Ekaterina Grushetskaya has been appointed as the new head of Shell in Russia in August 2021, making her the first Russian woman in the company's history to hold this position. In her first interview she told TASS about the direction Shell would take in Russia and why the energy transition is impossible if oil and gas are no longer an option.
- You became head of Shell's Russian business during one of the most difficult periods for the oil and gas industry. How would you define for yourself the upcoming challenges given the pressure of the climate agenda, on the one hand, and the sharp demand recovery, on the other?
- For me it is, of course, not only a great honour, but also a very great responsibility. I am the first Russian citizen to hold this position. There are both certain advantages and certain difficulties in this.
As for external conditions, the period is certainly challenging - crises, pandemics, and volatility. But we understand that traditional oil and gas remain a major part of the energy mix. At the same time, our whole industry, which is on the brink of fundamental change, faces a dilemma, the successful resolution of which will determine its future.
- What is the dilemma?
- First of all, the necessity to find a balance between the energy transition agenda on the one hand and traditional hydrocarbon-related areas on the other.
Shell has set a target of achieving carbon neutrality by 2050. But we should not forget that humanity will need oil and especially gas for a long time if we do not want the global economy to come to a halt. The world's population is growing, and the rate of decarbonisation of different countries and sectors of industry varies considerably and is generally difficult to predict. The demand for hydrocarbons will therefore persist over the coming decades, even under the most ambitious energy transition scenarios.
And one more point - it is extremely difficult to finance a new climate agenda without the production of conventional reserves. That is how the energy sector works. And it is crucial to understand this.
- This year Shell experienced unprecedented pressure from environmental activists, which even led to a court decision to reduce emissions by almost half by 2030. The proceedings are still ongoing. But how would such resolutions potentially affect the upstream business?
- I would rather not speculate about how court verdicts might affect business - as you know Shell has decided to appeal. It was a very serious precedent for the group. We are already actively involved in the climate change agenda, which is part of our strategy. All decisions on Shell projects are made only with our climate goals in mind.
The court decision ordering Shell to reduce its own emissions was an incentive for us to accelerate the implementation of the Group's new corporate strategy and we are prepared to meet this challenge whether we win this appeal or not. In the third quarter of this year, we committed to reducing net emissions from our own operations by 50% by 2030 compared to 2016 levels.
A different matter is that it is not clear why it is Shell that has been the focus in this case. A court order against one company cannot replace the necessity for developing national policies to reduce emissions, as well as to ensure energy security and access to energy sources. As we know, not all countries have equal capacities in this respect.
- So it would be premature to tell how such a decision, if made, might affect the company's upstream projects, including in Russia?
- Yes, it is premature. We understand that there is a demand for the production of traditional resources, and it will remain so for decades to come. There are consumers who have an interest in keeping oil and gas production going. So our approach is to reduce emissions at all projects while meeting demand. And again, it is this activity that funds the transformation of our business for the energy transition.
In an era of energy transition, Russia remains a very important country for Shell - both upstream and downstream. And so we are delighted that the Russian government is taking the issue of decarbonisation very seriously and paying attention to it at the highest level, aiming to become a carbon-neutral economy by 2060.
- Do you agree with the view that such courts against extractive companies could become a trend?
- It is certainly an unpleasant precedent for the industry. But then again, most companies decide on these or those projects already having in mind the carbon footprint they will have.
Shell is already showing real results in terms of reducing emissions. That is our argument in this case.
- Does compliance with ESG criteria have any effect on the profitability of Russian projects?
- The ESG criteria are already a standard, and Shell only participates in projects where they are met. Otherwise, we do not make decisions as a matter of principle.
Our Russian assets are quite competitive in Shell's global portfolio, including in terms of ESG criteria.
- But that was not the reason why you refused to participate in the Meretoyakhaneftegaz project?
- No, not at all. Meretoyakhaneftegaz is a special case where, unfortunately, there was not a very favourable environment for completing the deal, because the development was happening during the pandemic. In addition, unfavourable macroeconomic factors came into play. Unfortunately, under such conditions and against the backdrop of the deadline, we had to decide to exit the project.
- Does this only apply to a particular project? What is your overall attitude to Arctic projects?
- Yes, I am only referring to the MNG. As for working in the Arctic, it is not really a priority for Shell now, and we are not planning to consider new offshore exploration projects above the Arctic Circle - we are only considering onshore projects.
