Windfall

by McKenzie Funk

  TWO

  SHELL GAMES

  WHEN AN OIL COMPANY BELIEVES IN CLIMATE CHANGE

  More than thirty years ago, before Royal Dutch Shell became the first of the oil super-majors to take advantage of the melting Arctic Ocean, the founding father of its celebrated team of futurists made a visit to Japan. Pierre Wack was a thin, incense-burning Frenchman and a follower of the bald Greco-Armenian guru Georges Gurdjieff, who taught his pupils how to transcend the hypnotic state of “waking sleep” that he believed most humans occupied for the entirety of their lives. Wack himself spoke mostly in parables, and each year he took a few weeks of vacation from Shell to meditate with a second guru in India. On this trip to Japan, in the science hub of Tsukuba, north of Tokyo, he saw an art exhibit that he considered the perfect metaphor for his work at the oil company. The exhibit’s various video screens simulated how different animals saw the world. The bee saw hundreds of tiny images, the frog a two-dimensional reality with no depth of field. The important one was the horse. Because a horse’s eyes are mounted on the two sides of its head, the video screen showed the opposite of normal human perception. “Humans see peripheral objects, at the corners of our eyes, as blurred and distorted,” explains Wack’s protégé Peter Schwartz in The Art of the Long View, his book on the strategic tool Shell calls scenario planning. “We see the center in sharp focus. Horses, at least according to this Japanese representation, see the peripheral as sharp.” The goal of the scenario planner was to be like the horse—looking at reality but looking especially at its fringes, where the surprises emerge.

  In its simplest description, a scenario—a tool now adopted by everyone from Disney to the National Intelligence Council that has guided most of Shell’s major decisions for a generation—is a story. Each scenario is a plausible story about a plausible future, researched and told by a futurist like Wack. Because stories are how humans mentally and emotionally understand the world, the act of imagining a scenario is thought to force decision makers to prepare for it. A scenario is not a forecast: Forecasts tend to assume that the future will be a continuation of the present, said Wack, and they are useless just when they are most crucial—when companies need to anticipate “major shifts in the business environment that make whole strategies obsolete.” Wack’s goal was to develop multiple versions of the future—an improvement on the scenario-planning technique he first learned from Herman Kahn, the pear-shaped contemplator of nuclear apocalypse at the Rand Corporation and Hudson Institute and perhaps the first person to call himself a futurist. “Herman Kahn was trying to get the future right—trying to get the one that was close to reality,” Schwartz told me. “Pierre was trying to influence the decisions we make today.” Rather than bet everything on a certain outcome, Wack had his oil company preparing to thrive no matter which version of the future came to pass.

  In buttoned-down Shell, a conglomerate of sensible Brits and sensible Dutch who would grow the company to be by some measures the biggest in the world—eighty-seven thousand people in more than seventy countries and territories—the scenario planners were eccentrics who had direct access to top executives. They came up with futures that were simply too heretical for the suits to come up with on their own. “I had the feeling of hunting in a pack of wolves,” Wack told an interviewer before his death in 1997, “being the eyes of the pack, and sending signals back to the rest. Now if you see something serious, and the pack doesn’t notice it, you’d better find out—are you in front?” In Wack’s time, the scenario-planning team foresaw the twin Arab oil shocks of the 1970s—inconceivable to executives because oil prices had been so stable for so long—and Shell thrived when its competitors did not. Historically the least profitable of the Seven Sisters oil companies, it would after a decade become the most profitable, momentarily surpassing even Exxon.

  During the later tenure of the bearded, electric Peter Schwartz, a trained aeronautical engineer who had studied Tibetan Buddhism, worked with the “transpersonal psychologist” Willis Harman, and befriended Peter Gabriel and the Grateful Dead, Shell bested all the supposed experts who said collapse of the Soviet Union was impossible.

