SHELL IN THE NEW DECADE: THE WAY FORWARD

Bode Banjoko*

ABSTRACT: Todays Oil and Gas industry continues to experience tougher global competition for
the fear of scarcity of resources. This is coupled with the geographic challenges of having to explore resources in some of the harshest environments in the world. Under such conditions, the worlds biggest oil companies are looking for new and creative ideas to tackle and control the ever complex oil and gas supply chain. Companies are looking for ways to maximise profits and at the same time cut costs. Royal Dutch Shell plc, coming into the year 2010 with huge losses from the previous year looks to rebounding with prospects in existing and upcoming projects. This paper will give a critical analysis on the implications and make recommendations, citing some of todays most important management practices as key to the business growth and success of Shell.

The author is currently an MBA student in International Oil and Gas Management at the CEPMLP, University of Dundee. He holds a Bachelor of Arts degree in Economics from Stony Brook University, New York (USA). Previously, he worked as a Senior Accountant with US leading Oil Services Company, Kellogg, Brown & Root. He is a member of the Society of Petroleum Engineers. Email: bodebanjoko@yahoo.com

TABLE OF CONTENTS

TERMS OF REFERENCE .................................................................................... iii ABBREVIATIONS ................................................................................................ iv LIST OF FIGURES.v

1. INTRODUCTION ............................................................................................... 1

2. SHELL AND THE OIL AND GAS INDUSTRY SUPPLY CHAIN ISSUES.... 2 2.1. Shell in brief ................................................................................................... 3 2.2. Shell and its Supply Chain issues .................................................................... 4

3. THE WAY FORWARD: INNOVATION AND KNOWLEDGE MANAGEMENT..................................................................................................... 4 3.1. Innovation Management ................................................................................. 5 3.2. Knowledge Management ................................................................................ 7

4. CONCLUSION AND RECOMMENDATIONS ................................................ 9

BIBLIOGRAPHY

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TERMS OF REFERENCE The overall objective of this report is to present a critical Management report concerning control and management implications of utilising complex supply chains within the Shell Company. This report also provides recommendations of some of the contemporary management practices for consideration.

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ABBREVIATIONS BP British Petroleum

CSS

Current Cost Supplies

EPA

Environmental Protection Agency

IT

Information Technology

KM

Knowledge Management

LNG

Liquefied Natural Gas

MNOC

Multinational Oil Company

RDS

Royal Dutch Shell

SCM

Supply Chain Management

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LIST OF FIGURES

Figure 1: Oil and Gas Supply Chain .......................................................................... 2

Figure 2: Cyclical Innovation Process Mode .............................................................. 5

Figure 3: Cycle of knowledge .................................................................................... 8

1. INTRODUCTION On January 11, 2010, the Financial Times reported news on two of the worlds biggest oil companies. For the first time in three years, British Petroleum (BP) overtook Royal Dutch Shell (RDS) in market capitalisation. In the past year, BP had benefited from rise in production, cost cuts and success in finding oil in the Gulf of Mexico, while Shell has been burdened with heavy capital expenditure, coupled with seven consecutive years of falling oil and gas output.1 BP experienced a 19% increase in share price in 2009, valuing the company at 119.2 billion while Shell who only gained 8% over the same period is valued at 118.3 billion. 2 Comparing BPs increase from the year before, this has been a sharp upward turn, but what explains Shells low performance?

The oil and gas industry works as a global supply chain involving exploration, material handling, domestic and international transportation, use of technology, and so on. The industry offers a strong model for implementing supply chain management (SCM) techniques. Supply chain management involves providing maximum satisfaction to end users (consumers), in other words, delivering the right product to the right person at the right time while still maximising profits. Today, there are many opportunities for the coordination of activities across the supply chain even in the ever complex oil and gas sector. This is largely due to the development of information systems and communication technologies within the sector. Integrating supply management with other factors of operations allows all functions to be involved in the management decisions.

