Remoulding Shell

WHAT will the car of the future be? It is a simple enough question, but in its answer might lie the future of oil companies.

"Will it be an electric car? A hybrid car? Will it be a fuel cell car that runs on hydrogen?" Ben Van Beurden, chief executive of Royal Dutch Shell, muses. "In all these different outcomes we will have a different role to play."

Oil, the single largest source of primary energy globally, is after all mainly used in planes, ships and cars. It competes directly against renewables in only about 5 per cent of the energy market - where oil is used in power generation - particularly in the Middle East and in the Caribbean.

Falling costs in renewable energy means oil is increasingly less competitive in electricity economies. In transport, too, the shale revolution and rising demand for cleaner, more affordable energy - especially with the looming threat of climate change - mean that the commodity (sometimes called liquid gold) is being knocked off its perch, as natural gas gains favour.

Add geopolitical strife, a constant uncertainty in the energy world, to the equation and it is one heady mix that chiefs of oil and gas companies such as Mr van Beurden face.

Surprise announcement

Until he was picked to lead the Anglo-Dutch behemoth in an announcement that surprised analysts in late-2013, Mr van Beurden was a relative unknown in the industry. The 56-year-old had joined Shell as a chemical engineer; he still remembers the day he reported to work at Shell: Oct 23, 1983.

He had friends whose fathers worked for the company, he tells The Business Times during a visit to Singapore for the F1 Grand Prix, and from visiting their homes, he had been impressed with how "these were people who were really proud of that company".

Furthermore, "in the 1970s, in the Netherlands, if you wanted an international career as an engineer, the best shot at doing all of that would be Shell".

The job has since brought him across various parts of the world, such as Malaysia, the United States (Houston) and Sudan. "It's delivered on everything that I could have hoped for," he says.

Given many different types of work - technical, commercial, corporate - across both the upstream and downstream divisions of the oil giant, it was in the chemicals division that Mr van Beurden would eventually distinguish himself.

Tasked to helm the ailing segment that was strategically important but was one of Shell's worst-performing divisions in 2006, he was thrown the mandate by previous Shell CEO Peter Voser to either shape it up within four years - or else the company would sell it off.

Mr van Beurden set about overhauling the unit. Assets were reconfigured, closed or sold, and managers were made to compete with one another for funds.

The results: Profits more than trebled between 2008 and 2012, making for a shiny addition to his curriculum vitae that would set him on the path towards the top job.

"For every job that I took on, I always had the feeling: 'I hope I can tackle this challenge; it feels so much bigger.' Somehow it all worked out every time," says Mr van Beurden. He adds wryly: "Let's see whether the top job will also be one that I will succeed in."

Another turnaround job

Mr van Beurden has certainly wasted no time in moulding and gearing the company up for a future that holds more uncertainties than ever. Right off the bat, he told investors when he took up the job in January 2014 that he would improve Shell's financial performance and strike the optimal balance between growth and returns.

"When I came into the job, I thought we had many many things going well, after more than a decade focused on excellence and professionalism and very, very strong capability building," he says. "But I felt we needed to have a stronger focus on getting the company oriented towards the bottomline - much more financial performance management and much better discipline and capital allocation, and really delivering our projects exceptionally well."

Shell spends around US$30 billion to US$35 billion on its projects every year, he notes. "If you're not top-notch in the way you execute these, eventually it will start to affect your business badly. So these are the three priorities that I have, and I think we focused on them very well in the first year."

When the oil price plunged, Shell had been very well prepared, he adds. "We always knew that if you have a commodity business like oil and gas, it will go through cycles so you better be strong at any point in time so that you can weather whatever difficulties you have very well." The lower oil price also made a merger with British oil and gas firm BG Group - a company that Shell had looked at "so many times" - possible, allowing him to accelerate Shell's growth strategy and shape it to a different mould. Shell's US$70 billion takeover of BG was unveiled in April this year.

