adding         be met today by using more fossil fuels. that does not
    proven reserves, but if you first have to acquire        correspond naturally with decreasing co2 emissions.
    acreage deep beneath the gulf of Mexico or on the        it is impossible to rapidly replace oil, gas and coal
    edge of alaska, six to seven years can easily lapse      with another resource because the development of
    before the first oil is produced from those areas.       solar, wind and biomass is still at an early stage. it is
                                                             similarly impossible to have a large number of new
    Q	   Shell’s increased activities relating to            nuclear power plants operational in the short term.
    unconventional oil results in higher co2 emissions.      nor is it possible to rapidly reduce the demand for
    What does this mean for Shell’s emissions policy?        energy without this resulting in a drop in prosperity.
                                                             developing countries would have serious objections,
    A	     governments ultimately determine which oil        as would the citizens of developed countries, if they
    concessions are to be opened up, also where this         were suddenly no longer allowed to use their cars.
    includes heavy oil or oil sands. the production and
    processing of these “unconventionals” emit more          reducing co2 emissions is only feasible in the
    co2 than in the case of easy oil or a conventional       medium term if it is captured and stored on a large
    gas field. But it is pointless comparing the co2         scale. however, large-scale storage has not been
    emissions of an oil sands project in canada, for         implemented anywhere and a considerable number
    example, with that of the groningen gas field in the     of technological, legal and economic issues will have
    netherlands and subsequently designating the latter      to be resolved before it is.
    as the world standard. there is also little point in
    comparing this with coal, which generates more co2       Q	     experts warn that co2 storage cannot be
    emissions. What counts is that Shell is committed to     introduced so quickly on such a grand scale as the
    giving much consideration to how to set up               public and politicians think. do you agree?
    production and processing for unconventional oil
    and gas so that we maximise performance where our        A	     i see two phases. in the first, new power
    co2 emissions are concerned. this may include co2        stations will be made “capture ready”, i.e. their
    storage in the longer term. our objective is for our     design will take account of subsequent facilities for
    performance in managing co2 emissions to always          capturing and compressing co2 from exhaust gases.
    be in the top quartile in the industry for such          Using Shell’s coal gasification system would clearly
    operations. this prevents us from comparing apples       be beneficial, as it produces virtually pure co2.
    and oranges.                                             Using today’s technology, the capture, compression

	                                                              Straight	talk	on	energy’s	hard	choices		   1 8	J a n u a r y	2 0 0 8 	   Shell World   []
         the	date	set	by	the	european	
         union	for	its	climate	and	
         energy	obJectives	is	2020.	
         this	does	not	leave	a	great	
         deal	of	time	to	realise	such	
         ambitious	goals.	

         and storage of co2 at traditional coal-fired power                          have made in recent years, which is not easy to
         stations is expensive and energy-intensive, which                           copy. consider also the large numbers of people we
         means more co2 emissions.                                                   have been recruiting and the standard working
                                                                                     methods we are implementing everywhere. our task
         the second phase dawns when technological                                   is to rise to the top and then remain a step ahead of
         breakthroughs are achieved and all the legal issues,                        the rest.
         such as liability, have been resolved.
                                                                                     i’m proud that we understood relatively early the
         the date set by the european Union for its climate                          importance of having a strong technology and
         and energy objectives is 2020. this does not leave a                        project-management agenda and immediately set to
         great deal of time to realise such ambitious goals.                         work to realise it. i can recall enough examples from
         however, the eU budgets do not take account of                              the past in which we were aware of the
         carbon capture and storage (ccS) and there is still                         developments in time, for example by means of our
         no willingness to accommodate ccS within the                                scenario techniques, but did not follow them up
         european emission trading Scheme, as a result of                            adequately.
         which parties would receive negotiable emission
         certificates if they store co2. Moreover, it is very                        Q	      Shell’s strategy is “More Upstream, Profitable
         difficult to leave the individual member states to                          downstream”, i.e. growth in the exploration and
         implement and execute this policy, as they are all                          production of oil and gas and only growth in
         wary of losing their respective competitive positions.                      transport, refining, marketing and chemicals where
         this is why i believe Brussels should assume greater                        this is sufficiently profitable. But the highest profit
         responsibility for co-ordinating and executing the                          growth of the past two years was actually seen in
         climate and energy policy in the eU.                                        downstream. Will the strategy change?

         Q	     Shell is investing heavily in technology to                          A	     no. it’s great that we’ve been so successful in
         distinguish itself from other companies, but aren’t                         this sector, but downstream is and will always be
         others developing at exactly the same pace?                                 cyclical, much more so than exploration and
                                                                                     production. Upstream also offers us more scope to
         A	      i have a good feeling about the headway we                          distinguish ourselves in the field of technology. So it

[]   S hell World	   18 	January 	2008 	   Straight	talk	on	energy’s	hard	choices
    will remain “More Upstream, Profitable down-             essential: if you fail to invest in this, you will either
    stream”. you also observe that both segments are         have to continue flaring off associated gas, or you
    converging in our new projects: gas-to-liquids is        will have to shut down oil production. neither is
    downstream plus upstream, which is also the case for     acceptable.
    oil sands and sour gas.
                                                             Q	      a year ago, the future of the russian Sakhalin
    Q	    What progress has there been in nigeria over       ii project was the talk of the day. how do you look
    the past year?                                           back on that 12 months later?

