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Pitting hopes on the second generation

Energy giant Shell has appointed István Kapitány vice president in charge of retail sales of Shell for Europe. In his new duty he will supervise the company’s activities, in Germany, Austria and Switzerland, UK, Slovakia, Hungary, Poland, Bulgaria and Russia to name a few.  The BBJ asked him about his views on the future of fuel research, the ways of reducing expenses in a giant corporation and how spending more can lead to better business.

(Photo: Anna Györffy)

Kapitány joined Shell in 1987 and has held various positions with the company, including management positions in several retail markets such as Asia, South Africa, Greece, Turkey and the CEE region. Before becoming the head of the petrol station business in Germany in 2002, he was chief executive of Shell Hungary.

Last year Shell took over some 50 filling stations from Tesco. Have those been completely integrated into the Shell system?

It went pretty fast. We have experience in rebranding service stations all around the world. And it’s really a sort of skill and capability that we as a group have developed. In 2002 when I moved to Germany one of the big challenges of that was a merger with a company called DEA. We had to actually sell 1,000 service stations in 2003 because of a competition board decision. And when you have to sell 1,000 service stations, it’s a huge exercise, but at the same time we had to be rebranding 1,000 DEA service stations into Shell. We completed that in six weeks, which was a world record by any standard. I mean this was quite a big operation. These experiences we have from around the world, from Brazil where we have a big network and also had to rebrand and also in the US a couple of years ago with the Texaco service stations in big numbers. So with our engineering capability these 51 service stations’ rebranding went well, within budget.

But of course that is the technicality. The more exciting part was with the marketing. With these service stations we are now participating in a channel where we were not active before in Hungary, hypermarkets and supermarkets. You might be surprised but we are fairly good in some of these channels in some of the markets. For instance in Italy we have a 60% market share in hypermarkets, mostly in central and north Italy.

Hungary was getting the benefit of this kind of experience from around the world both in terms of thinking about this potential deal and then introducing it. You might see that some of the products in the shop are from Tesco. Customers like the idea that we keep selling some of the Tesco products but the product quality in terms of the Shell fuel is significantly enhanced.

How are these stations performing?

It’s very interesting that what we see rebrandings around the world go very well because what’s happening is that the location is really very strong since hypermarkets have a significant amount of customers. You might or might not have seen that our prices are relatively competitive. It means that if you got to place like Megapark you will see that it’s a very competitively priced service station.

Are the prices the same at each service station or do they differ by location?

No, it is very much location-based, depending on where you are and who your main competitors are, what kind of location you have. I mean these locations, most of the Tesco locations are fantastic. Of course you have a huge number of potential customers and if you have strong competition in the area we always watch them very carefully.

Are you considering any further expansion or is that even an option? Is Hungary already saturated when it comes to service stations?

Hungary has a great network of service stations. I have seen the European retail network and I can compare Hungary to other European countries. The station networks in the CEE region have been developed in the last 20 years and a significant part of them in the last 10-15 years. There is good order, the size of these service stations is optimum. They have shops many of them have car wash facilities. They do have enough islands, pumps for the customers. And of course if you compare that to some of the other countries, you have everything what you want. In Italy you still have stations with a single pump and cars lining up. You wouldn’t find anything like that in Central and Eastern Europe. They are not open 24 hours they don’t have a shop typically. In the CEE, customers are expecting from us a good store, help on the forecourts, a wide range of fuels and also of course toilets and other ancillary facilities. Hungary has already a network which I think is optimal for the industry.

In Hungary we do have close to 1 million customers using the Shell loyalty program, which considering the size of the country is a reasonable customer segment. Customers are very loyal to the Shell brand. But all across Europe the loyalty program is strong. In Hungary the other interesting part of this cooperation is that we are basically together in this program with McDonald’s. It is a very important player because the two brands are very complimentary, the two networks are very complimentary and the customers really like that they can buy collective points from Shell and McDonald’s and getting good deals and good discounts. This also shows the ability to move between the different kinds of marketing is very strong.

Shell operates in a way where we try to let the operating companies find new ways and if it works, we might pick them up, make a global standard out of them. Loyalty is one example. Many things we are using throughout the world started in a relatively small operation. It shows the flexibility that we have. It’s not like a gigantic overpowering operation, it’s really the other way around. We want those that interface with the customers to come up with good ideas. When it’s standardized we can use it in different parts of the world. Shell hasthe biggest retail operation the world with 145 billion litres of fuel sold, over 44,000 service stations - 11,000 in Europe, 246 in Hungary.

A very important part of my team meetings is general managers talking about their best practices to learn from each other.

You mentioned Shell’s product development. Where is this industry going right now?

