In his maiden trip to India,Royal Dutch Shell CEO Ben van Beurden says the world’s largest non-state-owned oil company by sales is as much focused on clean energy and renewable power as is it on oil retail and liquefied natural gas (LNG). Having led the company through a transformative $50 billion takeover of BG in 2015, Van Beurden told Arijit Barman in an interview that he believes India finally has what it takes to become one of its top five markets globally. He also touched upon gas markets and hubs to peak oil and making Shell more reliant on non-crude energy sources like clean power. Edited excerpts:
The way Shell has decarbonised its portfolio over the past few years, are we to assume that you feel the age of oil may be coming to an end?If you look at the energy mix at the moment from a demand and consumption perspective, currently the world consumes about 18% of its energy in the form of electricity. That means that there is still a very large percentage of energy consumed in the form of fossil fuels, oil, gas and coal. But if you look into the future we see that mix continuing to change. Does it mean that oil will disappear? No. It won’t. Oil will peak in demand and it will gradually slow down. Gas will at some point of time perhaps also peak. But I think that will be, if it happens, much later. But the key thing is the energy just will grow and the fastest-growing part of it is going to be electricity. That’s what we believe.
But oil prices have doubled in the last two years. What’s happening?
The fluctuation is first of all due to the fact that people who actually make the price are finding it hard to see the fundamentals of the market. At the moment, it’s sentiment driven, it is driven by a tremendous amount of liquidity in the market--money looking for any form of yield. It is speculative money and everything else. So I think oil prices in the long and the very long run will be driven by fundamentals. But in the near term they will be driven by all sorts of other forces.
Where do you think crude will eventually settle?
Oil price will settle somewhere between $30 and $130. And it will probably test the barriers at both ends. The oil price that we are seeing at the moment is not a bad oil price. It is probably sort of a mid-point of a range that we will see. And again, the real dynamics of supply and demand--on top of that superimposed the dynamics of sentiment--will actually create the boundaries. And you know for our company every $10 swing in oil price movement is about $6 billion in cash every year. So if it can hover between $40 a barrel or $50 maybe, you can imagine how much variation we have in our cash flows. Challenge is, how do I move away or how do I build another business that is not oil price sensitive but is much more focused on the fundamentals of the economy like petrochemicals, like power and natural gas, which has a degree of detachment already from oil prices.
Despite Shell’s long association with India, you are relatively low profile in this country. What’s your game plan?
Our ambitions in India are much higher than our current position. But our current position is not a position of insignificance or weakness. Everything that we have grown in India, we have grown from scratch. We have built our gas position here, we’ve built our products position here--retail, lubricants. But also crucially we’ve built tremendous technical and other capability in this country as well. Now, is that enough? No definitely not.
We have relocated and grown our capabilities here to serve as global businesses, whether it is our global integrated gas business, some of our global or products businesses, some of our global chemicals businesses, and increasingly also our global biofuels new energy businesses. But if I step into the more traditional businesses or products for instance in lubricants, yes we have tremendous growth plans.
We have a licence to build 2,000 retail sites in the country. We’ve only done 88 so far. But now that we have seen the playing field, we are stepping up growth, getting to 1,200 sites in less than the next decade and making this the really material business. This country needs to be in the top five in terms of our oil products business, in terms of contribution, customers and financial contribution. And a similar story I could tell for lubricants and natural gas. That was a tough nut to crack but we cracked it in the end in Gujarat with the Hazira LNG terminal.
Then I get to new energy. First of all, biofuels I think is a game changer. I think Prime Minister Modi said it exceptionally well. This is the opportunity perhaps for India to go from waste to wealth. And I think for us this is a great complementary strength to building our own supply chain into our own retail and commercial fuels business. But it is also an opportunity for us to decarbonise our footprint because this is technology that will reduce the carbon intensity from 70 to 90%.
And the other one is new energy, especially the power side of it. Again, I am absolutely convinced that India will prove to be an extremely tough nut to crack. But I am also convinced that there is a tremendous amount of potential when you crack this nut. Partly because of the growth imperative that the government has put up, the dynamism in the market, the innovation power in this economy. And the way we can do frugal innovation, test our new business models.