Over the years, the oil and gas industry has continued to face growing challenges, from stricter government regulation, political risks, competition, emergent new comers and political hostilities, which has affected growth and output. Due to the scramble for resources, many oil companies have been driven to explore and produce in some of the most hostile and harsh environments, which in turn tend to be extremely costly. Also, there have been concerns in the industry about the growing scarcity of natural resources, which underlies fears of not being able to meet
1 2

Crooks, E., BP overtakes Shell in market capitalisation, Financial Times, 11 January, 2010, A1 Crooks, E., Ibid.

production levels and goals. However, in reality, the resources are not the cause of supply restrictions with vast potential still available due to continuous discoveries of oil reservoirs around the world. The main challenge facing the oil and gas industry is not the availability of oil and gas resources, but putting these reserves into production and delivering the final products to consumers at the minimum cost possible. Thus, a solid supply chain management program will enhance this goal (Chima, 2007).

This report will give an analysis of the implications for the practice of knowledge and innovation management within the Shell organization, as well as recommendations for the consideration of the senior executives. Shell suffers from ongoing issues, related to over-spending, lack of a wider technological strategy, and slower production processes, while BP credits their recent achievement to improved safety and operational performance, this writer is of the opinion that with the new large and more unconventional projects envisioned for Shell, the key to success for the company in the next few years will be a re-dedicated focus on knowledge and innovation management. 2. SHELL AND THE OIL AND GAS INDUSTRY SUPPLY CHAIN ISSUES What is the definition of supply chain management? According to Helena Lourenco in her article, Supply Chain Management: An Opportunity for Metaheuristics , there is no clear definition of SCM, but there appears to be some convergence in literature as to what SCM is. In general, supply chain can be summed up as a series of interconnected activities which are concerned with planning, coordinating and controlling materials, parts and finished products from supplier to customer (Lourenco, 2001). The key success of SCM will rely on the incorporation of the activities of the supply chain, meaning cooperation, information sharing and organization throughout the entire supply chain. The supply chain in the oil and gas industry is considered a complex one where there exists a linkage between upstream suppliers, downstream distributors, information capital and flow through the chain. Below is a typical oil and gas supply chain link:

Exploration

Production

Refining

Marketing Consumer

Figure 1: Oil and Gas Supply Chain

The supply chain is not just a chain of businesses but a network of businesses and relationships (Lambert, 2006). Within the supply chain are many operations from drilling, producing, and refining to sales. Because there are sub-companies and other subsidiaries of Shell that carry out other operations in the supply chain, one of the main supply chain issues is the likelihood of each sub-company acting in its own interest to maximize profits, which results in lack of coordination and disorganization along the supply chain. This also results in the loss of the original objective of fully satisfying the customers. Other issues which this writer believes Shell is also experiencing includes the delay in delivery of necessary goods such as pipes and tubing materials which results in a longer period of production, and hence, high operating costs. Another key supply chain issue, is that, demand variability amplification in a supply chain is problematic, but can be dampened by operating the supply chain more coherently by using information sharing and lead-time reduction. 3 2.1. Shell in brief Shell is a global group of energy and petrochemical companies with headquarters in the Netherlands. A multinational oil company (MNOC) with a #1 ranking by Fortune 500 in 2009 and presence in more than 100 countries, Shell has established itself as one of the leaders in the exploration, production, and trading of various energy resources worldwide, but has also faced many issues and challenges. In the first 3 quarters of 2009, Shell recorded losses of -58%, -70%, -73% respectively in earnings on a current cost of supplies (CSS). 4 The company has also faced a number of lawsuits rising from pollution from its refineries and exploration activities. In 2008, violating the Clean Air Act, a United States legislation on air pollution with the objective of improving human health, the Environmental Protection Agency (EPA)

Chima, C.M., Supply-Chain Management Issues in the Oil and Gas Industry, Journal of Business and Economics Research, June 2007, p. 29 4 Royal Shell plc financial results for 2009, Quarterly results 2009, available at http://www.shell.com/home/content/investor/financial_information/quarterlyresults/2009 (last visited on January 21st, 2010).

filed a lawsuit seeking an end to the violations and with additional penalties of up to $32,500 per day for each violation of the Clean Air Act.5 2.2. Shell and its Supply Chain issues The goal of SCM is to provide optimal service to the customer at the lowest possible cost while maximising profits. An effective supply chain system can reduce spending and increase profits if certain practices are applied. In the past year, Shell has suffered from heavy capital spending and reduction in production output. An example can be seen in the oil rich Niger Delta region of Nigeria, where production as been cut due to militant disruptions. Other issues being experienced by Shell include the inability to gather and analyze data and information effectively in harsh environments, and the lack integration of existing technology systems with new technology, which is particularly common in the industry today. While Peter Voser, Chief Executive Office of RDS blames last years financial loss to the weak global economy and the reduction of upstream and downstream profitability in the industry, 6 this writer opines that a well devised supply chain will be the best solution. It can be guaranteed that with effective information sharing and innovation, there will be reduction in costs and improvement in production along the supply chain. 3. THE WAY MANAGEMENT FORWARD: INNOVATION AND KNOWLEDGE

