Increased Volatility – part two

Published January 18th, 2001 - 02:00 GMT

Jeroen van der Veer speech: Leadership in A Time of Information technology is helping to impel the market liberalization which is now underway in many parts of the world, including here in Europe.  


In Shell we believe that market liberalization is inevitable. It is being driven by a wide variety of political, technological and social factors.  


Although business becomes more difficult in a liberalized world because it is less predictable, it offers great opportunities for an international company like Shell.  


However, the ultimate driver for liberalization is the customer. We do not see an alternative to the change that is now underway.  


Competition clearly does drive improvements in efficiency and, over time, reduces costs. Interestingly, it also tends to decrease pollution as more efficient technologies are introduced.  


After all we don’t want to waste any of that expensive resource. Financial and ecological concerns can sometimes go hand in hand!  


However, short-term price movements will not always be downward – as we can see in the gas market in the United States today.  


The path to liberalization is not necessarily a smooth one – and it can impose high risks on companies and customers as the example of the Californian energy market shows.  


The power crisis in California is a salutary example. It is clear that the right types of boundary frameworks are needed – good governance – and that the - liberalization process has to be carefully monitored.  


As with the oil price, a lot depends on your mindset. Since we regard liberalized markets as inevitable, we welcome them -. In business, as in the rest of life, there is no sense in looking backwards.  


There has been considerable discussion about the effects of liberalization on energy prices – also here in Germany and in particular with regard to electricity.  


Longer-term energy prices will, I believe, tend to be lower than they would have been in non-liberalized markets. Given increased substitutability between different fuels, prices will probably tend to move in roughly the same way.  


Overall Shell considers it to be beneficial to retain the currently linkage between oil product and gas prices as incorporated in the present long-term take or pay contracts.  


We believe that such an arrangement has worked well and provides incentives for long-term investment - for both consumers and producers.  


Ensuring adequate gas supplies to the European market in the long term is going to require significant investment in infrastructure.  


Over time, if the North Sea is run down, the gas is going to have to come over ever-longer distances – from Algeria and Russia. LNG coming into the market will help – but that also requires considerable investment.  


If governments want to continue to build in a security of supply element – which I think is a fairly reasonable assumption – then that has to be paid for. Like any insurance policy it costs something.  


In the personal computer industry today one company, Dell Computers, operates without any inventory. Michael Dell defines inventory as bad information. That can never be the case with energy.  


The current linkage ensures incentives for the producers - Algeria and Russia – even if world prices rise above European levels – as they are now.  


Gas prices in the fully liberalized US market - due to supply shortfall and cold weather - are three times the price in Europe! Prices can go up – as well as down. The impact, as California demonstrates can be far reaching.  


Going without energy for even a few days does not bear thinking about. Increased competition is a wonderful thing and it will tend to bring prices down.  


But, will it have unintended consequences? How are we going to ensure security of supply? We have had such excellent security of supply in Europe that we now take it for granted. California shows us that is a dangerous assumption.  


It may be that new competitive markets can produce the type of long-term price certainty that power-generating companies need before they invest. But, we need to make sure of it. Liberalized markets are not an absolute. The right framework must be in place.  


Shell is moving rapidly to realize its aspirations in power generation. We call it atoms to electrons.  


Through a joint venture, InterGen, we are investing in a number of markets: in the U.S., the UK, and here in Germany in the near future as well. We are in Egypt, we are in Australia and we have just acquired an operation in Greece.  


The reason for this is that is we are already a part of this value chain and we see it as a logical next step – extending the chain.  


We haven’t made large-scale acquisitions in the generating industry on the continent so far for a very practical reason – the prices are very high.  


Current, per customer acquisition costs are extremely difficult to justify. It is very difficult to see how companies can make money at present prices.  


That said, in general, power generation is an attractive field for Shell. Far too often companies try to leap into areas they know little about, as we know from experience and from some mistakes - It is always tempting. You think the brand would work well in an area - so let’s give it a try.  


We have learned that is essential to have many more points of contact in order to guarantee success. We like areas where we can apply our technology or our commercial experience, AND our brand and our reach and our reputation.  


Power generation is one area. So is renewable – photovoltaic, wind and biomass. A hard business case for renewable is still very difficult to make.  


We are working very hard to make them into real businesses, investing a lot of money. Results are slow in coming, but we remain optimistic.  


As technologies evolve – and fuel cell technology is moving forward very fast at the moment – energy value chains can change dramatically.  


If some form of carbon pricing is generally introduced in coming years, non-carbon fuels will likely be able to carve a niche for themselves.  


Finally, I would like to address one last topic – the question of concentration in the energy industry.  


Are we going to see more merger and acquisition activity? In an industry such as energy, subject to a range of technological, political and market changes, it is almost impossible to predict. For a long time analysts were saying that the integrated majors were dinosaurs – we were doomed.  


Now, all of a sudden, with three super-majors leading the pack, everyone is once more concerned about too much concentration. I think there are complex processes underway which will lead major players to divest many functions even as they acquire others.  


There could be further consolidation at the top level, but it is probably unlikely. However there may be a lot more activity in the middle ranks.  


Shell sees great opportunities in managing our portfolio aggressively – acquiring and divesting as needed and stimulating innovation internally.  


We now operate in about 140 countries and have nearly a hundred thousand staff. There is great talent there and a great pool of experience. Leveraging that effectively is, we believe, the way to build a great 21st Century company.  

Thank you. 

Jeroen van der Veer, Managing Director of Royal Dutch Petroleum Company and Group Managing Director of the Royal Dutch/Shell Group at the 8th Handelsblatt Annual Energy Conference, Berlin, Germany 

© 2001 Mena Report (

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