Shell will grow from familiar roots

THE TIMES (UK): Shell will grow from familiar roots

“After the merger, Shell’s seat of power moves to The Hague. This should not be surprising, given that the mistakes of the past decade were mainly the fault of deluded or inadequate British executives…”

Wednesday 29 June 2005

By Carl Mortished

LIKE KIDS on a see-saw, stock market investors are playing with Shell, rebalancing it in the FTSE 100 index, but precious few are paying attention to the cultural shift within the firm.

Shell is restoring engineering as its prime purpose, a change in the company’s equilibrium that will have more impact than a few billion shares bought or sold. There is now a capital flight towards Shell; the merger of its Dutch and British parents into a UK plc, agreed yesterday and to be completed late next month, has the happy consequence of enlarging Shell’s weighting from 3.5 per cent to almost 9 per cent of the FTSE. British funds that benchmark their performance on the index of leading shares must buy more Shell to keep their portfolios in balance.

It’s an easy technical win for the oil company. More difficult is the internal shift, the transfer of corporate power to the Netherlands and the rebuilding of a culture that had gone sour.

Shell wants to be a technology-led company where science is held in esteem and the company is judged by its ability to deliver large, complex infrastructure projects on time and on budget. That might not seem radical — we know oil companies build big things — but Jeroen van der Veer, Shell’s chief executive, thinks that the technologists need a boost.

He is appointing ten chief scientists, one for every key discipline, and another person, just below board level, to lead the company’s initiatives in low-carbon technology. No longer must boffins metamorphose into bean-counters to secure a promotion. There is something of public relations in the new job-titles and status, but the important point is that the PR is directed inwards. Mr van der Veer is trying to repair the damage done during a decade in which energy companies tried to mask their true nature and pretend to the world that pumping noxious chemicals from the ground was ancillary, rather than core business.

Oil companies were under assault in the 1990s. Environmentalists taught Shell to be ashamed — oil was bad. Worse still, the investment community (in a disgraceful dereliction of responsibility and for which no institution is admitting fault) told Shell that spending money was bad. Instead of building towers of steel, energy was to be about trading on screens, jiggery-pokery corporate finance and, occasionally, support for large communities of disaffected and dysfunctional people in poor countries. The attacks from front and rear coincided with a collapse in the oil price and Mark Moody- Stuart, Shell’s then chairman, made drastic cuts in spending.

Instead of drilling, Shell and others made expensive and futile internet investments. Buttoned-down engineers were to be transformed into grasping entrepreneurs, motivated by new bonus schemes geared to performance targets. Costs were cut and profits went up, but the rate of oil discoveries declined. The effort to mask the latter led to investigations by American and British regulators and, ultimately, disgrace.

The van der Veer solution is “more upstream and more profitable downstream”. His brief mantra could be shortened further to: build, build, build. Shell has three mega-projects (known as elephants): the Sakhalin LNG development, the Qatar gas-to-liquids plant and Canadian oil sands mines. These three are to become ten by 2015.

The price of oil is obliging; with Nymex light crude above $50 per barrel, even the glutinous tar sands of Northern Alberta make fabulous money. Today, the barrier to growth is a deficit of people and Shell is joining a race for expensive skills. The average age of a petroleum engineer is just over 50, suggesting that between 60 and 80 per cent of the industry is due to retire in the next decade. The black propaganda from environmentalists (funded in part by BP and Shell’s flirtation with greenery) has done its job. From Aberdeen to Abu Dhabi, big oil is looking for talent. In the early 1980s, Texas A&M, a leading petroleum engineering school, had 1,400 undergraduates; this year the roll call is just 295.

A violent swing of the pendulum towards investment and growth is repricing assets sharply higher. Shell has plenty of cash, but people, unlike commodities, do not always move to the highest bidder.

After the merger, Shell’s seat of power moves to The Hague. This should not be surprising, given that the mistakes of the past decade were mainly the fault of deluded or inadequate British executives, but the question is whether a major enterprise is best-staffed and run from a village.

The Netherlands is, by tradition, Shell’s upstream science laboratory. The resurgence of techies could be a return to good old Royal Dutch engineering, but the real world isn’t quite like that. If Shell is to bring in-house once again the skills that were farmed out in the 1990s to oil service companies — the Halliburtons and Schlumbergers — it needs to hire Americans, French, Italians and Chinese. The question is whether the oil barons of tomorrow will wish to build their careers based in The Hague with Shell or would they rather go to Paris with Total, to London with BP or to Houston with ExxonMobil? The world is their oyster, but it doesn’t have to be Shell.

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