Royal Dutch Shell Environmental Complexity

Abstract

The following research examines the environmental complexity of the oil and gas industry in relation to Royal Dutch Shell (RDS, Shell). This industry is highly complex, highly competitive, and subject to volatility. RDS has expertly navigated this environment for over 100 years. There is no indication in the financial data that this will not be the case going forward. Even more promising is the continued willingness of Shell to embrace innovation through the use of technology and the pursuit of alternative energy solutions.

How turbulent is your company’s environment, and how well do you believe that they adapt to it?

The oil and gas industry is affected by many factors that have the potential to make the environment very turbulent. The primary contributors are:

• Environment: oil spills, regulation, operational hazards
• Economy: GDP, inflation, currency value
• Regulation: carbon emissions, conservation regulations, waste management
• Competition: industry competition, alternative energy solutions
• Supply and demand: demand for oil, suppliers attempts to gain market share

The longevity and size of Royal Dutch Shell are indicative of its ability to navigate this turbulence, and willingness to innovate to stay relevant. RDS has accomplished this through sound financial planning and business strategy.

#1

The following list breaks down the elements of the environment that affect the sustainability of RDS’s operations.   

Industry (Competitors, industry size, competitiveness, related industries)

• Primary Competitors
  • British Petroleum
  • Exxon
  • Saudi Aramco
  • Acron
  • Sinopec
  • China Petro
• Industry Size
  •  Experts estimate the size of the oil and gas production industry is between $75 and $87.5 trillion, which is 2-3% of the global economy (“What Percentage of,” 2018).
  • Oil and gas refining adds an additional $7 trillion in production value (“Oil Refining Market,” 2018)
• Competitiveness
  • RDS operates in a highly competitive market with competition from three types of oil and gas entities: integrated, private, and national.
    • Integrated oil and gas companies (IOC’s) operate in the upstream oil market and operations include discovery, production, refining, and distribution (Business Dictionary, n.d.). Shell is an IOC and ranks second in size behind Sinopec China.
    • Private oil and gas firms specializing in exploration and production.
    • National oil companies control 90% of proven oil reserves and have state backing. Nationally owned companies add the complication that they may operate by political motives rather than purely economic.
      • Saudi Aramco
      • National Iranian Oil Company (NIOC)
      • China National Petroleum Company
      • Petroleos Venezuela
      • Rosneft (Russia).
  • Green initiatives (discussed later) increase competition by offering consumers alternative energy sources.  
• Related Industries
  • The oil industry has a large subset of process industries as well as laterally connected markets. The subset includes refining, chemical processing, fracking, extracting, transportation, and resale.  The connected industries include large municipal power utilities, all branches of armed forces (national and international), and governments that supply security or collect royalties.

Raw  Materials (Suppliers, manufacturers, real estate, services)

• Suppliers and Manufacturers
  • IOC’s engage in the discovery, production, refining, and distribution of their own supply. While this gives RDS the ability to control both upstream and downstream processes, this also means that RDS must closely monitor the return on its assets (“Shell to divest,” 2019).
  • RDS is actively pursuing a dominant position as a supplier of alternative power with investments in wind farms and alternative energy production (“Electricity,” 2019).
  • RDS is taking a similar approach to the IOC model in the electricity sector. The long term strategy is to position itself to control upstream (production) and downstream (distribution and storage) of electrical power (“Electricity,” 2019)  
• Real Estate
  • Shell owns developed and undeveloped land in excess of 98 million acres.  
  • Shell maintains interest in 35 oil refineries around the globe. Some are wholly owned through subsidiaries, and some are shared with governments or other local companies operating as partners.

