Royal Dutch/Shell reinventing itself as total energy company

David Knott
Senior Editor

Heinz Rothermund managing director Shell U.K. Exploration & Production "The industry needs to be a partner in establishing sustainable climate-friendly energy systems. Its investment decisions have to make sense in economic, environmental, and energy terms."

Shell's forestry program has led to development of techniques that encourage eucalyptus trees to grow 5-6 m/year. Here is a 10-month old Eucalyptus grandis specimen being grown in Paraguay to produce veneer logs. Photo courtesy of Shell. [21,987 bytes]
Royal Dutch/Shell Corporate Structure. [56,818 bytes]
Heinz Rothermund managing director Shell U.K. Exploration & Production. "The industry needs to be a partner in establishing sustainable climate-friendly energy systems. Its investment decisions have to make sense in economic, environmental, and energy terms." [11,607 bytes]
Shell's Global Power Prospects. [128,797]
Worldwide Primary Energy by type. [95,794 bytes]
Royal Dutch/Shell solar panels have been installed on a roof in Apeldoorn, Netherlands. Shell aims to capture 10% of the blossoming solar panels market by 2005. Photo courtesy of Shell. [27, 749 bytes]
Solar cells under test at Shell's manufacturing plant at Helmond, Netherlands. Shell has announced a plant to build a similar plant at Gelsenkirchen, Germany, with first production due in 1999. Photo courtesy of shell. [45,375 bytes]

Royal Dutch/Shell has changed its structure so it can transform itself from the world's largest petroleum company into a total energy company.

One hundred years since Royal Dutch Petroleum Co. and Shell Transport & Trading Co. merged, the group has moved aggressively into power generation and created a new core business to pursue renewable energy projects.

RD/Shell recorded net income of £5.69 billion ($9.1 billion) in 1996, when it produced a net average of more than 2.3 million b/d of oil and 8.3 bcfd of gas.

Last year, exploration and production, refining and marketing, and chemicals businesses accounted for roughly 55%, 30%, and 14%, respectively, of net income. Coal and other activities accounted for the remainder.

The new structure of RD/Shell consists of five core businesses: exploration and production; oil products; chemicals; gas and coal, which will be responsible for power generation; and renewables.

Announcing the birth of the renewables business in October, Jeroen van der Veer, group managing director of RD/Shell, said this newest core unit showed a commitment to developing business interests complementary to existing activities.

"It also underscores the group's strategic direction," said van der Veer, "which is to provide energy and develop resources efficiently, responsibly and profitably in order to help meet the world's growing needs and to do so in a way that contributes to sustainable development."

Inspiration

Two years ago, no oil company would have risked a statement stressing sustainable development-at least in the context generally favored by environmental activists-but Shell has learned some hard lessons.

Since the summer of 1995, Shell has been hit by protests about its aborted plan to dump Brent spar in deep water, about alleged connections to Nigeria's brutal government, and about climate change.

Shell's position as the world's biggest and most visible oil company has been partly responsible for its selection as a prime target. The company responded thoughtfully to criticism and began to think in a way highly atypical for a petroleum company.

A Shell official told OGJ that Brent spar, Nigeria, and climate change have all had an influence on certain aspects of the company's subsequent business strategy.

But the new corporate position was not arrived at without a provision for conventional business considerations-particularly return on capital and increased flexibility to take advantage of business opportunities.

"There has generally been a growing awareness and knowledge of the environment," said the official, "which has led to growing public concern over environmental issues.

"There has also been an acceptance among the scientific community that there is sufficient evidence of global warming and that precautionary measures need to be taken.

"Added to this, the Brent spar and Nigeria issues caused Shell to look at its business principles and the way we interact with other parties.

"Then there is our understanding of the way business is changing, of a need to be faster on our feet, to look for beneficial strategic alliances, and to improve our return on capital."

Sustainable power

Chris Fay, chairman and chief executive of Shell U.K. Ltd., explained company thinking at a conference earlier this month.

"Sustainable development," said Fay, "must take into account environmental, economic, and social consideration. Concentrate on one to the exclusion of the others, and none of the three will be achieved.

"Addressing potential climate change is not about stopping the world. It is about finding more efficient ways of meeting energy needs and developing new energy technologies."

Fay said Shell foresees sustained growth in energy demand, with a continuing fuels trend from coal to oil to gas to renewable sources. In one scenario, new energy sources would begin to compete in terms of price and convenience.

Another Shell scenario is of a less-materialized world with substantially improved energy efficiency. In this scenario, new energy forms such as renewables would find it difficult to compete, as prices would stay low.

Heinz Rothermund, managing director of Shell U.K. Exploration & Production, told an earlier conference that oil and gas industry has great opportunities to contribute to sustainable development.

"When some environmentalists paint fossil fuels as the enemy," said Rothermund, "they overlook the economic and social elements of sustainable development. They sometimes seem to put principles before people.

"The industry needs to be a partner in establishing sustainable climate-friendly energy systems. Its investment decisions have to make sense in economic, environmental, and energy terms.

