THE WALL STREET JOURNAL: Shell's Chief Pursues Simple Goals: "And we need more of our reputation back, in my view.": Posted 18 January 2006

THE HAGUE -- Royal Dutch Shell PLC, the world's third-biggest oil company by market value, is emerging from two of the most tumultuous years in its century-long run.

In early 2004, the Anglo-Dutch giant admitted it had inflated its oil and natural-gas reserves, a measure of how much energy a company has in the ground. The stock tanked, and the board cleaned out the executive suites. Into the breech in March 2004 stepped Jeroen van der Veer, at the time the company's little-known vice chairman.

Under siege by shareholders, regulators and even many of his own executives, the new chairman hammered out expensive but quick settlements with regulators. Then the Dutchman pushed through a big restructuring, ending a cumbersome dual-board structure that dated back to 1907, when Royal Dutch Petroleum and Shell Transport & Trading joined up to take on archrival Standard Oil. Mr. van der Veer took over as the company's first American-style chief executive.

Today, with energy prices high and profit rolling in, Mr. van der Veer says Shell is bouncing back. He sat down with The Wall Street Journal at his office in The Hague last month to give a progress report and talk about the future of Shell and the industry.

He rules out making huge acquisitions; instead, he is pushing two simple strategic goals. First, reviving Shell's tarnished "upstream" businesses, which deal with finding and pumping oil and natural gas. And he wants to boost profit "downstream," in operations like refining and chemicals. But just as important, he suggests, has been his use of clear and simple goals to rally the troops. Excerpts from the discussion:

WSJ: Where are you taking Shell?

Mr. van der Veer: You only get something out of a crisis by being very transparent about what happened, and then to point very clearly in the direction where to go. This is not the time for complicated stories. And that is why we have chosen [the slogan], 'more upstream, profitable downstream.'

More upstream means we push our investment in the upstream [finding and producing oil and gas]: $15 billion out of $19 billion of [Shell's] total investment next year....

In downstream [processing oil and chemical feedstocks and selling to users], we roughly keep the capital employed constant, but what we have should be profitable....

My message is that the priorities are now delivery and growth -- with emphasis on delivery. You don't get a reputation by saying the things you are going to do. And we need more of our reputation back, in my view. And that is to have a consistent track record of basically [achieving] the performance we indicated.

We will not be perfect, but we can do a lot better. That is No. 1.

WSJ: What you're saying sounds similar to what Carlos Ghosn of Nissan said after he took over the car maker in crisis. To paraphrase him: We will make promises and keep them.

Mr. van der Veer: I'm very much of that school. I don't believe in 'stretch' targets. With stretch targets, either people start to find ways of portraying that they achieved them, or after a helluva lot of stretch, they don't make them, and they walk with their heads down. I think [setting stretch targets] is a great academic theory, but it doesn't work. I believe in achievable targets, and if people do better, then success breeds success.

I think that we have come out of a difficult period, but we know where to go, and we are going there.

WSJ: Do you see any Western oil companies doing an industry-changing merger with each other? Or has Big Oil gotten as big as it is going to get?

Mr. van der Veer: This is a very good question, and I think you'll get as many answers as people you interview. We can't easily read the stars. What can you do? You can study history. Most major consolidation in the industry has happened when prices were falling -- and people expected them to stay low. You need both.

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One very good example is how Shell Transport & Trading and Royal Dutch came together [in the early 1900s.] Prices were coming down, and it was because they were afraid of what Exxon [called Standard Oil at the time] and the Rockefellers would do.

I think 1998 is another interesting example. [BP PLC bought Amoco Corp., triggering a big wave of mergers.] The industry was consolidating, and The Economist wrote the world was 'drowning in oil.'

At this moment, oil prices are very volatile. If I read analysts' reports -- I don't make forecasts here at Shell -- prices are relatively high, and they are not expected to fall a lot and stay low.

And the second point is that history doesn't always repeat itself. Are we at the breakdown of the paradigm? That could be the case. And that is back to this whole reserves-replacement story. [Oil companies have been finding it more difficult recently to replace the amount of reserves, or energy in the ground, that they deplete each year through production.]

