How Shell Is Preparing For The Energy Sector’s ‘New Normal’ by [email protected]

Marvin Odum, Outgoing President of Shell Oil Company

The downturn in the oil industry has been “completely devastating” for individuals who lost their jobs and for companies without strong balance sheets that can “weather this storm,” Marvin Odum, outgoing president of Shell Oil Company, said recently during an interview on the [email protected] show on Sirius XM.

However, for Shell, the decline has provided new opportunities to realign its global strategy with the changing realities of global energy markets, Odum added. A 34-year veteran of Shell, Odum noted on the SiriusXM segment, “If you’re a company like Shell that spends a lifetime thinking about how you develop … the resiliency to get through these kinds of cycles, which you know will come, it’s a difficult time, but it’s a time you’re prepared [to] use to make strategic moves as well.” (Listen to the full SiriusXM interview with Odum using the player at the top of this page.)

Stung by a 70% slide in crude prices since mid-2014, last month Shell reported its lowest annual income in more than a decade, and pledged to make further cost-saving measures. Odum, who steps down at the end of March, was at the helm during Shell’s failed $7 billion bid to drill offshore in the Arctic, which the company abruptly called off last September. Since 2009, he has been on the executive committee, responsible for Shell’s portfolio interests in the Americas for shale oil, heavy oil and the Arctic.

In February, Shell acquired British Gas, a few months after BG reached record oil and gas output thanks to new projects in Australia and Brazil. The acquisition will boost Shell’s oil and gas production by 20%, according to Reuters, and bring it closer to challenging the world’s top international oil company, ExxonMobil. Combined, Shell and BG will overtake Chevron as the world’s second-biggest publicly traded oil and gas company measured by market value.

On March 3, in an on-campus discussion organized by the Penn Wharton Public Policy Initiative and Penn’s Kleinman Center for Energy Policy, Odum addressed the strategic challenges facing Shell and other energy producers at a session moderated by Arthur van Benthem, Wharton professor of business economics and public policy. Responding to a question by van Benthem, Odum noted that Shell as a company recognizes that the world is in an energy transition — away from a focus on fossil fuels to a mix that places increased emphasis on renewable energy sources, electricity storage and possibly the use of hydrogen.

“That transition is much more difficult than most people think it is, not the least because of the scale of the energy system and the trillions and trillions of dollars that have gone into developing that system.” –Marvin Odum

“That transition is much more difficult than most people think it is, not the least because of the scale of the energy system and the trillions and trillions of dollars that have gone into developing that system,” Odum said. “The world depends on that infrastructure, so replacing that infrastructure with something else is actually quite difficult. There is a real need to understand the complexity of the energy system overall.”

In a separate interview with [email protected], Van Benthem pointed out that while the transition to a new mix of energy sources may seem slow to take hold to outsiders, “it is actually very exciting and disruptive if you are inside the energy business — because it is not quite as slow as you would expect. It really means that a lot of traditional thinking has to be replaced.” Shell’s leadership has to think about how the firm can exist in 50 years if it is going to become mostly a natural gas and electricity company, rather than one that is predominantly an oil company, Van Benthem said.

A major theme of Odum’s Wharton presentation, Van Benthem pointed out, was that “although it is going to be very difficult — given the speed at which investment moves — to see a world predominantly powered by renewables by 2050 or so, it is completely wrong for oil and gas companies to say that they don’t have to take renewables very seriously because there are lots of exciting developments there.”

There are global ambitions to reduce CO2 emissions to 80% below 1990 levels by the year 2050, Van Benthem added. “Renewables will certainly play a big role — but you also have to rely on things like a shift from coal to gas and nuclear.”

A ‘Patient’ Approach

A second major theme of Odum’s talk involved patience. In effect, he said that patience is key to the way Shell does business. When asked about whether he is troubled by the volatility of oil prices, Odum said that Shell has no idea what oil prices are going to be on any given day, and rather than attempt to guess where they are going next, the company’s leadership tries to identify the best projects possible, in order to ride out multiple booms and busts and average it out over time.

The decisions about which projects to take on are not clear-cut, Odum noted. “[These decisions] rely on absolute clarity about what you are trying to accomplish and asking this question for every [investment] you make: Does this particular project have the ability to survive better than the other projects you have to choose from?”

“These decisions have everything to do with what the world will look like during [the coming] decades. Will there be a price of carbon? If so, what will it be? What are the environmental factors that have to be considered?” –Marvin Odum

Further complicating the challenge, “these decisions have everything to do with what the world will look like during [the coming] decades,” Odum said. “Will there be a price of carbon? If so, what will it be? What are the environmental factors that have to be considered? Also — all the geopolitical factors; the country-risk factors. That’s just a small number of factors that have to be considered.”

Clean Power

Odum also touched on Shell’s strategies for remaining profitable while nevertheless handling environmental challenges such as climate change, and related public policy initiatives such as the 2015 Paris Climate Accord and the Obama administration’s Clean Power Plan.

Many U.S. policy makers, energy executives and academics have expressed strong skepticism about the goals laid out by the 195 countries at the conclusion of the Paris Summit. “In my opinion, it was borderline embarrassing that the world leaders were holding hands like they saved the earth” after the Paris gathering, Van Benthem said. “It’s a start, but once you look a little closer into it, it is just a list of 200 good intentions, which are often very vague and are very easy to renege on afterwards.” Though world leaders “over-sold” the accord, according to Van Benthem, it could stand the test of time if major countries follow through with quick and serious action.

Odum saw it differently, however. “I personally think that 200 countries coming together to have consensus to some extent … and making commitments [is a] significant event in itself … and it builds a certain amount of momentum that

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