"That is indeed an opportunity that came. You don't necessarily create these opportunities that come. And, of course, you create your own success by being strong so that you can execute on it, by being prepared . . . and when the opportunity came, we were ready to move."

The deal brought to Shell BG's interests in vast oilfields off the coast of Brazil - one of the world's most highly prized oil provinces - helping to cement Shell's position as a global leader in deepwater oil and LNG, two areas that Mr van Beurden says are "incredibly exciting" and have attractive financial profiles.

By combining the two companies, "we will be creating undoubtedly the best company in our industry", he proclaims.

The deal will also allow Shell to simplify and focus on higher grade assets, and make the company more predictable in its growth path, he adds. "Therefore it will be a huge platform for change as well."

"So it's not just making the company financially better, making the company a leader in these businesses, but actually making over the entire company into something that is going to be the foundation for many years to come . . . That will define my agenda and the Shell agenda for quite a few years to come now."

Along with this sculpting work has come many tough decisions.

Shell has had to drop two big projects - an Arctic drilling exploration programme in Alaska and its Carmon Creek project in the oil sands of Western Canada - in recent months. The former, in particular, was highly scrutinised by environmental campaigners.

When it announced the decision at end-September, Shell said that it had not found sufficient amounts of oil and gas to warrant further exploration, and would instead take billions of dollars in writedowns. The decision to end almost a decade of efforts could ultimately cost the group more than US$8 billion, it was reported; it also makes large-scale development of the Arctic, seen as the last big oil and gas frontier, unlikely for years to come.

Given the high profile of the Arctic mission, Mr van Beurden tells BT in this interview - held before the decision to quit the project was announced - that he was aware that whether Shell carries on with it will ultimately be seen as his decision.

"We work in a business that is inherently hazardous. So managing risks and managing them down to what we think is as low as reasonably practical is our daily job. And, of course, you may want to put the bar higher in Alaska.

"But we have the same concern in that respect as many of our critics. It is just that we come to a different conclusion whether this is doable or responsible. It didn't come automatically. It wasn't as if I said - well, this is what we do for a living, so why don't we do it in Alaska?

"You do have to really convince yourself that we have the right measures in place and that we are doing this responsibly, we have the right team on it and we have the right focus, the right philosophy on how to spend and where to spend. And we know that if we don't have that, well it creates risk. For me, that was a personal journey as well."

A sustainable future

The move to put the Arctic oil exploration campaign on the backburner has also helped to burnish Mr van Beurden's image as an advocate for a sustainable energy future.

Since taking over leadership of Shell, he has called on the oil and gas industry to engage more publicly over climate change, to offer "some realism and practicality" in the debate.

While acknowledging that there is a tremendous amount of work going on in renewable energy which has accelerated in the past few years, Mr van Beurden, like many other oil executives, believes that the world will still continue to need fossil fuels for many years to come.

"Sure, if you fast forward a few decades, looking to the second half of the century, I think renewables will be, truly, the majority and the backbone of the energy system. But it will take some time for us to get there.

"Because no matter how hard it grows, it cannot take care of the doubling of the energy system we're going to see in the first half of the century. It is inconceivable technically, economically, logistically and in any other form, that all future energy needs will be taken care of by renewables, and on top of that, that all current energy needs will be partly taken care of by renewables. It's inconceivable," he says matter-of-factly.

"So if you have a more realistic view on how the energy system will evolve, including in the tremendous surge of demand, despite all the efficiency measures the world will take, we are going to need fossil fuel for years to come."

Within the fossil fuel complex, there will be important choices that have to be made, as natural gas, oil, and coal all contain different carbon intensities, he adds. "We are better off, of course, prioritising natural gas over coal. But the only way the world knows how to do that is by giving the right financial stimuli and signals."

Putting a price on carbon emissions will, in his view, accomplish this, as it can incentivise not only more efficient use of energy, but also other solutions such as capturing carbon and storing them.

"Because if we want to get to a net zero CO2 system, carbon capture and storage is going to be an intricate part of the solution - we cannot get out of it."

