Royal Dutch Shell

Royal Dutch Shell is a global, publically traded Public Limited Company, whose main focus is on the energy and petrochemicals business. Royal Dutch/Shell officially formed in 1907, with the merger of a London based Transportation Company called Samuel Shell transport and trading company ltd., and a recently formed oil company from the Netherlands, the Royal Dutch Petroleum Company. This merger facilitated the transportation of oil throughout the world, giving Royal Dutch Shell a global presence in the then emerging market of oil. Until 2005, Royal Dutch and Shell were two entities, with a 60/40 profit sharing mix, Royal Dutch and Shell respectively. The two companies officially merged into one entity, eliminating the slash after Royal Dutch. They have a principal listing in the London Stock exchange and their official headquarters are located in The Hague in The Netherlands. Shell as it is notably abbreviated as, began with the vision of its first operating manager Henry Deterding. Henry Deterding, provided the growing company with a strong backbone, taking Shell from a small player in the oil exporting business to a major competitor. Royal Dutch Shell, took control of Mexican Eagle Petroleum Company in 1919, and in 1932 formed an alliance with British Petroleum, and was Shell-Mex and B.P. Ltd until 1975. Its last major acquisition was in 2007 of the Ukrainian oil company Regal Petroleum. Today, Shell is based in over 140 countries, and is engaged in oil and gas exploration and production, transportation and marketing of natural gas and electricity, and marketing and shipping of oil products and chemicals. They also have interests in renewable energy, like wind, solar and hydrogen based energy. Royal Dutch Shell has come a long way since its inception and has become a world leader in the oil and gas market. This is in large part due to the company’s leadership, since the formation of the company strong leadership has brought Shell into a well-built company. Royal Dutch Shell through their strong leadership, ethics and corporate social responsibility; and their business environment have become according to fortune 500, the largest Corporation in the world.

Leadership and Managemen

The Management of Royal Dutch Shell, like other major oil companies BP, Amoco, Exxon and Mobil is highly complex. Controlling and efficiently profitably running an organization that is active in over 140 countries is not an easy job. Each country and region has its own difficulties and limitations that put the management’s strategy in challenge and force it to change regarding the political, economical and social situations. This is the challenge that Shell accepts and moulds itself according to the situation.

Strengths

Shell is one of the largest oil companies in the world and has a strong market position. Its operations include upstream and downstream operations in over 100 countries. The company has interests in oil production operations in 37 countries and majority interest in 40 refineries worldwide. Shell operates the world’s largest single-brand retail network, with more than 45,000 service stations. The cornerstone of the company is its leadership position in various fields such as oil products, deep-water production, Natural gas, and polyolefin. The company has established a strong brand image operating for over 100 years worldwide. Shell is ranked second in 2009 Forbes Global 2000, up from sixth in 2008. It was ranked eighth in 2007. The company is ranked First in 2009 Fortune Global 500 ranking. The company’s strong market position gives it significant bargaining power in the global oil industry.

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Shell’s business operations are vertically integrated with presence in both upstream and downstream businesses. In upstream, the company is engaged in the exploration and production of oil and gas. In 2008, the company’s total hydrocarbon production totaled 3,170 thousand barrels of oil per day. During 2008, the company participated in 224 successful exploratory wells. The company is also involved in the natural gas supply, storage, transport, distribution activities, and marketing of natural gas and electri>city. The company’s gas and power business operates in 35 countries around the world. In downstream, the company produces and markets refined petroleum products. Its refining and marketing division operates 40 refineries with an installed capacity of 4 million barrels per day. The company conducts its operations through an extensive distribution network comprising 9,000 miles of pipeline in about 70 countries, over 300 distribution facilities, and 3,000 storage tanks. Shell is one of the largest single branded retailers with more than 45,000 service stations spanning 90 countries. The company’s vertically integrated operations give it significant competitive advantage in the global market in terms of economies of scale, synergies, and cross-marketing opportunities.

Weaknesses

The company has been witnessing a consistent decline in its hydrocarbon production in the recent past. The hydrocarbon production totaled 3,170 thousand barrels per day in 2008. This was 2% lower than the production in 2007 and 7% lower than in 2006. The decline in production is attributed to field declines, lower volumes, price impacts of production-sharing contracts, the effects of the hurricanes in the US Gulf of Mexico, and the planned maintenance turnarounds in the UK related to the shutdown gas processing facilities. The field declines affected oil production in the Australia, Brunei, Denmark, Nigeria, Norway, the UK, and the US during 2008. In addition, natural gas production was affected by declining fields in Brunei, Germany, Malaysia, the US, and the UK. Declining production would adversely affect the company’s revenue growth.

Shell faced an administrative action in 2008. Shell was fined $109,600 by Washington’s Department of Labor and Industries, in June 2008. The company was fined for multiple safety violations in its Anacortes refinery. The refinery is the second largest of the four major facilities supplying gasoline and other petroleum products to the Puget Sound region. The department cited 23 violations ranging from inadequately instructing operators on how to deal with emergencies to faulty inspections.

Shell paid $120 million in June 2008, to settle a class action lawsuit led by the Pennsylvania State Employees’ Retirement Board and the Public School Employees’ Retirement Board. There was an allegation against Shell of overstating oil and natural gas reserves and artificially inflating stock prices over a five-year period from April 1999 to March 2004. In 2004, Shell admitted to have overstated its oil reserves by about 20%, 3.9 billion barrels. Many of the company’s executives lost their jobs, including chief financial officer Judy Boynton. In April 2007, Shell agreed to pay $352.6 million, plus administrative costs, to settle a lawsuit with investors outside the US who purchased the company’s shares. In May of 2009 Shell settled a $15 million dollar civil rights lawsuit in Nigeria. They were accused of paying soldiers to abuse locals in predominantly oil rich regions in Nigeria. Such huge penalties can have negative effects on the company’s profitability as well as Shell’s overall reputation.

