Royal Dutch Shell CEO Ben van Beurden talks about the company’s pending announcement on an up to $22 billion asset write down; the historic decision to cut what had been the world’s largest dividend for the first time since World War II; getting to net-zero emissions in 2050 and the future makeup of the company in latest edition of CERAWeek Conversations
In a conversation with IHS Markit (NYSE: INFO) Vice Chairman Daniel Yergin, van Beurden talks about the long-term impacts of COVID-19 on energy markets and Royal Dutch Shell’s operations; how advanced economies need to be “ahead of the curve” in getting the world to net-zero emissions; dealing with investors in a time of pandemic and energy transition and the importance of being “in step” with society to provide “products of the future” as customers become ready for them.The complete video is available at: www.ceraweek.com/conversations
On Shell’s planning and preparation for a pandemic:“We had pandemic very clearly in our risk matrix. But we looked at it much more from a business continuity perspective. And yes, I would say we have prepared for a pandemic or for disruption at the scale that we are seeing at the moment, very much successfully also from a business continuity perspective. But of course, it was always going to be difficult to assess what was going to happen to the economy.”
On operational and procedural responses to COVID-19:“A lot of things are of course fundamentally different. But a lot of things also haven’t changed. The offices are closed, and people are working from home and even more reliant on IT. We have tens of thousands of people in back offices doing all the operational activities that keep the company going and that has worked remarkably well.“Most of our people work actually in facilities and our facilities haven’t shut down. They are integral to the working of the economy. We have had to put at least as much attention on how do we continue to operate our facilities. That has been a major challenge as well. But also, that has worked and credit to everybody in the company and around us who has made that a very resounding success.“The biggest worry I had was how do you actually keep facilities running for a long time without the quite detailed oversight that we tend to have over the operation. How do you make sure that our technical controls, management of change, and permitting conditions do not gradually deteriorate without us actually being on top of it all of the time? So far, we haven’t seen anything slip or erode.
“Sometimes it is how you do an audit on a facility if you can’t visit it anymore. In some cases, it can be done, but in many cases, we found that you can do an awful lot virtually if there really is no alternative. In many cases we have found out that it actually works just as well or maybe even better. If you can do this with cameras, with robots, with online verification, with actually a team back home to oversee what is happening, sometimes you find that actually is a superior way of bringing technical expertise in.”
On financial resilience and efficient supply chains amid global lockdowns:“A lot of people think of it in terms of the financial resilience. And that is quite remarkable as well if you just see how many companies have seen a very significant dent appear in their cash flow statement; have to deal with a lot of financial pressures; change investment programs around. That is quite a remarkable demonstration of resilience in its own right.“But the even more profound aspect of it is that we tend to operate a global supply chain that is incredibly interlinked, that relies an awful lot on just-in-time management of hydrocarbons at a place where it’s going to be needed or energy at a place where it is needed. And what we have found [is] that despite this massive disruption that has taken place in the whole logistics chain, everything has continued to work. I do not believe anywhere in the world have we seen major shortcomings in the provision of energy or materials that are needed in the supply chain. That is actually quite a remarkable achievement if you consider how topsy-turvy the market has been for months.”
On energy markets and economic recoveries:“It’s probably too soon to say, ‘this is now how it will now look like.’ But there are a few things that we can probably speculate about or already observe or take a view on. It’s most likely not going to be a V-shaped recovery.“We are seeing a resurgence of motor gasoline particularly in those areas where people don’t like to rely too much on public transport and therefore, we will see a little bit more use of personal transport. But in general, energy demand and certainly mobility demand will be lower even when this crisis more or less [is] behind us. Will it mean that it will never recover? It’s probably too early to say. But it will have a permanent knock for years.“On (natural) gas, the same thing. I do believe that also the knock that we have seen on gas demand is going to stay with us for some time. In the long run, gas has the long-term potential to grow faster than any of the hydrocarbon energy carriers that we have around. But it will be inevitably delayed because gas demand that we have missed out will not be made up. At the same time, I believe that investments are adjusted either because of the sheer availability of cash, affordability, the risk aversion that companies like us will have for some time. So that has a balancing effect.
