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Shell Russia head: We will not be put away by uncertainty

Shell Russia’s Chairman Cederic Cremers has spoken to TASS about oil prices, Nord Stream 2 and new projects
Cederic Cremers Shell Press Service
Cederic Cremers
© Shell Press Service

- Oil producers have faced an unprecedented drop in demand this year. Do you think, Mr. Cremers, this can accelerate energy transition and decarbonization process and make an oil peak consumption closer?

- I think that the crisis and the pandemic of COVID-19 clearly put a lot of pressure on our industry – energy demand has dropped, and the impact on the economies around the globe is very real. I do think this volatile market will be with us for a while. We do not expect that there will be a recovery in oil prices or the demand of the products in the medium term. However, we do expect that it will recover in a longer period.

Therefore, whilst this crisis will have an impact, we do believe that in the slightly longer term those much broader trends of energy transition will take over again. It is difficult to say at this stage how much the behavior of consumers will change, will people get back to the same level of commuting as in the past or not, and therefore will it provide an opportunity to accelerate even more the energy transition. I can only say that the trend for energy transition was there before the crisis and will be there once we come out of it.

- When you say “medium term”, what exact time period are you talking about? Is that some two-three years or several months? Does that mean we will not see previous prices around $60 per barrel during this time period?

- We believe that both hydrocarbon prices and product prices will remain at lower levels than pre-crisis in 2021 and, possibly, towards the end of 2021. That’s certainly what we are using as our basis for planning.

- Do you think this will encourage energy companies to shift investments from oil to gas or renewables? How this will affect Shell’s investment?

- We had to adjust our expenditure, indeed. In our operating expenditures, we are expecting to spend about $3-4 billion less than we did in 2019, in the next twelve months. It also applies to some difficult decisions for people. For example, we have also decided that nobody in our global company will be getting performance bonuses over this financial year 2020. On top of that, we are reducing our capital expenditure from $25 billion to $20 billion this year, that is about 20% reduction.

However, the degree that each Shell business is contributing to this cut is different. Our upstream business is contributing about 45% of that reduction in expenditure; our downstream business – 30%, and our integrated gas including LNG and new energies business are contributing only 25% of this saving. Therefore, whilst all of them are reducing, we do see that the relative impact is different and is also related to the long-term shift in our industry.

- Are these reductions applicable to your activities in Russia?

- Yes. It has also impacted our activities in Russia, absolutely. When I talked about our operating expenditure, this is something we were driving through across all our activities and all places. For example, we have had to reduce drilling expenditure in our joint ventures in Russia. Also, we had to change the pace and aspirations of some of our new ventures unfortunately as a result of the current external environment. 

- Are you talking about your joint ventures with Gazprom Neft?

- Yes, that is correct.

- As we know, Shell had to quit from one of them. Are you going to halt the rest of the projects?

- Whilst we had to reduce the pace of our growth ambitions, Russia remains the country of strategic focus for Shell where we pursue growth in both existing and future businesses, including oil projects together with Gazprom Neft.

If you are referring to Meretoykhaneftegaz joint venture, then yes, unfortunately, we had to cancel that. The deal was not completed and had some ongoing uncertainties. Within the challenging external and financial environment, we could not maintain that uncertainty. That was very sad to leave that venture.

However, answering your question, it does not mean that we are stopping other projects, both existing and growth with Gazprom Neft. We continue to work strongly on our Salym Petroleum Development joint venture. In March, we closed a transaction to expand the area of operations of Salym by acquiring a license for Salymsky-2 block from Gazprom Neft.

Moreover, we continue engagements with Gazprom Neft about establishing a new joint venture, which is a frontier exploration prospect in the north-east of the Gydan peninsula. This is a joint venture that will cover two license blocks.

So, the short answer is that we continue our joint projects and we will continue to build that partnership with Gazprom Neft.

- Can we hope that you will make some announcement soon?

- Yes, if we are able to finalize that in the next weeks or months that probably could be an announcement. We all are looking forward to it.

This expected to be an oil-producing venture. Of course, still in the exploration phase, with high risk, high investment. However, that expected to be a long-term oil venture, that we will see operating for decades.

I can probably get no better example of whilst in the energy transition, we do continue to invest and maintain our traditional businesses.

- What share can Shell take in the Gydan joint venture after Repsol announced its exit from the project?

- I can only say that we continue working with Gazprom Neft on establishing this JV. I would not comment further at this stage.

- Anyway, we know Shell mostly as a gas company. This market is not doing well now too – we see a drop of demand and prices. How long do you think the recovery of gas market will take?

- Yes, you are absolutely right. We have seen that the economic slowdown reduced both gas and LNG demand across the globe. This is a large drop compared to the projections that we had just a few months ago. What is probably important that it will take a little bit of time for the demand to come back to the previous projections that we had in terms of demand growth, but we do see continued growth. This is not about fundamental demand destruction, but this is about a slower pace of growth in the near term.

Nevertheless, we do not see that the fundamentals of the LNG market have changed. We do believe that over the next 10 to 20 years an annual average growth rate of 4% per year is realistic. It will remain the fastest growing sector in the hydrocarbon space. That means that if you look at this annual rate between now and 2040 the market will double in LNG.

We believe, that in a broader scheme of energy transition natural gas will be replacing the current sources of coal or diesel that are used to generate power in many places around the world.

- However, it was reported that customers might reject up to 60% of LNG supplies in July. Do you think that Shell and Sakhalin-2 project may face this problem in upcoming months?

- We certainly are not seeing in our actual operations that kind of percentage that you are mentioning. It is standard in our industry that long-term contracts always include some volume flexibility for buyers they exercise from time to time, as the market conditions change.

