Our industry is changing rapidly, as we face up to the challenges of securing the energy the world will need. These changes naturally include the relationships between national oil companies, and international oil and service companies.

Some commentators portray this in terms of winners and losers. They see international oil companies (IOCs) gaining access only to the most difficult frontier projects, while national companies increasingly harvest their own ‘low hanging fruits’ with service company support, and some challenge IOCs internationally and along the value chain.

I think this is highly misleading – misunderstanding both the scale of the challenges and how this industry is developing to meet them. Why?.

Frontier projects

First, the technical and operational challenges we face are not confined just to a few frontier projects but are intensifying across this industry. Second, meeting them will require all our abilities – national companies, and international oil and service companies. Third, the way this industry is responding is by greater – not less – partnership and cooperation.

National oil companies have become highly knowledgeable and capable. They don’t depend on IOCs. But they do want to apply the best technologies and capabilities to meet their challenges and maximise the value of their national resource

What are those challenges? We have to meet accelerating energy demand, on which continued economic development and rising living standards depend. There are few remaining ‘low hanging fruits’. So that means producing more difficult barrels everywhere. Sometimes in remote and harsh conditions, but also:

o By raising recovery globally.

o In more complex geology.

o From heavy oil, tight and sour gas, and;

o From unconventional resources.

These all depend on our collective ability to gain much greater understanding of the subsurface, apply many advanced technologies together to best effect, and undertake highly complex projects and operations. And we must do all this at increasing pace to keep up with demand.

We also face the challenge of delivering much more gas, over longer distances, to many more customers. And we must respond together to pressing environmental concerns, including the need to reduce greenhouse gas emissions.

All this will surely stretch this industry, technologically and financially. But the greatest underlying challenge is human, developing and deploying the necessary skills and capabilities. Success is not win-lose but a win-win situation for all in this industry, and for our customers.

Harnessing global capabilities

IOCs gain their strengths from their global scale and integration, which enables them to develop and deploy technology quickly, and to build skills and capabilities. For example, Shell invested some US$750million on upstream R&D last year, focused primarily on the subsurface and improving recovery.

This effort reflects the needs of our partnerships. Our national partners are key stakeholders in our technology development.

For example, our research on enhanced oil recovery (EOR) techniques is greatly influenced by our involvement in Oman, where we have projects in all three main EOR technologies – thermal, miscible gas and chemical – and have established an EOR research centre.

Integration along the value chain is increasingly important. So is integration across disciplines, from subsurface to surface, and through the field life cycle. It requires people with deep professional knowledge, and the flexibility and perspective to contribute in increasingly complex operations. IOCs recruit and train globally, and develop peoples’ experience in varied operations.

Modern communications enables colleagues to interact across the world, increasingly sharing

real-time data direct from rigs and reservoirs.

Success in meeting this industry’s challenges will depend on our ability to share knowledge in this way.

In China, for example, the Changbei tight gas development will provide clean gas to Beijing for the 2008 Olympics. It came on stream this year and is ramping up production to three billion cubic metres a year.

As PetroChina’s partner, we bring experience of tight gas in the US to help develop this difficult reservoir using long multi-lateral horizontal wells.

Complementary contributions

Like IOCs, international service companies have a vital role. But we work in very different – and complementary – ways. Put simply, it is the difference between partnership and package.

IOCs seek partnerships to apply their technologies, capabilities and capital for long-term mutual advantage. We want to share both the risks and the rewards because this most closely aligns our interests with those of our partners.

By contrast, the business model of service companies is to sell defined packages of services to customers. In Shell, partnership with national companies is central to our business. We work with them in more than 20 countries, and undertake about half our capital expenditure with them. Although some have already endured for many decades, such partnerships are by no means a legacy of our past. On the contrary, we see them as an integral part of our future.

Take the Middle East, where we are active in twice as many countries as five years ago. We’re engaged in major, long-term projects – designed to double our production in the region in the next decade – and extensive exploration. This also includes in Libya.

