The Angle from T. Rowe Price: The Long View: Wael Sawan, CEO of Shell

While a lot of people talk about an energy transition, we're really much more in the space of energy addition, at least for the coming decade. Right. This is an addition game. It is not a substitution game yet.

Thank you. Thank you so much.

Yeah, I mean, I think—look, a lot of it was not by choice. A lot of it was forced, whether it was my dad's work—he was an expatriate working at the time for 3M—or, of course, circumstances in Lebanon, in particular through the early '80s when we had tried to come back, but barely lasted for a year. And then beyond that, of course, just the career choices I took. I'd say the biggest influence is you learn how to be able to sort of almost blend into different societies, and it opened up my mind, and I think I continue to hold that to different people's perspectives. It's really easy, coming from a household where my parents were trying to hold on to our identity with all the moves, to be firm, to be static almost in the way you think about things. Yeah. But all these moves, I think, force you to integrate, to listen, to adapt. And I do think that's one of the things that Lebanese are particularly known for. In addition to resilience, it's the ability to adapt where they go. And I've been very lucky in my career to have had multiple sort of different locations where I get exposed to cultures, to people, and to learn from that. I think it's also given me that resilience that I mentioned, because every time you move—and I see it more now with my kids—you have to build that resilience to be able to set yourself up for the new context that you're in. Yeah. But I do think it makes us better people.

Look, I think each one of them brought something specific. I think it was more the events that brought the resiliency more so than the locations. Than the place. The few examples...I mean, I remember distinctly living in the Netherlands when my wife and my son—who had just been born, my eldest, who was six months at the time—got stuck in the crossfire of Hezbollah and Israel at the time. And airports closed. I had to figure out a way to get through into Beirut. There were...getting into a car, lights had to be off because they were hitting cars at night. And it's those moments where you recognize it puts things into perspective. Yeah. What really matters. What really matters. And it also grounds the relationships with family and what matters to you when you have that extra minute in the day. Where do you want to spend it, and who do you want to call up and check on? I think from a professional perspective, resilience came from tragedies. I had just been given the opportunity to lead our Qatari business. It was in 2012. And at the time, couple weeks later, we had an industrial accident on one of our facilities, and two colleagues died, and I had to sort of face up to the wives and to the kids of not just those colleagues, but others to be able to say, 'If we bring this plant on, can you assure me that everyone's going to be safe?' Figuring out as a leader how you are able to look people in the eye and to be able to fulfill what they expect of you and what you demand of yourself, I think those are the moments where, at least I felt, my character was built and where my resilience was developed.

It's very difficult. Yeah. It's very difficult because I think it makes you, it forces you to go back to the core of who you are. And it just pushes you into a space that maybe is the most uncomfortable space, which is: How do I get beyond my own fears to be able to make sure that I am there to be the leader that I need to be for the people that are there? And each one of these experiences—good, bad, and ugly—I think in itself is formative. The most important thing is not to let go of those learnings as we go through and not to assume that those learnings are static. Right. Because every single context has a different antidote. Yep.

Look, I started by really looking at the external context first and then looking at the internal capabilities we have, the portfolio we had, and how are we going to be able to sort of navigate the years ahead. And what was becoming clearer to me, and this was literally just after the Russia-Ukraine, Russian invasion of Ukraine, and what I became more and more convinced of is that the energy system was going one way, and it was going to be more and more volatile in the years to come. And that was not just because of geopolitically induced volatility, but the very fact that it was going to become a much more varied energy system with more nuclear potentially. We still needed a lot of coal. We still needed oil and gas. We need electricity. Everything we can get our hands on. But the intermittency in renewables, for example, the age of the grids, that geopolitical uncertainty all meant that volatility was going to be heightened. And so it convinced me that the core of the company where we truly had a capability in areas like trading, backed by physical infrastructure, we needed to be able to not just hold onto, but we needed to hone and to grow and to strengthen. So there was a choice at that time to really double down, and eventually I pulled up the head of trading to sit on my executive committee and really start to bring that to life in our organization. From an internal perspective, I was lucky to have a lot of good stuff to build on. The values of the company were very strong. We had a good balance sheet coming in. But there were a few areas where I felt we really needed to sort of sharpen our focus. One was real clarity and simplicity of direction and vision. I remember coming in, and I just inventorized the number of targets we had put out there, and there were over 55 targets. Oh. We brought that down to a handful. Yeah. And that covered the gamut. We then moved into the second bit, which was we have a great culture, a culture of care, a culture of support, but we did not have performance edge. So we really brought the performance discipline and simplification mantra into the day-to-day, and we continue to hold onto it. Just stepping up the way we think about performance, not just talking about it, but everything from the cadence around performance, the transparency of data, the ability to have common goals for teams that sit in the matrix. And the third key area I think was capital, and capital allocation specifically. The industry has been notorious for questionable capital allocation. And I look back at our own history, and there were many things where I think we just got it wrong. So we elevated this concept of capital allocation, broadened our mind around it, shifted from what were monthly investment committees to weekly investment committees. Monthly, we used to do two hours. Now we do three hours every single week. Wow. We use a lot more AI and data to be able to interrogate track records, what the industry has been able to deliver to really give us the contrarian view on every single one of our investments. We opened our minds from investing in projects to actually you're competing every single day with my buyback. This is what my buyback can give me right now. And so just fundamentally shifting the way we think about capital allocation to much more of a shareholder-first mindset around it.