But what will be the principal three-four legs of the business in India?
I think on the products side, it will be retail and lubricants. We will have a very strong natural gas leg and the biofuels leg, which is going to be part of that retail leg as well. And then we will be growing a power leg in this as well. And then if the opportunities are really good, we can also look at upstream in the country. That is of course very much a global play for us.
What gives you confidence about India?
It’s absolutely true that you need to have the fundamentals right. And the fundamentals of first of all economic growth, but also the fundamentals of a predictable regulatory and legal framework. And I think what we have been seeing in the last years is very clearly improvements, not only in the fundamental macroeconomic prospects of the country, and therefore ways and means for us to access growth and demand segments and everything else, but also a lot of improvement and clarity in access, in the fiscal stability, in predictability of how our regulators and authorities behave in basically also dealing with some of the legacy issues that we had in that space.
I think there is an inflection point in energy transition as well. If you would have asked me five years ago how would you see India as a market for power and new energy, I would probably say--don’t know, let’s wait and see. But now I can see that this is a market that is going to play a major role in how electricity innovation will work out and we want to be part of that as well.
Why do you say ‘inflection point’?
I think the way gas has started to penetrate in Gujarat for starters but also we’re starting to penetrate in other parts of the other sectors of the economy, accessing not necessarily power. I think for us a very important part will be the commercial and industrial segment--the way perhaps we can bundle it up with power, maybe bundle it up with renewable power for instance. But perhaps also getting into gas for transport, which is a nascent but fast-growing segment globally including in India. So I think an inflection point has come, very clearly also because of the policies that the Modi government has set out. India has also made strong commitments to the Paris (climate accord). And I believe still, although it is all based on a lot of renewable growth, gas and power will have to play a role as well.
India is thinking of developing a gas hub. What will it take to make it work?
Number one is access to infrastructure. Unless the pipelines and maybe also in some cases the terminals are open access and are freely available with flexible business models, this structure will not work. Secondly, there has to be transaction density in the trading exchange itself. I mean if you take a look at the electricity exchange, we would all argue that 5% is insufficient to really create a trading (centre). There should be a minimum volume. Finally, there have to be financial instruments that back all of this.
In India we have imported LNG and also domestic natural gas. Where do you think pricing for both will settle?
Some of it of course eventually will have to converge in my mind. But let’s be very clear India will not have the capacity to be a price setter internationally. Actually there is hardly any market that has the capacity to be a price setter except for the United States. Everybody else is a price taker. And it is either a price taker for brand for all the crude related pricing, or it is a price taker on hub related pricing because increasingly you will see gas coming out of the United States. And then there will be a degree of arbitrage around it and cost to serve markets that will determine local pricing. But everybody else will be a price taker for a long time to come.
What is the plan for growth at Hazira?
I think the immediate next step we are working on is making it a hub for transportation That’s a new segment in the market. Trucking or having goods transported with LNG is a sensible and growing segment for competitiveness and environmental reasons. But the question is going to be--how do we link up customers that we can develop with the infrastructure that we have? So the key question for me still is how are we going to get access to infrastructure and that will determine what is going to happen with Hazira next. We will have to have the infrastructure access first. Can we see other access points in the Indian gas markets beyond Gujarat? Possibly yes. But again it will depend on access.
There are 100 city gas contracts coming up in the next few months. Will Shell be bidding for those?
I think it is not a strategic segment for us.
From wind farms to solar parks to hydrogen for cars, Shell is at the forefront of renewable energy. But you are absent from India so far.
You’re right in observing that we haven’t done an acquisition in India, which doesn’t mean that we haven’t tried. The focus is definitely going to be North America and Europe for this integrated play but also India. But you will see us at some point in time, you will see us make the move. I think the challenge is that at the end of the day the power sector market in India has not fully opened up in the way that frankly we wanted to or we expected to, right? And let’s be honest about it, we have an electricity act dated back to 2003, which actually talks about tremendous transformation which has not happened.