  Oil companies are future oriented by their very nature—it takes decades to conduct seismic surveys, secure leases, drill test wells, hit pay dirt, find partners, erect rigs, start production, and suck a reservoir dry—but at Shell futurism became part of corporate identity. Other scenarios contemplated the rise of Muslim extremism, the world’s growing environmental awareness, and, before the (World Trade Organization) riots in Seattle, a backlash against globalization. The scenarios carried evocative names befitting a good story—the Rapids, Belle Époque, the Greening of Russia, Devolution, People Power, Business Class, Prism—and were characterized, above all, by their openness to ideas that made executives squirm. It is therefore not surprising that Shell faced up to what would seem the most squirm-inducing future of all for an oil company: Along with BP, it was first among the majors to publicly accept the science of climate change.

  Schwartz had helped build a large-scale climate model in the late 1970s at his previous job at the Palo Alto think tank SRI International, which had invented not only the computer mouse but also VALS (“values and lifestyles”), a research methodology that advertisers used to target specific segments of the American public. By the time of his arrival at Shell in 1982, climate change and emissions were already part of the oil company’s scenarios, and it seemed inevitable, he told me, “that we would decarbonize over time—for many reasons, climate among them.” This was one reason Shell began moving aggressively into natural gas, which is less carbon intensive than oil.

  In 1998, another onetime scenario planner, Jeroen van der Veer, who would soon become CEO, directed a formal, company-wide study of climate change’s impacts on Shell’s global business. The result was an in-house version of the Kyoto Protocol: a goal to reduce the company’s own greenhouse-gas emissions by 10 percent by 2002, an internal cap-and-trade scheme, a shadow carbon price, and a commitment to evaluate projects on the basis of not only the profit they would make but the carbon they would emit. Under the cap-and-trade scheme, individual Shell units were given permits based on their past emissions, then encouraged to reduce those emissions and sell the permits to units that needed them more. The program soon failed because it was voluntary—only those units able to easily cut carbon signed up—and because the few that needed more permits simply went to Shell headquarters and asked for them and headquarters handed them out. But the commitment to calculating internal emissions remains, and the company easily achieved its 10 percent reduction by 2002, largely by stopping some of the methane flaring that has long lit up the skies above its refineries in Nigeria. If you count carbon the way Shell does, looking only at its own operations, it is now no more of an emitter than the Marshall or British Virgin Islands. If you include emissions from the products Shell extracts from the earth and sells to the world, on the other hand, it is more like Germany—responsible for at least 3 percent of humankind’s annual greenhouse gases.

  A decade after van der Veer’s first climate study, Shell went a big step further. In 2008, it publicly released two scenarios describing the world up to 2050, Blueprints and Scramble, that explicitly warned of the dangers of climate change. They also foresaw a massive boom in global energy demand. For the first time, Shell declared that it had a preferred scenario: The greener, less emissions-intensive Blueprints offered the brighter future, for the company and the planet. Van der Veer gave interviews: It should be made expensive to emit carbon and other greenhouse gases, he declared. Global cap-and-trade agreements were urgently needed. Efficiency standards should be imposed. All this would require more government regulation. “People always think . . . the market will solve all of it,” he said. “That of course is nonsense.” But as time passed and governments continued to do little to regulate emissions, Shell, following Wack’s prescription, prepared to thrive in whichever version of the future became reality. I
t would become a test case for how forward-looking businesses might choose to navigate climate change on their own.

  • • •

  SHELL FIRST ANNOUNCED Blueprints and Scramble the same week its chief Arctic strategist, Robert Jan Blaauw, was at a conference called Arctic Frontiers in Tromsø, Norway: six days of speeches, coastal cruises, banquets, dance shows, and concerts also attended by the super-majors ConocoPhillips and ExxonMobil and large national companies including Norway’s Statoil, Russia’s Gazprom and Lukoil, Italy’s Eni, and France’s Total. On the first night, the eve of northerly Tromsø’s first sunlight of the year, I watched as hundreds of executives and dignitaries stood together and ate ceremonial solbolle pastries—sun balls—and were welcomed by a native Sami performer in a wool sweater. “Are you feeling volfy?” he asked the polyglot crowd, and then he cradled the microphone and began to howl.

