Paddy's writing on Business, Brand and Reputation

This blog contains some of my writing on Brand and Reputation, including those on Shell - the corporation that I worked for for 37 years. Some of the articles have previously been published - others are seen here for the first time. The purpose of the website is to contribute to discussions on the role of brand and reputation management in today's business world. Please also see: Comments welcome to me at:

Saturday, January 26, 2008

Running out of oil ?

We'll begin to run out of oil in 7 years, says Shell

Plus ça change! When I was in The Netherlands in the early 1980s I sat on the Energy commission of the Ministry of Economics as Shell’s representative. There was much debate at the time over the high levels of profits that Shell was making from its (part) ownership of the Groningen gas reserves. Part of Shell’s defence of these profits was that the reserves were finite, that much investment had been made upfront, and that, therefore, it was legitimate for the company to get a good level of financial return. The key variable in this argument was the extent of the reserves. Obviously Shell’s argument to be allowed to secure high levels of return on capital was boosted if the reserves were estimated at a lower level - the higher the actual reserves then the longer they would last and the longer that Shell’s profit streams would last as well. Shell’s reservoir engineers and others assessed the Groningen reserves at a particular level and published their estimates. Shortly after this the then Professor of Energy Studies at Erasmus University in Rotterdam, Peter Odell, went public saying that Shell and other oil majors consistently underestimated hydrocarbon reserves. His argument, as I recall it, was that insufficient attention was given by Shell to future scientific and technology advances that would allow difficult reserves to be tapped or would turn uneconomic reserves into viable ones.

Given Shell’s more recent propensity to over-estimate rather than under-estimate reserves the Groningen story is somewhat ironic! However the substantive point of Odell’s argument remains valid and he was certainly proved right over Groningen where Shell’s estimates of the early 1980s have proved to be huge under-estimates. Odell knew that it was in Shell’s interests to preach a pessimistic credo about Groningen – and it is in Shell’s interests to continue to be pessimistic about reserves at a global level. Why? The main reason is the same as it was back in the 1980s – the wish on the part of the Oil majors to avoid the imposition of windfall profits taxes. The three largest oil companies (Exxon, Shell and BP) made nearly $60billion in profits over the last year between them (Shell $18.2billion). With oil continuing to be priced at around $90 these levels of profits are pretty much assured for the foreseeable future. Shell argues that it is up to governments to support diversification away from traditional energy and is looking for subsidies to develop its Renewables activities - again this argument is reinforced with a doom and gloom scenario over reserves in relation to increased demand. Similarly Shell has a huge potential profit stream from the development of its oil sands projects – especially in Canada. These projects are controversial for environmental reasons but permissions to proceed can be expected to be easier to obtain if legislators are worried about future energy supply security.

History teaches us that man has an almost infinite capacity to innovate – not least where hydrocarbon production is concerned. High oil prices are a driver of innovation and this, when combined with the certainty of increased global oil demand and the near-certainty that energy use throughout the 21st century will continue to be dominated by hydrocarbons means that we can expect the spur for innovation to be high and the technology effects on production to be considerable, if unpredictable. But to suggest that “We’ll begin to run out of oil within 7 years” as the Shell-inspired Daily Express headline suggests is nonsense and alarmist. Calculated self-interest is at play here and nobody should be fooled by it.

© Paddy Briggs January 2008