Laaja versio Jorma Ollilan haastattelusta (englanninkielinen)

This an abridged, edited and verified transcript of an interview of Mr. Jorma Ollila, the Chairman of the Board of Royal Dutch Shell, plc. Mr. Ollila was interviewed in English by Mr. Juhana Rossi, staff writer for Helsingin Sanomat. The interview took place in The Hague on March 4th, 2009.

Question: There was a man called M. King Hubbard employed by Shell. How do you view his intellectual and scientific legacy, i.e. the peak oil theory which proved to be broadly true for the continental United States.

Answer: I think the peak oil theory has a certain explanatory power for individual oil fields. But if you take a global view with all technological opportunities and oil reserves which have not been discovered, the theory's explanatory power is more limited. I don't think we have seen the peak point in oil production globally. There is more oil to be discovered through exploration and more oil to be produced due to new technologies.

Q: The International Energy Agency predicted in its most recent World Energy Outlook that the demand for oil in 2030 will be 106 million barrels per day (bpd). Two years ago the United States Energy Information administration predicted that the demand for oil in 2030 will be 118 million bpd. At same the time many analysts predict that the production of crude oil will peak within the next couple of decades around 95 million bpd. This view has been publicly expressed by Mr. Christophe de Margerie, the CEO of the French major oil company Total. What's your take on this theme? How much oil the world will need in 2030? How much oil it will be able to produce?

A: I have read the speech in which Mr. Margerie expressed his view, but I don't know its foundation. All I can say is that if we look at the forecasts for both demand and supply, I think most forecasts have not tended to be particularly accurate. What we are clearly seeing now is a situation where technology does influence the supply of oil and the capability to produce it. Advances in technology are continuing. So we haven't seen the end of potential opportunities.

If we look at the demand side, surprises tend to be more a norm than an exception. What we are seeing now are not only the advances in renewables and the impact they will have, but also the impact of public policy. The subsidies for alternative sources of energy, particularly for biofuels and also other opportunities such as the electric car, will be very defining on what the demand for the alternatives for the hydrocarbons will be. There are also factors relating to public policy in automobile industry. What sort of CAFE requirements will be established in the United States? I think the Congress is debating that.

Then there is the recession, the length and depth of it. It's not certain when we will return to economic growth and rising demand for oil again. We're in a little bit of fog right now. So I think there is every reason to be very, very cautious.

There is a quite strong likelihood that not only the number 106 is on the high side for the demand as well as the supply number 95 is on the low side. But what we have also seen is that the market tends to clear any imbalance, i.e. there is a price mechanism which brings signals to the supply and to the demand side, and they will meet. This is what has happened with other natural resources, and oil is no exception.

Q: Would you personally prefer to see politicians leave the markets to their own devices, so that the subsidies for the use transportation fuels would be cut, and the subsidies for biofuels and renewable ventures would also be cut?

A: I think it is a theoretical assumption that we have such an option. Hydrocarbons as natural resource as well as finished products like transportation fuels will continue to be in the interest of public policy, whether in fiscal policy or in terms of industrial policy. That will continue. It is the job of the industry to work with that and adjust.

Q: What sort of public policy you would like to see executed in future so that there would a working balance in supply and demand for transportation fuels?

A: It is not that simple, because we not do have the exact cost for different alternatives. Fiscal measures can be counterproductive. In other words, favouring strongly one particular renewable alternative could lead into cost effects which would not be easy to handle. Secondly, we are now in the deepest and grimmest moments of the recession, so it is very difficult to think what the world will look like when global GDP grows by five percent, but it will one day. So when we are back on the growth path, we will again need all the possible forms of energy.

We will return to days when the energy challenge is not only about climate change and producing energy in a sustainable way, but also about access, about getting enough affordable energy. The public policy has to take this into account. Hydrocarbons will continue to be a major part in the energy supply because of their relative abundance and cost advantage.

Q: The recent relatively low price of oil has perhaps been unsustainable if you think of the investment needs of the future. Low price of oil makes it relatively difficult to put in place a large and credible investment strategy. Nevertheless Shell will spend more than 30 billion USD on investments this year. In longer time perspective international oil companies such as Shell have to cope with the fact that oil is a non-renewable resource. Once you deplete a reservoir, it's gone. At the same time a growing share of untapped sources are controlled by national oil companies. How can you tackle or neutralize this kind of two-pronged threat?

