What will Shell’s role be in an increasingly carbon-constrained, and increasingly electrified world? Clearly the company sees its natural gas business as becoming central to its operations, gradually overtaking its oil business. But beyond that, the future is uncertain. Jeremy Bentham, Vice-President of Global Business Environment and head of the Shell Scenarios team, sees Shell evolving into a company that provides flexibility and resilience and has the ability to integrate complex, cross-border and cross-sector energy activities in an urbanised, globalised world. “The way businesses and organisations have developed is quite specialised and siloed. Future organisations are going to have to cross these boundaries.” We interviewed Bentham at Shell’s Powering Progress Together conference in Rotterdam on 15 May.
Jeremy Bentham’s “Business Environment” team, responsible for Shell’s famous Scenarios, sits “about 20 yards away from the office of CEO Ben van Beurden and CFO Simon Henry”, says Bentham, when I ask him about his position within the company. “I make sure we regularly talk to each other.”
My question is undoubtedly not new to the Shell veteran. Shell is unique among energy companies in that it has developed Scenarios now for over 40 years, since 1971, and has, ostensibly at least, made these Scenarios a central part of its strategy development. Yet to outsiders there is always the question how the often playfully named Scenarios – most recently “Mountains” and “Oceans”, but before that for example “Scramble”, “Blueprints” and even “Just do it” or “The Carter Miracle” – affect the real, practical business decisions within the company.
Bentham explains that the corporate strategy unit of Shell consists of three “interlocking teams” – the Strategy and Competitive Intelligence team, the Financial Planning team and the Business Environment Team – who share offices and “work closely together on almost all things”. They are also located right next to the offices of Shell’s corporate executives. “What we are doing with the Scenarios is not an academic effort, it shapes the way people think about the future and hence the choices they make now”, he stresses. “This type of work has been going on for over 40 years. The fact that we are still doing it means people find it useful. If it wasn’t useful, we wouldn’t be doing it.”
“The kind of industry we’re in has to have a perspective that goes out decades”, adds Bentham, who himself has worked in all parts of the Shell organisation for more than 30 years, in commercial, scientific and technological jobs, including as CEO of Shell Hydrogen. “Because energy infrastructure goes out decades. You don’t build an oil platform or refinery or pipeline for two years. Of course you can’t predict the future in detail, but neither is it random and what you can do is think systematically about it. What are the main features of the future energy landscape? What are the major uncertainties? Those are the questions we ask, but we always do this to make better decisions now.”
The business of Bentham’s unit is about much more than producing the Scenario reports, Bentham explains. “For example, over the last two days we brought some leading thinkers about China together, both from within and outside of China. Not to make them agree with each other about future developments in China. But to hear their perspectives, see where they are aligned and where they are different. That tells you about real differences in the world. We always try to understand the perspectives of different people, different sectors of society, different parts of the world.”
Nevertheless, this still raises the question how the perspectives garnered by the strategy teams and scenario developers inform the business decisions of the Shell board. For instance, why did Shell decide to take the risk of investing heavily in Arctic oil? Was this decision informed by Shell’s strategists?
Bentham: “One of the ways in which I look at our work is to look at the big decisions. Any big decisions will have lots of fingerprints on it. Are our fingerprints on it? Did we help shape this? To give an example, the extent to which Shell is growing its gas and LNG business and its LNG transport business, is consistent with scenario work that we did since the 1990s. Or the way we have developed the biofuels business, having some confidence in that being a growing business going forward – that would be within there as well. As to the Arctic, what we have highlighted is that the world’s underlying demand for energy is surging and continuing to surge, as a result of population growth but also of people achieving a higher quality of life. We said all forms of energy will grow and will be needed to meet that demand. And so frontier areas like the Arctic offer opportunities to meet that underlying demand. At the same time, we recognise the growth in concern and activism around environmental issues. This is reflected in our operational standards but also in the way we have applied a shadow CO2 cost (of $40 a tonne, editor) in our project evaluations since 1999. We have highlighted that Arctic oil is a complex issue. What is done there needs to be done responsibly and carefully. Currently we have seen policy uncertainties about Arctic oil, so we are taking a breather in considering how to go forward there.”
But you have not decided not to invest?
No. I won’t be the one making that decision anyway. But I will advise on it. And my advice will bring together parts of the dilemma. The world needs more energy and this could be an important source. But the world is also concerned with sustainable development and this is a sensitive area.
Arctic oil is one opportunity, but there are many opportunities for Shell going forward. However, you seem to be relying on your oil and gas business mostly, in addition to biofuels. You are not active in a large way in renewables like solar and wind. Your CEO Ben van Beurden said this morning [at the Powering Progress Together conference], “don’t think because we are good at finding oil and gas we are necessarily good at solar power”. Aren’t you running the risk of making the wrong choices for the future because you hold on to oil and gas?
That growth in solar power is something we support. In one of our scenarios solar could be the largest single primary energy source by 2060. We have been active in solar power and still are, in Japan. But if others have better synergies than you, you don’t serve your investors or society at large by doing something that they can do better. Electronics companies who do a lot with silicon are going to be better at doing certain things because of that synergy. We are very good at finding, transporting and modifying molecules. So biofuels are much more natural for us to make a contribution to.