If you read the [stories about the mergers] of 1998, or of the early 1980s, it was opportunities, or maybe cost synergies, that drove the deals, but it was not, 'This is the best way to acquire reserves.' That was not the headline of the mergers. Hence, is there something new now?

And the third [point] is: Forget history, forget the breaking of paradigms, use common sense. Which sometimes is not a bad thing.

Common sense is: 'I have a dollar here, what can I do with it?' I can give that dollar to the shareholder, I can put it to organic growth or I can buy somebody else with it. Then one has the whole debate over the money you return to shareholders...or, do I invest it in all new projects or do I invest it in acquisitions?

And then you come to the conclusion. We have been quite fortunate with our pipeline of future prospects, the things we can do with our own money, and that's why we increased our capital expenditure [budget] from $15 billion to $19 billion. And that's why we can afford to wait.

Minor acquisitions, below $10 billion, they will continue [in the industry] even at the present prices....Big acquisitions, at this moment, it is very hard for us to see how you make shareholders money.

WSJ: How are plans for Shell's biggest projects coming along?

Mr. van der Veer: We have three what I call mammoth projects, multibillion-dollar projects. In 2015, we will have 10 mammoth projects. That is my forecast.

We have enough possibilities thanks to our deal flow and to our exploration finds...We have enough access to opportunity to invest so much money. Which feels a bit different than what I read about from the competition.

These investment levels should bring us to our aspirations for 2015, which is between 4.5 million and five million barrels a day [of oil-equivalent of oil and gas output, up from estimates of about 3.5 million for 2005]. That is quite a tough call, because we will have inflation at the time, we will have some surprises.

WSJ: And Shell's oil- and gas-exploration program?

Mr. van der Veer: We went astray three years ago. When prices were low, we went for 'near-field drilling' [looking for oil near already-discovered fields.] High success, but on small additional finds, using existing infrastructure. But at a certain moment, you run out of moneymakers. [Now, Shell is] going for new, big provinces, which have lower probability of success [but a higher potential upside].

WSJ: What's your strategy with alternative energies such as wind and hydrogen power?

Mr. van der Veer: Every form of alternative energy is a pot on the fire. But I call it a small pot on the fire. Having a pot on the fire you can smell it and sniff it. Some pots boil very well, and some pots you take off the fire, which we have done as well. And we won't be afraid to put new pots on the fire.

In 20 years or 30 years, alternative energies will start to play a key role. My wish, my ambition for this company is that if we can make at least one alternative energy a major business, then I think we have done well.

WSJ: Really? Alternative energies will be for real 20 to 30 years from now?

Mr. van der Veer: Yes, before it is really big business, not a niche business.

WSJ: There's a lot of talk about a coming decline of global oil and gas production. Is that in your horizon?

Mr. van der Veer: This is the whole 'peak-oil' theory, [that global oil output will hit a peak and then go into decline in coming years]. Peak oil does exist for easy-to-drill oil and easy gas.

And you may have had peak oil in some regions...The peak of West Texas oil has happened. But the peak of oil sands, you don't know. The peak of coal gasification in China, you don't know when it comes. The peak for very deep-water oil, you don't know when it comes.

The peak philosophy in itself is correct -- but people forget where it applies....If one takes unconventional oil and gas into account, there are plenty of reserves left.

The problems of the industry are twofold: Do we have the technology and the money to attack those reserves, and can we get the commercial conditions to take the risks? It is not because the stuff is not there.

WSJ: Do you think we'll see acquisitions of Western oil companies by Mideast or Asian national oil companies [NOC]?

Mr. van der Veer: I think the logic of a full-blown merger is hard to see if one has a large shareholding by the state. But I can see joint ventures for specific projects or even countries.

WSJ: So, might Shell take large stakes in NOCs?

Mr. van der Veer: I believe it is more logical that you have 50-50 joint ventures in something.

Write to Chip Cummins at chip.cummins@wsj.com and Michael Williams at michael.williams@wsj.com