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The Herald: Shell’s North Sea troubleshooter

December 01 2007

JOHN Gallagher has had big jobs around the world but cannot have faced a tougher judgment call than the one he made when he and his family found themselves in the path of the hurricane that devastated New Orleans.

As head of the Shell oil group’s operations in the western Gulf of Mexico, the Scot was advised to take his wife and their four children to a local emergency centre in the city when Hurricane Katrina loomed in August 2005.

But, recalling the fateful decision to leave the city in which he had been living for three years just a day before Katrina swept in, Gallagher says he and his colleagues felt more decisive action was needed.

This thing was clearly getting big. On the Saturday morning, it was a category three but when we all woke up on the Sunday morning it was a category five,” he says.

The decision to leave was followed by a temporary refuge in Houston, Texas, for Gallagher’s wife Catherine and the children.

Having returned to New Orleans the day after the storm broke to see what he could do, Gallagher found himself in the middle of what it immediately became clear was an appalling tragedy.

“We were rather fortunate, we had three trees through the house and a lot of damage, but not compared to the massive death and destruction that you saw on the TV here.”

Gallagher remained in New Orleans until 2006 when he returned to Scotland, to become the senior representative of Shell’s upstream exploration and production business in the UK.

He is reluctant to go into details about what he saw, confirming only that the “images that people saw all around the world were clearly there”.

An anecdote conveys something of the enormity of what Katrina did.

After a 100-mile drive from Baton Rouge back to New Orleans during which he did not pass a single car, Gallagher says he was struck by “the deafening noise of wildlife” in a city which had lost the electricity upon which it relied for so much.

But the 47-year-old makes no attempt to hide his pride at the role that Shell played in helping local agencies respond to the calamity.

“People like myself were first and foremost trying to help and that was the order, trying to help the community around us. Shell were one of the first to have mechanics and electricians readily available, were one of the first that had gasoline, we were the only people that had food and temporary electricity at our base.

“Within 48 hours we were trying to get hospitals up and running using temporary power.”

Gallagher’s day job also required him to lead efforts to restart production in an area where nothing could be produced immediately after the storm.

After demonstrating its social credentials in such fashion, Gallagher cannot have been pleased to find one union recently saying Shell should leave the North Sea for the sake of its workers. The comments were made by Unite in early November after the Health & Safety Executive (HSE) upheld some complaints it made about Shell.

As the North Sea remains the biggest part of Shell’s European operations, what happens in the mature province concerns Gallagher, as vice president technical for Europe, very personally.

Last week, a report by the HSE said the industry was not doing enough to safeguard the 30,000 people who work offshore, while a fire on a rig sparked fresh concerns.

Small wonder that when we meet in Aberdeen the day after the blaze on the Lundin-operated Thistle Alpha platform that Gallagher wants to focus on the subject of safety.

Asked what he sees as his main responsibilities and objectives, Edinburgh-born Gallagher has no hesitation: “First and foremost to keep everybody safe, every day. Our obligation to safety is paramount.

“We don’t always get it right and we’ve got huge room to improve but there is tremendous commitment there.”

Regarding last week’s broadside from the HSE, Gallagher sounds a similarly reasonable note.

“We very much welcome the report … (It) was very insightful and it’s got a number of clear recommendations that we wholeheartedly embrace. Shell has recognised the maturing challenges of the North Sea for some time and we are two thirds of the way through a $1.2bn asset integrity upgrade programme which goes to many, many aspects in the report.”

Questioned about why it is taking Shell so long to get up to scratch, Gallagher’s response suggests changing commercial imperatives resulting from the oil price boom have caused problems.

“Product prices in the last five years or so have matured to a level that I don’t think was forecast by anybody in the industry, and what that did to the maturing North Sea is elongated facility and infrastructure and platform life way beyond what we thought just at the turn of the century.”

Gallagher thinks the demand which has been supporting prices is unlikely to fall much, using a simple statistic to make the point.

In the US there are 300 million people and 300 million cars, whereas in China there are 1.3 billion people and between 10 million and 15 million cars. Against that backdrop he is adamant that whatever Unite says, Shell will remain committed to the mature North Sea from which it pumps around 350,000 barrels oil equivalent daily.

He says reports that the recent decisions to sell off a clutch of fields and axe plans for a new headquarters building were the prelude to Shell quitting the province were way wide of the mark.

Noting the fields up for sale only account for 8% of Shell’s North Sea output, he says: “We still have got the other 92% to focus on as ongoing business. We strive and aim to be the leading company in the North Sea.

“People don’t turn their backs on their heartlands and this is very much a heartland for us.”

This year the company will develop four fields. Drilling plans include a costly “top cat” well on a big prospect west of the Shetland Isles.

Gallagher, who got a first in chemical engineering from Edinburgh University and an MBA from Henley, says the asset sale decision was a commercial no-brainer.

“We are spending $25bn annually across the globe and we’ve got more and more choice where we put our investment.”

When smaller fields become unable to compete for incremental investment it may be better for everyone if Shell sells them to someone who will spend.

Having decided on disposals which will affect 400 people, the plans to replace a leased building with a Shell-owned facility did not stack up, says Gallagher, his speech peppered with “y’knows”. Other verbal habits reflect years in the US from which he says his four children returned with Louisiana accents, with a proud father’s chuckle.

While a seat on the Shell main board could be in prospect for someone in his position, Gallagher says his ambitions are centred around his three sons and one daughter, aged seven to 13.

“As a family man my ambitions are around seeing those four wonderful children flourish in every way that they should flourish. That drives Catherine and I hugely.”

Also a proud Scot, Gallagher criticises the government, which has increased tax rates twice in five years, for not doing enough to ensure the long-term future of the North Sea basin, which has brought huge benefits to Scotland.

“Combine the mushrooming of supply chain costs, the physical aspects of basin decline with time, you superimpose on that greater tax through two hikes in SCT; I look at the portfolio of opportunities today and they are every bit as marginal as they were four or five years ago.”

However, Gallagher defends the decision by Shell to shift investment into areas like Russia where governments have rewritten the rules of engagement at huge cost to foreign oil firms.

Shell was effectively forced to sell half of its stake in the giant Sakhalin 2 project in Siberia relatively cheaply.

“We’ve had challenges in Sakhalin but there is enormous materiality in the project.”

The prospect of developing other big projects means Shell will continue to look further afield, drawing on 100 years experience of dealing with political and country risk.

Such confidence may reflect the happy experience of a man whose career success could owe much to a precocious judgment he made in the early 1990s on the team that discovered the bumper Oman deep gas basin.

He said: “I was the engineer that first read the production performance records. The initial results were so good that my technical analysis as a young engineer was doubted by my supervisor, it just appeared on paper to be too good to be true.”

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