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Jeroen van der Veer, chief executive of Shell, answers back

May 22, 2008

Jeroen van der Veer, chief executive of Shell, answers back

Chief executive of Shell, Jeroen van der Veer

(Gill Allen/The Times)

Chief executive of Shell, Jeroen van der Veer

Top industrialist Jeroen van der Veer, chief executive of Shell, agreed to answer Times Online readers’ questions on the outlook for the oil industry and his own corporation, one of Britain’s largest oil companies.

Questions have streamed in from around the world on subjects ranging from Nigeria to wind power. Here, we bring you a selection of the questions we received which represented the themes of many other repsonses.

We apologise for not including everyone, but the box at the end of this article will allow further comment.

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Q: Jacob Koshy, Doha, Qatar:

Oil price is on rise, resulting in inflation in developing countries. Emerging economies like India & China needs energy to fuel growth; OPEC is not considering (at the moment) increasing production to meet rising demand. It means prices are set to rise. As a socially responsible company, what is Shell’s strategy to combat inflation in developing countries and meet rising demand?

A: Jeroen van der Veer:

Thank you for your question. Finding additional affordable energy to keep the world’s economies growing – and doing so in a responsible way — is indeed one of the big challenges of our time.

At Shell we are investing a great deal of time and money to develop new energy resources. In 2007, our net capital spending amounted to about $24 billion and this year it will rise to some $26 billion or $27 billion.

We are searching for new sources of oil and gas because we are convinced that fossil fuels will remain the predominant source of the world’s energy for many decades to come. The number of projects we have under construction has more than doubled since 2004. We have over 50 large projects underway and of course many more smaller ones.

We also continue to work on renewable energy, where we aim to develop at least one substantial business by 2015. Right now we think wind — especially in North America — and biofuels that don’t compete with food show special promise.

All of those efforts address the supply side of the picture. But, of course, oil prices are determined on the world market by the relationship between overall supply and demand.

We at Shell think demand will continue to grow in the years ahead, thanks in large measure to continued strong economic growth in places like China and India. I might add, that is what underpins the recent increase in prices of a whole range of commodities, not just oil.

Q: Colin Wilson, New Zealand:

As we are all paying so much at the pumps, how come the citizens in the third world countries our fuel comes from (such as Iraq, Iran, Nigeria) are not all driving around in solid gold Cadillacs?

Jeroen van der Veer

Let me try and give you some context. We believe that revenues paid to producing governments should be disclosed in the interests of transparency and good governance, wherever possible. We are a leading supporter of the UK Government’s Extractive Industry and Transparency Initiative (EITI) and Shell has been voted onto the board of EITI as one of two oil industry members.

You mentioned Nigeria. We are pleased that the Nigerian Government and others support EITI. Interestingly in Nigeria, a multi-stakeholder committee has been appointed to oversee the practical steps necessary for full disclosure of revenues from both the government and the oil companies (including the state oil company, NNPC).

The democratic government of President Yar’Adua returns a significant proportion of the revenues it receives to the State Governments (31.1 per cent) and to Local Government Areas (15.21 per cent). In addition, 13 per cent of the revenues generated by the oil industry are returned to the States where production took place.

For instance in 2006, the Federal Government allocated some $10 billion to the 36 States in Nigeria. A significant proportion (some $3.6 billion, or nearly 36 per cent) went to the four States in which the Shell Production and Development Company’s operations are mainly located.

Q: Richard Lessels, Cheshire:

I find it staggering that a global company such as Shell cannot put aside some of its profits to support the consumer. After all, what do you do with these profits? Surely they could be used to make a difference at the pump and ultimately show that Shell is an organisation that actually cares. In a market place where the competition all look the same, would it not hurt to be a bit more innovative as opposed to declaring an increase in profits?

Whilst I appreciate oil prices have dramatically increased, an organisation with the history and pedigree of someone like Shell surely saw this coming. By just raising the price at the pump you’ve shown that there’s nothing different between companies like yourself, BP or similar oil giants.

Be a market leader and do something different. Consumers want (even need) value, and in an economic slowdown value is surely represented by decreasing prices. Free loyalty points or other such marketing gimmicks won’t cut it in the long term.