“Particularly on the gas side, many of the investments that actually looked quite strong—North American LNG projects—now all of a sudden don’t look as strong anymore. I would think that therefore even though demand has been postponed, supply has been postponed in equal measure.
“I do think that for a few years we will see a resettling and a recalibration in which also consumer attitudes around travel, around personal mobility, around stepping into an airplane again will also be affected that we should not discount.”
On Shell’s asset write-downs and dividend cut:“We are still working very much on what exactly the write-down amount is. We have until the end of this month when we have our Q2 results. We felt we had to highlight that something like this was coming. It could be as much as $22 billion post-tax. It will be a major number. Investors understand that if you indeed lower your outlook for oil and gas prices, refining margins particularly, but also some other margins, then of course some assets that were already under pressure in terms of their valuation on the balance sheet could be at risk of being impaired. And that’s what happened. The fact that it’s non-cash is helpful so people know that it may have all sorts of balance sheet effects, but it’s not going to have an effect on the operational coverage and the coverage of dividends.“The dividend was a big deal. It was a big deal for everybody. It was a big deal for me as well. It was a very hard decision. It’s an iconic dividend. It was the largest dividend in the world. You don’t do these things lightly. No CEO wants to be the CEO that cut the dividend.“But on the other hand, if you are being hit by a crisis like this, if you are seeing that at risk is going to be the long-term financial resilience of the company, and if you see that even though you take very significant measures to preserve the financial resilience of the company—we took $5 billion out of our capital program; we take up to $4 billion out of our operating cost program; a few billion dollars of working capital; here we are talking about $10 billion a year. If you then still see that carrying on with this dividend would mean ever more gearing, ever more net debt or even further measures to slash the capital program to reduce the operating cost, at some point in time it actually also becomes an easier decision.
“[The board and I] felt that continuing a payout of close to $15 billion a year would not serve the long-term interests of these same shareholders. You could even argue that it would not have been responsible to borrow that entire amount and in the process reduce the financial strength of the company. In the end we know that this will pass, we don’t know when and how. But what I do know [is] that when it does pass I want to emerge as a company which has its financial resilience intact and is well positioned for whatever it is that comes next; and we could only do that by taking the measures that we have taken.
“I’ve heard so many times—you now have $10 billion, what are you going to do with it? This was $10 billion that we didn’t have in the first place, so the only thing I’m not going to do with the $10 billion is borrow it. That is the only thing—it’s not as if we have $10 billion lying around. We have $10 billion less debt as a result of this on an annualized basis.
“The moment you know that this decision in a wide range of scenarios is inevitable, you better deal with it—and you better deal with it also from a position of strength. If you reduce the dividend in order to preserve your financial resilience, then you better do it when there is still the maximum financial resilience to preserve. I think there’s more understanding of that now—now that we’ve had that clarification and discussion.”
On Shell’s net zero by 2050 ambition:“Indeed, it’s a big ambition. It’s a long way out, by the way. In addition to having an ambition on 2050, we’ve also sharpened the ambition that we have for 2035. This was with us already for a long time. We had been thinking about where do we need to go to with the company. We had ambitions set for 2035 and for 2050. We had been in dialogues with investors and with other commentators in the company who felt that we needed to do more and we ourselves also felt that we needed to make sure that we were completely aligned with [the Paris Climate Agreement]. I think we got a lot more personal clarity about what it would mean to be Paris compliant. We said we can’t anymore be a 2 degree [Celsius] company. We have to be a 1.5 degree [Celsius] company. That means if you think about what 1.5 centigrade means, it actually comes down that you are net zero by 2050.“The world can probably be net zero by 2060. But if you are a European company, advanced economies need to be ahead of the curve when it comes to carbon neutrality; so, the E.U. setting a target of carbon neutrality by 2050, the UK, we felt that we had to do something similar.“Then you have to find out how you’re going to get there. We looked very much at the work that was done by the IPCC, the 1.5 degree centigrade special report, we looked at all the curves and how the energy system has evolved, what we need to happen; we took the extremes away—the extremely positive or the extremely negative views—and we came out with a pathway that actually reasonably well coincides with our own pathways and said that is what we need to achieve. It means that we have to obviously be net zero on our own emissions. It means that we have to reduce the carbon content of our energy products to be in line with what society needs to be by 2050 according to the IPCC 1.5 degree special report. It meant a roughly two-thirds reduction in carbon intensity of our product portfolio.”