"Shell supports sustainable development, and it sees it as a journey of continual change. Progress will come with increased understanding of the consequences of human activities, and as we see and seize opportunities for modifying them.

"Responsibility goes with opportunity. Our opportunities come from providing affordable, clean, reliable energy products that bring benefits to society in a responsible way."

Powergen push

RD/Shell is keen to develop power generation and sustainable energy schemes, but only if they can be supported in conventional economic terms.

In October, Shell International Gas Ltd. (SIG), which along with Shell Coal Pty. Ltd. comprise the recently formed gas and coal business unit, revealed an expanded plan for investment in power generation projects.

The move is not simply an extension into another business area, but a recognition by a major gas supplier that it must provide guaranteed markets for future gas developments if it wants to keep expanding.

So successful has been the company's search for likely projects, however, that it has already had to review its power generation strategy and increase its financing.

SIG is negotiating to begin 12 linked development and power generation projects worldwide (see map, p. 31). These have a combined capacity of more than 10,000 MW, of which Shell equity would be 3,000 MW.

Although the company already generates thousands of megawatts of electric power at its own sites, only last year did Shell decide to become a power generator to third parties.

New business

Walter van de Vijver, chief executive of SIG, said Shell is looking for new businesses and is particularly looking to squeeze more value from the gas production and usage chain.

"Shell is world leader in LNG and intends to remain there," said van de Vijver. "We are trying to open new markets for LNG, which is still competitive with the pipeline alternative. Overall, we see LNG as a very important area for growth."

At the end of 1996, Shell's worldwide natural gas reserves amounted to 1.5 trillion cu m, said van de Vijver, the largest in the world for a commercial petroleum company.

At that time, the company's gas production was also the largest for a commercial company, averaging more than 2 million boed.

Shell's current focuses for gas business are western Europe, Asia-Pacific, North America, and liquefied natural gas (LNG), said van de Vijver.

Through SIG, the group is looking for new opportunities in the Asia-Pacific region, Latin America, eastern and southern Europe, and Africa, he said. The company of late has been particularly keen on power generation.

"Shell is increasingly active in Latin America," said van de Vijver, "where there is great growth potential for gas and power generation as energy markets are opening up."

Electricity demand

Dick de Jong, SIG's director of strategy and business services, said RD/Shell expects to double its gas business every 10 years. This is the same prediction it was making 20 years ago, he pointed out.

De Jong said the highest growth in energy demand worldwide is expected to be for electricity, with gas coming second: "And gas is rapidly becoming accepted as the fuel for electricity generation."

Fifty percent of growth in gas demand by 2020 is expected to be for power generation. In 2020, worldwide total gas demand is expected to be 2 trillion cu m, up from 300 billion cu m last year.

"Everywhere, we see governments and state companies moving in the direction of privatization or liberalization or both," said de Jong.

A rise of 1.5-2 million MW in global capacity for electric power generation is expected by 2005-10, said de Jong, of which 23-49% will be owned by independent power producers (IPPs).

"Shell used to be simply a peddler of gas," said de Jong. "We used to find it and produce it and take it to market. With privatization and liberalization, we can move further downstream towards customers.

"Increasingly, we have to become masters of our own destiny. We now need to be aware of what's going on in markets, and we need to help IPPs, for example, to create markets, particularly in developing regions."

Gas is particularly wanted for power generation in developing countries, said de Jong. This especially has persuaded Shell to become a power generator, with a view to creating markets for gas.

"Power generation projects are a means of creating beachheads in developing markets, " said de Jong, "as a way of selling more gas. But we need to develop a tool kit to help customers get what they want."

Intergen deal

Earlier this year, Shell negotiated to take a 50% stake in Boston-based Intergen, a subsidiary of Bechtel Corp., Houston, established 2 years ago to pursue IPP projects.

This investment is seen as key to Shell's immediate power generation plans. De Jong said negotiations with Bechtel are under way and are expected to be concluded in the very near future.

Shell's power generation projects will not be confined to gas: among the prospective projects identified is a 1,300 MW coal-fired scheme in Australia. Although natural gas will be the main fuel, coal, LNG and other fuels will be considered, where appropriate.

Van de Vijver said getting involved in power generation is a natural progression for Shell. Rocksavage power station in the U.K., due for completion next year, may become the first joint Shell/Intergen generating capacity.

SIG also hopes to make an investment decision on Philippines power schemes in the next 4 months. There, the Malampaya and Camago offshore gas fields are earmarked for development to supply a number of existing and planned power plants.

While Shell is prepared to admit it has increased its power generation budget, van de Vijver fought shy of revealing numbers: "We will become more open about budgets once the Intergen deal is concluded.

"A deal with Intergen is close. This agreement shows how we now have to create markets for our gas, as we did not have to before, so we don't have reserves of stranded gas."

Renewables launch

Completing its new structure, Shell will make history's largest investment in renewable energy to establish a new division to promote solar power, biomass, and forestry projects.

Shell International Renewables (SIR) will invest more than $500 million over the next 5 years, split equally between solar and biomass projects and forestry.

Van der Veer said that the company is already in the renewables business in a small way: "This announcement represents a step change."