A: Obviously the current oil price is an issue for many players in the industry. There's a difference if you are planning investment with the price level of 100–147 dollars per barrel versus the current level of 40 dollars per barrel.

If you look at the decision-making in Shell, the investment plan for this year was decided by the board in mid-December with a clear view that we could have a full year or even a longer period of prices we are now seeing. We made some changes in priorities and decided on some delays as we have announced. But essentially we continue the investment program that has been set out during the past three or four years. It was a very conscious decision, and this is a very viable investment program even during a period of very low price of oil we are seeing now.

But there are many technologies, fields and countries for which this kind of low price level is an issue. It means that the cost level has to come down significantly. If you look at the overall costs in exploration and production, they have more or less doubled in the last four years. There are elements which have even tripled, for example certain personnel costs.

Clearly, when the price of oil comes down from 100 dollars to 40 or 50 dollars, costs come down as well, however mostly at a slower rate. In many instances there is a lot pressure for the costs to come down to make projects viable.

To answer your point about the long-term future, the access to resources is linked with demand. If there is a pick-up in demand after the recession with an impact on oil price, you will see the market clear. The oil price will have to match with available opportunities. Essentially, those opportunities will be where national oil companies (NOCs) and international companies (IOCs) will work together. This is the way the system has worked broadly speaking during the last twenty years, and that will be very much the case in going forward. I don't see the basic paradigm changing that much.

Q: Recently there have been shifts in the balance of power with the national oil companies seemingly gaining the upper hand. Shell had tense negotiations with the Russian authorities about Sahkhalin project, and Shell had to relinquish its controlling share of the project. At the same time, for example, in Venezuela the country's government has tightened its grip on hydrocarbons. Do you think this process could be reversed now that the prices have come down, and the national oil companies need western expertise and capital?

A: That remains to be seen. It is not for me to forecast. There have been comments to this effect, but as I said, I think you will see a good continuing co-operation between the NOCs and IOCs. It has worked in the past because there is a complementarity particularly in tapping the unconventional resources and building access to deep water and to arctic conditions which require very complex project management as well as technological input. We're likely to see healthy and good co-operation between NOCs and IOCs.

Q: There is a wide array of energy technologies in existence and under development apart from the traditional oil production, refining and use. Some are closely related to traditional hydrocarbon business such as the use of oil sands. Others are more removed from the traditional hydrocarbon business such as turning algae into fuel. In your opinion, which technologies offer real opportunities of developing genuine competitive advantages and becoming profitable? And in turn, which technologies perhaps hold no promise and shouldn't be subsidised?

A: That's the 64 000-dollar question. There is no single answer. Many renewable technologies, in fact most of them, need subsidies in order to get off the ground in commercial scale. That's the case in wind and solar energy, with biofuels, with electric car. Since it is public money, the public decision makers have to make the choice. When the technology evolves, you hope to get into a situation that we will have open competition and the market will clear.

It's not so different from the other technology projects in other fields of science. Only the stakes are higher. We need energy all the time. The sums of money are huge. Since the technology lead times are so long, until 2030 hydrocarbons will continue to play a dominant role.

At the same time the demand for energy continues to grow. You need three things to happen. You need energy efficiency. We have to improve energy efficiency, not only in our homes by having double glazing also in terms of processes, industrial processes etc. That's the first thing. The second thing we need is CCS. Carbon capture and storage is fundamental because the use coal is increasing so much. We will not be able to have sustainable climate change policy unless we have CCS, because the use of coal is increasing. Thirdly, I think we need to develop second and third generation biofuels to satisfy the demand on the transportation side.

Then if you look at the longer term, 2050 and beyond, then we can look into the future where the share of hydrocarbons is lower and you'll have renewable technologies taking hold after longer lead times.

Q: Can I infer from that answer that until 2030 Shell will remain primarily an oil and gas company, and then perhaps evolve itself into an energy company?

