Harry Brekelmans on the future of Shell

December 19, 2011: 11:48 AM ET
Harry Brekelmans, Shell

FORTUNE -- Figuring out the direction of the world's largest oil company has never been simple, but rarely has it been more complicated than now. Oil and gas are getting harder to find, governments worldwide are restricting carbon emissions, and the global economy has begun a long-term move toward energy that doesn't get pumped out of the ground. Imagining Shell's future in such a world has been Harry Brekelmans' job for the past two years, made even more challenging because so many constituencies -- consumers, communities, environmentalists, politicians -- pay close attention to Shell's every move.

Brekelmans, 46, is a Dutch engineer who has spent most of his career as a Shell geoscientist or operating executive based in Egypt, Britain, The Hague, and Moscow, where he ran the company's joint venture in the giant oilfield of western Siberia. He says his strategy assignment has given him context that will be valuable in his new assignment, overseeing all of Shell's interests in Russia and managing its production in Russia and Kazakhstan. He talked recently with Fortune's Geoff Colvin about the future of biofuels (big), when global oil use will start to fall (before 2040), why Shell is building the world's largest floating structure (to reach more gas), and much else. Edited excerpts:

Q: Let's start with the news. The price of oil has come down dramatically since spring. How come?

A: The most important factor is economic growth and the projections for it. The past few weeks have certainly created doubts about the robustness of the economy and growth rates. The fragility of what's ahead has an immediate impact on projections for energy growth.

Shell has a wide window into energy demand globally. What is that view telling you now -- where is strength and where is weakness?

While the near term is very important, it's crucial to think about the long term. Our industry has a heartbeat that gets measured in decades rather than years. Between now and 2050, driven by demographic growth and increasing economic wealth, particularly in developing nations, particularly in Asia but also in Africa, there will be demand growth that will be significant and perhaps unprecedented. Put that together with the supply picture, where it's increasingly difficult to see us unlock significant resources, and you'll see the tension that we've seen in recent years continue in coming decades.

If you look across all possible sources of new energy, conventional and unconventional, where's the greatest increase in supply likely to come from over the next 20 years?

A number of areas come to mind. An important one is Iraq. One could see anything from five to 10 million barrels a day of additional capacity being released there over the coming decade or so. That's a significant addition. Offshore Brazil is another very significant resource base. Among unconventional sources, heavy oil in Canada is another significant addition. West Africa still holds some promise. Saudi Arabia is working to release further capacity.

What about energy more broadly defined?

Great question -- I've been focusing on oil with the examples I gave, but adding all that together will not be sufficient to meet demand that will be growing at unprecedented rates. If that were to continue for decades, you would need other sources of energy -- very much so -- to meet global demand.

First and foremost among other sources is gas. The emergence of unconventional gases in North America over the past decade has added very significantly to gas as a resource. Then you put into the mix renewable sources -- wind and solar -- which over time we think will be significant but we also think will require time, again measured in decades, to reach scale.

That's a critical issue for Shell, which has investments in biofuels, wind, and other alternative sources. For a company of Shell's size, an important question is, Which of them will be workable on a major scale? Because otherwise they can't have a noticeable effect on the business. Which ones look most promising from that perspective?

You're right; what is key to us is to differentiate ourselves and make an impact using our specific and differentiated skills and competences. The first area I'd point to is gas. Of all our peers, we're most focused on developing our gas business. We're very close to equal balance -- fifty-fifty -- in our oil and gas production, and we see our gas business growing over coming decades. We feel it's one of the sources that needs to be focused on more, given that it's a lower-carbon alternative to many other fuels, particularly coal, used for electricity generation. We are very big on insuring that we retain a lead in that space. If you look 10, 20, 30 years forward, I would say that we'd still be leading in gas, and that probably would be our most significant business.

Biofuels are very important for us. We recently made a very significant investment in a joint venture in Brazil in sugar-cane-based ethanol. That makes us one of the biggest distributors and producers of biofuels. It's our view that biofuels are a lower-carbon alternative to fossil fuels for transportation and one where we can reach scale quite quickly. We feel we can differentiate, get to scale quickly, and help the world deal with the carbon issue.

In the U.S., ethanol has never been economical without government subsidies. Is that going to change?

Sugar-cane ethanol can certainly be produced economically in the investments we've made, and over time we can see ethanol being economical in Europe and North America even without the incentives. Of course there's an interaction with overall energy prices, but we think biofuels will be an economically viable alternative.

Later this year Shell begins construction of the first floating liquefied-natural-gas platform, which will be the largest floating structure ever created -- much bigger than the largest aircraft carrier -- costing $10 billion to $12 billion. What makes this worth doing?

It's an engineering marvel, first of all, and I'm an engineer by background, so I can't help being very enthusiastic about it. It's a huge, amazing structure, the length of four football fields. When fully loaded it weighs six times as much as the world's biggest aircraft carriers.

One of the features of the gas business is that a lot of significant gas resources are stranded. Given the costs associated with transport to markets, a number of significant resources have always been uneconomical. With the floating LNG, you can design and develop one, and then use it many times. You're suddenly changing the economic equation and opening up a significant number of stranded resources that can now be developed economically.

The first place we'll use it is our Prelude field off the northwest coast of Australia. That was a resource that until this point could not be developed. Over the coming years we'll be able to develop a number of other alternatives using that kind of technology.

The energy industry needs tremendous innovation. Shell is known for an approach to innovation called the game-changer process. What is it?

