On June 13 Jeroen van der Veer, Managing Director of Royal Dutch Petroleum Company and Group Managing Director of the Royal Dutch/Shell Group lectured at World Petroleum Congress, Calgary, Canada, and expressed his opinions on the oil industry’s future. Here are some exerts of his lecture.
Abstract
Business is being transformed by liberalized global markets, the communications revolution and accelerating technological change. Evolving energy systems – and the discontinuities within them – offer new opportunities. Companies that miss them will suffer. Major energy companies have an even more fundamental role in financing petroleum developments. Project financing depends on wide-ranging technical, project management and commercial skills. Projects in sensitive areas demand increasingly stringent social and environmental standards. In fulfilling their duties to shareholders, companies must acknowledge wider responsibilities. Being trusted to meet them will be increasingly important for a company’s reputation in the marketplace. Fulfilling them helps build essential relationships. They are good for business.
Globalization is nothing new – after all the Dutch were helping to develop the global economy 400 years ago.
A. Introduction: The globalization debate
The topic of the moment generating widespread and fierce debate – in business, government, the media, and even the streets. Why does it arouse such passions? There is surely more to it than just the ‘liberalized international market economy’ – although the impact of that will be much greater than many imagine.
Some see a world increasingly controlled by big business – diminishing the role of national governments and the value of democratic choice. They blame globalization for growing inequality and exclusion. They fear the consequences of scientific and technological progress.
From the perspective of hard-pressed business managers increasing corporate control seems illusory in face of shifting, widening, accelerating and intensifying competition; increasingly volatile and changeful business conditions; and growing public and regulatory pressures.
We believe that economic growth – and engagement in the global economy – is the primary force for alleviating poverty. And that the conditions which promote development – such as the rule of law and fiscal discipline – benefit all. We are optimistic about the power of science and technology – driven by the energy and responsiveness of competitive enterprise – to provide better choices and new solutions.
I believe that the oil industry has a remarkable record. Not just in the returns we have generated for our shareholders. But also in the contribution we have made to society by:
supplying the convenient, safe and economic energy people depend on, creating wealth through employment, taxes and profits, innovating and investing for the future.
We are responding to the needs of a new century. But it is not enough just to assert this. We have to demonstrate it. We have to regain people’s trust.
B. Changing energy futures
Petroleum developments – and their financing – are affected by profound changes in energy industries, business methods and capital markets.
In industries characterized by large-scale, complex, long-lived and expensive infrastructure, change is bound to be evolutionary. But, within this, there can be significant discontinuities – technical, market, socio-economic and in public attitudes. It may take time for the full impact of such discontinuities to be realized. But businesses that miss them suffer quickly.
Past technical discontinuities included the steam engine, internal combustion and nuclear power.
Combined-cycle gas turbine power generation may be another – providing the efficiency, flexibility, cost-effectiveness, cleanliness and lower carbon emissions people want. Gas is increasingly the fuel of choice for power generation – displacing coal and oil. However, its future depends on our ability to deliver it to market economically.
Potential discontinuities include solar power and hydrogen fuel cells. We are pursuing both possibilities in Shell. But we certainly don’t underestimate the ability of existing technologies to fight back.
Greater energy efficiency is a sort of creeping discontinuity. The impact of new communications on social and working patterns has still to be seen.
Environmental requirements are increasingly important drivers. These include the threat of climate change and – particularly in developing countries – the impact of industrial and transport emissions on public health. The Kyoto Protocol has still to be ratified. But it is already having a profound impact on the way governments and business think. For my part, if the world thinks that carbon dioxide emissions should be reduced, I see that as an opportunity. However - concern for energy supply security is also a factor.
Resource scarcity is unlikely to be a discontinuity in the first quarter of the century – given our ability to recover more from existing resources and to access new ones. The Athabasca Oil Sands Project is an example of accessing new resources. The project was evaluated against possible future carbon costs and low oil prices.
C. Corporate strengths count
Let me turn to the issue of financing. I want to make one simple point. Major energy companies now have a more fundamental role in financing petroleum developments. We expect this to continue. During the 1990s there were suggestions that – as capital markets developed – project financing might be a way of obtaining cheaper finance and diversifying risk. Recent events suggest this was premature.
Unfortunately, petroleum projects – particularly the gas chain projects which are increasingly significant – are long-term and complex. They involve the multiple risks of this industry – geological, technical, market, politics, exchange, price. They are often in difficult places and sensitive environments. We regard investing in such projects as our core business. We are equipped to evaluate them and confident of our ability to realize their value. We have the financial strength to fund our own investments and believe this provides the most competitive projects.
Shell will participate in project financing for several reasons:
Firstly these projects – particularly the gas ones – are very complex. Many projects are touted; few come to fruition.