    A	     our people on the ground are seeing some          A	     this is a project that now has a new ownership
    improvement, but we must admit, it’s often a case of     configuration with majority stakeholder gazprom
    two small steps forward and one step back. this has      and with Shell holding 27.5%, but also with
    unfortunately not resulted in a return to our old        responsibility for providing the technology. the
    production volumes. nigeria is very rich in oil and      project has made great progress over the past 12
    gas, onshore and offshore. if you look at the long       months, also with regard to the relations with the
    term, i.e. over decades, these reserves will indeed be   russian government. We are also collaborating well
    produced. We can and want to participate in this,        with our russian partners. i’m convinced that
    but only if our people can work safely there.            Sakhalin ii will be a showcase project on a global
    Q	    So Shell will continue to invest in nigeria?
                                                             Q	    So no hard feelings about how the ownership
    A	     yes, but as i said, provided our personnel can    reconfiguration came about?
    work there safely. incidentally, continued investment
    is a necessity. nigerian oilfields experience a          A	    if this is something that bothers you, you
    substantial natural fall in production, so production    should not participate in international business.
    would rapidly decline if investment were                 What we have learned from this is that you can only
    discontinued. We are also investing large amounts in     work with large russian partners in russia. We are
    nigeria lng (which produces liquefied natural gas)       now a partner of gazprom in Sakhalin and have
    and the associated gas-gathering system. the latter is   entered into a strategic alliance with rosneft. there is

	                                                               Straight	talk	on	energy’s	hard	choices		   1 8	J a n u a r y	2 0 0 8 	   Shell World   []
                      a direct, demonstrable logic in russia for doing               Q	   When will Shell choose the large-scale
                      business with russian partners. this also involves             renewable energy business it intends to develop?
                      direct political involvement. But that is no different
                      from the netherlands, for example, where the state             A	      People in europe in particular tend to think the
                      had always been a partner in our gas production                transition to renewables will take place much sooner
                      enterprise. We have always felt comfortable in that            than our own analyses would suggest. this will be a
                      situation.                                                     dynamic process that will develop slowly. We have
                                                                                     already dismissed several options. our search will
                      Q	    So what does the future hold for Sakhalin ii?            continue in three directions: second-generation
                      Wasn’t it agreed that the project would develop into           biofuels, large-scale wind farms and second-
                      a major gas hub on russia’s eastern seaboard?                  generation solar cells. and also hydrogen in the long
                                                                                     term, although this is not actually a renewable as you
                      A	      i like to look at things realistically. let’s first    have to use a great deal of energy to produce it.
                      finish the project and make sure everything is up and
                      running properly and then start developing the next            if one day a renewable proves to be a true
                      phase. From the very beginning, our vision has been            competitor of oil and gas we would be prepared to
                      to expand the number of lng trains and gazprom                 invest a considerable amount in it. We do not want to
                      has adopted this. So we will need to look at where             be a small player because we would eventually lose
                      the gas feeds for the extra plant are to come from.            out. But large investments are only worthwhile if the
                      But i repeat, this is relevant in a future phase, for          price/performance ratio vis-à-vis the market is sound.
                      which no fixed dates have been set.                            renewables are still too expensive and there is really

         Working on biofuels in Hawaii

[]   S hell World	   18 	January 	2008 	   Straight	talk	on	energy’s	hard	choices
    no point investing in large-scale production of
    something that is too expensive for consumers.

    We are and will remain an ordinary company and so
    we have to meet all the normal business criteria.
    We’re not taking part in a popularity contest.
    Moreover, Shell cannot solve the world’s energy
    problems. however big our company is, we only
    provide a fraction of global energy requirements.

    We do have a role to play here, and it is one we are
    dedicated to filling. We invest in research,
    development and the demonstration of new
    technology from which these alternative sources must
    at some point materialise. We are trying hard to find
    alternative energy sources and we have occasionally
    been too fast off the mark compared to our
    competitors. So far our investments in renewables
    have earned us little or no return. But we will
    continue to pursue this.

    *Jeroen van der Veer spoke to Piet de Wit.

    people	in	europe	in	particular	
    tend	to	think	the	transition	
    to	reneWables	Will	take	place	
    much	sooner	than	our	oWn	
    analyses	Would	suggest.
	                                                           Straight	talk	on	energy’s	hard	choices		   1 8	J a n u a r y	2 0 0 8 	   Shell World   [ 0 ]
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