A: That's a pretty rash conclusion. I am not sure it is the right conclusion. The only thing one can say in all likelihood, if the world relies on hydrocarbons for 70–80 percent of its energy needs in 2030, Shell will be significant player. But it is also true that Shell will accelerate its investments into other sources of energy towards 2030. Those investments will in all likelihood increase significantly.

Q: Let's touch upon some specific technologies. Among them is the oil sands in Canada. Roughly about 1,2 million barrels of oil per day were produced out of oil sands in Canada last year.

A: A good start.

Q: Shell has a project over there. Its current production capacity is 155 000 barrels per day. It will be expanded to 255 000 barrels per day. You also recently announced that you are putting on hold the next phase of expansion. There are certain obvious drawbacks to oil sands. One is the effect on the environment. For example, you need a lot water to produce a barrel of oil out of oil sands. It takes also a lot of energy to turn oil sand into crude. It was recently reported in the press that a study by the American RAND corporation found that producing crude out of oil sands causes 10–30 percent more carbon dioxide emissions than ordinary crude oil production.

A: If I may add a fact: when we looked at the whole chain from well to wheels, oil sands cause 15 percent more carbon dioxide emissions compared to ordinary crude. That's the environmental challenge. Processes always improve, but surely this is an issue.

Q: Once the economic logic is there, does Shell look forward to expanding crude production out of oil sands?

A: You have two factors. The processes continue to improve. It has already happened with the current volume of production. Also the CO2 challenge will likely to be addressed by ourselves and others. But the longer term plan is to look at oil sands as one source of unconventional oil when the economics is there.

Q: What about gas-to-liquids (GTL). You currently have the flagship GTL project Pearl in Qatar. Very impressive project: 140 000 barrels of high quality mid-distillates per day. But at the same time a very expensive project. According to press reports the cost has risen from five billion USD to 18 billion USD.

A: Let's look at the background. After the first oil crisis in 1974 Shell started a major R&D project to develop coal-to-liquids (CTL) through gasification and synthesis. Shell achieved major innovations in this area, so we have a lot of know-how. Then in 1993 Shell opened the first commercial gas-to-liquids (GTL) project in Bintulu in Malaysia which has given us many years of experience on commercial, not laboratory, scale production of GTL. That was used as the planning paradigm for the Qatar project. The project proceeds generally well, and it is in line with our expectations at the time of our final investment decision. Unit development cost is below group average, and about the same as many of our other integrated gas projects around the world. We are within the timing expectations, which will see construction complete across the end of 2010, the project ramp up beginning in 2011. I think the numbers you referred to are guesses by journalists. So we do not comment otherwise.

Q: So your investment will be recouped and you will make some profit for your shareholders.

A: Oh, absolutely, absolutely.

Q: What about biofuels. We are currently stuck with the first generation of biofuels which affect the food chain, and based on some calculations the production and use of some biofuels may cause greater CO2 emissions than production and use of ordinary diesel or gasoline from crude oil. Is this situation a sort of necessary evil we have to go through before we move on to second generation biofuels? It seems that both in the U.S. and the EU the policymakers and the public have committed themselves to advancing the first generation of biofuels through subsidies and mandates.

A: This is a very difficult area. This matter has been under consideration in Shell during the past 10 years. For us a clear view has emerged that second generation biofuels will be a factor, and the world should look into how you can develop renewable sources of energy. But it was our view that first generation biofuels from food-based sources are not the ones that should be deployed to the consumers in major scale, because they distract the food chain.

If one does a little bit of research and looks at the global food balance sheet and how looks going forward, one becomes worried. We had a little food crisis two years ago, and that was only a mild beginning, there's more to come. There will be very difficult years ahead for us to feed up to nine billion people in this planet well before 2050. You have the dynamics of feeding the people which makes it necessary not to interfere with the food chain.

Therefore Shell has not participated in the first generation biofuels as a producer, but we are distributing them. At the same time our efforts in the second generation biofuels have been formidable. We are one of the first energy companies to invest into second generation biofuels. If you look at the most promising area, it is algae, where we have done a lot research.

Q: Would you agree with the assessment that the current biofuel policies in place in the US and the EU are detrimental to the food chain and also to the environment in terms of CO2 emissions?

A: I am not a person to start condemning a certain program in the US or in the European Union. All I say is that there are serious issues that need to be solved.