A: Jeroen van der Veer:

Let me try and help explain our position. I recognise that customers are concerned and affected by the price of fuel.

In every country where Shell operates, we strive to provide customers with a consistent supply of competitively priced fuel. In each country, fuel prices are determined by supply and demand and are influenced by such factors as OPEC supply restrictions, federal and local taxes, weather and stock levels.

Obviously an important factor influencing rising fuel prices is the price of crude oil. The world demand for oil remains very strong, coming from mature economies like the US and Europe, plus the developing economies of countries like China and India. Tight supplies have also been aggravated by political instability in some key producing countries.

In terms of pricing at the pumps in the UK, on average 67 per cent of the pump price of petrol and diesel in the UK is made up of excise and VAT. Shell offers on average the cheapest fuel in the UK – compared to our oil major competitors. Fierce competition in the UK makes fuel retailing increasingly a high-volume, low-margin business.

You raise a good point about being a market leader and what we do with our profits. We are in the middle of the largest investment programme in Shell’s history, and the largest in our industry, investing over 26-27 billion US dollars and building over 50 large projects.

To put it simply, we need to invest in order to produce more energy in the future. The world will need vast amounts of extra energy in the coming decades to support economic growth and reduce poverty. By 2050, energy demand could more than double as the world’s population rises and developing countries expand their economies.

At Shell we are focusing on what we do best and I believe are playing our part in delivering energy for the future.

Q: Sivakumaran Vipulananda, Bahrain:

What are your main concerns/priorities about the exploration and refinery businesses in Saudi Arabia, Qatar and the UAE?

A: Jeroen van der Veer:

Qatar is an important focus of activity for us in the region and it will remain a priority. We are working with the Qatari government to develop the country’s large natural gas resources and we have major projects there. I might add as an aside that our work in Qatar is especially significant in an era when environmental concerns are growing, because natural gas is the cleanest-burning fossil fuel.

We are a partner with Qatar Petroleum in Qatargas 4, a joint venture to produce liquefied natural gas (LNG) that can be shipped by boat to markets around the world. The plant that will cool the gas and turn it into a liquid is under construction. LNG from Qatargas 4 is destined for the East Coast of the USA and other markets.

Our other major project in Qatar is the construction of a large facility called Pearl GTL to convert natural gas into a cleaner burning alternative to diesel fuel, as well as other useful products. This is a really ground-breaking initiative because of the proprietary technology we use to convert the natural gas in a process called gas to liquids, or GTL for short. Once the plant is complete, the liquid fuel produced there could help fight local air pollution in congested cities because it produces lower amounts of particulates and other pollutants when burned than traditional diesel.

By the way, GTL Fuel will be one of the components in the tank of Audi race cars shooting for a third consecutive win in the gruelling 24 Hours of Le Mans endurance race in France in mid-June.

Q: Robin Mackrill, London

The recent Brazilian offshore discoveries of Tupi and Carioca are reported to be potentially the largest in 30 years.

What is the probability of further big oil discoveries in the future?

A: Jeroen van der Veer:

We certainly can’t rule out the possibility of further big finds. However, I think the likelihood is declining.

Much of the world’s easy-to-access oil and gas has already been located and is under development. What remains is in harsh frontier environments, such as deep ocean or the Arctic, where it is more difficult and more expensive to extract. Or it is in deposits like oil sands that we tend to lump under the term “unconventional”, which basically means it takes special technology to produce it. There the hurdle is not so much locating resources – in many cases we already know they are there — but rather inventing cost-effective and environmentally responsible ways to extract them.

That’s one reason we are putting increased emphasis on developing unconventionals to meet growing energy demand. We expect around 15 per cent of Shell’s oil production will come from unconventional sources in 2015, up from about 5 per cent now.

Q: Gary Ng, Hong Kong

“More Upstream, Profitable Downstream” has been Shell’s “mission” in the past few years. Being the largest petrochemical project in Nanhai in mainland China, how would Shell tackle the price control of the downstream products in China and what is the strategy of Shell in China’s downstream business in the coming 5 years?