Yes, we had some of our LNG customers who had some deferments of specific cargoes just in short term due to full tanks or full inventories. However, the overall number of such cargoes is relatively small, very manageable for us operationally and within the normal bandwidths.

On the LNG side, we have not had to reduce the production at all for any of these reasons. We can remarket these cargoes relatively effectively in the market. Sakhalin-2 has a very privileged position in the Asia Pacific market being very close to the key markets: Japan, Korea, China, Taiwan. In addition, it has always been a very strong and reliable partner for its customers. It has a very strong reputation in the market. We continue to be effectively placing many of the cargoes that we produce, including additional spot cargoes, into the market.

- As we mentioned Sakhalin-2 project, do you think that plan of its expansion could be delayed due to the current crisis?

- It is a great question. Our overall ambition to expand Sakhalin-2 remains unchanged. I still believe it is the most logical way to expand the LNG capacity on the existing industrial site in the Far East. The exact timing and pace will undoubtedly be impacted by what we are seeing in the short term right now.

Reality is that these projects have lifetimes of decades, more over than 20-25 years. They tend to be less dependent on short-term cycles and economic impact, but more on the longer-term trend including what I have mentioned earlier in terms of what is our long-term outlook for LNG markets.

- You have said Shell believes in the gas market. How this can affect your interest for new projects in Russia? For example, Novatek is going to start looking for new partners for its next LNG project in a few years. Could it be interesting for you?

- I believe that in the future Russia will be one of the few most competitive supplies sources for LNG demand growth. The share of Russian LNG will continue to grow compared to the past.

The combination of our strength in the LNG market and strength of Russia in the gas market remains something we are very interested in. We are open to different opportunities in Russia whether within our existing or new partnerships.

- In general, how do you see the future of Shell in Russia, let us say in ten years? How the Shell’s portfolio will look like?

- Where we are today, with all the uncertainty it is not always easy to predict the world ten years ahead, it is even difficult to predict 18 months away. However, let me give a couple of thoughts on this. Therefore, we start from the next 18 months.

Of all the energy companies working in Russia today, Shell actually has the most diversified portfolio. We are active not only in LNG and in upstream oil business, but we are also very strong in downstream. We are proud that Shell logo is present everywhere from Saint Petersburg to Sakhalin, if you look across Russia.

On the downstream side, we are striving to become the number one customer choice both in premium lubricants and in fuels. On gas and LNG, we remain very keen to see how we could grow together with Russia whether it is expansion of Sakhalin-2 or new projects and partnerships. With oil we are primarily focusing on the larger Western Siberian basin, starting from Salym and then right up through the North into Gydan.

Sometimes I see comments that the current crisis or energy transition or other things could force Shell exit Russia. But our presence is quite broad in different sectors of the economy, and we are looking to stay here. Russia will continue to be a country of strategic importance for us.

If I look a little bit further ahead in your 10-year question… Shell started its business in Russia 128 years ago. I think both of us realize, that last 128 years have had their periods of uncertainty as well. I am quite convinced that as a company we will not be put away by the uncertainty in the next ten years. The overall global energy agenda will probably shift in the next 10 years and Russia's energy agenda as well. We hope to shift with that and continue to grow.

In addition to the three areas I mentioned before, we’ll also be on the lookout for new opportunities where we might grow. There are things like E-mobility or LNG for road and marine fuel. In addition, hydrogen is a market that can grow during the energy transition and where Russia can play an important role.

- Is there any difference in achieving energy transition goals, if we compare Russia and Western countries?

- One thing that we sometimes forget about when we talk about energy transition is that we still have about 1 billion people in the world today that live without access to electricity and the benefits it brings. Thus, for me energy transition is not only about managing the carbon challenges, but the dual challenge of how to make that transition to a low carbon energy future and meet the growing needs of the whole world. This is a huge challenge. In order to meet that challenge, many different things will have to happen. I hope that we will be seeing a bigger role of new technologies that will come into the energy mix more and more in addition to oil and gas.

I think it is fair to say that the energy transition debate in Russia today is not as it is, for example, in the European Union. In addition, in the recent years there has been a misconception that the energy transition may even be a threat to Russia and Russia's traditional role as a hydrocarbons exporter. However, today I see the perceptions and the public debate are shifting in Russia. I see more and more readiness to explore what energy transition can bring to Russia in terms of the sustainability, economically and environmentally. I see companies, government agencies and academic think tanks are shifting their view on this.

The role of gas in the energy transition provides a huge opportunity for Russia. Gas emits from 45% to 55% less greenhouse emissions than coal. Russia both in terms of its resources and its geography remains one of the key countries that can help make that transition not only in Europe, but very importantly also in Asia.

- As you have mentioned Europe, I cannot skip the question about Nord Stream-2 project. Shell is one of the investors in it. As we know, the Nord Stream-2 will not receive any exemptions from the European Gas Directive. Do you think there is still any possibility to adapt the project to the 3rd Energy Package?

- As you have said, Shell is just a lender to the project. The Nord Stream-2 operating company holds the core discussions with the German regulator. I can only reiterate that once the project is completed, it will become critical for the European Union in the sense of providing reliable access to natural gas at very competitive prices.

- However, as an investor, are you concerned about receiving dividends, benefits from the project due to delay?

- We do not receive dividends. We are a lender, not a shareholder. But just to be clear, I will not be a good businessperson if I don’t worry about [the delay]. Again, in our industry many things that we invest in are long-term and there are long-term risks associated with them. So, the most important thing is that the pipeline would be completed, and this is more important than the exact timing.


Interviewed by Julia Khazagaeva