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Interview

with Ann Pickard, Shell in Australia

24.08.2010 / Energyboardroom

Australia in many ways can be considered “home turf” for Shell given this company’s rich tradition in liquefied natural gas (LNG) and the driving force that LNG plays in the growth of Australia’s oil and gas industry. How will Shell’s future investments in Australia mirror and exceed its past successes here?

We began our recent history on the upstream side, of course, with the Northwest Shelf Venture a number of years ago. The Northwest Shelf Venture is both a premier gas exporter and supplier that opened up the domestic gas market here in Western Australia (WA). Globally Shell produces over 18 million tons of LNG per year. By 2020 we will add another 15 million tons, more than half of which will come from Australia. Australia is critical in terms of Shell’s growth in the LNG marketplace.

Shell is a major investor in the historic and upcoming Gorgon Gas Project. Final investment decision was reached last year which was a very exciting time for both Shell and the industry at large. What is tops on the agenda for Shell to address with relation to Gorgon as it goes forward?

I think Gorgon is working really well. I was at the partners meeting last week to track the progress of the project and it is going just as it should right now. One of the things that impresses us about Gorgon is that the project’s partners are investing about $20 billion into the Australian community over the next 4-5 years with the expectation to invest about $33 billon overall in the country. Gorgon has created over 3,000 jobs in Australia and will create another 7,000 as the projects go forward. Of course the other big LNG projects that we are in are Browse, the CSG to LNG project through Arrow Energy in Queensland, Prelude, and Sunrise. We are well distributed throughout quite a few of the major LNG projects around.

You expressed much confidence and enthusiasm in Shell being the first to develop and operate floating LNG (FLNG) technology through the Sunrise Project. Do you place a particular importance to be the first in the operation of this technology?

I am not worried about being the first, but I am pretty sure that we will be. Shell is a company of firsts. Looking at our history, we were a pioneer in deep water technology and on the front end of many of the world’s LNG plants. FLNG is not a new technology but it is an innovative use of existing technologies. It is what I consider a “game changer” and we should be able to take final investment decision on Prelude in the first half of next year.

The nice thing about Prelude and FLNG is that it will allow us to get to remote gas deposits that in the past were considered stranded – too far to put in pipelines to onshore facilities. Prelude will open up a whole new “game” in terms of access to stranded gas reserves. It will also be the first of several FLNG facilities. Our plan is to design one and build many. All the front end engineering work is being completed right now and Prelude, Sunrise, and four or five more will come out looking pretty much similarly designed. There will be some small adaptations to adjust for ocean currents and marine specifics, but the general design will be the same for all of them.

FLNG is a lot less expensive than trying to put in projects that are too far to get to from shore. It also has a better and lower emissions footprint overall and we are very excited about it.

It also eliminates the borders that Shell or any other major can operate in.

Eliminating borders is an interesting concept, but we always have to be sensitive to our stakeholders. No, FLNG projects are not coming to an onshore plant, but the workers supporting Prelude, for example, will be mainly living in Australia and we will have onshore logistics bases to supply them. We still need to make sure that we have good stakeholder management. Our big stakeholders in this case are the federal and state governments. Working with the federal government for Prelude is very important given the gas is in Commonwealth waters.

Coal seam gas (CSG)-to-LNG projects are widely expected to boost the country’s gas production and largely underpin growth forecasts for the industry. The Shell and PetroChina joint venture to acquire Arrow Energy and its CSG assets has been granted all necessary regulatory approvals to date. What are the main synergies and complementarities that will make this partnership such a success?

It is a win for all three partners: Arrow with its ongoing upstream technology as it has been a CSG producer for some time; Shell with its LNG technology; and then of course the Chinese coming with the interest in exploration, wanting to learn more about this business, and bringing a market to the table. It is a three-way equal partnership that is going to set us apart from the other competitors in the area.

Do you foresee the CSG industry trend being one of consolidation? Will the majors increasingly consolidate with and take over the junior and mid-cap companies and their assets for LNG feedstock?