A: Jeroen van der Veer:

There are no price controls in China for petrochemicals products. I believe the price controls you refer to are in gasoline products.

The Chinese government regulates the retail price of fuels in China whereas China has to pay international prices for imported crude, which constitutes nearly half of China’s current consumption. The regulated retail price has not risen as fast as international crude oil prices, and so in recent years Chinese refineries have been making losses.

Shell does not have any refineries in China today, so is not exposed to these losses. Over the next 5 years, we would like to grow our downstream market position in China, including investing in refining capacity to secure product supply. Price regulation will be one of the issues that we will need to consider carefully together with our partners when we make an investment in refining. Shell believes that longer term, a free market is the best way to ensure efficient allocation and use of scarce resources like oil, and that the Chinese government will want to move in this direction.

Q: Jan Sunner, Portsmouth, UK

For decades, science has clearly understood the inevitability of both “peak oil” and climate change. Nothing has been done and both are now here. It is clear who the winners and losers are. To illustrate, EACH American pays about $1,400 per year as a premium for oil being scarce. The cost of a massive transition from petroleum-based power to electrical power, using solar thermal generation, can be estimated to have been less than $1,000 per year (at a premium of about 5c/kWh). Can you see any redeeming features, except profits, in this situation?

A: Jeroen van der Veer:

This is a key area of focus for us. The peak-oil theory, as first published by King Hubbert, who was an American former Shell employee, is correct for easy-to-access oil, at least. In his time, this theory was true for easy to access oil in the USA, but he could most certainly not have envisaged the future development of the Gulf of Mexico or today’s development of oil sands.

It is true that “easy oil and gas” – or conventional oil and gas that are relatively easy to extract – will not be able to match the pace with which demand is growing. The main reasons are the maturing of existing fields in many parts of the world, the scale of the investments required to enhance oil recovery from these fields and to bring new projects on stream, and of course the limited access for the international energy industry in some countries.

I have been warning for sometime about the end of the “easy oil” era, and I think the message is slowly beginning to sink in. And so is the logical consequence: we need all the energy we can get.

What is less obvious to many people is that even if we develop and deploy all the energy we can together – including unconventional oil and natural gas, including alternative energy, including nuclear and including more coal – we will still struggle to match demand. Unless we can curb the consumption of energy through radically more efficient technology.

That brings me to climate change. More energy means more CO2 emissions at a time when climate change already looms as a critical issue. At Shell, I am determined to adopt first-quartile environmental standards and to develop a leading ability in managing CO2. So for example we are focusing our energies on CO2 reduction by increasing the efficiency of our operations, establishing a substantial capability in carbon dioxide capture and storage (CCS), and aggressively developing low-CO2 sources of energy.

We are investing in biofuels from non-food crops that offer significant CO2 benefits and we’re investing in hydrogen and next generation solar power. We are also helping to manage energy demand by offering products and services – like fuel economy formulations for petrol and high-efficiency lubricants – that help millions of customers use less energy and emit less CO2.

Q: Peter Burdett

As the oil majors always receive a negative press for the high price of petrol at the pumps, would Shell ever consider, for transparency reasons, to show the exact cost of sale price at the pumps, the actual price of a litre of petrol, as charged by Shell, plus the Tax burden levied on top, to give the grand total?

I believe in this age of transparency, the government should take the flak instead of the oil majors for the high price and agree with the oil producing nations that the price is not only caused by supply/demand cycles, but by individual government taxes.

I have written to Mayor of London, Mr Boris Johnson, to push for this transparency to be shown across the capitals petrol stations or flashed across his office to highlight the extortionate high tax take at the point of delivery, by this government under the guise of green taxation, your support in this would be most welcome.

A: Jeroen van der Veer:

Fierce competition in the UK makes fuel retailing an increasingly a high-volume, low-margin business in the UK. We offer on average the cheapest fuel in the UK – compared to our oil major competitors.