On Shell’s Scope 3 emissions as part of the net-zero goal:“From the wellhead to the end use of all the energy products that we will be selling in 2050 there should be zero emissions. Zero emissions in our operations, zero emission in the manufacture of the product, zero emissions associated with the energy product as such, and zero emissions on a net basis from its use. It is indeed a wide-ranging ambition. But it’s the only way that a company like us can stand up and say we are Paris compliant.“We were the first ones to come with a Scope 3 commitment or ambition for 2050. We were the first ones to have a net carbon footprint concept. At that point in time we had very much modeled it on what we thought would be a less than two-degree Celsius outcome. When we laid it out for our investors, and for the community, and for society in general, we felt it was difficult to get. We had quite a bit of debate and also internal debate: how do we make sure that people really get it that this is what a progressive company can and should do?“At some point of time in that discussion I felt that we’re not going to win the debate until we make a definitive statement that we want to be a net zero energy emissions business; because a lot of the discussion was about ‘this is an intensity metric, is it an absolute metric, what about the emissions of your customers?’ In the end the only way to deal with it is to say that zero is zero. It doesn’t really matter how you calculate it or how you ratio it or not ratio it, absolute or relative.
“Zero is zero. We want to be a company that is zero in terms of the emissions associated with its business. Can’t be clearer than that.”
On the response from investors to industry’s climate ambitions:“I do believe that investors are hampered by the fact that many companies have come with the claims that they are Paris compliant, have their own ways of demonstrating it or putting ambitions and targets out there and there is therefore a certain degree of decoding that investors have to do—is a Shell claim the same as a claim of this company and who is better or worse? I think we have to help investors by, as an industry, being a lot more calibrated in our approach. The more we can harmonize, the better it will be for investors to understand.“There are some investors who think it’s great, that’s exactly what we needed and are now looking for all the proof points of how we would make that pivot in our investment program, in our product portfolio to actually deliver on this—more low carbon electricity, biofuels, hydrogen—let me see how you’re going to do it. Then there are also, on the other end of the spectrum, investors who believe that this is a recipe for value destruction. These investors have to be convinced of a different set of arguments, namely that we can, and we should have confidence that we can invest in these technologies and in these value chains of the future while we still preserve the attractiveness of us as an investment.”
On ambitions of “being in step with society” and maintaining a “license to operate”:“In step with society, that is quite often understood but also sometimes we draw criticism for it. The criticism tends to come from those at that end of the spectrum who believe that we should have a leading role; we should just do whatever we think is right whether society is ready for it, yes or no. Of course, that doesn’t work. You can get a little bit ahead of your customers. You can try to bring your customers along. But ultimately, if your customers are not ready to take your products of the future, then you have to pace your development accordingly. Does it mean we can sit on our hands and say whenever society is ready, we will be there on the day? No, I don’t think so. We need to push and pull.“The societal license to operate is integral to the success. I do not believe you can be a successful company in terms of an investment case if society doesn’t carry you, or if you don’t carry society. I do not believe you can have an energy transition where you want to be a company of the future if society actually sees you as a company of the past and doesn’t buy it that a company like you should have a future.
“Yes, indeed, society does have a critical view of our industry. Quite often we can sit here and bemoan ourselves and just say society is wrong on this and society doesn’t see all the wonderful things we do. These types of bemoanings don’t really help. The reality is society indeed sometimes has a somewhat simplistic view of our sector, our companies, the things that we do, and we have to just say ‘how do we change the narrative around this?’ That doesn’t mean we have to be pedantic and say, ‘you better listen up.’ It means that we have to deliver different types of proof points.”