To me consolidation and cooperation are two slightly different things. You can range from sharing facilities such as pipelines to consolidations where you merge two properties together. I think you will see a range of those activities around.

The majors, Shell in particular, have an advantage in that we have been in the LNG business for so long. We have a strong LNG trading organization that helps work on market and we have relationships with customers around the world. With those two elements, the majors will play a strong role. Obviously having the financial wherewithal is important as well.

Do you think the Shell-PetroChina venture signals a growing ambition by China to engage more as an upstream partner rather than an end-use consumer?

Having just worked in Africa we have seen the Chinese move around the world in search of energy security. It is not surprising that they move into Australia as well and it attests to why Australia is such an attractive place to do business. It is the third biggest gas exporter, potentially, after Russia and the Middle East. When looking at the buyers and what they are targeting, they certainly do not want all of their eggs in one basket. The security of supply aspect is causing more and more consumers to move into the Australian market. Some buyers want to move all the way up the value chain; some prefer not to. There is a combination of factors there. PetroChina is demonstrating that it does want to move all the way up the value chain. But some buyers just prefer an off take agreement.

As you mentioned, Shell has a deep and reputable history in LNG. However, CSG-to-LNG is a new and groundbreaking concept. It has never been done before. What are the challenges and new learnings that this process poses to a company as established as Shell?

One of the challenges with CSG is having the ability to drill a lot of wells at a competitive rate. That is one key element that we have to look at and be able to do competitively. The second aspect is that CSG to LNG represents a huge ramp-up. Whereas traditionally CSG in Australia has been for local markets, it has not needed the big ramp up that an LNG plant requires. Making sure that we are ready for that ramp up is critically important. The third aspect is off take and the customers. Those three pieces coming together are something that Shell will help bring to the table.

Customers are looking for security of supply. However, when looking at the global gas market is there an industry concern of an oversecurity of supply? Shell itself is involved in many of the world’s major LNG projects from Sakhalin to Qatargas and of course here in Australia. Combined with the surge in unconventional production in the United States are you concerned about a depressing effect on long term gas prices and do you think all of Australia’s LNG projects will get off the ground and meet their expected timetables?

What you read in the press estimates $200 billion in projects in Australia. They obviously will not all get off the ground without customers. Everyone is always worried about a glut but typically these projects do not take off without customers. It is a “lumpy” business. We see LNG demand rising at a fairly steady rate of between 6-8% per year. But when looking at China, their LNG consumption will increase from 9 million tons this year to about 45 million tons by 2020. So demand continues to increase while projects bring in lump amounts of gas at one time. It is never a perfect fit. If you look over the longer term, which is the view that Shell tends to take, the two will balance out. Most customers prefer long term contracts and the spot market is still no more than 10% of LNG supply. The supply and demand therefore more or less match up at the end of the day.

Australia is an attractive place to do business because of its historically stable fiscal regime. The devil lies in the details and the details of the reformed super-profits tax are still being ironed out, perhaps until well after the upcoming elections. As it stands now, are you pleased with the latest tax proposal and how it has been reconfigured from its original version?

We do not deal well with economic uncertainty. As oil companies, we are good with subsurface, construction, and completion risks. But we get very nervous with what I call “above the ground risks.” We are not crazy about new tax changes, particularly ones that impact existing investments.

We engaged with the government fairly quickly on it, in part because the Arrow acquisition was ongoing. What we ultimately found was that government was willing to listen. You are absolutely right, the devil is in the detail. For example, on the Queensland side for CSG-to-LNG, the transition arrangements have to be carefully worked out. There are an awful lot of details that still have to be worked out after the elections. On the Northwest Shelf we have seen our joint venture pay about $16 billion in excise taxes and royalties over the past 25 years, in addition to the corporate taxes that venture partners pay. That is one that I worry about a lot. Fundamentally, we do not like tax changes after we have already made long-term investments. The outcome might be satisfactory in terms of the impact on the project, but the precedent of tax regimes changing on something where you have sunk so much in investment is something that we do not like.

