Zaharuddin Megat, Managing Director Shell Exploration and Production International, Manama, Bahrain, spoke on May 22, 2000 on the prospects of partnerships between GCC and Shell. The following are excerpts from his lecture.
Keeping up with the pace of change in the new millennium will be one of the biggest challenges for industry and government alike in the GCC countries. Globalization, technology and deregulation are creating some challenges – but also powerful opportunities to meet energy demand effectively and sustainably through new approaches to partnership between energy multinationals and the GCC countries.
Many people see change as challenges. But in the industry, we know that it also presents opportunities. As we stand at the door of the new millennium, here in the Gulf Cooperation Council (GCC) countries, the opportunities are abundant. From Shell’s perspective of sustainable development, that we are particularly excited by the combined opportunities for wealth creation, social development, and environmental improvement.
NEW MILLENNIUM, NEW WORLD
What trends taking place in the oil industry. In the last 30 or so years, the price of oil has varied quite dramatically. But there has been a definite trend downward in the marginal cost of non-Opec oil. This puts downward pressure on oil prices in general.
Opec’s share of the world market has fluctuated in the past. Over the next decade, it is expected that Opec will supply perhaps half the world’s incremental oil demand. Middle East Opec producers play a pivotal role in this. The world today consumes 13 times as much energy as it did a century ago. But the chances of that continuing for another hundred years are slim.
For one thing, the world’s population is not growing at anything like the same rate. Between 1900 and 2000, the number of people on the planet rose by a factor of three and a half. By the end of this century, the UN projects a global population of about 10. Patterns of energy consumption are changing too. Since 1970, energy demand has grown by only 1 percent a year in most developed countries. In these countries, energy consumption may even start to fall, as service industries take over from manufacturing, and efficiency improves.
Over the next couple of decades, the major increase in energy use will be in developing countries. So it is expected that overall energy demand will continue growing. Thus, Shell, identified two possible scenarios for the future. New Game scenario, existing institutions and organizations have adapted to globalization and liberalization.
In the other scenario, People Power, individuals flourish in a world of diversity. Authoritarianism and conformity are out. The world of People Power is volatile and exciting, but many institutions and organizations seem outdated, ineffective and incapable of necessary change.
In developing countries, expanding transportation should spur oil demand. But gas consumption will grow much faster – doubling by 2020 – because gas-fired power is more efficient, lower cost and cleaner. Vehicle efficiency, in particular, is being driven from several angles. Governments demand it. Technology is advancing to allow it. And, perhaps most of all, vehicle manufacturers and fuel providers see efficiency as an extremely strong competitive weapon. Sales of gasoline-electric hybrid vehicles, such as the Toyota Prius are going well in Japan.
The American government-industry partnership will have its first high-efficiency vehicles on the market in two years.
ENERGY AND GCC COUNTRIES
Why so much pressure for efficiency? Because the consumer society has woken up to its power – the power to influence government and industry. Society has become more specific, and more confident, in its expectations of the energy industry and every other industry. It will become even more so in the future. Oil industry, and government, must respond to those expectations or we will lose the respect of the individuals who make up society – and hence their support, whether commercial or political.
At the same time, GCC nations have a difficult balancing act to do, to manage oil demand, and oil prices, on a global context. In Western Europe and North America, demand growth for Middle Eastern crude oil is slowing. Supply is more diverse, so security of supply is less of a worry for these regions.
Meanwhile, in the Asia Pacific region, where the Middle East is the unchallenged supplier of incremental crude, demand is growing – but so are concerns about such a strong dependence. So, we expect increasing competition in the Atlantic Basin to be the key determinant of price over the next few years. In some years, oil prices may be low and in some years higher, but hovering around the mid-teens in dollars per barrel.
Where does this leave GCC aspirations of development? In a low-oil-price world, the capital-intensive activities of the oil industry are harder to find funding for – more so, if revenues generated by the industry are also needed to sustain or grow other desirable sectors for the New Economy. It is expensive to stay on the crest of the technology wave – to build producing capacity, while maximising efficiency and minimising costs – and that expense is daunting when other claims on revenue exist.
So efficient exploitation of hydrocarbon reserves assumes paramount importance. Multinationals have had to live efficiency to survive, to create value for shareholders and for the societies they are part of. So partnership becomes the viable option – partnership with multinationals, who have invested, and continue to invest heavily, in capital assets, technology and people, and for efficiencies to be assimilated into new economies.
Clearly, the speed of change and the new imperatives of the oil industry call for new rules of partnership. GCC countries have been far-sighted in the structural changes they have already made to accommodate this. Ongoing market liberalization will further enhance the depth of engagement – and its results.
But future progress depends critically on continuity – continuity of fiscal and legal frameworks; continuity of commitment from governments and corporations alike. Experience bears me out – countries that maintain the kind of continuity I am talking about are already better off in terms of exploiting and marketing their hydrocarbon resources. They have also been able to maintain the momentum of social – as well as economic – development.
