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Shell Chief Bets Big Despite Downturn

Christopher Helman02.10.09, 06:45 PM EST

Jeroen van der Veer expects solid returns on $31 billion in outlays this year.

HOUSTON–In a keynote speech today at the CERAweek energy industry conference in Houston, Jeroen van der Veer, chief executive of Royal Dutch Shell, emphasized that his company would continue investing through the current downturn, planning an outlay of $31 billion in 2009.

“To invest or not to invest. We are convinced that it is better to keep on investing. You have to replace easier oil with more difficult oil. You can do that best with long-life projects that you can do for years,” said van der Veer, singling out as an example Shell’s $20 billion investment in Russia’s Sakhalin 2 project.

Van der Veer’s comments echoed those earlier in the day by BP (nyse:BP – news – people ) Chief ExecutiveTony Hayward, who pledged a similar scale of investments for his company. (See “BP Chief Urges Oilpatch To Keep Investing.”)

In a time of low commodity prices, said van der Veer, cash is better invested in future projects than returned to shareholders. “Investing is about timing. You care about costs,” said van der Veer, adding that Shell is constantly balancing the relative value of growing organically versus acquiring other companies. Shell earned $31 billion in 2008, up 14% from a year earlier.

Without declaring expressly that oil and gas prices were set to rise, van der Veer insisted that energy demand will likely double by 2050 as the global population surges from 6 billion to 9 billion. “People like electricity, and they like to drive in cars,” he said. “But oil and gas is not enough to supply the future energy demands of the world.”

As for green energy alternatives? He said that renewable energy will come, but its adoption will be slow, because in economic terms “even the difficult oil and difficult gas is competitive.” Even so, Van der Veer says he put costly solar panels on his own house at the encouragement of his children. “I told my children my break even point will come when I am 103,” he said. Worldwide, “there is no point in building a hell of a lot of stuff that is too expensive.”

Currently, with economic concerns outweighing environmental ones, Shell won’t be investing much in carbon dioxide solutions: “This is not a good climate to do a lot of carbon capture projects.” That said, there are easy ways for governments to encourage renewables. “Why is there more wind energy in the U.S. than Europe? Because you can get the permits very quickly,” he said. “Especially in a time of recession, getting permits can really help.”

On the issue of carbon emissions legislation, van der Veer said either cap-and-trade or carbon taxes would work to reduce greenhouse emissions. In Europe, “for years we have had a carbon tax on gasoline, but we call it duties.” Paying $8 a gallon for gasoline has resulted in the average European car being 40% more efficient than the average U.S. car.

Van der Veer said he appreciates that not every energy company has the mammoth balance sheet and ample cash flow to support high levels of capital spending. The implication is that the giant oil companies spending through the downturn are more likely to lock in better prices for services and to grab assets for better prices than the oilpatch minnows. “Our projects are robust against low energy prices. We expect that construction prices will go down and the upturn in the economy will come,” said van der Veer.

Like BP’s Hayward earlier in the day, van der Veer amiably skewered oil services giants like Schlumberger (nyse: SLB –news – people ) for not bringing their prices down commensurate with the plunge in commodities, in effect telling the service companies they were getting too big for their britches.

“Say you want to build a house. We [Shell] are the architect of the house. And after the house is built, we like to live ourselves in the house and continue to improve the house by watching other houses,” he said. “What is Schlumberger? Either the plumber or the scaffolder, but it has a specific job to do. It may make a lot of money, but after the job is done, it disappears. Yet from time to time, the plumber thinks that he can be the architect.”

Van der Veer’s message: When the oil and gas cycle turns up again, it’s the architects and owners of assets like Shell that will profit the most from the investments they’re making today.

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