Many of Shells projects including the new liquefied natural gas (LNG) and gas-toliquids developments in Qatar are technology driven. Technology helps drive companies to lower costs. The management of innovation requires technology. Innovation involves change and introducing something new. Knowledge is a source of innovation. Knowledge and Innovation in the business world today are of increasing importance and continues to be vital for any developmental project. Knowledge is the mechanism that drives toward planned growth while innovation applies knowledge to achieve profitable potentials.

Metzger, L., Environmental Groups Sue Shell Oil for Clean Air Act Violations at Deer Park refinery and Chemical Plant, Clean Air News, Texas Environment. April 28th, 2008 6 Royal Shell Plc. Financial results for 2009, Quarterly results 2009, available at http://www.shell.com/home/content/investor/financial_information/quarterlyresults/2009 (last visited on January 21st, 2010).

3.1. Innovation Management Innovation involves thinking fresh and solving problems in new inventive ways. Innovation can be defined as the process whereby new and improved products, processes, materials, and services are developed and transferred to a plant and/or market where they are appropriate. 7 Successful innovation management depends on the senior executives and the motivation to commit the resources to allow employees and groups to recognize innovation and respond accordingly (Bruton and White, 2007). Innovation management and technology management are interconnected. It also involves integrating the companys existing systems and processes with new and better processes. New innovative technologies can help companies remotely oversee wells and fields, and can therefore take preventive measures to help prevent delay in production time. The results can only lead to better discovery and recovery rates, production and less operating costs. The Cyclical Innovation Process model described by John Cooke in his article Create a platform for your fut ure product innovation (as shown below) with three main areas of focus helps set the new direction for innovation:

Rubenstein, A., Managing technology in the decentralized firm (New York, USA: Wiley, 1989)

Figure 2: Figure 2: Cyclical Innovation Process Mode

(Source: Cooke, 2008) Business processes and value model The direction starts with the culture, value and leadership. The main questions to ask are: What is Shells innovation history? What area of the company does the drive for innovation need to emerge from? For example, production, sales or marketing? How open is senior management to innovation? What type of attitude?

The next step will be a look into the business processes: What are the existing and current processes? Review and evaluation. What are the current product development processes? What is Shells attitude towards its assets and capital spending?

Customer expectation and experience This area involves the market structure: What are the key customer/client issues and problems? 6

What is Shells view of current market strategy and setting? What are some of the views or insights of other sub-companies and consumers?

Product offering and support The final area focuses on the companys performance, technologies and its competitors: What are the companys critical limitations to inno vation? What are Shells technological capabilities? Who are the main competitors? What are they doing?

3.2. Knowledge Management Knowledge and information sharing are becoming ever more important within firms and organizations and are vital assets to the success of businesses. It is very beneficial for an employee or user to have convenient access to knowledge and information. Knowledge involves translating data and information into meaningful set of relationships understood by another individual. The management of knowledge can be defined as the process of identifying, capturing, organizing, and disseminating the intellectual assets that are critical to the organizations long -term performance (Debowski, 2006).

Knowledge and information is essential for decision making, problem solving, communication and interpersonal relationships, enhancing business and professional effectiveness, performance and success (Hartley and Rowley, 2008). It is a companys most valuable asset, a combined expertise of a companys employees and partners. There are two types of knowledge: Tacit and Explicit. Tacit knowledge is knowledge where an individual cannot easily communicate or is even unaware of having. Individuals can have difficulties in applying their expertise or knowledge in tackling challenging issues. Explicit knowledge is knowledge that can be clearly communicated and shared by an individual, for examples information in manuals, documents and so on. It can be documented, categorized and communicated to others as information. The ultimate goal of knowledge management (KM) therefore, is to be 7

able to convert tacit knowledge into explicit knowledge. For most executives, having information they can quickly interpret and analyze is one of the most valuable assets.