In terms of transparency, why don’t you have a look at the following link to explore where the money you pay at the pump goes: http://www.petrolprices.com/price-of-petrol.html. As you will see, in the UK pump prices are the result of a combination of many factors, which include: Tax, the crude price, the international market price for refined products (which may or may not mirror movements in crude prices), exchange rate movements and distribution costs.

Where does Shell fit in this picture? There are over 3,500 oil companies in the world, and as one of them, Shell produces only 3 per cent of the world’s crude oil. We must purchase additional oil supplies on the spot market, at these record crude prices, in order to meet our own refining and retail demand.

Q: David Turver

Are you considering any form of transaction with Borders and Southern Petroleum to enable Shell (or Woodside) to have a stake in drilling in the South Falkands Basin? Are you considering any deal regarding any of the Falklands acreage?

A: Jeroen van der Veer:

As you can understand, we never comment on questions about future acquisitions. We have no upstream assets on or around the Falklands. We did have some acreage, but relinquished it in 1999 following some initial exploration activity.

More generally in terms of our exploration strategy, we look for basins that can give us the kind of potential for half a billion barrels, then we like to have significant production, say over 100,000 barrels of oil equivalent that we can bring in for Shell.

In terms of exploration acreage, last year we bought 43,000 square kilometres of new, high quality acreage. This is an area roughly the same size as the Netherlands. This year we have brought acreage in Australia, and in Alaska where we won 275 of the 302 blocks in the Chukchi Sea. We have also continued to strengthen our position in the Gulf of Mexico, winning eight blocks in two new lease sales.

Q: Henk Huizing, Germany

Thanks to knowledge and access to hydrocarbons, Shell just celebrated its 100 years anniversary as one of the largest international integrated oil companies. How can Shell remain in shape if knowledge continues to spread and access to hydrocarbons to run dry?

A: Jeroen van der Veer:

There’s no doubt that we live in an increasingly competitive world. Many national oil companies are skilled operators with strong finances. And we don’t always have the access to resources that we would like. But I don’t think international oil companies like Shell are an endangered species.

We will continue to undertake projects that others aren’t capable of. Things like complex, multi-billion dollar projects that integrate elements from both the upstream and downstream part of our business – projects like the Sakhalin II project off the coast of Russia, or Pearly GTL in Qatar, which I mentioned earlier.

We will also continue to develop know-how that other companies don’t have. Shell has one of the strongest patent portfolios in the industry and we are taking steps to maintain that technology leadership. For instance, we increased our R&D spending from $500 million in 2004 to $1.2 billion in 2007.

Q: Alan Neale

Are we going to continue to dig up and process what is left of the conventional oil ( it is half gone now hence peak oil theory), heavy unconventional oils (Shell have a massive investment in Canada’s oil sands) and start converting coal and gas to liquids or start exploiting sustainable/renewables energy sources through programs such as DESERTEC which allows for large scale High Voltage Direct Current cables of up to 3000 miles in length to tie in pan European and American super grids that utilize all manner of concentrating solar power, wind, wave, geothermal, biomass, hydroelectric, normal solar, photo voltaic and hence develop new liquid transport technologies such as hydrogen or continue to pursue Biofuels in a vain attempt to offset oil prices whilst the world appears to starve?

Complex question I know but it is what is needed. Energy provision come 2020 is important and not 2100 as by this time we would have consigned our grand children to rack and ruin due to CO2 emissions being too high.

A: Jeroen van der Veer:

As you can imagine, we spend a lot of time thinking about the future of energy and what the outlook for the industry might be. And we work closely with a range of governments and national oil companies to help them think about energy options.

We believe that energy choices that will be made during the next crucial half-decade will begin to produce different effects a decade from now — and that these choices will shape the world for a half-century to come. At Shell, we think the world could take one of two routes, which we’ve called Scramble and Blueprints, for the development of the energy system over the next fifty years.

In both scenarios we envisage very strong growth in renewables. But that growth can’t possibly meet all of the increased demand we will see over the next 50 years, for reasons of constraints in scaling up.

