Ed Crooks Shell CEO on debt, gas, Iraq, mergers, and more

Peter Voser, the CEO of Shell, is reported in today’s FT as suggesting he had brought the company’s debts under control, with some help from the bounce-back in the oil price, and that if oil remained at $80 Shell would not need to add to its borrowings next year.

He was talking at a lunch for a handful of reporters in London, at which the conversation ranged over most aspects of Shell, the company he took over in July. (He was previously chief financial officer.)

Here are some of the other key points from what he said:

On the Pearl gas-to-liquids and Qatargas 4 liquefied natural gas projects

The two projects together are of huge significance for Shell, making Qatar what he calls “the new heartlands” for the company. Together they will add about 350,000 barrels of oil equivalent of production per day, about 10 per cent of Shell’s output today. (Shell owns 100 per cent of Pearl GTL, and 30 per cent of Qatargas 4.) The production from Qatargas 4 will keep Shell as the world’s biggest LNG producer.

When they are fully on stream, from 2011, they will generate $4bn per year for Shell’s cash flow. (That is almost a fifth of the company’s entire cash from operations this year.)

Pearl is now set to cost $18bn-$19bn. The original estimate was $4bn-$6bn, although that was from 2002, and Shell says the specification of the project changed before final investment decision. Shell’s share of Qatargas 4 is about another $2bn-$3bn.

There are 50,000 people employed at the Pearl project, who live in a vast “village” with its own mayor. There are dozens of different nationalities working their, each provided with their own canteen facilities, and social services such as healthcare. But staffing will now start to run down as the project nears completion, set for the end of 2010.

On other projects: Brazil, Russia, Canada and the US

Those two big gas developments are part of the construction plan building 1m boe/d of capacity. Other projects include Sakhalin 2, the LNG plant in Russia that Shell has retained 27.5 per cent of, in spite of being muscled out of the leading role by Gazprom, and BC-10 off the coats of Brazil. Two more that are coming are the Perdido deep water Gulf of Mexico field, and the Athabasca oil sand project expansion in Canada.

Shell’s upstream strategy is to have more of its production in OECD countries, perhaps because of its bruising experience in Russia. In the presentation for analysts in Qatar this week, Shell talked about new opportunities including the deep water Gulf of Mexico, onshore “unconventional” gas in the US, the north-west shelf of Australia, including the giant Gorgon project, and offshore Norway. Two of the leading non-OECD opportunities are in a couple of the world’s most difficult countries for operators: Iraq and Nigeria. Kazakhstan’s slice of the Caspian Sea, which holds the vast and troubled Kashagan project, is another new opportunitity, although Shell says it has been finding sweet oil, not contaminated with the sulphur that has made Kashagan such a nightmare.

The Arctic is another important frontier. Shell is getting close to drilling in the Beaufort and Chukchi seas. “It could be the next big province… and we paid significant money for acreage.”

On gas versus oil

From 2012, more than half Shell’s production will be in gas, Mr Voser said. It will be a gas company more than an oil company. The plunge in gas prices in open competitive markets such as the US was unwelcome, he admitted, but 90 per cent of Shell’s gas output is sold on long-term contracts in Asia and Europe, often on 20-year deals, that are linked to the price of oil, not US gas. “Practically everything [from Qatargas 4] will go to the Asia Pacific region, where it is oil price linked,” he said. He argued that even though a pure gas price would seem to offer better value now, particularly in view of the IEA’s predictions of a “gas glut”, most customers and suppliers were likely to stick with long-term oil-linked contracts, because “they would prefer to manage one volatility, not two.”

He added: “Our long-term view is that gas has a very strong growth rate… In China, we are selling LNG at the moment, and we can sell what we have [on] long-term contracts… In the medium term, the growth of gas is going to be quite significant.”

GTL technology is also a way for gas producers to hedge their exposure to the gas price. If Pearl is seen to be a success, where might the next GTL plant be built? Where the gas reserves are and the market is: “Algeria, Iran, the US,” among others.

