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Shell CEO Calls for More Access to Drill in U.S.

For Royal Dutch Shell and the rest of the energy industry, "it's all hands on deck and overtime on the bridge," the CEO said last week. CEO Jeroen van der Veer also said it was time for the Obama administration to heed the call and allow exploration in Alaska's Outer Continental Shelf (OCS).

"These are tough times that require tough choices," said van der Veer, "but the current economic recession is a temporary situation. The longer-term trend is still one of growing energy needs." He was the luncheon speaker at the Cambridge Energy Research Associates (CERA) annual CERAWeek conference in Houston.

Echoing comments made earlier in the week by BP plc CEO Tony Hayward (see related story), van der Veer said the oil and gas industry "needs to invest through the cycle...As soon as economic growth resumes, the demand for energy will pick up...and pick up fast. That's what we at Shell refer to as the first 'hard truth' for the period up to 2050."

The "second hard truth," he said, "is that even if we produce energy from all possible sources, it will be difficult to supply these growing energy needs. The third hard truth is that higher energy use will translate into higher CO2 [carbon dioxide] emissions. It's not difficult to see why these hard truths remain valid. In the first half of this century, around three billion people will be added to the world's population, at a rate of 75 million people each year -- equivalent to the entire population of Turkey. And all those people will want to have electricity...and many of them drive a car.

"So for the longer term we don't expect a 'demand surprise,' because the people will be there and they will ask for energy. Also, oil and gas will continue to be the world's main energy providers...It will take decades before other energy forms rank better on the 'three As' of affordability, acceptability and availability."

The challenge to supply the world's growing energy needs "is made more urgent by the rapid decline rates of existing fields," the Shell chief said. "To avoid making a future supply crunch even more severe, the industry should continue to invest. But that will not be easy, in light of the economic recession...

"To invest or not to invest...that's the question."

According to van der Veer, the oil and gas industry is the most capital-intensive industry in the world. Shell, he said, "was the largest private investor over the past years. And it is becoming even more capital-intensive as the world's energy needs increase and supplies of easy oil become less abundant. We need large, long-life assets that can reliably deliver big supplies through different economic cycles. So Shell has made such projects a priority. But these giant projects take a long time and a lot of money to build."

In North America Shell is investing in onshore unconventional natural gas products "that allow us to dial up and dial down the number of drilling rigs quickly, and hence the cost of activity," said van der Veer. "This allows us to react rapidly to a changing market environment." Another advantage Shell sees in North America is the infrastructure and storage capacity that already exists, "so you can produce the gas very quickly."

Pointing to previous periods when oil and gas prices fell, the CEO noted that eventually, "demand and price began to recover" as economic growth took hold in developing countries. "The lesson we learned is that demand responds quickly to economic conditions, but that demand is only one half of the story," he said. "The other half is supply. And supply moves much more slowly."

Shell, he said, is "determined not to repeat the start-stop approach to investment of the past. Instead, we aim to reap the benefits of sustained investment when the global economy recovers. Start-stop policies also damage your entire critical mass of know-how, expertise and employee motivation. And even for a capital-intensive company like Shell, people matter most. So we want to keep as many good people as possible."

This year Shell "will remain a relatively large investor...with a strong focus on cost, and making sure we're not way out of step with our competitors," said van der Veer.

The CEO also reiterated his call for the Obama administration to remove barriers to drilling for oil and gas in some areas of the United States, including offshore Alaska. Shell's Alaska unit in December halted its 2009 drilling and exploration plans in the Beaufort Sea following an unfavorable court ruling by the U.S. Court of Appeals for the Ninth Circuit in San Francisco (see NGI, Dec. 22, 2008). In November the court ruled that the Minerals Management Service (MMS) improperly granted permission to Shell Offshore Inc. to drill in the Beaufort Sea north of Alaska and Canada (see NGI, Nov. 24, 2008).

"The new administration has made early statements of support for expanded domestic oil and gas production," said the CEO. "I hope that support also applies to Alaska. Alaska's Outer Continental Shelf contains the most promising undeveloped hydrocarbon resources in the U.S.A. These resources could significantly reduce U.S. dependence on oil imports.

"In opening up new frontiers, our industry must protect the environment and work closely with local communities and other stakeholders; that goes without saying," van der Veer noted. "But I think we have proven that we can achieve that balance if given the opportunity. I hope and trust that remaining legal issues will be resolved, so that we can help to make these large resources available, create thousands of jobs and generate billions in new revenues for the state of Alaska and local communities in an environmentally and socially responsible way."

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