Examination of Witnesses (Questions 260-276)
SHELL UK LIMITED
25 JANUARY 2005
Q260 Chairman: You have got the money.
Mr Smith: — as I read it
from people's websites in interacting with the customer do understand
their needs and help them. We do not have that interaction with
the customer.
Q261 Chairman: What I am saying is, you
have the added resource, not all of which will be going on investment.
Mr Smith: We do have social investment
programmes. Our social investment programmes are based on youth
enterprise and technology and I think, Mr Chairman, you may know
some of those in Livewire and Step and Shell Education Services.
Resources are not infinite; you make choices about where you are
going to put your effort.
Q262 Chairman: Is it done on a percentage
basis, Mr Smith, in the sense that if the profits are high you
spend even more or if the profits are low you rein in expenditure?
Mr Smith: What we aim to do is
to try to have these programmes running for the long term. Step
has been running for 17 years or so and Livewire has been running
for over 20 years, if I remember rightly, and the longer you can
keep those programmes running the better and more effective they
are going to be. Thinking of turning them up and down as profits
wax and wane does not sound to me like the best way of doing it.
The other thing around the world we do is that we make contributions
of something like $100 million a year in various ways—road
safety, cottage hospitals in Nigeria. We contributed £250
million into the Shell Foundation, which is a charity, and that
does work around the world. There are five themes. One of them
is about people who are made ill or are disabled in some way by
burning wood and charcoal inside their homes, and we are trying
to help them mitigate the effects of that, trying to work on air
quality in major cities in the developing world and trying also
to help small and medium sized businesses get started in the developing
world to provide energy services. It is not as if we are not doing
anything. I feel we are doing quite a bit.
Q263 Chairman: I recognise that all the
big companies have corporate social responsibility programmes
and you often send us copies of your annual report to that effect,
but what we are a little bit uncertain about is that if you accumulate
substantial profits which are unanticipated, on a scale which
is beyond the dreams of avarice, you might almost say, would it
not be reasonable for a government to say, "Perhaps we could
help you spend some of that money"?
Mr Smith: If by that you mean
increasing the tax rates then I would say we would be concerned
about—
Q264 Chairman: No, not necessarily the
rates, just the windfall profit. It has happened before in the
1980s when Mrs Thatcher, whose room we are meeting in, introduced
a windfall profits on the banks because there was a surge in interest
rates. They did not like it but they paid it. I do not think it
brought the banks to their knees.
Mr Smith: Here is the man who
does the production in the North Sea. I would be concerned about
the unintended consequences of that.
Mr McFadyen: I am deeply concerned
about such a notion. As you probably know, in 2002 the industry
was surprised by an increase in supplementary corporation tax.
I think it is only today that the industry is beginning to recover
from that, as James said, given the long term nature of our investments.
I must stress that my job is to put reliable, cost effective and
efficient production to the market. That takes massive investment.
Any change in the fiscal regime or any notion of windfall tax
will dent investor confidence. I am absolutely convinced of that.
My concern is about the unintended consequences. Will this really
enhance security of supply? I wonder about that. What I see is
an impact on investor confidence, as I said. I see an impact on
activity levels, on projects and on production levels overall.
I worry that this might even exacerbate the current security of
supply situation notwithstanding the job impact that this will
have.
Q265 Judy Mallaber: The point is that
you have had unanticipated profits as a result of which hundreds
of thousands of families have found themselves having to pay a
huge proportion of their budgets in fuel costs and have maybe
not been able to turn on their heating. Do you not think that
if you have had that unintended extra amount in your profits some
of that could go towards alleviating some of those problems for
further fuel poverty programmes? Secondly, are you saying that
none of that extra money that you have made is going to go back
to your shareholders in dividends?
Mr McFadyen: As James said earlier,
if you look at our investment programme in UKCS we intend to spend
$1.7 billion per annum. If you look at our historic levels of
spend in the UK over the last 10 years we have invested—and
this is Shell money—£8 billion sterling. That is the
type of investment that allows me to do what I do, if you like,
which is provide a safe and efficient supply of energy. That is
the biggest difference I think I can make as a supplier of energy.