Human Resources (Labor market, employment agencies, universities, unions)

• Labor market
  • Shell offers jobs in over 70 countries (“About Us,” 2019). The Shell careers webpage reflects a keen interested in recruiting and retaining top talent from a variety of fields: engineering, IT, sales, business development, analytics, and management (“Careers,” n.d.). Shell employs a workforce of over 81,000 people. It is the only oil company to make the Forbes top 100 places to work (Kauflin, 2018).
• Employment agencies
  • RDS manages hiring and onboarding in-house. They have a comprehensive recruitment and onboarding program. Shell’s website allows applicants to take competency exams and put themselves into a hiring pool without applying for a specific job (“Careers,” n.d.).
• Universities
  • Shell has special opportunities for MBA and Ph.D. graduates that will fast track them into leadership positions.  Shell hosts MBA recruitment events and offers a robust internship program (“Careers,” n.d.).
• Unions
  • Shell’s US operations make use of labor unions though it is not a requirement of employment. One of the primary unions shell works with in the US is the United Steel Workers Union (Hancock, 2019).

Financial Resources (Stock markets, banks, private investors

• Stock markets
  • Ticker symbol: RDS (Yahoo Finance, 2019).
  • Stock performance
    • P/E 11.84
    • Market cap $235.04bn
    • EPS $4.96
    • Dividend Yield 6.50%
    • Performance note: RDS is trading near 52-week low with a buy rating from industry analysts.
• Banks
  • RDS uses a subsidiary Shell International Finance to finance and issue its bond debt. Currently, RDS has $49.75bn in outstanding Bonds with maturity dates ranging from 2019 – 2045 (Shell, 2019).
  • Credit Rating (Shell, 2019)
    • Short term A-1+
    • Long term AA- with a stable outlook
• Private investors
  • RDS does not fund Capex with private debt

Market (Customers, clients, potential users):

• Customers, Clients, and Potential Users
  • Industrial. Shell has a presence in 900 airports in 60 counties to supply fuel to the aviation industry. Shell is the worlds leading supplier of bitumen which is used in road construction, roofing, and polymers and supplies over 1600 customers in 28 countries (“Bitumen,” 2019).
  • Private. Shell has 43,000 fueling stations in 70 countries. These are often convenience and gas locations that service consumers. RDS will use these locations as part of their strategic conversion to electric power stations (LeSage, 2017)
  • Government. Shell supplies JP-8 and JP-5 which is US and UK grade jet fuel to both militaries respectively. Shell also partners with some small governments in oil production areas. One example of this is the partnership with the government of Brunei. Often RDS will set up foreign subsidiaries which are more suited to navigating and complying with local laws.

Technology (Techniques of productions, computers, information technology, e-commerce)

• Techniques of production
  • Shell uses conventional well extraction methods for oil and natural gas reservoirs. In shale or tight rock developments, Shell uses extraction by fracturing otherwise known as fracking. This method involves breaking rock by pumping in a water and sand solution. This releases the gas from the rock. Shell is a fuel refiner that refines products such as unleaded gasoline, diesel, heating oil, liquified natural gas (LNG), and military-grade jet fuel. Shell also is a producer of bitumen which is used in industrial applications such as polymer manufacturing and asphalt.
• Computers & Information Technology
  • Shell is very active in the information technology space, using agile technology to drive operations as well as management practices. Building on the Scrum platform, in 2017 Shell began an aggressive initiative to use DevOps to increase the speed of decision making and the decrease production time. In plain terms, Shell is changing its approach to internal software development to make it leaner and deliver faster results (Riggins, 2017).
  • This approach allows for greater adaptability in software development. Previously 50% of the software development team was IT consulting, and with the new agile DevOps approach, that number is 5% (Riggins, 2017).  

• E-commerce
  • Shell forayed into e-commerce with two websites in the year 2000. The goal was to connect B2B and B2C customers in the travel industry. The sites were to contain travel information, travel goods, and an interactive map of fueling stations. The website shellgeostar.com is no longer operational and simply includes a landing page with links to route planners (“Shell creates two,” 2000).