At the end of last year, together with Gazprom Neft, we created Gydan Energy, an exploration joint venture in the Arctic. These are truly harsh, arctic conditions. Our joint venture has recently completed drilling its first well, and now geological exploration is in progress.
- Are the results expected to be promising?
- It is too soon to tell. It is important that our partnership with Gazprom Neft is very successful, as evidenced by the work of our joint venture, Salym Petroleum Development (which has been developing the Salym group of oil fields in KhMAO since 2003 - note TASS). Today, the cumulative volume of production in those fields has exceeded 100 million tonnes of oil since the start of the project, and the total length of the wells drilled has reached 5 million metres.
- Russia plans to increase LNG production several times over by 2035, to 130 million tonnes per year. Do your forecasts for the LNG market match this estimate?
- Russia has huge development potential in this area, given its proximity to the prospective Asian region. Right now, of course, Russia is still under-represented on the global LNG market, with 19% of the world's remaining gas reserves compared to 8% of global LNG production.
Yet demand for LNG is growing. By 2040 it will reach about 700 million tonnes per year, almost double its 2020 level. And 75% of this growth will be concentrated in Asia, near Russia's raw material base. Therefore, it is logical that Russia will occupy a significant share here. At the same time, we see that there is not enough production capacity to meet such demand.
So, we would like to participate in such projects in the Far East, because the Asian market certainly feels a demand for this energy resource.
- So Shell's ambitions in developing the LNG business belong to the Far East region?
- Not necessarily only there. I mean the areas where it makes sense to develop it in terms of proximity to the Asian region. But other regions may also be of interest to us.
- But there is a pressing issue of the raw material base in the Far East...
- It is true.
- In this regard I would like to ask whether we will see progress in expanding the raw material base for Sakhalin-2.
- We are working on it, but there is no progress in these negotiations so far. Right now, the primary concern is to load the two existing lines of the LNG plant.
- How interested are you in staying involved in the Sakhalin-2 project and extending the PSA beyond 2041? What is the main difficulty in renewing the agreement?
- We would like to continue participating in this project beyond 2041, but it always has to be economically justified.
- Is it about changing the PSA economic conditions?
- It is primarily about efficient management of the company, about ensuring that the production lines are filled, about a comprehensive economic model of the enterprise itself in terms of both production and LNG supplies.
- Where is this issue now?
- This is all discussed at the working level within the Sakhalin Energy committees (the Sakhalin-2 project operator - TASS commentary). And there is a constant contact with the Russian side, as it is part of the PSA management.
- Sakhalin Energy has recently sold the first batch of green LNG. This is such a new story for the market. Do you think this product will have a sustainable demand? Will the buyers be ready to pay extra for the "clean" label?
- The question is the right one, but you answer it yourself. Demand for carbon-neutral LNG largely depends on the consumer. There was an application and Sakhalin Energy supplied such a batch to Japan, and before that, Shell, together with Gazprom, supplied the UK. I am not ready to talk about future applications. But I think that the future of carbon-neutral LNG largely depends on state regulation in this field.
- The question is about conventional fuel. This year has been very difficult for independent petrol stations, because of the strong fuel price increase. Shell is the biggest independent player here. How interested are you in this market, considering the difficult situation with margins?
- Shell has quite a big filling station business, and in recent years we have built up the number of its stations to about 420 across the country. And they exist, as you rightly pointed out, in a very difficult margin situation, where the profitability of this business is negative because of the disparity between wholesale and retail prices.
Another problem for the fuel retailer is the high bank acquiring fee, which is as high as 1.5%. This does not compare to the rates in Europe of 0.3-0.4%. Of course, we would like to see dynamics on this issue. The petrol station business no longer exists in its pure form, it is a complex of services - shops, cafés. Therefore, we would like to see rates comparable to, for example, the restaurant business.
- Is it possible to say that in this situation you will reduce the chain of filling stations or revise your plans for its development?
- No, that is out of the question. On the contrary, thanks to the development of such an area as Shell Café, the last quarter was very successful. We hope to develop this business, but we also count on working with the Russian government to improve the efficiency of the filling station market.
We are not going to change our gas station network development plans, and we will continue to increase the number of stations and regions where we have a presence. But I repeat: we are now working with the government to improve the profitability of this segment.