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The Wall Street Journal: Risk-Taking Shell CEO Stays in Race

WSJ image Jeroen van der Veer

Risk-Taking Shell CEO Stays in Race
With Unusual Strategies,
Big Investments in Staff,

Van der Veer Battles Rivals
By CHIP CUMMINS and GUY CHAZAN
March 29, 2007; Page B1

LONDON — When Jeroen van der Veer, a low-key chemicals executive and marathon ice skater, took the top job at Royal Dutch Shell PLC in 2004, industry watchers wondered how long it would be before the Dutchman took a tumble at the scandal-tarred energy titan.

Three years later, he’s not only still in the race, but he’s also starting to outpace BP PLC, his biggest European rival. Since taking over Shell amid a scandal over how it accounted for its energy reserves, Mr. van der Veer has ridden the oil-price boom to higher profit. At the same time, though, high costs and diminished access to fresh reserves have been squeezing Big Oil, so he has pushed a bunch of large-but-risky development projects.
 
In the long oil-patch rivalry between European giants Shell and BP, Mr. van der Veer’s company is back on top. Shell’s shares outperformed BP’s last year, as BP floundered from a series of operational blunders and scandals in the U.S., including a handful of safety probes stemming from a refinery blast and pipeline problems in Alaska. For the first time in years, Shell’s market capitalization is bigger than BP’s, at $215 billion to $209 billion. Among non-state-controlled oil companies, only Exxon Mobil Corp. is larger.

Yesterday, Shell’s board extended Mr. van der Veer’s contract to 2009, a vote of confidence in his performance.

It hasn’t been easy skating. Shortly after taking the helm, Mr. van der Veer abolished Shell’s century-old dual Dutch and British board structure, a move that streamlined decision-making and accountability. The company is still something of a sprawl, based in The Hague, but with its primary stock-market listing in London. Then, late last year, the Russian government grabbed away Shell’s majority stake in a crucial project. And both Shell and BP have underperformed Exxon, disappointing investors recently with reduced short-term-production estimates.

After concentrating power in the company’s first modern chief-executive role, Mr. van der Veer started outspending competitors by pumping cash into a series of gigantic “nonconventional” energy projects. Shell hoped these long-life projects would refresh its tired portfolio of traditional oil-development deals. Shell is diving in deeper than many other companies and expects that 15% of its oil and natural-gas production will be from nonconventional sources by 2015, up from 5% today.

Mr. van der Veer has also had to beef up the company’s research-and-development staff. Like most oil companies, Shell underinvested and shed staff during the low-oil-price days of the 1990s. Mr. van der Veer went on a hiring spree to staff his big projects. In an industry starved for talent, Shell says it hired 4,500 midcareer professionals last year. He has appointed Shell’s first chief technology officer and seven “chief scientists,” as well as an executive to spearhead research into carbon reduction.

“We put technology, technology development and research on the map,” Mr. van der Veer, 59 years old, said in an interview at Shell’s London offices across the River Thames from Westminster Palace. “I think it’s absolutely key to our future.”

Big bets include a $20 billion oil and liquefied-natural-gas project on the island of Sakhalin in Russia’s Far East and an $18 billion gas-field development and natural-gas-to-diesel plant in Qatar.

“In order to grow our business and be strong and be profitable, we have to do things that others can’t do,” Mr. van der Veer said. “Boiled down, when it comes to unconventionals, it is still possible to … make good returns.”

After three years of skepticism, some analysts are buying in. Shell’s nonconventional projects should kick in meaningful production growth after 2010, pushing Shell ahead of BP’s mostly conventional plays in the long term, according to Neil McMahon, a London-based analyst at Sanford C. Bernstein.

Mr. van der Veer also has outflanked BP’s deal-making CEO, John Browne, at the negotiating table. In Libya, Shell signed an agreement in 2004 with the country’s leader, Col. Moammar Gadhafi, to explore for gas and refurbish a crumbling LNG plant there.

Meanwhile, Lord Browne has been mired in talks over BP’s gas ambitions there, and Libyan officials have publicly criticized BP’s tactics. A spokesman for BP said the company isn’t disappointed with its efforts there. “We expected these negotiations to take some time, and they have,” he said.

Recent successes look all the more impressive given the state of Shell when Mr. van der Veer took over. Early in 2004, Shell surprised investors by disclosing it had massively overstated its energy reserves, the measure of oil and gas a company says it has in the ground and a key metric investors use to gauge a company’s growth prospects. Shell’s stock fell sharply after the disclosure, which triggered a series of regulatory probes and a steep fine from the U.S. Securities and Exchange Commission.

In the aftermath, directors ousted Shell’s top executive, Chairman Philip Watts, and installed Mr. van der Veer. A mechanical engineer and economist by training, Mr. van der Veer worked his way up through Shell’s low-profile refining and chemical businesses. International investors weren’t enthused initially by the lanky Dutchman who spoke thickly accented English.

“At first, I thought you need a dynamic leader to get the company going,” says Bernstein’s Mr. McMahon, who has a neutral rating on both Shell and BP. “But given their aim, the long-term rejuvenation of their portfolio, maybe [Mr. van der Veer] is exactly what you need.”

Mr. van der Veer joined Shell in 1971 at the age of 24. In many meetings, he wears shell-emblazoned ties and cuff links. He is a long-distance ice skater, twice completing a famous 200-kilometer race through 11 cities in the Netherlands.

He made his name running a huge Dutch refinery, where he navigated labor problems and executed an expansion. Inside Shell, he is “regarded as a straight talker,” says Mark Moody-Stuart, a former Shell chairman and now chairman of mining giant Anglo American PLC. “Thoughtful, but tough,” Sir Mark says.

Mr. van der Veer’s nonconventional strategy is a gamble. Oil prices appear supported at about $60 a barrel. But a fall to $30 a barrel could shatter the economics of those deals. Shell says it can lock in long-term contracts for much of the output, hedging its bet.

Mr. van der Veer has had setbacks. Costs for Shell’s biggest nonconventional projects have soared. In Nigeria, a big chunk of its huge oil production volume remains shut down by fighting in the Niger Delta. Late last year, Russian President Vladimir Putin extracted control of Shell’s Sakhalin project and brought in state-controlled OAO Gazprom as the majority partner, dimming Shell’s output and reserves prospects.

Mr. van der Veer says not all the details of the new shareholding agreement have been worked out, and he says Shell is fortunate now to have a “very strong Russian partner.” But he limits the positive spin he is putting on the episode. Asked if Shell is happy with its situation, he says only, “It is early days.”

–Bhushan Bahree in Vienna contributed to this article.

Write to Chip Cummins at [email protected] and Guy Chazan at [email protected]

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