  The previous summer had shrunk Arctic sea ice by an extra 500,000 square miles, twice the area of Texas, a dramatic record. Carbon emissions, most of them from fossil fuels, were largely to blame. Yet inside the auditorium, the question was not if the Arctic should now be developed but how. Norway’s petroleum and energy minister: “I think it’s important to recognize that this [melt] is also an opportunity.” A fellow at Alaska’s Institute of the North: “Also in the Arctic are 25 percent of the world’s known coal reserves.” A Norwegian social scientist: “The Arctic Climate Impact Assessment looks at how climate change impacts the conditions for oil and gas production, not how oil and gas production impacts global climate change.” A ConocoPhillips executive: “Listing the polar bear under the Endangered Species Act will do nothing to shorten ice retreat.” An author of the new Arctic Council Oil and Gas Assessment: “In general, animals that have feathers and fur have sensitivities to oil spills.” A representative of Sarah Palin’s office whom President Obama would later choose to head the Alaska Gas Pipeline Project: “As a noted historian said, ‘The wealth generated by Prudhoe Bay and the other fields on the North Slope since 1977 is worth more than all the fish ever caught, all the furs ever trapped, all the trees chopped down; throw in all the copper, whalebone, natural gas, tin, silver, platinum, and anything else ever extracted from Alaska, too. The balance sheet of Alaskan history is simple: One Prudhoe Bay is worth more in real dollars than everything that has been dug out, cut down, caught or killed in Alaska since the beginning of time.’ Yes, oil is everything to us.”

  At the end of the second morning, during a session titled “Environmental Challenges—Risk Management and Technological Solutions,” the head of the World Wildlife Fund’s Arctic program took the stage. “Apologies to the translators,” he said, “because I’m going to talk very fast. Okay. Would you buy a house on a floodplain below the one-in-fifty-year flood level? Would you, if you were a regulator, set the standard for nuclear power stations for one serious accident every one hundred years?” His voice was loud, his accent Australian, and his gray mustache flapped up and down as his head whipped back and forth.

  “I think the answer for most people here would be no,” he continued. “So why do we, the most inventive and intelligent species on the planet, continue to undertake activities which have far more risk than any of the things I’ve just outlined?” He began reciting facts: the pace of Arctic warming, the contraction of Greenland’s ice sheet, and the magnified sea-level rise from Siberia’s swollen rivers. Carbon in the atmosphere was increasing by 1.9 parts per million each year, up from 1.5 parts per million during the previous thirty years. Natural carbon sinks—oceans, plants—could now hold 10 percent less carbon than fifty years ago, their efficiency as buffers weakening. “Since 2000, the growth in carbon emissions from fossil fuels has tripled—tripled compared to the 1990s!” he said. “We’re exceeding even the highest IPCC emission scenarios.” He showed us a graph and how we were above the red line.

  “Okay, let’s summarize,” he said. “We lost 22 percent of the area of sea ice in two years. And you think that’s business as usual. We’ve lost 80 percent of the volume of Arctic sea ice in the last four years, and we pretend this is just part of what we do.” He looked at the crowd, visibly seething. “So, what can we conclude?” he asked. “That the emperor has no clothes. The expansion of oil and gas activities in the Arctic will fuel further greenhouse-gas emissions, which will, in turn, cause further warming and systemic changes to the Earth’s system, which, in turn, will cause massive impacts in the Arctic and globally, which will hurt you and me. Ladies and gentlemen, we are living inside the paradox.” He then called for a moratorium on all offshore oil and gas development in the Arctic. For a moment, there was a stunned silence—his anger seemed out of place, rude and unhinged, an interruption to what had so far been a pretty nice conference—then the crowd clapped politely.

  In time, Shell would have a practiced response to the apparent paradox, which was to say that it was no paradox at all. “There was a question about whether there was a paradox to produce oil and gas in the Arctic,” Blaauw told another conference. “I don’t think so. The story is pretty simple. Today, we share the planet with 6.9 billion people. By 2050, there will be 9 billion people. In order to meet rapidly growing demand, especially from China and India, diverse sources of energy need to be developed in parallel. Renewable energy, yes, in ever greater volumes. We need to reduce CO2 emissions. But also fossil fuels and nuclear. We need them all. As conventional oil and gas sources run out, we need to look at unconventional resources and unconventional locations. And that’s exactly where the Arctic comes in.”