On Shell’s future business areas:“We will be in the oil business going forward. As a matter of fact, we believe that oil will have a very significant role to play for a long time to come and that profitable investments can be made in the oil sector. But it does mean that we’re going to be even more selective on where it is that we want to put our money to work. We always had an approach of value over volume and now there is going to be even more [of] a high grading of the quality type discussion going forward.“Gas will continue to be an important sector going forward. We do believe that growth there is going to be with us for some time. We do believe that gas is not just a bridging fuel but also a destination fuel.
“We want to be an integrated power player. That means that we need to be having positions in generation, but also positions in the customer end, and also positions in the middle. We believe it needs to be dominantly green and we believe that we need to integrate these positions with the other energy vectors that we have. We have an unbelievably good capability when it comes to trading and optimization of our own networks. As that system evolves and needs to attract billions, hundreds of billion, if not trillions of dollars of investment, that investment is only going to come forward if attractive returns are to be made. We have a really good recipe for playing and winning in that sector. We want to not pass up on the biggest thing in energy in the future that is going to be around, which is electricity.
“And then the other energy businesses: think of biofuels, think of hydrogen, but also think of the other tools that we can have in the toolkit like nature to mitigate the intrinsic carbon footprint of our products; or carbon capture and storage. Yes, these will be business opportunities for us as well. But they will be rolled very much in with a stronger focus on the customer. Because I believe the energy system of the future will be an energy system where the value is created much closer to the customer than it is created closer to the resource. Therefore a company with a strong brand, which we have, but also with the ability to integrate value propositions for customers and a focus on the sectorial approach—so really understanding in the different sector of the economy, what are the energy needs and how do we create business opportunities out of it—I think is going to be the winning proposition going forward.”
More on the company’s efforts in hydrogen: “I remember when we started up Shell Hydrogen in the late 90s, we thought it was about to take off as well. We were almost congratulating ourselves that we got this one right in terms of timing. Then of course here we are more than 20 years later and it’s again just about to take off. It is tough to call these things right. And it takes a tremendously long time. Getting from the first commercial application of technology to it being 1% of the energy mix tends to take 25 years in our sector—something that of course a lot of people overlook. But it’s a pretty reliable development statistic.“For hydrogen maybe things are different at this point in time. The technology has evolved quite a bit. I think the concept of green hydrogen is starting to come within reach. I think governments are really wising up to the idea that many of the energy transition plays that they had in mind, hydrogen needs to play an integral role because it’s not all going to be electrification. We will have to have some molecules for very heavy-duty mobility demand or for high-temperature heat or even for space heating, and it can be done quite efficiently with hydrogen. Policymakers are beginning to see the need for this and are beginning to see also the role that hydrogen can play as a storage component, a long-term transportation component. Does it mean hydrogen will be the next big thing in the next five years? I don’t think so. But I do believe that those companies who set themselves up to succeed in that area and can make the right type of investments and can seed it and develop the hydrogen markets of the future are going to be the long-term winners and we have every intention to be just that.
“[Shell Hydrogen] has been reinvented a few times. But it is very much alive and kicking. Even though we are of course not the largest hydrogen company in the world—that is very much where industrial gas companies are—in terms of hydrogen for mobility or hydrogen for other uses than just the refining or petrochemical or industrial use, we are indeed amongst the leading, if not the leading player. It’s small but it’s nevertheless a position of leadership that we are maintaining and that we want to build out as much and as fast and as reliably as we can.”
About CERAWeek Conversations:
CERAWeek Conversations features original interviews and discussion with energy industry leaders, government officials and policymakers, leaders from the technology, financial and industrial communities—and energy technology innovators.
The series is produced by the team responsible for the world’s preeminent energy conference, CERAWeek by IHS Markit.
New installments will be added weekly at www.ceraweek.com/conversations.
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