The fastest growing companies today are companies that have a better understanding of the role KM plays. Understanding and being able to make a good judgement on the significance and value of any information found or received is very important. The cycle of knowledge assists in carrying out KM goals.

Figure 3: Cycle of knowledge

(Source: Adapted from Mark Burk's Cycle of knowledge, 1999)

Knowledge Generation; knowledge is gained in so many different ways; journals, manuals, conferences, meetings, research, experience

Knowledge capture and organization ; knowledge is then sorted and put together and outside links are created.

Knowledge sharing; knowledge is then shared for wide accessibility through high technology computer tools such as Internet, and other communication means. 8

Knowledge adaptation and use; this stage involves accessing and using the information made available through technology and information technology (IT) databases.

Knowledge tends to flow along organizational lines. People can access information more than they can use it. Organizations are starting to realize that what they know, and what their employees know is crucial to their success. Information and innovation technology are essential, but what is even more important is corporate culture. Investing a lot in technology will also require fully understanding the need of the end users. 4. CONCLUSION AND RECOMMNEDATIONS The innovation process is an on going process. To facilitate innovation, you must first recognize the changes in the business world in terms of customers, technology, competition, demographics and the need to adapt to the changes. Secondly, create a culture for it to take place, allowing ideas and creativity to flourish in the company and creating controls around it. Once the culture has been created, and when there is openness, then comes building it in the companys policies and emp loyees. To do this, management must look outward and work with customers to identify problems. Also, the fear of change should be eased with the employees through effective communication. Innovation should be introduced in a way that competitors cannot duplicate and with a purpose of adding value to the business to achieve profitability.

On the other hand, knowledge will help compete for customers and clients. Shell needs to find a new focus on IT investments to enhance its database and network for better flow and sharing of information. It is also very important to understand that KM is much more than IT, hence Shell should create a culture and environment for knowledge sharing. At times, when employees leave a certain company, the company is left with lost knowledge. KM is also fostered through communities of practice where individuals and members of groups of common disciplines make efforts to share their experience and identify good practices (Tiegland, 2007). A lot depends on the energy and commitment of information and knowledge workers. Employees must

know how to gain, develop, share, control, and take advantage of information. They also have to be able to help and enable others use and apply them effectively. Finally, it is required that employees should have a thorough understanding of the systems, and appropriate range of technologies to identify and measure relevant sources of knowledge and information.

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BIBLIOGRAPHY SECONDARY SOURCES Books Bruton, G., and M. White, The Management of Technology and Innovation: A Strategic Approach (Vancouver, Canada: Thomson South-Western, 2007).

Debowski, S., Knowledge Management (Sydney, Australia: Wiley, 2006).

Hartley, R., and J. Rowley, Organizing Knowledge: An Introduction to Managing Access to Information (Hampshire, England: Ashgate Publishing, 2008).

Lambert, D.M., Supply Chain Management: Processes, Partnerships, Performance (Florida, USA: Supply Chain Institute, 2008).

Rubenstein, A., Managing technology in the decentralized firm (New York, USA: Wiley, 1989).

Articles/Journals

Chima, C.M., Supply-Chain Management Issues in the Oil and Gas Industry Journal of Business and Economics Research, (2007)

Crooks, E., BP overtakes Shell in market capitalisation, Financial Times, 11 January, 2010, A1.

Metzger, L., Environmental Groups Sue Shell Oil for Clean Air Act Violations at Deer Park refinery and Chemical Plant. Clean Air News, Texas Environment. April 28, 2008.

Ramalhinho Dias Loureno, H., Supply Chain Management: An Opportunity for Metaheuristics. UPF Economics and Business, 2001.

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OTHERS Internet

Burk, M., Knowledge Management: Everyone Benefits by Sharing Information, available at http://www.tfhrc.gov/pubrds/novdec99/km.htm (last visited on January 22nd, 2010) Cooke, J., The Innovators Sweet Spot: Create a platform for your future product innovation, available at http://www.cocatalyst.com/blog/index.php/category/innovation-tools (last visited on January 22nd, 2010). Royal Shell plc financial results for 2009, Quarterly results 2009, available at http://www.shell.com/home/content/investor/financial_information/quarterlyresults/2 009 (last visited on January 21 st, 2010).

Tiegland, R., Knowledge Management in Global Firm, available at http://www.slideshare.net/eteigland/knowledge-management-in-global-firm (last visited on January 22 nd, 2010).

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