He explained that Shell decided to invest in renewables because it is "an energy solution for the future." While renewable sources account for only a few per cent of energy use today, they will account for 10% in 20 years.

"One scenario," said van der Veer, "predicts that we will be using 50% renewables by 2050, if there continues to be a 2%/year growth in energy demand.

"Renewables will be a very major business 50 years from now, and Shell aims to be a major player. We are confident a large market for renewables will come, so we had to decide on a step change in investment."

Van der Veer said Shell believes fossil fuels will continue to be important, but their use will reach a plateau by 2020. By this time, renewables will have become significant (see chart, p. 31).

At first, renewable energy will grow in niche markets rather than compete with traditional fuels. The type of renewable energy does not affect the overall picture, maintains van der Veer. Technologies will compete, but the market will decide which wins out.

Shell believes it will succeed in renewables because it has been involved in that sector, although on a small scale, for some time: since 1973 in development of photovoltaic cells and since the early 1980s in forestry.

"We have a growing market for renewables," said van der Veer, "and have made vital technical developments in solar power and forestry, but with renewables we will have to learn as we go.

"For example, we have no expertise in the manufacturing industry, so we must really learn a lot to make solar panels. Over time, we believe we can master this competence and capability."

Solar power

SIR's aim is to secure a 10% share by 2005 of the rapidly expanding solar power market, which it estimates to be worth $1 billion/year.

Jim Dawson, president of SIR, said the company has two photovoltaic cell manufacturing plants: Shell Solar Energy BV in the Netherlands and Showa Solar KK, a joint venture in Japan owned 75% by Shell and 25% by Siemens GmbH.

SIR is expanding manufacturing capacity at the Netherlands plant so it can produce enough solar cells to generate 5 MW of electric power. Before 2000, SIR intends to have 20 MW production capacity there.

Dawson said SIR hopes its solar panel sales will amount to 30 MW by 2002 and that it aims to hold 10% of the worldwide market by 2005. The Japanese plant already claims 10% of the country's solar panels market.

In early November, Shell announced a plan to build a solar cell factory at Gelsenkirchen, Germany, in a joint venture with Pilkington Solar International GmbH, Cologne.

The plant will produce polycrystalline cells with a total capacity of 25 MW/year. The plant will be similar to the Netherlands unit and is expected to cost $18 million. It is due in production in 1999.

Shell expects worldwide sales of photovoltaic cells to grow at 15%/year to 2010, during which time purchase costs of solar panels are expected to fall by 4%/year.

Dawson said current predictions show a $6 billion/year global market in solar technology by 2010, while Shell will seek a 10% market share through aggressive efforts to reduce manufacturing costs, new technologies, and possibly acquisitions.

Biomass/forestry

Shell has forestry projects across the southern hemisphere, with eucalyptus and pine plantations in Chile, Uruguay, Paraguay, New Zealand, and the Republic of Congo.

The company's total land holding for forestry amounts to 200,000 hectares, of which 120,000 hectares are planted. Annual planting amounts to 10,000 hectares, while a total 1.2 million cu m/year of timber is harvested.

Shell has been developing its forestry techniques for 15 years, to the point where it claims it can grow eucalyptus trees at a rate of 5-6 m/year.

SIR's plantations already supply pulp for paper mills and the wood veneer industry and will increasingly be used to fuel biomass power generation schemes.

"Half the world's population doesn't have electricity," said Dawson. He predicts photovoltaics and biomass will be able to provide power to undeveloped regions at an affordable rate.

Shell plans to target rural markets with a combination of solar power and biomass schemes. Biomass projects would be used to feed gas engines and small boilers in rural areas and large boilers in power plants to generate power for distribution grids.

"Solar and biomass have a common goal-to convert sunlight into marketable energy," said Dawson. "Such an 'energy forest' can fuel a rural market.

"A combination of photovoltaics and biomass is well suited to feeding industry, rural, residential, and distribution grid markets. SIR will be unique in this combined solar/biomass approach."

Dawson said Shell's targets in biomass are: to have four small-scale power schemes operational in 1998 and 20 in 1999; to build a large-scale project of 50 MW capacity in South America beginning in 1998; and to have a total 250 MW of installed biomass generating capacity by 2005.

SIR intends to brand its renewables strongly under the Shell Solar trademark. While solar and biomass will form the bulk of the business, the company has also started a wind power feasibility study.

The wind power study will determine whether the technology is worth pursuing for future investment through SIR. Dawson said any future investment in development of wind power technology would be in addition to the solar/biomass program.

Finance

Dawson said the planned investment in SIR is the world's largest investment in renewable energy to date and represents a significant proportion of RD/Shell's total $10-11 billion/year capital program.

He said the forestry side of the business is already profitable through sales of wood pulp and veneers. The photovoltaics side is operating at a small loss, but profits are expected next year.

Dawson said photovoltaics could not yet be profitable without government subsidies to encourage research and development and without regulatory help to encourage installation of solar panels. "A bit of pump priming is certainly helpful to get the solar power show on the road," said Dawson, "but it would not be beneficial to have too much aid or for too long."