Shell CEO: 'Paradigm Shift' for Sustainability and Security

Energy Intelligence’s 2019 Energy Executive of the Year, Ben van Beurden, CEO of European major Shell, spoke to last week’s Energy Intelligence Forum in London on the unprecedented risks and mixed signals the oil and gas industry is having to navigate — but also why the European major remains committed to its low-carbon energy strategy. Edited highlights follow.

Q: In the wake of the apparent attacks on the Nord Stream pipelines, is Europe prepared for increased risk to energy infrastructure? Is it more difficult to defend infrastructure that is spread out over such a large area and that is held in the hands of private companies rather than a state energy champion?

A: I think at the time [of the 2019 attacks on Abqaiq], we said that, if that were to ever happen, that will be a Black Swan event. Oil prices could go to $200, and it would be quite a task for Aramco to respond. And then of course, [Aramco CEO] Amin [Nasser] turned it into a very Small Swan event. But the point is, we can't rely on that sort of response, that sort of containment, that sort of recovery if energy infrastructure in the North Sea got attacked, or anywhere else in the world.

So, I do think that we cannot be complacent about this, and I also don't think we can rely on there being a sort of obvious and logical entity to respond to events, if they were to happen. So, prevention here is going to be absolutely essential. And I hope it won't come to it, but we'd better be ready for situations where a significant amount of infrastructure is out of commission.

Q: Should people get used to paying more for their energy if there is going to be a security component there as well?

A: I think what we are seeing at the moment is at least two aspects of the energy trilemma play out. We’ve always said energy is caught in a trilemma: it needs to be more sustainable, it needs to be affordable, and it needs to be available.

There was a time that the only focus was on sustainability of energy and nobody really cared about the availability or the affordability — that was sort of taken for granted. Now, we are seeing that you can't take the affordability for granted, and it is therefore something that we have to manage — particularly in gas, particularly in Europe. And now you see that actually governments are obsessed with affordability of energy. But we haven't really seen energy security issues yet. And therefore I really fear that if that were to happen, that nobody will worry about sustainability, and might not even worry about affordability.

Now, can you solve it by a premium? No, I don't think it works that way. I think you solve this by good policy and by making sure that we understand that this is a very volatile market [and] that you cannot afford spare capacity to run very, very small. … But you don't get it by paying a little bit more for Saudi crude. You get there by a deliberate policy. And I think and hope at least that the events that we are experiencing today are a bit of a wake-up call for governments to say, ‘Oh, hold on, it is, it is actually a trilemma, and we should manage the other aspects of the trilemma as well.'

Q: We're seeing really unprecedented levels of market intervention — windfall taxes, price caps, multibillion-dollar bailout packages. Do you see any of these being effective? Are there any you are particularly worried about?

A: First of all, indeed, it's unprecedented what is happening. I know there are quite a few voices out there that say, “Let the market take care of it. It's the best way. The best remedy against high energy prices is high energy prices, so it will all be fine at the end of the day.” I'm afraid I don't subscribe to that logic entirely. Sure, the market needs to do its work and therefore we need to have market signals in there. But you cannot have a market that behaves in such a way … that is going to damage a significant part of society. You simply cannot have that. Governments cannot have that, and I think many of us in this room wouldn't stand for that either. So, one way or another, there needs to be government intervention, and I think government intervention that somehow results in protecting the poorest. That probably may then mean that governments need to tax people in this room to pay for it. I think we just have to accept [that] as a societal reality. It can be done smartly and not so smartly, and I think there is a discussion to be had about it. But I think it's inevitable.

Intervening in markets, capping prices, particularly on exchanges, etc. — I think that is going to be a real issue because it's very difficult to really understand the unintended consequences of market interventions, particularly when they are on exchanges. It's been said before, but one of the challenges is governments don't pay too much attention to this industry in the first place, and then with a lack of understanding, to intervene in very sophisticated markets, is, in my mind, one of the biggest risks that we are facing as an industry. And therefore I hope that governments will think twice, or at least consult very broadly with the big players in the industry, with experts in capital markets, to understand what I can and can't do and what the consequences might be.

Q: One of the most complex interventions that's being contemplated is the G7’s proposed cap on Russian oil prices. Many are struggling to understand how it could be enacted and what the consequences might be. Do you see a way it could work?