Sovereign risk is a term that was and still is widely tossed around in relation to the proposed tax scheme. Having worked in Africa and South America, is sovereign risk really an applicable concept for a developed, free market, and OECD country such as Australia?

I think investment dollars go where the resources are and where regimes are, or are perceived to be, stable. Western Australia and Queensland are blessed with enormous resources, which is good news. But any sort of quick or unexpected change in something like the tax regime discourages investment because people will wait and see what develops. That is what we have seen around the world. People will wait and see, or the investments will go elsewhere.

At the end of the day Australia is an OECD country and it is expected to get back to being a stable country in terms of the tax regime. We think it will work out.

It is not just a tax change that is creating uncertainty. It is the issue of how we are going to treat carbon emissions here in Australia. We have seen quite a bit of change in government positions on that in the last several months. The tax change and the uncertainty around emissions have created an environment that is less than predictable for us, so that does cause some concern.

You come in with a very accomplished track record on safety having improved the culture and safety statistics in Shell’s African operations. How are you applying that safety mindset and driving it down from the top here in Australia?

There are several areas to address on the safety front. First off, we have not been an operator in Australia in the past, except for some exploration activities. But as we move towards full operation of production, either through Arrow or on Prelude we are getting the safety side set up right. Particularly where we will operate on Prelude we are paying a lot of attention to safety, despite being 4-5 years away from producing. Our goal is to make sure we have the safety side set up from Day One.

With Arrow, the merger will be completed on August 24 and on August 19 I will make my first visit there. I am talking on one subject – safety. The statistics in Australia, not just in our industry but across all minerals and resources, are really not world class in terms of safety. If you set it right from the front then you tend to get better safety behaviors throughout.

When looking at BP – a fellow supermajor company, a company sharing similar Anglo-Dutch corporate cultures, and a joint venture partner here in Australia – how do you view the Deepwater Horizon incident and what lessons do you extract from it for Shell?

The BP event is a tragedy. Anytime you think about 11 people losing their lives it is a terrible tragedy. Then there is the environmental impact. We, I am sure like every other company, stopped to look at our procedures. In doing so we, at Shell, have full confidence in our well designs and in our practices and we know that we are doing everything possible to prevent that type of failure from happening again. You cannot absolutely say that under no circumstances will it ever happen again. But we have a lot of confidence in avoiding a future incident. We did not change a single one of our procedures or practices as a result of the accident. As we continue to learn more, we will obviously take new learnings into account. I feel very good about the prevention side.

On the cleanup side, we, the industry, will learn a lot. That is where a lot of the activities are going on now, to see what we can learn from that. At the end of the day the industry and the world need deepwater drilling and production. It is important that we can regain the trust that we have lost as an industry from our stakeholders. It is important that we reassure them that not only are our drilling practices good and reasonable, but that we have a better handle on cleanup activities in the event of another accident.

Preceding any of the gas supply or technical challenges that we were discussing earlier comes the need to staff projects with ample human resources. Australia currently finds itself in a human resources shortage amidst the resources and minerals boom. How big of a concern is this for Shell?

We mentioned the tax regime and environmental standards. The third thing that I talk about in the area of “above the ground risks” is industrial relations. It is not only ensuring that we have the skilled resource base, but that we have satisfactory and stable industrial relations. The luxury of being a start up about 4-5 years away is that we have a human resources plan that is going into place to make sure that we can reach out and get people ahead of time. They may not be experienced in oil and gas, or perhaps they are experienced in the downstream side such as in refinery operations, but we can retrain them and bring them in to the operational side.

Yes, there is a human resources crunch in Australia and Western Australia. It is not enough to just keep looking in traditional places. We have to be more creative about it by looking to train people. I am joining the board of the University of Western Australia Energy and Minerals Institute. I have a real big interest in making sure that we are reaching in and encouraging kids to stay in maths and sciences. We want to grab them while they are young, get them to stay in science programs, and produce more graduates as well. It is a very tough area but we have a fairly creative forward looking plan to deal with the human resources issues.