MULTINATIONALS AS PARTNERS
The energy multinationals are under pressure too – more so, as there are now more of them. Pressure to find low-cost oil. Pressure to gain more and more cost efficiencies, through economies of scale and technology innovations.
Meeting these pressures requires size. But scale does not guarantee economies as of right. So energy multinationals are leading the world in embracing the technologies that will deliver economies.
Technologies
In particular, the technologies of the new economy: e-procurement, e-learning and development, e-services. Overall, e-commerce offers exciting new opportunities to build relationships and reduce costs.
The other technology advances current in the industry today – for example, smart wells, expandable tubulars, time-lapse seismic imaging – these advances are outstanding in their sophistication, and their impact on speed, costs and volumes.
Energy multinationals have the size, experience and technology to make a major contribution to value creation. They can provide capital, technology, and other resources. Those of us who operate across an integrated value chain, including associated gas, liquefied natural gas, gas to liquids and other energy sources as well as oil, are best placed to help in meeting energy demand.
Local Contribution
How we contribute to the societies where we operate? One of the most effective ways is to employ as many local staff as possible. 90,000 of Shell’s 100,000 employees are local staff. But our philosophy of fully leveraging the diversity of 78 nationalities of our staff, placing them in over 108 countries which best use their skills and ingenuity, means developing a tremendous learning culture across the Group – while at the same time ensuring that we are assimilated into local cultures and conditions.
Employing local people, and sharing expertise from other environments, we can transfer knowledge, experience and technology to the countries where we operate. And we can go further – several national oil companies have seconded staff to a Shell company, to receive training, a chance to apply it, and the opportunity to share knowledge, experience and expertise with Shell colleagues.
We also think it’s important to work with local contractors. That means buying goods and services locally. In 55 of the countries where Shell operates, 75 percent of the money spent on goods and services in spent inside the host country. To increase that proportion, we are helping local suppliers and contractors to reach Shell’s required standards – and so become competitive with international suppliers.
Contribution to the community - for instance, shell has a scheme called Live Wire. This programme operates in Oman, South Africa, Chile, Australia, Hungary, the Netherlands and the UK. Live Wire is aimed at young people, to give them advice and support to start and run their own businesses. This is just one way that can help stimulate the local economy, as well as contributing to hospitals, schools and environmental protection programmes.
When we seek to do all these things in partnership with any country – let alone the major resource holders of the world – we must do so in a spirit of shared interest. Respecting local sensitivities and sovereignty. And, of course, enhancing operational results for everyone’s benefit.
STRATEGIC THRUSTS
Shell has two main strategic thrusts: developing long, strong relationships with major resource holders such as GCC; and enhancing our ability to access new resources.
Oil industry is a long-term one. In this industry, we talk in terms of decades, rather than months or years. That’s why long-term commitment, by all the partners involved, is essential. For our part, in industry, that means focusing relentless on costs, better technology, improved learning, and more effective dissemination of that learning.
Take Oman’s Yibal field, for example. Here, advances in well technology mean wells are now cheaper than during primary development. Petroleum Development Oman calculates a technology payback of $1 billion in reduced costs – plus additional production, and substantial additional reserves.
Shell companies have been active all over the Middle East for many years. Most recently, we reached an important step in Iran when we secured the agreement to redevelop the offshore Soroosh and Nowrooz fields.
That agreement meant we had been successful in demonstrating our very real commitment to the region. We had also shown sensitivity to the needs and challenges of our partners. And, at the end of the day, we had shown we are capable of delivering value.
One of the reasons we can deliver value is because we operate more oil and gas production than any other private enterprise. This experience gives us the expertise to select the appropriate technology, at the appropriate time, to maximise operational results.
In the GCC, as elsewhere in the world, we seek to do this within the framework of sustainable development – integrating the creation of economic wealth with environmental improvement and social equity.
DRIVING FORWARD IN ALIGNMENT
As participants in this GCC conference, all of us here form a mini-community of our own – a community faced with challenging, but potentially very rewarding, times ahead.
The other success factor in the GCC countries will be making sure the goals of each multinational and government involved are aligned, and stay aligned.
Maintaining alignment has its own learning curve, so being able to draw on prior experience of relationship building in other regions is a definite advantage – while the expertise needed to contain risks and costs is essential.
Globalization, technology, deregulation – they’re all changing the rules of competition in oil. And changing the way partnerships can and should be constructed and operated for maximum mutual benefit.
Both GCC and oil multinationals have a lot to offer each other, and a lot to gain from each other. We need each other. And together we are an effective force to meet the challenges of evolving energy systems, to meet new needs, offer new choices, and provide new solutions.
AlBawaba--MEBG.