That is where I should concentrate my efforts.
Q266 Mr Berry: I think it is extremely
unreasonable of my colleagues to expect you to sit there and say,
"Yes, we think a windfall tax would be a good idea".
You could not possibly do that; you would be sacked. Your shareholders
would go berserk. It is totally unreasonable for them to ask the
question and your answers are absolutely predictable. That is
not a criticism of you. I do not see what else you can say when
you are sitting there. The point I want to put to you though is
that the fiscal stability point is the key issue and it is about
the investment climate. I think you make a very important point
about fiscal stability being advantageous to investment and so
on, but would you at least acknowledge that if we are talking
about entirely unanticipated excess profits it is a bit difficult
to put forward a strong argument that says that it is unanticipated
excess profits that will determine long term investment? That
is the part of what you are saying that you might acknowledge
is stretching it a little bit.
Mr Smith: We said earlier that
seven years ago the oil price was 10 dollars a barrel. When we
make our investments we have to anticipate the possibility that
there will be fluctuations both up and down in the oil price.
I suppose any new tax dents confidence. When you say that we would
say that anyway, I am trying to make comments that I think are
important to UK Inc as well about getting the maximum out of the
North Sea, about jobs in the UK and about balance of payments
and about bringing material to market because, as I tried to say
at the very beginning, in competitive markets it is supply and
demand that will out on prices. The best thing that we can do
is bring new gas to the market and that is what we are aiming
to do which, other things being equal, will have a moderating
effect on prices.
Mr McFadyen: James mentioned at
the beginning that we are also investing in projects outside UKCS.
We are bringing that gas to the UK market. If I take Orman Lange
as an example, that requires a Shell investment this year, next
year and beyond adding up to something in excess of a billion
dollars.
Q267 Mr Hoyle: In fairness, my colleagues
are absolutely right because this is unexpected money; this is
a windfall gain for your good selves. Obviously, quite rightly,
the industry does invest, it commits its investment long term
and it works on a low level of return and when it was 10 dollars
a barrel you still had to get your investment right, you still
had to get your production costs down. All that has been in place,
but this is beyond the wildest dreams of what the industry expected
for the long term. Okay, it may fluctuate for a couple of weeks
but this has been a long term gain. I understand your investment
but all that money has already been put at one side; that money
is there. This is over and above that. Are you trying to say to
us today that you are going to put all this extra windfall into
new investment, new fields around the UK? No. Let us be honest.
This windfall money is either going to go to the shareholders
or it is going to go into profits somewhere else; I do not know,
but let us be honest about it; let us not mislead each other,
that suddenly you have got to spend a billion pounds to get your
gas to market in the UK. That commitment is already there; that
money has already been set aside. This is not coming out of these
windfall profits.
Mr Smith: We are aiming to find
and produce as much oil and gas as we can. All the projects that
we can find to do we will want to do and bring hydrocarbons still
into the market. I only say that any change in the tax regime
will dent confidence and denting confidence is not going to be
good for investor confidence.
Mr Hoyle: I do not think we need to mislead
each other; that is what I am trying to say.
Q268 Sir Robert Smith: Shell does not
just invest in the UK. What would the consequences be in terms
of deciding where to invest?
Mr Smith: We invest internationally,
we invest around the world. Our total investment programme is
going to be $15 billion a year for the next few years. One thing
I would like to emphasise is that we use the word `heartlands'
to describe our upstream strategy and the UK Continental Shelf
and the North Sea are still firmly part of our heartlands.
Q269 Chairman: Would you sign up to the
figure of $27-$30 a barrel as being the range in which you can
get a return on investment?
Mr Smith: We tend to do our investment
screening in the $20-$25 a barrel range and then we think pretty
hard about downsides and we think pretty hard about upsides, so
you cannot pick one number.
Q270 Chairman: I realise that we are
talking about a range, but what I am trying to get at is where
the range is. It could be between $20 and $30, you are saying.
At the moment we are talking about oil prices that are 50% in
excess of that.
Mr Smith: Yes.
