Jeroen van der Veer, CEO, Royal Dutch Shell

By Ed Crooks

When Jeroen van der Veer looks back on his five years as chief executive of Royal Dutch Shell, he reaches for a phrase from John F Kennedy. One of his priorities, he says, was to change the culture, so Shell employees thought less about themselves, and more about “what you can do for the company”.

In the fevered atmosphere of the company in 2004, after it was revealed that its oil and gas reserves had been misreported for several years, that culture change was badly needed. The incentives for managers and staff had to be put straight. “If you do good for the company, you make progress in the company or you get more salary,” van der Veer says now. It is an approach that is characteristic of his management style.

As he has said: “I come from a Calvinistic country where you simply work and try to do good, but never say you are pleased about it.” In person he is lively, with a sharp sense of humour, but in his leadership of Shell he has been steady, consistent and careful.

Petrol pumps at a Shell petrol station in London. Royal Dutch Shell Plc followed an oil industry trend of reporting sharply lower first-quarter profit due to lower crude prices, while outperforming analysts’ forecasts.

It is a measure of his success that Shell now seems well able to maintain its independence. When he took over, and for a year or two afterwards, that was not the case. “We had the problem with the reserves and we had to get it behind us,” he says.

Yet as he comes to the end of his tenure - he steps down at the end of June - his management is facing its sternest test since that crisis. The plunge in the oil price from a peak of almost $150 last July to about $50 today, while industry costs remain, for the moment, at highly inflated levels, is putting enormous pressure on the industry.

Analysts at Bernstein Research have argued that the profitability of the large oil companies’ production, as measured by net income per barrel of oil or gas, in the first quarter of the year is likely to have been the lowest this decade.

The industry is, in effect, back to the days when oil was about $10 per barrel, and many of the biggest companies — Shell not among them - were forced to merge to cut costs. Today the concern is not about Shell’s survival, but its long-term prospects. There is a risk that the squeeze on its finances will choke off the investment in new projects that will be the sources of growth.

As van der Veer puts it: “To invest or not to invest; that is the question I think about.” His answer, so far, has been to invest. Shell plans this year to have the world’s biggest private sector capital-spending programme, investing $31bn-$32bn (£21.6bn), slightly more than last year, and higher than BP’s plan for less than $20bn.

At today’s oil prices, however, Shell is not generating enough cash to fund that capital-spending programme and its dividend. “We are not immediately nervous at the oil price even if the oil price is $35 per barrel,” van der Veer says. However, he adds: “If the oil price stays fairly low your gearing would run up all the time because you are still a high investor and you pay dividends. At certain volumes it may go up too high.”

Gearing — net debt as a proportion of capital employed — is set to rise from about 7 percent today to the low 20s by the end of the year. Van der Veer says he would “prefer” to keep it less than 30 percent. That is why Shell is trying to drive down costs, cutting thousands of jobs and negotiating price cuts with its suppliers. “If the business environment stays fairly lousy — I don’t hope that, but if that’s the case - then we expect very large procurement savings from all our suppliers,” van der Veer says.

Already, costs in some areas are down 15-20 percent. Those reductions will help Shell keep up its investment in new projects. “The art is to figure out an investment level which you go a bit up and a bit down, subject to the business environment, so subject to oil and gas prices, but not to have huge swings up and down. Because the nature of the industry is fairly long term, you are building for years,” van der Veer says.

Getting the investment strategy right in the next decade will be a job for Peter Voser, the chief financial officer who will succeed him. “A new leader should do new things,” van der Veer says. “We worked together on the subject over the past so many years, but in the end, it is over to him. All I see is that Mother Nature put enough oil and gas in the ground. I see plenty of investment opportunities that are much better than the cost of capital. If we are successful at grabbing those opportunities, you have a fantastic growth company.”