Yeah. So, for a long, long time, we struggled to justify doing any acquisition just because of where our share price was. Yeah. The buyback just looks so good. It just looked too good. Yeah. Right? ARC, we had liked a lot strategically, and I'd been looking at ARC for over two, two and a half years. But we just could not make the numbers work in a way where I could stand up in front of our investors and say, 'Look, this is going to be accretive, and here's how I can bank that for you.' Fast-forward to the opportunity. We were getting ready to make a move, and, of course, the events of end of February materialize in the Middle East, and we're like, 'Man, this is going to be tough.' What happened next was we found alignment with the ARC board on strategic direction. And at the heart of it, it's our ability to be able to synergize with adjacent blocs that we have where we are a top performer in gas, UTCs, and gas production with a company that is a leader in liquids production, lowest on the cost curve, bring those two assets together, leverage the fact that we have, of course, our LNG Canada value chain that allows us to monetize that gas through an international market, leverage our trading capacity in the U.S. and in Canada to be able to also premiumize those molecules, and, of course, synergize through cost takeout. So a whole bunch of opportunities.

Look, I mean, I think, I'm,,,of course, I have a massive affinity to the region. My brother lives in Dubai. I've lived in Oman. I've lived in Dubai. I've lived in Qatar. I've worked across the region. Every single minister, every single head of state I have a personal relationship with. Yeah. So this was painful firstly on a personal level, as I recognize that many of these countries were going to be caught up in the crossfire. So my first act toward colleagues, toward friends, toward family, and toward our own people was just checking in. And in the days that followed, I had multiple touch points with my own teams. I had multiple touch points, for example, with some of our seafarers, just to check in on them, and some of them were stuck in the Straits. 'How are you guys doing? Are you getting what you need? Are the satellite phones working so that you can talk to your families?' The biggest contribution I can make in that moment is to mobilize the capability to be there for our people, but as you say, it's also to step back. So we created, very quickly...we have a protocol in the company that goes into crisis team situation, so I granted the crisis team mandate. My chief of staff moved in as crisis team lead. Under him, there's an entire team that's set up that includes, for example, scenarios: What could happen, how should we be thinking about that? HR, what do we do with our 2,500 staff who are in the region and another 10,000 dependents there? And so on and so forth. We, of course, mobilized our intelligence capability that allows us to know what's happening with ships, radars, all of our connects with governments to be able to make sure that we are one step ahead. And all of that capability gets managed through this crisis team that is on the ball every few hours of the day. My role is just to be able to be there, to pick up the phone: 'Who do you need me to call? What do I need to do? Who do I need to meet?' But really I take my lead from the team rather than become the person who's drawing capability and asking the team for things.

It's protocol, and it's training. And so we have to...we run these simulations on a regular basis. Sadly, over the last few years, we've had more actual experiences than we like, but we do this. We do it, for example, for hurricanes in the Gulf of America. We do it for cyberattacks. How would we respond? So all of that has to be institutionalized so that you are not sort of catching up when, God forbid, something like that happens.

I think we start by developing our own view of the energy system. And what we see in the energy system is while a lot of people talk about an energy transition, we're really much more in the space of energy addition, at least for the coming decade. Right. This is an addition game. It is not a substitution game yet. Yeah. And so a lot of what we're focused on is what are those energy forms and the parts of the value chains where we have a competitive advantage, where we have a right to win, and that's not everywhere, and we've learned that the hard way over the years. Yeah. And so we're really focused on those areas. The volatility that I referenced earlier is indeed a feature of that energy system of the future. And embedded within that is a huge level of uncertainty, in particular in the external world. And so rather than worry about that uncertainty, we try to focus on a few things which we think we can control. One is our own capability, our balance sheet. We focus on the fundamentals. And how does that translate into action? We try to look at resources that are at the lower end of the cost curve. So irrespective of where the world goes, we need to be on the lower end of the cost curve and, where possible, on the lower end of the carbon curve so that we have real resilience in the molecules we have. Beyond that, having a healthy balance sheet in what is perennially a cyclical industry is wisdom. That doesn't mean you need to have too strong of a balance sheet, but it means being really smart about how we are not getting too excited in the good times, but building the firepower to play countercyclically buybacks or opportunities as they emerge. That's another piece we can control. I think thirdly it's about diversification of supplies. Part of uncertainty is I don't know what artery is going to be clogged tomorrow in the global energy trade. I don't know what country is going to impose restrictions on its supplies. We lost a great asset in Russia after the events there. Yet the overall system continues to work, so the diversification of supply sources and infrastructure is key. And I'd say critically we are deep believers in integrated value chains. That means it's not just about source of supply, it's not just about owning the customer, it's also about owning the artery that connects them. Right. That's shipping. We're seeing that now, so... Absolutely. ...how critical. Critical. Yeah. Right? So we are one of the biggest industrial shippers in the world. We have shipping capability in the organization. When you have control of your own destiny through the terminals, through the pipelines, through the ships, it allows you to be able to move, in particular in times of uncertainty, which plays back to the comment around volatility. So when we think about capital allocation, to the heart of your question, we reflect on that canvas of, OK, so what are the control points that we really need in this bigger picture? We don't need every control point, but we need some critical control points where we need to allocate capital. It could be in the supply. It could be in the infrastructure. It could be in building the consumer part of it, right? In airports, it is the depots at, for aviation at the airports, so we can get our aviation fuels to be sold to the airplanes. We don't need the pipeline. That's free access. But having the depot in the airport is the control point that allows you to sell to that aviation customer, irrespective of whether they want to buy sustainable aviation fuel or just jet fuel. That is the value chain thinking, the integrated value chain thinking that we continue to develop and build up because we think that'll be very resilient and very value accretive into the future.