So what needs to be done?
It’s separation of carriage and carrier. It is about open access place. We have to understand how storage plays into this one and what form of storage. And how do you actually price something like that? We haven’t resolved any of that. But at least the government is taking note of that and is making the changes.
The way Shell has decarbonised its portfolio over the past few years, are we to assume that you feel the age of oil may be coming to an end?If you look at the energy mix at the moment from a demand and consumption perspective, currently the world consumes about 18% of its energy in the form of electricity. That means that there is still a very large percentage of energy consumed in the form of fossil fuels, oil, gas and coal. But if you look into the future we see that mix continuing to change. Does it mean that oil will disappear? No. It won’t. Oil will peak in demand and it will gradually slow down. Gas will at some point of time perhaps also peak. But I think that will be, if it happens, much later. But the key thing is the energy just will grow and the fastest-growing part of it is going to be electricity. That’s what we believe.
But oil prices have doubled in the last two years. What’s happening?
The fluctuation is first of all due to the fact that people who actually make the price are finding it hard to see the fundamentals of the market. At the moment, it’s sentiment driven, it is driven by a tremendous amount of liquidity in the market--money looking for any form of yield. It is speculative money and everything else. So I think oil prices in the long and the very long run will be driven by fundamentals. But in the near term they will be driven by all sorts of other forces.
Where do you think crude will eventually settle?
Oil price will settle somewhere between $30 and $130. And it will probably test the barriers at both ends. The oil price that we are seeing at the moment is not a bad oil price. It is probably sort of a mid-point of a range that we will see. And again, the real dynamics of supply and demand--on top of that superimposed the dynamics of sentiment--will actually create the boundaries. And you know for our company every $10 swing in oil price movement is about $6 billion in cash every year. So if it can hover between $40 a barrel or $50 maybe, you can imagine how much variation we have in our cash flows. Challenge is, how do I move away or how do I build another business that is not oil price sensitive but is much more focused on the fundamentals of the economy like petrochemicals, like power and natural gas, which has a degree of detachment already from oil prices.
Despite Shell’s long association with India, you are relatively low profile in this country. What’s your game plan?
Our ambitions in India are much higher than our current position. But our current position is not a position of insignificance or weakness. Everything that we have grown in India, we have grown from scratch. We have built our gas position here, we’ve built our products position here--retail, lubricants. But also crucially we’ve built tremendous technical and other capability in this country as well. Now, is that enough? No definitely not.
We have relocated and grown our capabilities here to serve as global businesses, whether it is our global integrated gas business, some of our global or products businesses, some of our global chemicals businesses, and increasingly also our global biofuels new energy businesses. But if I step into the more traditional businesses or products for instance in lubricants, yes we have tremendous growth plans.
We have a licence to build 2,000 retail sites in the country. We’ve only done 88 so far. But now that we have seen the playing field, we are stepping up growth, getting to 1,200 sites in less than the next decade and making this the really material business. This country needs to be in the top five in terms of our oil products business, in terms of contribution, customers and financial contribution. And a similar story I could tell for lubricants and natural gas. That was a tough nut to crack but we cracked it in the end in Gujarat with the Hazira LNG terminal.
Then I get to new energy. First of all, biofuels I think is a game changer. I think Prime Minister Modi said it exceptionally well. This is the opportunity perhaps for India to go from waste to wealth. And I think for us this is a great complementary strength to building our own supply chain into our own retail and commercial fuels business. But it is also an opportunity for us to decarbonise our footprint because this is technology that will reduce the carbon intensity from 70 to 90%.
And the other one is new energy, especially the power side of it. Again, I am absolutely convinced that India will prove to be an extremely tough nut to crack. But I am also convinced that there is a tremendous amount of potential when you crack this nut. Partly because of the growth imperative that the government has put up, the dynamism in the market, the innovation power in this economy. And the way we can do frugal innovation, test our new business models.
But what will be the principal three-four legs of the business in India?