Q271 Chairman: John Browne at the weekend
was quoted as saying that in three years' time it will probably
still be around $30-$35, which is still not a bad return, is it?
Mr Smith: Yes. Of course, John
Brown works for another company.
Q272 Chairman: It is the same products
that you are selling, you use the same techniques in bringing
it out of the ground by and large.
Mr Smith: The fact that we screen
at those levels means that that is where we think the long term
marginal cost of production will be and that is what feeds into
our economics. As I say, we do look at upsides and downsides.
If there is a change to the fiscal regime and a windfall profits
tax that will affect investor confidence. The consequence may
be less hydrocarbons out of the North Sea than all of us want.
Chairman: To mix metaphors once again,
we do not wish to kill off the goose that lays the golden eggs.
Equally, we are very conscious that sensible turkeys never vote
for Christmas. We just wanted to tease out of you the position.
We are not here to trick you into selling your soul in the sense
that, "These guys have agreed to a windfall profits tax;
we did not expect that". We just wanted to raise with you
the issues and concerns.
Q273 Judy Mallaber: We just wondered
whether you would rather be regulated or taxed, if I could put
it that way. If you had a choice which would you prefer: stronger
regulation or a tax when you get these kinds of profits?
Mr Smith: I would probably need
to respond separately to both questions and I have done my best
to respond to the point. A stable fiscal regime I think would
be good for hydrocarbons in the North Sea and therefore good for
the nation. I am not sure I know what you mean by regulation but
I think we all believe that free markets are the best thing and
free markets will find the right prices and create the right incentive
to invest.
Q274 Sir Robert Smith: A lot of the witnesses
we have had have a concern that there is not the information there
for them to know that the supply market coming out of the North
Sea is operating in the way the free market should and those witnesses
are saying, "Is there not a way we could get more information
or better regulation?" to give them the confidence that the
price they are paying is a consequence of market fundamentals
and not of a market not working properly.
Mr Smith: You will have had explained
the measures that have been put in place over the last two years
in phases and it has been in an Ofgem press report that providing
information about standardising the offshore information, if I
remember, is the first thing to do so that the information can
be consolidated in the right way. Operational planning was the
second phase and then flow of gas into pipelines and forecasting
of delivery fields, which is something that is going to be put
in place. I think the industry has responded to that a lot and
we are always ready to discuss if more would be useful.
Mr McFadyen: From the point of
view of an upstream operator here in the UK I think the DTI are
doing a great job when it comes to licensing and moving further
acreage etc; that needs to be noted. When we are looking at our
operating activities and the role of HSE, DEFRA, SEPA, etc, I
think they are doing a grand job. I would make the same point
in my experience about the OFT when it comes to economic regulation,
which I think was the expression you used.
Q275 Chairman: Yes, I did.
Mr McFadyen: I think the OFT are
doing a great job there.
Q276 Chairman: On the basis of other
work we do, OFT parachute in when there is a particular issue.
What we were looking at was economic regulation on a more consistent
basis in the sense of the way that Ofgem operates in relation
to UK gas and electricity markets where they keep a weather eye
on it. They found in the work that they did, looking at the reasons
for the price spikes, that their competence denied them access
to information and to a proper appreciation of what are called
markets in these areas. Again, I am not asking you to volunteer
whether you wish to be hanged or electrocuted but on the other
hand we do see that if the market does not correct itself in the
way that you are suggesting, that it has become dysfunctional,
there may well be for us no other option but to recommend to Government
that they look again at the way in which energy is regulated,
not just from the beach to the household or the factory but also
from the point of extraction from the sea, that is the context
in which we are looking at this, and whether indeed, while the
DTI does a number of good things and you have indicated them,
the sponsoring department should necessarily always be the regulating
department and whether economic regulation can be at variance
with economic promotion and a wider degree of confidence across
the economy and not just in your own industry. That is the context
in which this question has been posed.
Mr Smith: The OFT does have a
lot of powers upstream as well.
Chairman: It does. It is whether or not
they should be divested to a specific agency that would have the
economic regulatory role. That is something that you can think
about perhaps when you are not counting your money. Thank you
very much.
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