Let me give you some examples of the difficulty of scaling up renewables. For instance, if we were to replace all of today’s coal-generated electricity with wind farms – at typical wind farm load factors – that would require a land area equivalent to 3 times the entire area of France. And if every house in Britain had a 4-m² solar PV panel set up on the roof, it would only generate the same amount of electricity in a year as half of a modern, 1-gigawatt nuclear power station. For context, in 2005/06, Britain’s maximum demand was 63 gigawatts.

So in order to meet this increase in demand, we believe that it’s not a question of hydrocarbons or renewables but that actually the world needs more hydrocarbons and more renewables. By 2050 in the Scramble scenario we envisage renewables making up 37 per cent of total primary energy, and in the Blueprints scenario, 31 per cent.

Q: Glen Kristensen:

I am confused. My understanding of supply and demand theory is that as demand outstrips supply, the price rises accordingly. The Saudi government and others claim that while they are producing oil at close to full capacity, they are able to fullfill all requests for oil which they receive. Why then, if demand is not yet outstripping supply is the price of oil rising as though it were and perhaps more importantly, what do you envisage will happen to the price of oil when demand really does outstrip supply?

Jeroen van der Veer:

A: These are indeed confusing times. I expect continued volatility in prices. I also think that demand will eventually respond at the current price. We already see some evidence of that in the US, where consumption has actually started to decline for the first time in decades. It will, however, not result in a drop in demand, but in a slower rate of growth. As I mentioned earlier, that’s because of population growth and rapid economic development, especially in Asia.

There are a great many psychological factors in the current price. The reality is that there are no hold-ups in the supply chain: refineries do not have to wait for tankers, trucks are not held up at the refinery and consumers do not have to wait at the filling station. The physical logistics are working well.

To meet growing energy demand over the next few decades, I think companies like Shell – and society as a whole – will need to improve energy efficiency while at the same time developing an array of energy sources, including conventional oil and gas, the unconventionals I mentioned earlier, renewable energy and nuclear.

It may not always be a smooth ride, but I’m convinced we will get there.

Q: Ian Pemberton

What are your thoughts on an impending oil campaign in the waters around the Falklands islands? Shell has been there once before and do you believe they will return or if not, that a new oil province will be proven?

A: Jeroen van der Veer:

We have no upstream assets on or around the Falklands. We did have some acreage, but relinquished it in 1999.

I can’t comment in terms of future interest, but more generally in terms of our exploration strategy, we look for basins that can give us the kind of potential for half a billion barrels.

Q: Nick Ryan, Shepherds Bush

How has the culture of Shell changed since the reserve scandals of 2004?

A: Jeroen van der Veer:

Absolutely. The unification of Royal Dutch and Shell Transport in 2005 has simplified our governance structure. Accountabilities are now absolutely clear. We have a single chief executive. We have a single board. And it is a board where there is true dialogue! So we’re in very good shape on that front.

Q: Stephen and Robina

Knowing that off-shore wind power is roughly twice the cost of nuclear and can exist only with public subsidy, will Shell persist in pushing this technology?

Arguably the future of fossil fuels for power generation depends on carbon sequestration; what priority does Shell give to research on this subject and how soon can you envisage universal commercial applications and at what additional cost.

Does Shell believe that thermal solar power generation in desert areas could provide significant elecrtic power for Europe?

Do Shell researchers agree that electrolytically produced hyrdogen to power fuel cells can never provide a viable alternative to the IC engine or electric power for vehicles?

A: Jeroen van der Veer:

At Shell, we continue to believe that a portfolio of technologies will be required to deliver clean energy to society and that offshore wind will make up a part of this in selected markets. We continue to be involved in offshore wind. An example is the 108MW NoordzeeWind project off the coast of the Netherlands, of which Shell owns 50 per cent. In its first year of operation in 2007, the 108-megawatt project delivered enough power for about 100,000 households.

As you say, carbon sequestration has important potential for managing carbon dioxide emissions, so thanks for asking about it. Shell is working on the necessary technology to capture carbon dioxide emissions from industrial installations like power plants and store it safely underground. We are working on the development of large-scale carbon capture and storage (CCS) demonstration projects in Australia and the Netherlands, for instance. At this stage, it is essential that we ‘learn by doing’ in order to reduce costs, accelerate technology development and ultimately make CCS commercially viable.