Economic Conditions (Recession, unemployment rate, inflation rate, growth):

• Recession or Growth
  • Shell operates in over 70 countries. As such there is rarely a micro-economic factor that they do not feel in some way. Conversely their size insulates them from some of the smaller economic trends having any real impact. Instead RDS must monitor GDP in larger economies such as the US and Eurozone as well as China. It must also watch for changes in worldwide demand as well as how international political tensions may affect production levels (macrotrends, n.d.).  
• Unemployment rate
  • Unemployment rates vary by country, and as a result, Shell may be affected by different economic factors in each region it operates in. RDS has been reducing its stake in underperforming assets. Along with this, Shell’s workforce has shrunk from 93,000 in 2013 to 82,000 in 2018. This is the result of lower oil prices and an abundance of supply (macrotrends, n.d.).
• Inflation rate
  • Because Shell operates in so many geographies, it deals with a wide variety of currencies and exchange rates. Wages and the cost of production are reflected as a factor of the economy in the region. Shell uses the US dollar when forecasting the price of oil and as such, will monitor inflation the US.
• Business Growth
  • Shell’s financial performance has been steady but not based on a growth outlook. Rather, Shell has been streamlining operations to increase free cash flow and position itself for an increasingly competitive energy market (“Strategy,” 2019).

Government (City, state, and federal laws, regulations, taxes)

• City and State Laws
  • RDS’s international presence is managed through diversified compliance to local city and state ordinances. This is usually done through the use of subsidiaries which are business entities wholly subject to laws and regulations where they operate.
• Federal Regulation
  • Shell is subject to Federal laws that vary by region. In the US, the EPA regulates and sets policy for environmental impacts. The Interstate Oil and Gas Commission sets policy for drilling and production. There are also government regulations outlined in the Clean Air Act, the Clean Water Act, and the Safe Drinking Water Act (“EPA proposes,” 2019). These were designed to regulate different portions of the oil and gas industry. Additionally, the Federal Energy Regulatory Commission regulates pipelines and transportation (FERC, n.d.).
  • In less developed locations such as Nigeria, these sorts of measures don’t exist as explicitly as they do in the US (Mandler, 2018). In these cases, Shell’s internal policies, as well as Nigerian laws, will govern. Global groups such as International Association of Oil & Gas Producers work with local governments to form policy (IOGP, n.d.)
• Taxes
  • In 2018 Shell paid over $64.1bn to governments (“Payments to,” 2019).  
    • $10.bn income tax
    • $5.8bn in royalties
    • $48bn in sales tax

Sociocultural (Age, values, beliefs, education, religion, work ethic, consumer and green movements)

• Age, Values, Beliefs, Education, and Religion
  • RDS’s highly diversified business operations are driven by the development of high functioning, diverse employees. Shell maintains a diversity and inclusion policy, generous benefits for maternity leave, and accommodation for disability (“Diversity and Inclusion,”n.d.). Named in the Forbes top 100 places to work, Shell actively recruits graduates from top schools in addition to offering internship programs (“Careers,” n.d.).
• Consumer and Green movements
  • The trend towards alternative energy and emissions reduction is included in the Shell business strategy. Shell’s stated goal is to have reduced its carbon footprint by 50% in 2050 (“Strategy,” 2018). Additionally, Shell is positioning itself to be a producer and distributor of electricity and is actively investing in charging stations and alternative power production (Ball, 2018).

International (Competition from and acquisition by foreign firms, entry into overseas markets, foreign customs, regulations, exchange rate)

• Competition from and acquisition by foreign firms
  • Shell bears no purchase risk due to its size and dominance in the industry. In 2018, Forbes ranked RDS as the worlds most powerful oil company (Poole, 2018). While there is no risk of a buyout, RDS operates in a highly competitive market driven by global supply and demand.
• Entry into overseas markets and foreign customs
  • As previously mentioned Shell has entered international markets through subsidiaries which aid cultural insights and regulation compliance specific to the region.
• Regulations
  • Shell is bound by the rules of the region where it operates (see previous regulation section).

#2

Is the organization internationally diversified? If yes, where are they currently (regional or by country, could be broken down by product distribution or brick and mortar locations, etc…? Who are their major competitors? What markets should they expand to?

