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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
technology.
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
scale.
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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