  Shell executives also studiously avoid any suggestion that the company’s Arctic ambitions are tied to melting sea ice. This is, in many ways, reasonable. As Blaauw has pointed out, the last time oil prices were this high, after the 1970s oil shocks, Shell began exploring the Arctic’s Chukchi and Beaufort seas, west and north of Alaska, only to give up a dozen prospects after oil prices bottomed out again. Its main Arctic drill ship, the twenty-eight-thousand-ton, 270-foot-diameter Kulluk, which it purchased in 2005 and began refurbishing at an eventual cost of more than $300 million, is more than thirty years old, having been built during this same period of high prices. Now prices were back, global supplies were further depleted, and improved technology also made the Arctic more commercially viable: Thanks to a new exploration technology, directional drilling, no longer does every well require an expensive, environmentally disruptive platform of its own. Rather than dozens of pinpricks in the seabed, a single platform could drill a web of wells in every direction. There was another key change: In the 1980s and 1990s, the eight-hundred-mile Trans-Alaska Pipeline was full of Prudhoe Bay oil, too full to carry anything more. Now it was running so dry that Alaska officials were desperate to find new supplies, lest the depleted oil in the pipes get so cold that it began freezing in place.

  But melting ice is not irrelevant. In public statements and private conversations, Shell officials acknowledge the following truths: Climate change is real. Climate change is melting the Arctic. Ice-free seas are easier for shipping. Ice-free seas are easier for spill cleanup. Ice-free seas are easier for seismic survey, which, as the company Web site explains, “enables explorers to see through solid matter in the same way an ultrasound can see a baby inside its mother.” And in places like Alaska, governments allow oil drilling only during the ice-free summer, a season that is lengthening year after year. As a Shell vice president once told a crowd at yet another conference, “I will be one of those persons most cheering for an endless summer in Alaska.”

  I caught up with Blaauw in the Arctic Frontiers coffee line one morning, and he voiced a similar thought. An eighteen-ship Shell armada had recently sailed to the Beaufort Sea, where the company had again acquired drilling leases in 2005, but it was blocked in court by a coalition of Native and environmental groups before summer exploration could begin. “It was such an abnormally low ice year,” Blaauw told me, “so it’s a pity we weren’t allowed to go forward with the drilling.” T
he Arctic wasn’t like Saudi Arabia. “If you lose your chance to drill in the Middle East,” he said, “you can go back in six weeks. But the Arctic is slow, very slow. You must wait an entire year until the ice is gone again.” I asked if talk of the high north as the world’s next oil elephant was overblown. It was not, he said. I should keep an eye on Alaska’s upcoming Lease Sale 193, the first offshore auction in the Chukchi Sea in seventeen years. “There are enormous hopes for the Arctic,” he said, “and I think you’ll see that reflected in the prices at this Anchorage lease sale.”

  • • •

  IN THE OPTIMISTIC WORLD of Blueprints, wrote Jeroen van der Veer in the booklet introducing Shell’s two scenarios to 2050, “growing local actions begin to address the challenges of economic development, energy security and environmental pollution. A price is applied to a critical mass of emissions giving a huge stimulus to the development of clean energy technologies.” There would be energy efficiency measures, electric cars, solar panels—“increasingly a world of electrons rather than molecules”—and, crucially, widespread adoption of carbon capture and storage, or CCS, the still embryonic process to catch carbon at power plants before it enters the atmosphere. CCS would keep greenhouse gases in the ground, and it would keep fossil fuel companies in business. Shell would prepare for either scenario, van der Veer wrote. “But in our view, the Blueprints’ outcomes offer the best hope.”

  Blueprints, along with its counterpart, Scramble, was imagined as a plausible outcome of what Shell called the three hard truths: There would be a step change in global energy use. (“Developing nations, including population giants China and India, are entering their most energy-intensive phase of economic growth.”) There would not be enough conventional energy to keep up. (“By 2015, growth in the production of easily accessible oil and gas will not match the projected rate of demand growth.”) And climate change and other environmental stresses were real and getting worse. (“People are beginning to realise that energy use can both nourish and threaten what they value most—their health, their community and their environment, the future of their children, and the planet itself.”)