Opportunities

Shell announced a proposal by Shell Canada for the acquisition of all of the outstanding shares of Duvernay Oil Corp, in July 2008. The acquisition was completed in August 2008. Duvernay, based in Alberta, is engaged in the exploration and development of natural gas and crude oil in the deeper, western portion of the Western Canadian Sedimentary Basin in Alberta and Northeastern British Columbia. The company owns about 450,000 acres in two large gas project areas. Duvernay owns and controls the natural gas processing and delivery infrastructure in both the project areas. The company produces over 25,000 barrels oil equivalent per day predominantly in natural gas. The company plans to increase production to about 70,000 barrels per day by 2012. Shell has a strong presence in North America tight gas activities. With the acquisition of Duvernay, Shell could strengthen its portfolio through enhanced technology and scale. Duvernay’s acreage together with Shell’s operating expertise and financing capabilities provide a strong platform for future growth.

Increasing demand for liquefied natural gas, the demand for liquid fuels is expected to increase to 108 million barrels per day by 2030, an increase of 30% from 2005. The demand for global liquefied natural gas is expected to more than triple in volume from 2005 to 2030, driven by the demand in North America, Europe, and Asia Pacific markets. Currently, Shell is participating in the Liquefied Natural Gas projects in major projects, Pearl GTL and Qatar gas 4 LNG in Qatar. The company is also participating in LNG projects in Australia. The company’s focus on LNG projects implies it is well positioned to venture into opportunities in the growing market worldwide.

Threats

Shell’s business is subject to numerous laws and regulations relating to the protection of the environment. With rising awareness of the damage to the environment caused by industry, especially regarding global warming, regulatory standards have been continuously tightened in recent years. One of the most important developments in this area has been the introduction of the Kyoto Protocol for the reduction of greenhouse gases. The protocol calls on industrialized countries to reduce their greenhouse gas emissions level by 5.2% on an average annual basis during the 2008-2012 periods. The company has a significant presence across the US and the European markets. A weak economic outlook for these regions could depress industrial development and impact the demand for the company’s products.

Related threats to Shell include its major competitors, domestically and worldwide. These major competitors include and are not limited to: Exxon Mobil, British Petroleum, Conoco Phillips, PETRONAS, Total, Chevron and CITGO. These companies are vital threats to Royal Dutch Shell’s bottom line because they, for the most part, offer the same types of products and services sometimes at a substantial price discount.

There are some main problems and issues inside Royal Dutch Shell that are evidently highlighted and should be resolved so the company can keep their competitive advantage when analyzed and compared to other corporations. The predominant problem is the higher than normal employee turnover rate which can be contributed by the employees to the company. In recent years namely there was a large increase of employees that were leaving Shell, in exchange for other employment positions in oil and petroleum companies that are direct competitors of Shell. Although this phenomenon did and does not impact all global operations, there is still a negative impact on the performance of this business organization since these events happens in customer rich areas such as Asia, India and the Middle East.

Another major problem that is being faced by the company is its eroding supply base in the Middle East and other oil producing regions due to the ongoing friction between the United Kingdom and oil producing countries in the Middle East such as Iran with regards to topics such as the war on terror, the occupation of Iraq and the ongoing negotiations on the nuclear ambitions of Iran. Since Shell Company is partly British owned, these contemporary issues and news can directly affect the supply and logistical train of the company. Due to the support given by the British government to the United States with regards to the occupation of Iraq and the war on terror, the company has been losing the influence and prestige when it is viewed by Arabian and Middle East producing companies. This animosity against the corporation stem from the fact that it is a British company in the Middle East. This company has also supplied fuel, oil and other petroleum based products to the occupying forces in Iraq and Afghanistan which are wholly composed of the British and American Armed forces. To remedy these pressing problems, certain issues and concerns must be addressed. To combat the negative publicity that is being shed against Shell in the Middle East countries and the loss of the preferential treatment previously offered by Middle East countries to the company, an appropriate campaign must be launched to erase this negative perception about the company. This publicity campaign will not only be geared towards oil producing countries but will also focus on other Middle East countries. Reconciliatory talks and discussions must be established with the members of the OPEC in relation to the current prices of oil and petroleum based products. To further reinforce these steps, the company must assign area/regional managers in these countries who have a significant understanding and immersion in the local culture and thinking to reduce the probability of misunderstanding and miscommunication that would add another injury to the present situation. The CEO must also have leadership qualities and characteristics to inspire his/her subordinates to respect Arabic customs and traditions. He must exude motivation, self confidence and necessary skills that are suitable for the job at hand. Lastly, the company must set up two programs so that it can remedy the last problem mentioned in this paper. First, to capture the new market, it must redefine its products to comply with strict government and environmental standards. The process of using, mining and manufacturing its products must be free from any pollution and contamination. These vital steps will not only please a government and a lobby group but would also earn the sympathy and recognition by the public. The company must also take steps in reengineering its internal structure to accommodate renewable sources of energy. It must train personnel and employees so that they would be ready to research, experiment and to test various sources of energy that is being developed by the oil industry. Similar to most global companies, Royal Dutch Shell has many strengths and weaknesses that affect the overall performance of the company. However, Royal Dutch Shell, through the company’s commitment to strive for excellence combined with their upstream and downstream revenue streams, their leadership structure and corporate and social values have become the largest corporation in terms of revenue in 2009.