Yeah. I'd start off by saying we see great momentum for LNG into the future, largely because it is one of the most versatile energy forms that is able to plug gaps around the world on both the industrial side as well as the transportation side. There's very few that pack as much energy content and are able to move across locations like LNG. I think the other thing is what this crisis has shown is despite the fact that 20% of the globe's LNG is trapped in the Straits... Yeah. ...markets haven't gone crazy. Yeah. And that's partly because of all the new supplies that have come into the market, giving resilience into the future.

I'd start by freely admitting that I have never, ever gotten the oil price prediction right. I mean, I have been horrendous at it. And that's partly because I think what sits in oil price is so difficult to predict. Yeah. The geopolitics, the changing nature of the industries that are using our product, and, of course, just natural events. As we look into the future, the way we think about oil price is what is the marginal cost of the barrel that you need to bring into the market to meet the demand at that point? We don't see a fundamental destruction in energy demand at the moment, in particular, crude demand. We see maybe 2.5, 3% since the crisis has begun, which is tiny. It's temporal. We don't think it's permanent. So demand isn't hugely changing. The problem is easy oil is behind us, and so you're going to have to continue to find ways to be able to drive engineering, options to bring down the cost of oil. But we see that $70 is a good clearing mark for the demand profile that we see into the future. We'll see whether that view changes, but what is happening is more and more, I think, the cost of a barrel of oil is going up, because you're moving from, call it tier one sweet spots in the Permian to tier two and eventually into tier three. And we have significantly explored opportunities around the world, so while there are still lots of barrels to find, we are depleting at the moment on average around 5% a year. And if you think about the shales, it's depleting much faster than that. Right. And so I do think 70+ is a fair range to look at, while saying that is too simplistic of a number because it's an average across a period. And what you will find with our commodity is it goes all over the place... Right. ...from 40 all the way to 100, and that's what an investor should be thinking about. It's the cyclicality around the 70 moreso than a singular number.

I really hope so. I mean, we are seeing early proof points of that, but it's still small compared to the numbers we're talking about. So if you're losing 5 million barrels a day... Yeah. ...what you find at the moment is AI is particularly powerful, in particular in the subsurface, in pattern recognition, so moving from physics-based articulation of opportunities in the reservoir to a bit more pattern recognition-based opportunities. That typically is more about moving your recovery factor in the reservoir by another 1 or 2%. OK. At some point, you hit the challenges of physics and geology. Right. And that becomes much tougher because then your cost structures will go significantly higher. Yeah.

Too early to judge what it can do, and too early to judge its full potential. What we are seeing at the moment is the easy bit of AI is productivity enhancement. The more exciting bit of AI that we have seen of late is in trading... Yeah. ...as well as in the subsurface. Interesting. Those are two areas where we find we are running hard to be able to get our systems to fully leverage the capability. By the way, it's not the technology that we're finding is the issue. It is our workflows, it is our legacy ways of thinking. It is the culture, the behavior. We have, in essence, created workflows that work for people, rather than workflows that are able to adapt to systems. And so we're having to work through that at the moment on both the subsurface and the trading. And one area that I've been particularly impressed with, with how we can leverage AI, is in decision-making. So when I go into a meeting now, I have my pre-read. I'll go into Copilot, I'll put my views coming into the meeting, and I'll say, 'What am I missing?' And I get a great challenge as to, look, here are different things you should consider rather than just your current view. Yeah. So on a personal level, it's helping. But on a corporate level, in upstream for example, the team has now developed what they call the upstream brain. We take every single bit of data that's coming from the assets, from the sensors, from all of the assurance we are conducting, from all of the reports we have, to be able to really get forensic around what are the areas of focus to be able to enhance performance on an asset or in a business. Yeah. That's a step change given the volume of information we are trying to digest.

I'd say there's two big differentiators we see. Getting your data in a good shape early. We've been working on this now for six years, so we have some pockets where we really see the data has moved forward in a big way, and we see the value of that now. Yeah. Right? But it is essential because everything else, the technology has never been the issue. It is our discipline in the quality of the data and the harmonization of the way we think about data. So I think that's one critical ingredient of how we need to be able to work on this. I think beyond that, when I reflect on our own journey as a company, the systems we have haven't always spoken to each other. Right. And that is something which I think is a real challenge.