While the public typically thinks that tackling climate change is merely a matter of using more renewables, it is not as simple as that, he says.

"We need more solar, we need more wind, that's certainly true. But we also need less carbon. As there will always be a carbon element in the mix, we need to also tackle the reduction of carbon intensity.

"It's a little bit like if you are on a diet - you can say you need to eat more salads, you need to eat more healthy food, etc. But it's not just that. You also have to stop taking 10 sugar cubes in your coffee. So you have to do both and quite often that balance is not quite understood (within climate change discussions)."

Shell already has a few carbon capture-and-storage projects in the United Kingdom, Australia and Canada. Companies such as Shell are ready to do more, but can only do so if they make economic sense, says Mr van Beurden, emphasising that a carbon price is very important.

"And I do believe also, in the run-up to Paris (where the UN climate change talks will soon take place), with the increased attention this whole issue gets, there is a higher likelihood that indeed large economies will collaborate in doing something together that makes sense.

"And not everybody has to adopt an emissions trading system to deal with climate change. That maybe is a naive or idealistic view that people have held before, and I don't think it's needed." A tax system could work as well, he believes.

"What is important is that first of all large blocs need to tackle it. And then you have to find a way to make these systems talk to each other. Because, if we all do something different, of course, you get what you call carbon leakage. Then companies will be saying, well, I better get my products made in that country because I have a lower tax burden there than elsewhere.

"So you have to somehow deal with that by either having a border tax or by having a mechanism that will take care of it. That's difficult to design, and . . . that's why industries and governments really need to sit together and say, we want this as well, this is the way to do it, this is how it could work for us, don't do it like that, etc, etc. So I think there is a role to play for industry."

Renewable energy, too, will be an area that Shell intends to invest more in. But that does not necessarily equate to building plants for solar panels, he says.

"(Shell) may not be the most logical company to develop solar panels or wind turbines. But we are good when it comes to trading, when it comes to understanding customers, when it comes to doing transportation of energy, etc. So that's where I think in the future we will make our money in that space."

This could come in the form of understanding how to store renewable energy and conducting trades around it, or combining it with gas to offer a constant stream of energy for customers, he explains. In the longer term, harvesting solar energy from an area such as the Sahara desert and transporting it to Europe in the form of liquefied hydrogen could be a possibility.

Underpinning these possibilities is Mr van Beurden's understanding that the energy system, which since time immemorial has been supplier-driven, is starting to be shaped more by the consumer.

"The consumers will make choices. They're doing it already at the moment. They will choose whether they will have a solar panel. They will choose how to contract for energy with their utility company. Therefore the whole dynamic of the system will shift over time . . . So we will have to focus our business much more on the consumer end of things than perhaps we traditionally have done."

Already, Shell is investing in research and development in future technologies, as well as in hydrogen refuelling stations in Germany and electric cars in Canada. "These are things we do, not just as an experiment, but as a small business. So it's (about) incubating businesses: trying to understand how these markets work, who our customers are, how you make a proposition for customers."

Shell invests "hundreds of millions" each year in these businesses. Though small compared to the billions it spends on oil and gas-related projects, "that's not because of ill will, so to speak", he says, but because the renewable market is still too much in its infancy.

For Mr van Beurden, how the future of the energy world will look like is hard to say - both companies and governments are "very bad" at picking early technology winners, he thinks. It is also why the answer to what the car of the future will be is still an unknown one.

"I'm sure (the renewable energy sector) will change. I'm sure it will evolve in a way that I couldn't quite foresee. But we have to be at the forefront of it."

BEN VAN BEURDEN

CEO, Royal Dutch Shell

1959 Born in Netherlands

1983 Joined Shell after graduating with a Masters in Chemical Engineering from Delft University of Technology, Netherlands

2005 Vice-President of Manufacturing Excellence, based in Houston, USA

2006: Executive Vice-President of Chemicals, based in London, UK

2013: Downstream director with regional responsibility for Europe and Turkey

2014: Appointed CEO of Royal Dutch Shell