The Scotsman: INTERVIEW: Two into one will go

The Scotsman: INTERVIEW: Two into one will go

“… the wounds from the reserves debacle are still sore for many investors, although they were made less painful in February when Shell reported the biggest annual profits made by a British company – £9.4bn.”

Sunday 3 July 2005

INTERVIEW

GUY DIXON

[email protected]

IT IS one of the most important weeks in the history of oil and gas giant Shell, but James Smith wants to talk about birds. The chairman of Shell UK is in Edinburgh for a conference organised by the Scottish Chambers of Commerce to coincide with the G8 summit at Gleneagles, and is discussing the London Array – a £1.5bn project to build 270 wind turbines in the Thames Estuary – and the threat it poses to bird species.

“The Red Throated Diver and the Scoter are the two we have to think about,” he says with evident sincerity, before pausing and gazing solemnly around the darkened room at the bemused delegates.

Few appear particularly interested and Smith moves on to speak about nuclear energy as if it is perfectly natural that one of the most controversial issues in the world should follow seamlessly from ornithology.

That Smith has made it to Edinburgh at all is surprising. On Tuesday he was in London for the group’s historic annual general meeting where shareholders voted to merge the two constituent companies, Royal Dutch and Shell Transport & Trading, into a £100bn oil and gas giant to be known henceforth as Royal Dutch Shell.

The scrapping of the archaic dual structure dating back to the formation of the Anglo-Dutch partnership in 1907 is designed to make Shell more competitive and transparent following the group’s annus horribilis last year, when it revealed it had overestimated its proven oil and gas reserves by a quarter.

The merger will create an oil and gas juggernaut headquartered in The Hague but listed on the London Stock Exchange. Its weighting will rise from 3.5% to 9% of the FTSE 100 when the merger goes through later this month and British funds that benchmark their performance on the blue-chip index will buy Shell to keep their portfolios in balance.

But not everyone is pleased with the changes. Around 3,000 British shareholders owning around £192m of shares are facing an estimated £77m capital gains tax bill. Some expressed their anger at the AGM, although a spokesperson for Shell was quick to point out that they were in a “minority”.

Once the meeting was over, Smith jetted up to his native Scotland for the Edinburgh conference where, apart from his ornithological observations, he was due to tackle global energy demand and the thorny issue of corporate governance. But Shell’s historic vote could not be sidestepped, and speaking afterwards in the bar of the Carlton Hotel he takes questions on the reorganisation without shedding much new light. The corporate changes, he says, will improve “efficiency, lines of responsibility and business simplicity”.

“We are delighted with the outcome,” he says. “We are a British company, headquartered in the Netherlands. It creates a single company with a single board and a single chief executive.”

Shell blamed some of last year’s difficulties on poor communication between colleagues in the UK and Holland. But Smith doesn’t agree that 2004 will be a year remembered for all the wrong reasons.

“I think we had a good year last year in terms of business performance,” he says without a hint of irony. In an attempt to draw a line under the matter, he adds that controls have since been put in place to make sure it never happens again.

But the wounds from the reserves debacle are still sore for many investors, although they were made less painful in February when Shell reported the biggest annual profits made by a British company – £9.4bn.

It was a reminder for investors of the resilience of a company that can produce profits like that even when it is in trouble. Smith sums up the new corporate ethos as “more upstream and profitable downstream”.

Group chief executive Jeroen van der Veer plans to increase R&D spending from $553m to around $700m each year as Shell increases production by 31% to five million barrels of oil and gas a day by 2015.

Such bullish words have helped Shell’s shares recover after they plunged below 350p following the reserves bombshell – a fall that resulted in the company briefly being tipped as a potential acquisition target. On Friday, shares closed up 10.25p at 533p, valuing the business at £52.13bn.

The near doubling of the market capitalisation that will follow the merger should cement the group’s status as a hunter rather than hunted once more, but Smith says there are “no specific acquisition plans at the moment”.

The profits have proved controversial enough given the high oil prices at present, but there is the added problem that burning oil and gas contributes to climate change. Smith insists it is “not contradictory” that a company that is indirectly contributing to pollution – and which has been the target of protesters’ anger for its environmental record – should lecture on climate change.

But Shell is walking a fine line between trying to do its bit to protect the environment and meeting what Smith refers to as its “responsibility” in ensuring that demand for energy is met to ensure there are no upsets in global economic growth.

During his speech – which was well received by around 125 delegates – Smith cited research forecasting that global energy demand could double by 2050.

“Energy demand growth will be substantial. Countries are increasingly thinking about security of supply. And we have to avoid harmful environmental impacts, especially from climate change. These challenges can create contradictory pressures.

“With more economic growth coming from developing countries, especially India and China, we are seeing significant growth in demand for energy. This is a key factor underlying the International Energy Agency’s forecast that total global energy demand could increase by 60% by 2030.”

Smith insists that Shell is doing its bit in ensuring that non-renewable energy sources are conserved and that new methods of generating power – using wind, sea, hydrogen, nuclear power, biofuels and pollutant-free oil and gas – are developed.

He later says the UK government is trying to get some sort of consensus with other countries on how to tackle climate change and should be applauded for its efforts. “I would give some acknowledgement to the government that they are trying to muster common goodwill into international effort,” he says.

Smith is on safer ground when speaking about Shell’s activities in the UK. The company employs 2,500 in and around Aberdeen, but fears have been rising for years that the oil majors will reduce their exposure to the declining fields in the North Sea by shifting staff and resources elsewhere. Smith told delegates that the UK continental shelf (UKCS) is in “vigorous middle age” and reeled off statistics like an industry veteran to back up his claim that the region remains at the “heart of Shell’s global strategy”.

He added: “So far, 30 billion barrels of oil equivalent have been produced. It is estimated that there are nearly another 30 billion barrels to be produced over the next few decades.”

Such assurances will help ease concerns in the region as well as allowing Smith to keep track of the diving birds around Aberdeen for some years yet.

CURRICULUM VITAE

Home life: Hailing from near Dornoch, Smith is married with one son.

Hobbies: Golf, skiing, hillwalking and gardening.

Academic background: Has a degree in physics and is a chartered accountant.

Career: Has worked at Shell since 1983. In addition to his responsibilities as UK chairman, he is head of executive resourcing at Shell International – a role that involves ensuring that there is talent in the company to fill the top 200 jobs.

Past experience: He has also worked in communications, health, safety and environment at Shell, and spent much of his earlier career in upstream oil and gas production.

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