On costs

The reorganisation “moved very fast” in 2009, Mr Voser said. For 15,000 posts, people have had to re-apply for their jobs. About 50,000 people work in the areas affected by cuts, out of Shell’s total workforce of 102,000, and in those affected areas 10 per cent of the staff have gone. Even in the newly-created projects and technology division, which is a centre of expertise for the group to draw on, 1,800 jobs have been cut from a workforce of 10,000 as duplicated roles are abolished. There will be more redundancies next year, too, although he refused to put a figure on how many. Shell’s procurement budget is $65bn a year, so saving 10 per cent off that is a big number. Some $1.4bn worth of procurement has been shifted to China, where supplies can be sourced for 20-40 per cent less. About 15 per cent has been cut from the $7bn annual drilling budget.

On Copenhagen

Shell’s wish-list has three items on it: recognition that the world needs to put a price on carbon; adioption of a cap-and-trade system as the most efficient way to deliver that price, and acceptance of carbon capture and storage as a possible way to curb emissions. Mr Voser argues demand for fossil fuels will continue to rise; in three or four decades’ time, there will be a billion more cars on the road, he says. Over the same period, a large proportion of the world’s increasing demand for electricity will be fuelled by coal. That makes CCS a logical solution, and Shell is pursuing pilots in Canada, at Gorgon, in Scotland and in the Netherlands. The Copenhagen meeting may or may not reach a decisive conclusion, he said, but either way it would be only “a milestone, an intermediate step.” He added: “the train has left the station, and we will be on it.”

In carbon capture development, other countries such as Canada, Australia and the US are catching up on Europe. “Europe had a leading position for quite a while, but it has been hit by delays in disbursing funds.”

Europe’s emissions trading scheme “is not working to complete satisfaction, but it can be made to work… It is a good start, and we can build on that.”

On Nigeria

“The situation has improved, security is better… but it is too early to call it a success.” Funding for the joint ventures with the state oil company is now in place, and construction is going well on the big Gbaran-Ubie oil and gas project, scheduled to open next year.

However, the new proposed oil law is a concern. “The version that was tabled could mean Nigeria would struggle to find international investors,” Mr Voser said. He added that the company had always said that as part of its continual thinking about its global portfolio, it could at some point be prepared to do a deal with its Nigerian assets. The company was still dependent on Nigeria for growth in the 1990s and the early years of this decade, but that was no longer the case. “Since 2004, we have worked very hard to make sure we do not depend on Nigeria for future growth.”

Projections for growth from this year allow nothing at all for a recovery of lost Nigerian output. If that happens, it will be a bonus.

On Iraq

Shell is back in Iraq with two projects: its 20 per cent share in the international companies’ stake in the West Qurna oil field, where the majority partner is Exxon, and its plan, agreed under an MoU, for a gas-gathering project in the south to collect associated gas that would otherwise be flared off, and then sell it, at first in the local market and for power generation, and then for export as LNG.

The Kirkuk field, which Shell knows particularly well, is some way away from being able to agree a service contract of the type agreed for West Qurna and a couple of other Iraqi oil fields, “for political reasons”.

On Russia

The potential for Shell to share in the development of Yamal “is a direct function of what we delivered with Sakhalin,” which was “a masterpiece delivered, the start-up the best ever of any LNG plant.” Shell now knows the environmental conditions Yamal faces, Mr Voser said, such as the threat of icebergs and the need for ice-breaking LNG tankers. Vladimir Putin has asked for a development plan by the end of March next year, and foreign companies have been offered the possibility of taking equity stakes in production. Shell is one of the many companies hoping for a piece of the action, and is focusing on the potential for an LNG plant. The development could be five years or so away, however.

On M&A

“We have an enormous project pipeline [to invest in]… and anything we would bring from the outside would have to beat that.”

On refining

Shell is trying to shift its portfolio from “West” to “East”. “We still think that Europe is over-built in refineries.” Shell also wants more complex, higher value refining capacity.