In some European countries we already introduced a new fuel called Shell FuelSave. We are advertising it and marketing it very forcefully. Essentially what the product does because of its special components is that it reduces consumption for a thankful by a liter. So if customers buy this the immediate benefit is one liter. One might ask since we are an oil company we sell petrol so why would we want to do that? Clearly, to satisfy the customers. We hope that more customers will buy from us so they can consume less. You not only have the product as part of the FuelSave but we also offer advice. For instance in Germany we have an internet-based driving school helping  customers with the FuelSave product. How to drive in a way that they further reduces consumption. I worked with one of the ambassadors for the program, she is a racing driver. She was teaching me according to these rules and it’s pretty impressive how much reductions you can achieve if you just watch your driving style.

Shell is also by far the biggest seller of biofuels, with 9 billion liters all around the world in 2009. It’s a fascinating figure for a company thought of mostly dealing in fossil fuels. For example, we have just signed an agreement with Cosan to create join venture  for the production of ethanol, sugar and power, and the supply, distribution and retail of transportation fuels in Brazil.  The important piece though is that we are working to ensure that the biofuels we purchase for blending are produced in a more sustainable way – safeguarding the environment and delivering benefits to society. . Shell was one of the first energy companies to invest in advanced biofuels that use non-food feedstocks and can offer lower ‘well to wheel’ CO2 production. We believe that the way to move forwards is with the advanced biofuels, so-called second generation. The fuels sold all around the world are typically first generation.

The difference is that first generation fuels are typically made out of agricultural produce also suitable for human consumption and represent a part of the food chain. We do not believe that in the long term and the sustainability of the planet this alone will be enough. We need to be spending far more energy on second generation and we do that. We have joint ventures and stand-alone companies which are developing new ways of producing biofuel from the leftover, the non-edible parts of agricultural produce (like straw) or pilot research facility to grow marine algae for conversion into biofuel. At our companies and JVs we are trying to put these very feasible opportunities into commercial reality while having a solution that is sustainable and not working against the food chain.

How do you see the future of biofuels? Do you see it coming as an evolution or a big bang that quickly reshapes the market?

We see that this is an evolution clearly driven by different kinds of factors. In different countries there are different regulations on the level of biofuel that you must have in your products. It also needs to be an evolution, because the solution, second generation biofules for instance, is simply not there. But it is by no means a slow progress.  

But there are of course other types of renewable fuels. Second-generation fuels seem to be for us the time being the most plausible, the most commercially viable and still very advantageous option for an environmentally friendly supply chain. There are other developments throughout the world. There’s wind, there’s solar, there’s electrics and these are very good and valid developments. Clearly, the only one thing we know for sure is that oil is going to be ruining out in the foreseeable future. In our own view oil and fossil fuels will still play a very important part in the fuel chain of supply when it turns 2050.

When it comes to gas it is available in a bigger quantity. We are very active in so-called GTL, gas-to-liquid technology. We already have a tests factory operation in Malaysia. We have a new, huge factory in Qatar coming in 2011, which will produce enough GTL fuel to fill over 160,000 cars a day. That means we will be able to supply GTL in commercially sustainable quantities.

What happens is that from gas we produce a liquid fuel which is basically like a diesel fuel that works with diesel vehicles. This is important for us since we first needed the technology which we developed extensively and tested extensively. A team using GTL fuel has won the Le Mans 24 hour-rave four times already. We have started selling GTL in commercial quantities in Europe.

The Qatar factory which is a huge commitment and investment from Shell will be another important step in making GTL commercially viable, which is always a big challenge.

How far is it from that stage?

With the bigger GTL quantity that we will be producing in Qatar, we believe we will achieve this commercially viable phase. You can’t do this if you’re always scratching the surface. Commercially I think this is a very good idea because as I said gas is available all around the world in huge quantities. Therefore we really need to be thinking about new ways of using gas. We believe we can reach this stage, otherwise we wouldn’t be building this huge factory.

Are your competitors also interested in this technology or is this a Shell project?

There are similar technologies. Sese coal project is using coal in South Africa which is basically making liquid fuel from coal. But Shell is the biggest in this area. The Qatar factory will be the biggest of its kind in the world.

So we are playing a very active role and we should because Shell is an energy company that no longer means only oil. By 2012, natural gas will make up half of our upstream production, growing further after that. You can see this is an ever-changing world and Shell is trying to show the way, the profitable and environmentally sustainable way to stay a strong energy company in the world.

The gas you use in Malaysia or in Qatar is procured locally?

Of course, one of our main activities is exploration which we do all around the world. So we have major downstream activity, the refining of the products that we produce.

What do you think about experimental projects like the electric car charging station launched by ELMŰ or the similar CNG filling station introduced by FŐGÁZ? Are these actual business possibilities or is that still far away?