We are also actively asking governments to put in place the rules and incentives necessary to kick-start widespread use of the approach. CCS is currently not commercially viable and there are insufficient incentives to make long-term private investment in CCS attractive. In order to achieve the wide-scale deployment of CCS, Shell therefore advocates the urgent implementation of the following policy measures:

The use of emissions trading as the primary mechanism to provide incentives for CCS.

Incentives which bridge the ‘financing gap’ created by the short-term nature of existing emissions trading schemes, such as the one operating in Europe.

A clear regulatory framework to manage any environmental and health risks, based on existing expertise in the oil & gas industry.

International and national laws to recognise and permit CCS operations.

On solar power, we believe that thin-film technology could hold the most promise to generate electricity from the sun’s energy in an economically viable manner. So in 2006 we decided to move from conventional crystalline silicon production to CIS thin-film technology.

With Silicon shortages continuing, the Shell patented CIS thin-film technology uses 100 times less raw materials than traditional silicon crystalline. It also offers the highest efficiency’s and is easier, and we believe, cheaper to produce in high volumes.

Together with our joint venture partner Saint Gobain we continue to develop the next generation of CIS based thin-film technology.

I can’t comment on thermal solar power in the desert, though think there could be power transmission issues, but in Europe itself we have a production plant under construction in Saxony, Eastern Germany, with our partner Saint Gobain. The plant will have the capacity to manufacture enough solar panels each year to power the equivalent of around 6,000 European households per year with clean energy.

On hydrogen, we continue to work on it as a potential alternative fuel for the future. We have recently opened demonstration hydrogen refuelling stations in places as diverse as White Plains, New York in the USA and Shanghai China. One of the keys to making it a viable fuel will be finding a truly renewable source of hydrogen. It is too soon to say what the leading technology will be and it is possible different technologies will be effective in different locations.

Q: Frank Brettschneider

December 2005 was the month with the greatest oil production. Since then the production has flattened. Have we hit peak oil? If not, when do you expect to and what do you think will replace oil in the future? Hydrogen? Batteries? Biofuels?

A: Jeroen van der Veer:

We look at global energy development at Shell, and as I mentioned earlier, we think the world could take one of two routes, which we’ve called Scramble and Blueprints, for the development of the energy system over the next 50 years.

Under the Scramble scenario, we may see the dynamics behind energy nationalism – fears over energy supply and the possibility of jeopardizing economic growth – turning into a scramble for resources. In this scenario we believe that in just over 40 years, fossil fuels could have some 58 per cent market share, renewables (including hydro) could have about 37 per cent and nuclear the balance with 5 per cent. Interestingly coal could still have a market share of 30 per cent.

Our other scenario, Blueprints, reflects the dynamics behind the possible formation of new coalitions of interests. These do not reflect uniform objectives, but build on a combination of supply concerns, environmental interests, and associated entrepreneurial opportunities.

So in Blueprints you find entrepreneurial-driven innovation and the further development of hybrid/electric cars. Houses are better insulated, electricity becomes increasingly important and you get an integrated, more global approach to regulation. The key enabler to change is meaningful CO2 pricing, established by a mechanism such as emissions trading, for instance. That stimulates innovation and investment in new energy technologies and paves the way to CO2 capture and underground storage after 2020.

So we could see electric cars more prevalent from 2020 and commonplace by 2040, although the bulk of transport energy is still provided by liquid fuels. There is the continued uptake of solar and wind, pulled along by the electrification of the energy system. By 2040 we may see centralised solar power. Utilities that rely on coal and gas are required to implement strict carbon abatement technologies. In the developed world, almost 90 per cent of all coal-fired and gas-fired power stations will have been equipped with CCS technologies by 2050, as well as 50 per cent in the developing world.

Q: Paul Sullivan:

Don’t worry about people complaining about higher prices – ultimately most of it is tax and you are in business not a charity… and my shares in your company are doing very well thanks.

Keep up the good work!

A: Jeroen van der Veer:

Thanks for the encouragement.

http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article3985479.ece

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