How do you approach your role as a female executive in a male-dominated oil and gas industry?

I guess I have been the female for so long that I forget most of the time that I am a female! I think I am a good role model and I am looking to aggressively develop women. We have people shortages not just here in Australia but around the world. If we are not developing women or talking to women then we exacerbate our people shortages. I think by having a female chief executive it tends to encourage or make women hope that there is a future for them. I do not know if I am any different from male executives in terms of the way I go about the business. But I am certainly cognizant of the role model that I am.

Did you ever wake up one morning thinking that you would be one of the 25 most powerful businesswomen in the world?

No, I am still always amazed at the opportunities that Shell has given me. First off, Mobil gave me an awful lot of opportunities. I always joke that I made my mistakes at Mobil and Shell got me mistake-free. There are tremendous opportunities that both Mobil and Shell have given me. Interestingly, and I do not think I ever said this publicly before, what I have found is that a lot of times it is men who have given me the breaks and it is those men who have daughters and realize that they do not want a glass ceiling for them.

The landscape of Australia’s oil and gas executive management is an interesting hodgepodge. There are many expatriates. Many executives of marine service companies come from the United Kingdom, for example, while subsea engineering executives tend to be Norwegian. Executive managers of the majors here in Australia tend to be American, yourself of course included. When do you see Australians taking over as the executive managers of supermajor companies here?

Something that we have done at Shell is implement a worldwide plan on our expatriation. We are always looking to develop the next layer of human resources so they can come through. Because we have been in Australia for over 100 years we have a huge number of Australian expats outside of Australia. But a lot of them have not traditionally been in the upstream side. What we are now aggressively doing is trying to make sure that we have Australians developed on the upstream side. Over the last year we have brought a lot of Australians home. My leadership team consists mainly of Australians, there are a couple guys from New Zealand, one from the Netherlands, one Brit, and me; we are mostly regional here. We are setting the example, but that is what Shell has always done around the world for development of the top jobs in a country. We always like to make sure that we have a few people who are available from that country to step into the top jobs.

There are a lot of Americans but you have to look at where the industry comes from. And you can also look at females. The very aggressive and proactive development of women in the US has given women an edge in the US vis-à-vis the rest of the world.

Mr. Krzywosinski’s speech at the APPEA conference in May focused on the “New Energy Economy.” Globally that is a big pitch for Shell in its push to promote renewables, gas-to-liquids, and cleaner fuels. How do you see this New Energy Economy being developed here in Australia and what is the picture that you can paint for our readers?

I think the centrepiece for Australia is gas. You look at the world’s demand for energy and it is growing quite a bit. Then you look at our carbon situation and you recognize from a global perspective that we need to do something about it. It is going to take a mosaic of fuels to do something about it. But it takes a long time for alternatives of any kind to gain market share. It takes 30 years for a fuel to gain market share. Biofuels, which Shell is involved in, have been around for about 30 years and have recently reached a 1% market share. The quickest and shortest way to improve our carbon emissions is to put more gas into the world, particularly into power plants. Depending on the gas, a gas-fired power plant is 30-70% more efficient than its coal equivalent power plant. That is probably the biggest step change we can make right away in terms of world emissions. When you look at where export gas is coming from, as I said, it is the Middle East, Russia, and Australia. For Australia it has to all be about gas.

Are there any last topics you would like to discuss or final messages you would like to convey that you feel have been left out of the conversation?

The other role for gas which involves not just Australia playing the game is gas-to-liquids. The launching of The Pearl GTL project in Qatar has to be one of the most exciting projects being commissioned right now. There are over one billion cars on the planet today and there will perhaps be two billion by the middle of the century. We are going to need every type of fuel possible, maybe even hydrogen, going forward. Looking at Pearl alone, it will be able to provide fuel for 160,000 cars per day and provide base lubes for 225 million cars. Gas is just a really exciting business to be in right now. That is why it is nice to be in Australia.

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