In the future I expect vehicles powered by everything from advanced petrol and diesel to biofuels, electricity, CNG and eventually hydrogen. Electric vehicles offer the potential to reduce CO2 emissions from road transport. However, as for all fuel and vehicle options, there are several key challenges to be overcome, in particular WtW CO2e intensity (especially where electricity is produced from fossil fuels e.g. coal), electricity supply and infrastructure robustness, vehicle battery technology and consumer acceptance. Based on our Blueprints Scenario (part of Shell Energy Scenarios to 2050) we see potential for 50% of vehicles sold in the 2030s to have electric or fuel cell (hydrogen) drivetrains.

Let’s look at Hungary. The government is currently finishing up its energy strategy. What kind of steps or incentives would you prefer to forward the development of sustainable fuels and perhaps also to make fuels cheapen?

What we do around the world is spend a significant amount on research and development. We believe it’s a good investment for a business to have that. We would not have any expectations from a government to take over any of those areas. Over 30 years we we are developing so-called Shell energy scenarios, trying to see where the world will be, what the energy mix will look like. All around the world we present these to the governments to show them what we see and that is true in Hungary. Governments and NGOs tend to like there. Of course, these are just scenarios. We do not know the future, but we are preparing ourselves to be ready  to operate under different scenarios. Many governments are reading these scenarios and we are always keen to work with stakeholders on different kinds of developments.

Fuel prices are a huge concern in Hungary and often criticized for the high tax contents. Where do you see prices going in a year or so?

If I knew that, I’d be a very rich man. That’s a very difficult thing to reasonably predict. I have no intention to venture into any prediction in that field. The only thing that we know is that we are trying to be very competitive both in terms of our products, how we operate service stations and also with our cost base.

All around the world we are trying to reduce costs significantly concentrating only on the elements meant to satisfy customers and nothing else. That is what we feel we need to do to provide reasonable prices.

And of course the reasonable price is in a market economy. And the market in Europe is very competitive and the individual countries are very competitive which applies for Hungary as well. What you have here is a very balanced set of competitors. We have a very high quality regional/local player MOL with very good levels of operating of efficiency. We have very good regional companies like Agip and one international company, Shell. And then there are various discounters which ensure that the level of competition is pretty high. Comparing Hungary to other countries, the level of competition is very intense.

When it comes to the price of the final product, the one biggest element is the tax. We know that tax content is very high in the European Union, higher than in the United States. The other component is the price of oil which as I mentioned is very difficult to predict. Shell produces only 2% of the world’s crude oil, so even though we are a big energy company, we only have a small share in crude production. Therefore for us to predict which way it will go is very difficult.

What are the things that a company the size of Shell can do reduce expenses?

In the last two years we reduced manpower significantly all around the world. We are reducing unit costs for things we can do globally and don’t have to do locally. The best is example is from the end of 1996 when I came home from Africa to run a retail operation in CEE. We had a product back then called Formula Shell. I found it very fascinating that we had a commercial that was produced in all eastern European countries, one for each. Today, we have one globally, like the Ferrari commercial for the V-power. You don’t need to be inventing local solutions for things which are global.

Another good example is from 12 years ago when Shell companies were involved in different sponsorship activities all around the world which people locally felt important to sponsor. It is not like that anymore. We do have global sponsorship, for Ferrari for example. This is not a traditional sponsorship but a technical partnership. Our engineers you see at the Formula 1 tracks are evaluating everything. Like taking the blood pressure, they are helping Ferrari get the best performance out of the engines, the fuels and the lubricants. So you have this focused sponsorship but not the other many sponsorships that we would have had five years ago. It’s a far more thought-through process.

Then there are of course many other things that companies do. Many of our financial services are outsourced to areas where this can be done better.

We now also use global systems instead of having many individual systems. All that is helping us reduce the cost where the cost is not needed to satisfy the customer. Where the cost is needed to satisfy the customer, we are even adding back. A good example, something I am very proud, of was in Germany. We reinvented hot water as they say. We introduced pump attendants, in German they call them “Tankwarts”. They look like traditional pump attendant, but if you understand what’s happening it’s a very different concept, because Germany was for 30 years self service. When I took over there I asked them why don’t you serve customers? They said German customers don’t need that. So I said alright, why don’t we just test it. And guess what, customers just loved it. And when we said we would have a press conference on this subject, journalists came in huge numbers. They said they found it interesting that service has been reintroduced in an area that was not considered to be service-oriented. Now German customers can drive up to the station and they can see two options. They can have the self service option or go to the one island with a “Tankwart”. They then may pay an extra euro for the service, but this is optional. But you know what, more than 80% of customers pay. The reason our competitors don’t do this is that it’s very expensive, labor costs a lot. But you know there is good cost and bad cost. This is a good cost. (BBJ)