I think on the products side, it will be retail and lubricants. We will have a very strong natural gas leg and the biofuels leg, which is going to be part of that retail leg as well. And then we will be growing a power leg in this as well. And then if the opportunities are really good, we can also look at upstream in the country. That is of course very much a global play for us.
What gives you confidence about India?
It’s absolutely true that you need to have the fundamentals right. And the fundamentals of first of all economic growth, but also the fundamentals of a predictable regulatory and legal framework. And I think what we have been seeing in the last years is very clearly improvements, not only in the fundamental macroeconomic prospects of the country, and therefore ways and means for us to access growth and demand segments and everything else, but also a lot of improvement and clarity in access, in the fiscal stability, in predictability of how our regulators and authorities behave in basically also dealing with some of the legacy issues that we had in that space.
I think there is an inflection point in energy transition as well. If you would have asked me five years ago how would you see India as a market for power and new energy, I would probably say--don’t know, let’s wait and see. But now I can see that this is a market that is going to play a major role in how electricity innovation will work out and we want to be part of that as well.
Why do you say ‘inflection point’?
I think the way gas has started to penetrate in Gujarat for starters but also we’re starting to penetrate in other parts of the other sectors of the economy, accessing not necessarily power. I think for us a very important part will be the commercial and industrial segment--the way perhaps we can bundle it up with power, maybe bundle it up with renewable power for instance. But perhaps also getting into gas for transport, which is a nascent but fast-growing segment globally including in India. So I think an inflection point has come, very clearly also because of the policies that the Modi government has set out. India has also made strong commitments to the Paris (climate accord). And I believe still, although it is all based on a lot of renewable growth, gas and power will have to play a role as well.
India is thinking of developing a gas hub. What will it take to make it work?
Number one is access to infrastructure. Unless the pipelines and maybe also in some cases the terminals are open access and are freely available with flexible business models, this structure will not work. Secondly, there has to be transaction density in the trading exchange itself. I mean if you take a look at the electricity exchange, we would all argue that 5% is insufficient to really create a trading (centre). There should be a minimum volume. Finally, there have to be financial instruments that back all of this.
In India we have imported LNG and also domestic natural gas. Where do you think pricing for both will settle?
Some of it of course eventually will have to converge in my mind. But let’s be very clear India will not have the capacity to be a price setter internationally. Actually there is hardly any market that has the capacity to be a price setter except for the United States. Everybody else is a price taker. And it is either a price taker for brand for all the crude related pricing, or it is a price taker on hub related pricing because increasingly you will see gas coming out of the United States. And then there will be a degree of arbitrage around it and cost to serve markets that will determine local pricing. But everybody else will be a price taker for a long time to come.
What is the plan for growth at Hazira?
I think the immediate next step we are working on is making it a hub for transportation That’s a new segment in the market. Trucking or having goods transported with LNG is a sensible and growing segment for competitiveness and environmental reasons. But the question is going to be--how do we link up customers that we can develop with the infrastructure that we have? So the key question for me still is how are we going to get access to infrastructure and that will determine what is going to happen with Hazira next. We will have to have the infrastructure access first. Can we see other access points in the Indian gas markets beyond Gujarat? Possibly yes. But again it will depend on access.
There are 100 city gas contracts coming up in the next few months. Will Shell be bidding for those?
I think it is not a strategic segment for us.
From wind farms to solar parks to hydrogen for cars, Shell is at the forefront of renewable energy. But you are absent from India so far.
You’re right in observing that we haven’t done an acquisition in India, which doesn’t mean that we haven’t tried. The focus is definitely going to be North America and Europe for this integrated play but also India. But you will see us at some point in time, you will see us make the move. I think the challenge is that at the end of the day the power sector market in India has not fully opened up in the way that frankly we wanted to or we expected to, right? And let’s be honest about it, we have an electricity act dated back to 2003, which actually talks about tremendous transformation which has not happened.
So what needs to be done?
It’s separation of carriage and carrier. It is about open access place. We have to understand how storage plays into this one and what form of storage. And how do you actually price something like that? We haven’t resolved any of that. But at least the government is taking note of that and is making the changes.
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