• Countries
  • Shell operates in 70 countries. Their current strategy is not geographical expansion, rather financial efficiency and alternative energy production.
  • Shell is currently engaged in exploration in locations where it already has a business interest: The North Slope of Alaska, Albania, Bulgaria (“Shell Investors,”2018)
• Upstream and Downstream Markets
  • Upstream Production (“Shell Investors,” 2017)
    • Oil wells 11,454
    • Gas wells 4,266
  • Downstream Refining and Chemical Manufacturing: 35 locations worldwide (“Manufacturing locations,” n.d.)
  • Downstream Fuel Stations: 43,000 in 70 countries (Oller, 2018).
• Competitors
  • Integrated oil and gas companies (IOC’s) are companies operating in the upstream oil market and operations include discovery, production, refining, and distribution (business dictionary, n.d.). Major competitors in the space are Exxon Mobile, Chevron, British Petroleum, and Conoco Phillips.
  • National oil companies control 90% of proven oil reserves and have state backing. Saudi Aramco, National Iranian Oil Company (NIOC), China National Petroleum Company, Petroleos Venezuela, Rosneft (Russia). Nationally owned companies add the complication that they may operate by political motives rather than purely economic.

#3

How complex and unpredictable is the organization’s environment?

• Complexity: RDS operates in a highly complex business environment.
  • Global demand directly affects RDS revenues. The US Energy Information Administration (EIA) expects the demand for oil to increase in 2020 by 1.4 million barrels per day over 2019. RDS expects a peak in demand somewhere between 2020 and 2040. These projections are based on the expectation of real global GDP (+2.6%) and US Dollar value (-1.6%)(EIA, 2019).
  • Global supply is another complicated matter that is the result of price, competition, and political events. Given the same assumptions as the demand calculation, the EIA predicts a commensurate increase in global supply of 1.5 million barrels per day (EIA, 2019).
  • The trend toward alternative energy also complicates the oil production industry. RDS must balance its long term strategy for alternative power with the need to maximize revenue from oil-producing assets in the short term.
  • Interdependencies: While the oil companies compete, they also rely on each other to help maintain stability. For example, if a price war begins then no one profits. Because of this, companies will often produce below capacity to preserve price stability. Any changes motivated by competition or politics can rapidly alter the amount of oil these companies supply to the market.
• Unpredictability
  • Commodities and Futures markets lend some stability to commodities producers. They can use futures to lock in sales and also trade positions as a hedge against volatility. Also the futures market is a composite picture of the collective projection about future prices which aids in forecasting.
  • Security Threats. In unstable regions, security threats pose an unpredictable variable for RDS. In Nigeria, Shell spends $6.97bn on government security for its operations (“Shell Pays Nigerian,” n.d.). An example of this unpredictability is the recent drone attack on Saudi Arabia that sent oil prices skyrocketing (Shepher, Raval, & Dempsy, 2019).  
  • Political Environment and National Interests. The current political environment (nationally and abroad) is unpredictable. The US-China trade tensions have caused the most significant drop in energy prices in four years (Rapier, 2019). Additionally, OPEC has historically struggled with the US for control of oil prices. Now, both parties have leverage to reduce or increase supply. Controlling output has been used in the past to manipulate oil prices (Sharma, 2019).  

#4

Does your organization’s strategies and goals fit their environment?

The research suggests that RDS maintains strategies and goals that fit their business environment. As previously discussed, Shell operates in a turbulent industry. RDS is actively streamlining its operation to strengthen its financial position for future turbulence while investing in new oil exploration and alternative energy sources. Maximizing highly-profitable assets acts as a buffer against volatility and helps fund future investment in sustainable energy. This approach is both efficient and effective. Shell is also wisely leveraging the power of technology to increase the speed of decision making in an uncertain environment.

#5

Did your organization align across the environment, strategy type, and organizational goals?

RDS’s goals and strategies are aligned with the environment it operates in. Continued success will depend on how well they can adapt to future market changes, and if they will successfully position themselves as a dominant producer of electricity.

Where do you think the organization should go now? Do you predict changes in their environment?

As previously discussed, the organization should continue to use its financial strategy to streamline operations and increase cash flow which will fuel investment in alternative fuels. While the environment is unpredictable, the demand forecast for oil is likely accurate as reliance on oil isn’t something that appears to be changing anytime soon. The primary factors to monitor are the political environment, specifically, trade wars as well as the price of oil.

References

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