A: I struggle with it as well, to be perfectly honest. I'm sure you can make it work in certain ways, but how effective would it be? I have my doubts. And what sort of instruments would you need for that? People have talked about, well, we need the insurance industry to come along to make sure that ships can’t transport oil that is priced above the cap anymore. It's easily said, but not so easily done. And so I see that as a real implementation challenge. There may well be some people that think well, maybe it's better if it doesn't work very well because otherwise we may see oil prices going through the roof, but that's another matter.

I think the bigger challenge in my mind is not so much can somehow governments of the world figure out how to cap Russian oil prices, but actually can we make a meaningful intervention on gas markets here in Europe? Can we somehow intervene on the [Dutch] TTF or something else? I think that is a much more challenging prospect. I would say if you really want to protect consumers, that is probably an area that governments are going to look at first and foremost, rather than oil prices. I mean, we've lived through oil prices above $100, and it’s less than $90 today. But we haven't lived too long through gas prices that are above the equivalent of $300 a barrel. So if I was a government, inevitably you'll be drawn to the challenge of how do I contain gas prices? And then I think is a much more challenging thing.

Q: How has your engagement with investors changed through the course of this unprecedented year?

A: It has changed, but I would say that it's still early days in this. It has definitely improved. I think there's a certain segment of the investment community that is rediscovering that this is actually quite a valuable and useful segment of the capital markets to invest in. We can produce a lot of cash and a lot of it actually comes to our investors. So, we are, in a way, harder to resist. But I think there's also a little bit of a re-appreciation that maybe indeed this wasn't so simple. Maybe this wasn't a sort of one-track mind problem where we just get out of oil and gas because we don't need it anymore anyway and we should focus on other forms of energy. I think there is a little bit more balance, a little bit more understanding.

Also, by the way, more understanding on the business models of new energies, which are quite often looked at in a relatively simplistic way. Like, why would you produce a commodity that comes with the utility-type return? And of course our answer is well, you know, that's not our strategy. Our strategy is to work from the customer back, where the returns are much better. But I think at this point in time, there is more appetite from investors to really listen to what it is that we have to say — because I think deep down, everybody understands that this is a moment when the whole paradigm shifts, particularly in Europe, where we can see that we have to go onto this decarbonization journey, not because it is the right thing for the climate, which is one, but it's also something that has to do with energy security. And therefore, how can companies like us not only do that, but benefit from it? I think is much more topical with investors than it has been for many years.

Q: Are investors saying, look, markets are telling us, high prices are telling us that it’s okay to spend a bit more on oil and gas in the near-term, as this is what the world needs right now?

A: Yes, we hear that as well. But then I have to sometimes remind our investors that we are still investing a very significant amount of money in in oil and gas. It's less than what we used to, absolutely. But you know, as we sit here, we spend about $8 billion a year in oil, and we spend about $4 billion to $5 billion in LNG. That's a very significant quantum of money. Now, you can say, “But you used to do more, so why don't you just quickly ramp it up at $5 billion a year?” No, you can't, really. It takes a long time for these projects to come on stream. If you really want to work on spending $5 billion for next year, you should have started years ago. So, it's not a quick response. Can we do more short-term projects? Do they make more sense? Absolutely. Do some projects that are a little bit on the cusp all of the sudden look a little bit better? Sure. We'll do that as well. But you cannot have a quick response to the market signals that we are seeing today in the sort of multiple-billions-a-year spend level.

Q: But do these changes that we're seeing — whether it's government market interventions, whether it's changing attitudes of investors — change where you spend the capital that you choose to put to work?

A: There is always flexibility in the strategy we have. Our strategy is a business strategy where we want to pivot into the energy system of the future, which we believe is built from the customer back, with new supply chains in these customer domains. And yes, we can flex that. We can say, well, it looks as if [biofuels] can go faster, or hydrogen can go faster, or power can go faster, or maybe a little bit more nature [based solutions]. And we will continuously readjust our spending to where to where it makes more sense.

But the strategy is very much indeed that — pivot away from the traditional legacy investments that we had in commodity-based oil and gas products. Now, can we go faster? Can we go slower? Sure, we can. And that's what we do. Probably you will see us doing even more in customer-backed strategies in Europe because that is where this is more needed today and also more welcome today. And you will probably see that the investment levels that we are maintaining for oil and gas are in those countries, those resource holders where that is being seen as useful, meaningful, welcome and everything else. But if you say, “If I gave you an extra billion [dollars] to play with, where would you be inclined to spend it? Well, I would be inclined to spend it in the energy system of the future, because that, I think, is where most of the future value is going to be.