It's a methodology and a mindset where we allow people to work on off-the-wall ideas that are far away from being viable. They can be put in an incubator and get stimulated with extra funds, so they can grow and bloom within their own space without getting absorbed by the corporate machine. Parts of the floating LNG development were conceived within the game-changer process.

Other examples?

One of the applications we use significantly in our conventional oil and gas business is what are called swellable packers -- they isolate the formation from the well itself. We're using materials that one of our researchers came across when he was in a toy shop. We all know them -- they're these little animals that you throw in a bucket of water and they swell up. We use that same methodology to constrict sleeves that you can insert in wells. They get soaked with fluids, and then they set and expand and provide a seal around the reservoir. It's very cheap and simple.

Shell's long-term forecasts show fossil fuels as a source of the world's energy starting to decline after about 2040. What causes that turning point?

Gas could continue to grow until 2040 or even 2050. Oil we see peaking before that, mostly driven by costs and environmental sustainability challenging the use of fossil fuels. As a result, alternatives such as wind and solar will be gaining prominence, albeit at a relatively slow rate.

How do you evaluate the peak oil hypothesis -- basically right or basically wrong?

People talk about peak oil in the sense of supply. But I think of Sheikh Yamani's classic quote, "The Stone Age didn't end because we ran out of stone." People simply moved on to different and better things. The same will happen with fossil fuels. It's very important to realize that we'll be moving on to alternatives before we run out of oil and gas.

The year 2040 is not necessarily the demand peak either. The interaction between supply and demand will govern at what point -- 2030, 2040, 2050 -- we really see the peak. But rest assured, I think there will be gas and oil left by the time we've moved on to those alternatives.

How does Shell grow and prosper after fossil fuels start to decline in use?

Beyond 2040 we will still be using some fossil fuels. Gas will still be important, and given the scale of the global markets, I think that still leaves enough of a commercial space for us to play in.

Biofuels will at that point, and perhaps beyond that, be a very significant business, and meanwhile we're exploring other alternatives that could provide low-carbon sources of energy. Hydrogen is one that we've explored for some time and are still actively involved in. It's difficult to see that gaining material scale in the nearer term, but it's not impossible for hydrogen to gain prominence in coming decades, and it's an area where we have specific skills and will want to play.

We're also exploring a role we could play in vehicle electrification. We don't yet see a viable business there, but again it's not beyond us to see us developing business propositions there in coming decades.

And then urbanization is a huge driver of how efficiently or inefficiently we'll be able to deal with energy. We're looking at the provision of energy services to urban areas in a variety of ways that in the long term can provide us viable and significant business opportunities.

One forecast is that by 2050, three-quarters of the world's people will live in cities, the equivalent of a new city of 1 million every week for the next 30 years. Is that fundamentally good news or bad news?

It could be either. The numbers are stunning, and the work we've been doing with a number of experts shows that urbanization is driving energy demand growth. People living in urban areas tend to use more energy than people not living in urban areas, but there is a vast difference in the way that cities could develop and the implications for energy use. There is a striking difference between compact, well-designed, well-governed, usually relatively wealthy cities and sprawling, chaotic, not so well-governed cities. The differences in energy intensity are so vast that it will have a huge effect on whether this will be a positive development or a painful and difficult one.

Vehicle electrification is highly significant in that equation. What will determine whether electric vehicles become a major trend or a minor trend?

A combination of factors -- convenience, cost, and technology, and of course they all interact. But there's no doubt in our minds that electric vehicles will play a role in the way mobility is conceived in the future. The point we would raise is that there will likely be a mosaic of solutions. In some of the cities I visited recently, you see a combination of hybrid vehicles, compressed natural gas, LNG, and electrical vehicles. And the internal combustion engine still has a long way to go in attaining additional efficiencies.

The futurist Ray Kurzweil predicts that solar energy will be able to provide all of the planet's energy in 20 years. Presuming you don't agree, where does he go wrong?

Solar is one of those energy sources we should be pursuing. What we would say, however -- and we can substantiate it in the work we've done recently -- is that it takes decades for any energy source to reach scale. It takes about 30 years for any new energy source to attain 1% market share. That's been the case for gas. Within the basket of gas carriers, it's been the case for LNG. It's been the case for nuclear, for biofuels, and for wind.

It just takes time for technologies to be economic and be accepted by users globally. We think the same will be the case for solar. So if you think in terms of three or four decades before we reach 1%, then his theory is challenged. Will solar play a role? Yes, it will.

What's the outlook for significant international cooperation on carbon emissions?

It remains something that we advocate for. It won't be sweeping global measures. We think that would be effective, but we recognize the challenges of it, given the diversity of issues that governments face. What you have seen in past months is more regional and local action. If you look at legislation over the past 12 months, there's been a lot surrounding emissions and environmental impacts that are positive. So we shouldn't underestimate the fact that on the ground, things are happening. Is it at a sufficient pace to deal with the challenges ahead of us? Probably not.

This article is from the October 17, 2011 issue of Fortune.

The Leadership Series: Formerly called "C-Suite Strategies," this is the latest interview with a top executive by Fortune senior editor-at-large Geoff Colvin. See video excerpts of this interview at fortune.com/leadership plus find Colvin interviews with Charles Schwab, the team of Jeff Immelt (GE) and A.G. Lafley (P&G), former New York City schools chancellor Joel Klein, Pimco's Mohamed El-Erian, Humana CEO Michael McCallister, and many more. To top of page