In exploration, we’re using advanced techniques to identify prospects, and to drill very deep wells safely in difficult, overpressured geology. And we're excited to be combining the long experience in the LNG business of both partners, with our own very wide access to international markets.

One of the things IOCs bring to their partnerships is knowing how to make optimal use of the capabilities of service companies, leveraging our scale as major global customers in these relationships. One element of this is the annual in-depth review meetings I have with the leaderships of Schlumberger and of Halliburton.

We also work with service companies when we want to achieve industry wide application of Shell innovations, to gain early income while staying ahead of the learning curve.

We do this with them because that’s where their strongest capabilities are. Enventure – our US$170million turnover expandable tubulars venture with Halliburton – is one example. And we don’t just work with traditional service companies. For example, we're now using the drilling subsidiaries of the major Chinese NOCs in Nigeria and Oman.

Valuing partnership

National companies seek the best technologies and capabilities to meet their needs. They know how to make good choices. I believe most continue to value partnership.

For example, Qatar is working with international companies to realise its bold vision for developing its natural resources. It has done so with great clarity, decisiveness and foresight. In Shell, we’re very proud to be a partner of Qatar Petroleum in two huge projects: Qatargas 4LNG and Pearl Gas to Liquids (GTL).

Qatar’s vision for GTL includes achieving leadership in this important new market, commercialising more gas by meeting expanding demand for cleaner, more efficient, more valuable products.

In Shell, we have been pursuing the potential of GTL for 30 years, developing our technology, gaining operational experience and developing markets. We bring this experience to the Pearl project, as well as of undertaking massive engineering projects. The high quality GTL products the Pearl plant will produce are all more valuable than their conventional equivalents. But Shell process technology – and ability to access markets – enables the production of more of the even higher value specialities, such as GTL lubricant base oils.

Of course, national companies also operate internationally and along the value chain, and value partnerships with the capabilities of IOCs in this as well.

For example, we recently signed an agreement with Qatar Petroleum to pursue joint international opportunities.

And, in the United States, our longstanding Motiva downstream joint venture with Saudi Aramco announced a major refinery expansion last month – the largest increase in refining capacity in the US for 30 years.

Striking a new balance?

The title of this article refers to ‘striking a new balance’ between national and international oil companies.

I see it differently, as highly productive relationships that are constantly evolving, as IOCs respond to the changing needs of their partners and NOCs make hard-headed judgements about what is best for their business.

Although I have focused on partnership, this takes place within a highly competitive industry. None of us can take for granted that we will be chosen as partners, will win contracts, or will attract investment.

Competition drives dynamism, responsiveness to change, and the relentless search for innovation and improvement. We apply these individual strengths to build this industry together.

I believe partnership between national and international oil companies makes the best of those strengths, giving us capabilities that are even greater than the sum of their parts.

I am confident that this partnership will endure. Because of the magnitude of the challenges we face everywhere.

Because meeting them requires harnessing all our abilities. It is a sum not a balance.o

o Shell is a global group of energy and petrochemical companies. It is active in more than 130 countries and territories and employ 108,000 people worldwide.

Key projects the company is involved in include: Athabasca Oil Sands Project (Overcoming technical challenges to get hydrocarbons from the oil sands of Athabasca, enough to supply about 10 per cent of Canada’s oil needs); The Pearl Gas to Liquids (GTL) project in Qatar will be the world’s biggest plant producing clean liquid fuels from natural gas; Groningen gas field (Adding 40 years to the life of Europe’s largest gas field); Bonga Deepwater Project (Shell is the leading partner and operator of the first deepwater project offshore Nigeria); Na Kika, Gulf of Mexico (production from deepwater reservoirs once considered too costly and difficult to tap); Nanhai Petrochemicals Complex (chemicals plant producing 2.3 million tonnes of products a year to help meet rising demand in China); Sakhalin II (Developing the world’s largest single integrated oil and gas export project).o