So how will you then prosper in a carbon-constrained world which is increasingly being electrified, as the International Energy Agency has recently stressed once again? Won’t your business shrink?
One of the big challenges that will emerge from the growing amount of wind and solar energy is not so much about how you produce the electrons, but how you introduce volatile intermittent energy into the energy system against a demand where people anticipate they can turn on the light any time. How do you develop a system that is resilient and flexible? We believe that gas and gas fired plants can provide the flexibility . Smart grids and demand response systems will also be important, but that’s on the demand management side. On the supply side gas-fired power will be able to bring that kind of flexibility. The cheapest quickest power station to build is gas-fired. That’s where companies like ours can play a role.
Are you going to be a provider of back-up power primarily? That sounds rather limited.
First of all, don’t forget that power generation is currently only a fifth of global energy use, although increasing electrification is an important feature of our scenarios as well, and providing gas-fired power can be a very big system.
It’s not just back-up power, it’s baseload as well, also in industry and residential use where there are needs for efficient heat rather than electricity. Increasing electrification is a core expectation from our scenario as well and providing gas-fired power can be a very big part of a very big system. We see that the opportunities and challenges that arise cross boundaries. Different kinds of boundaries: international boundaries, e.g. in supplying a fuel. But also public-private boundaries and industry sectoral boundaries. So it really comes down to an area that is still being explored. A new industry is being created. The question is how can all participants collaborate better over time. The way organisations – whether government or industry – have developed under the pressures of the last 50 years, is that they have become specialised and siloed. Now more and more people are aware that future developments are going to have to cross these old boundaries. That’s easy to say, but no so easy to do.
What is the business case for Shell in this?
This is to some extent as yet unknowable. You are effectively creating or being part of creating something that has never existed. We have never existed in a world that has more than 7 billion people, that has the amount of demand for energy that we see now, that has more than half the people living in urban settings. It’s clear that how energy in the broader sense and electricity – which currently is still only one-fifth of global energy use – will develop has a lot of unknowables. As a company with a lot of investment and insight and expertise in the energy system we will be part of exploring these new frontiers.
Some people say you try to extend the fossil fuel system as long as possible.
We know that oil and gas will continue to play a very important role in the energy system for some time. But if you look at our scenarios, you will see how biomass and renewables are part of the growth outlook. So actually while in one sense the world does not seem to change quickly, in another sense it is changing deeply and relatively rapidly. That’s why we find it important to share our insights with people outside the company, at a conference like this.
How the Energy Scenarios helped Shell adapt to systemic shocks
According to an article in Harvard Business Review, “Living in the Futures” (May 2013), written by Angela Wilkinson and Roland Kupers of Oxford University, who both used to work for Shell, the Shell scenarios first began to take shape in 1967 under the leadership of Jimmy Davidson, head of economics and planning at Shell’s Exploration and Production (E&P) division and Ted Newland, who was asked by Davidson to start up an activity called Long-Term Studies at the London headquarters of Shell. Soon the Frenchman Pierre Wack was brought in, under whose leadership the first formal Shell scenarios were completed in 1971.
This first production went off to a flying start, because it anticipated the oil crisis and oil embargo of 1974. The report “sketched the possibility that the power in oil markets would shift from consumer to oil-producing nations – and that the interests of those producers would dictate cuts in production, not the eternal increases foreseen in the business-as-usual version of the future”. Yet “predicting the future” is not what Shell scenarios are about, write Wilkinson and Kupers: “We have no solid examples of Shell’s having anticipated future developments better than other companies—the mythology around anticipation of the 1970s oil crises notwithstanding.”
Rather, as they put it, “What does seem clear is that a sustained scenario practice can make leaders comfortable with the ambiguity of an open future. It can counter hubris, expose assumptions that would otherwise remain implicit, contribute to shared and systemic sense-making, and foster quick adaptation in times of crisis.”
As an example they mention the way Shell managed to respond to the financial crisis of 2008: “In the few years following publication of the 2007 scenarios, at least three major energy-market events failed to fit the world energy model: the 2008 financial crisis; the U.S. shale-gas boom; and Germany’s decision, after the Fukushima nuclear disaster, to speed up its transition to renewables. However, the model had been used to trace the energy impact of a deep recession—giving credibility to the recession-and-recovery scenarios that were created and presented to Shell’s executive committee within days of the Lehman Brothers collapse in 2008.”
In addition, Wilkinson and Kupers point out that “scenarios can build social capital within and beyond the organization”. In other words, they are valuable in providing a tool for “external engagement”. For example, as Doug McKay, scenario team member from 1996-2002 recalls: “We facilitated a set of scenarios for the Chinese government. The notion that you would actually think outside the official plan was like pulling teeth. Over a one-year period we developed the scenarios with them, and it gives you insights into the way they are thinking that you just can’t get otherwise and, of course, you wouldn’t get as a businessperson across the table discussing things with them.”