Q: One way to curb CO2 emission would be to burn less hydrocarbons. To give an incentive for people to do so would be to levy carbon tax on transportation fuels, in other words increase the taxation on gasoline and diesel. Would this in your opinion be a way forward in curbing the overall energy use?  

A: The industry view, expressed for example, by the European Roundtable of Industrialists and also by the oil and gas industry – Shell included – has been that in order to address the climate change and environmental issues we need a price for carbon. If you then ask the economists, how can this be achieved, you get a very clear answer– cap-and-trade in the form of European Emission Trading system, ETS, for instance, or the SO2 system in the United States which have been very successful.

Then there is the alternative, a direct carbon tax. Taxation is already very high for transportation fuels in many European countries. What I am saying is that the industry has already learnt how to live with it, and the society has been able to manage it very well.

In Shell we have taken the view that cap-and-trade is more market-oriented system. Engineered well it works better than direct tax, and it is politically easier to implement. If you look at politicians, it is very difficult for them to impose a tax on petrol.

Some U.S. oil and gas companies favour direct tax, because its impacts are clearer. You would know how much it would be and how it would impact. With cap-and-trade you have leakages, and it influences certain industries in an unpredictable way. All I am saying there is a little bit of debate which is better, but I think there is a general recognition, not only in gas and oil industry but more broadly, that we need a price for carbon. Otherwise we have no way of designing effective climate change policy.

Q: Do you think "a green oil company" is a contradiction of terms? International oil companies advertise their green energy and corporate responsibility projects. That's fine, but in the end their business relies on hydrocarbons. We need them, but when you produce them and we use them, CO2 emissions are created. Should oil companies be more honest about this? I recently read comments by Andrew Gould, the CEO of the oil services company Schlumberger, who said that's detrimental for the oil and gas industry not to acknowledge what companies are all about, and it confuses young people who are deciding about their careers.

A: I start from your final point. Chemical engineering, geology and other disciplines which are important for oil and gas industry are extremely sexy now for young people. They have grown in popularity in the last five years in a way which you could not have forecast. It is very interesting that this industry is perceived as very attractive and as an exciting thing. It's the complexity of the energy challenge. That's where it comes from, simply.

My second comment is that I came into this industry two and a half years ago from the outside. After having looked around for a few months one of my first observations was: Wow! These companies explore and produce hydrocarbons that supply 80 percent of the energy needs of the globe. There is a CO2 impact, yes, but the companies are doing a lot more than is publicly known. The attitudes within the companies, just the sheer knowledge of environmental impacts and climate change issues, their ability to have a dialogue with any environmentalist, any government official, any politician, is well beyond what I had expected. What is green? That's open to debate. My observation, coming from the outside, this is an industry that is not only aware what it is doing and what it has to do, but it is also addressing all its challenges.

Q: In you capacity as the chairman of the board for Shell you were instrumental in the selection of Mr. Peter Voser as the successor to Mr. Jeroen van der Veer as the CEO of Shell. Now we have two neutrals, one Swiss, the other Finn, leading this great Anglo-Dutch company, or more like an institution, perhaps. Is this deliberate?

A: I was picked by somebody else. I can only speak for the choice of Mr. Voser, whom I had gotten to know in the last two years. It was very clear. We had a number of very strong candidates in the company, and we went for the best. Very simple.

Q: Finland and Switzerland are perceived as neutral countries. You come from Finland. Mr. Voser comes from Switzerland. This company is almost like an institution within Great Britain and the Netherlands, so does choosing top leadership from neutral countries emphasizes that Shell is an international company?

A: Historically, the company has had either a Dutchman or a Brit as the CEO or as the Chairman. So I suppose your observation is fair. But nowadays this company is very much a meritocracy. There is a very strong meritocratic undercurrent in the company. Whatever your background is, if you do well, you get to go as high as you deserve. Nationality, gender or ethnic background doesn't play a role in these days.

Q: You signed on for another year as the Chairman of Board of Nokia. You have had a long and distinguished career with Nokia. Are we approaching the moment when you will cut your connection to Nokia?

A: You will have to ask the board. They wanted me to sign up for another year. That was very fine with my Shell colleagues and the Shell board, so here we are. No further comments.

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