Secondly, executing such projects – perhaps in deep water, or with difficult reservoirs, using new technology, or involving complex chains – requires wide-ranging technical, project management and commercial skills. These can only come from extensive experience and long-term investment in technology, people and relationships.
Thirdly, major development agencies– such as the World Bank – seek to encourage long term investment in developing countries. In Shell, we are committed to developing long-term relationships – which we believe enable us to utilize our skills and technology to create continuing value for mutual benefit.
To take just one example we have been working to unlock the secret of Oman’s complex geology for 40 years – applying the latest technologies to extend the Sultanate’s oil and gas resources. This has brought continuing success. One recent fruit was the discovery of new gas reserves to support an LNG scheme – which delivered its first cargo this year.
Fourthly, institutional fund providers – and also commercial lenders – require increasingly stringent social and environmental standards for projects in sensitive areas.
D. Responsibility is good business:
I think all businesses do already accept – implicitly or explicitly – that, in fulfilling their duties to their shareholders, they must meet wider responsibilities. Shell business principles recognize five areas of responsibility – to shareholders, customers, employees, those with whom we do business and society as a whole.
We believe fulfilling these responsibilities is a business imperative, for two reasons - firstly being seen
for rather being trusted – to meet them will be increasingly important for a company’s reputation in the
market and its license to grow. The second fulfilling those responsibilities helps build essential
relationships. They are good business in themselves.
Let me focus on just a few examples, starting with employees. Energy companies need the best people and need them to work at their best. Workers want to do worthwhile work – contributing to society – for a company whose values they share. And they want to do stimulating work, where their actions count, their performance and potential is recognized, and their views matter.
Hierarchy doesn’t appeal. I prefer to see Shell as a professional network applying global insights and standards locally.
E . Liberating creativity:
We understand that the future of our business depends on a continuous flow of new processes, new products, new technologies, new businesses. So we have developed a process called ‘Gamechanger’ to encourage and harness the creativity of all Shell people. Of course, commercial innovation is more than just good ideas. It is about implementing those ideas to create new value. Venture capitalists are the midwives of innovation.
People are encouraged and assisted to put forward ideas – at any time – to a panel of their peers. These are accepted or rejected within one week. Money is available to work them up quickly for more searching review by technical and commercial experts. Then a rapid structured process tests business value and technical feasibility.
It is a classic win-win – for our people and for our business. And it helps fuel progress for society.
F . Meeting customers needs:
Commercial success can only come from retaining the trust of existing customers and attracting new ones. Acting responsibly towards them is plain good sense. We all have less and less time. As consumers we are overloaded with information and the multiplicity of choice.
I see customer expectations as a series of overlapping layers.Recently there has been a growing expectation that major energy companies will help provide solutions – to social problems in the countries in which they operate, and to the environmental problems associated with energy use. That doesn’t mean we can give up on quality and convenience.
In the longer term we seek to offer new energy choices. Shell Renewable is working to develop commercial solar, wind, biomass and geothermal energy. Shell Hydrogen is pursuing the possibilities of fuel cells for transport and power generation.
G . Engaging with others:
Defining business responsibilities to society is more difficult. In Shell, we believe the only way forward is to engage with all those who have an interest in our activities – understanding their perspectives, responding to their concerns, trying to meet their expectations, gaining their trust. From our side we must always start from a central truth – that companies contribute nothing if they are not competitive and profitable.
Transparency is essential. Our annual Shell Report , describes what we are doing to meet our commitments. Much of the data is externally verified. We also see the Shell Report as a focus for dialogue. Engagement is at the heart of ensuring the social and environmental standards of petroleum developments – working with governments, local people and experts to maximize benefits to the community and safeguard the environment.
A central thrust is to manage greenhouse gas emissions – halving them by 2010. This will enable the project to produce low-sulfur synthetic crude with 6 percent, fewer emissions than those associated with the imported oil it will displace.
Concluding remarks: Delivering value
The first responsibility defined in our business principles is to shareholders. I have no doubt that fulfilling wider responsibilities is essential for doing this.
It adds value by improving relationships and encouraging innovation. Being trusted to meet people’s expectations pays dividends in the marketplace.
It reduces risks. Being the focus of public criticism is bad for business. So is losing the public debate. Shareholders – and investors in petroleum developments – recognize that high standards are the entry ticket for the game.
And it responds to the aspirations of our shareholders who are members of society and as concerned as anybody else for its future.
I have strayed some way beyond the narrow focus of this session and thank you for your patience. I have done so because I believe regaining public trust is a priority and that recognizing wider responsibilities supports rather than hinders business success.
This industry has a record both of delivering value to shareholders and of contributing to society. We have to demonstrate we can continue doing both in the changing conditions of a new century. In Shell, we are believe we are on track to meet that challenge.
Source:SHELL.
