Financial Times: Elusive skills that give Shell hope: “Royal Dutch Shell, once considered one of the best managed companies in the world, has had a seriously bad patch lately.”: “At the moment, Shell is a long way from becoming the company that would beat its rivals in the environment Mr Van der Veer outlines.”: Wednesday 2 November 2005
By Thomas Catan
Published: November 2 2005
Royal Dutch Shell, once considered one of the best managed companies in the world, has had a seriously bad patch lately.
Its troubles have come at a time when international oil companies, the "oil majors", are already struggling to stay relevant in a new business environment in which state-owned, national oil companies are king.
Outlining the future for the venerable Anglo-Dutch oil company, Jeroen van der Veer, Shell's chief executive, believes it must put itself in a position to be able to take on projects that are beyond the scope of the national companies, and to be able to do so better than its rivals.
In 2004, Shell was forced to admit it had overstated its "proven" reserves of oil and gas, a figure that is closely watched by investors and strictly defined by US regulators. The debacle led to the loss of about one-third of the company's reserves from its books, $150m (£84m) in fines and a boardroom purge that ejected chairman Philip Watts.
Shell hoped to put the reserves crisis firmly behind it when the management changed in October 2004 but, instead, it has been hit by a series of delays and cost overruns at its biggest new projects. The worst was its flagship Sakhalin-2 liquefied natural gas project, which has seen costs double to $20bn, and is running far behind schedule.
Other projects have also been blown off course. Its Bonga oilfield in Nigeria is two years behind schedule and more than $1bn over budget, says Stewart Williams, an analyst at oil consultancy Wood Mackenzie. Costs at its Athabasca oil sands project in Canada have risen significantly.
High oil prices mean the projects could still turn out to be lucrative. But the cost overruns call into question Shell's ability to manage large and complex projects and have hurt its reputation with the governments that control access to oil and gas resources. Sakhalin has complicated negotiations for an important partnership with Russia's state-owned gas monopoly Gazprom, and may have derailed Shell's efforts to secure a stake in the huge Shtokman gas field.
Formerly, national oil companies needed international oil companies like Shell to extract and sell their oil and gas. They needed their capital, expertise and, above all, their global marketing network to turn the oil and gas into dollars.
But now the national oil companies have access to capital on a scale and cost comparable to the oil multinationals, as the recent effort by China's Cnooc to purchase Unocal demonstrated. Through oil service companies such as Halliburton or Schlumberger, state oil companies also have access to most of the same technology as oil majors.
In addition, many state oil companies have moved into the "downstream" sector - buying the refineries that turn crude oil into useful products and investing in marketing operations abroad to sell them to consumers.
"The recent events have helped our humility," Mr Van der Veer told senior staff in May.
So what are the oil majors needed for? Mr Van der Veer's answer has been to identify areas where Shell can add value.
First, it must be able to offer skills and know-how that national oil companies cannot acquire elsewhere. It must offer exclusive technology that can make the extraction of hydrocarbons more economical than its rivals.
Shell will also have to take on projects that are too large, complex or technically difficult for national oil companies to operate alone. And it must do so better than its formidable competitors.
Liquefied natural gas projects are an excellent example and an area in which Shell has a lead. Natural gas must be extracted from the ground and then cooled to minus 1600C at expensive liquefaction plants. The liquid fuel is shipped on a fleet of specially designed tankers to foreign markets, where it is warmed again at costly "regasification" terminals.
The long and expensive value chain spanning several continents would be difficult for a national oil company to replicate, the theory goes. Gas in particular must have a market, as it is far less easy than oil to trade as a commodity in a spot market. But those projects are huge in their scope and cost.
Shell is working on three multibillion-dollar schemes, which Mr Van der Veer terms "elephant projects". By 2015, he wants Shell to have 10 such initiatives on the go at any one time.
In the future, he says, many will be conducted in technically challenging "frontier" areas of the world. And Shell must be able to put together commercial proposals that are attractive enough to persuade host governments to choose Shell as a partner.
At the moment, Shell is a long way from becoming the company that would beat its rivals in the environment Mr Van der Veer outlines. ExxonMobil, the world's largest publicly traded company, is a master of project management, consistently delivering big projects within budget and on time. BP is a skilful dealmaker, snapping up companies such as Amoco and Arco and managing to secure access to Russian oil through its joint venture with TNK.
By contrast, Shell missed out on the merger wave of the late 1990s, partly because it bet that oil prices would stay low and partly because its peculiar dual-company structure made it hard to use its stock as takeover currency.
Shell also lost some of its technological edge in the 1990s, when it laid off much of its technical expertise and scientific talent. And judging by the current problems with project delivery, Shell is in no position to take on up to 10 multibillion-dollar projects in frontier environments outlined by Mr Van der Veer.
He has, however, moved swiftly to address these problems. The first, and most dramatic, was to end the dual-parent company structure, which investors saw as cumbersome and bureaucratic. In a mammoth transaction completed earlier this year, the Anglo-Dutch parent companies were merged, controlled for the first time by a single board and a single chief executive.
Shell executives say this has greatly speeded up decision-making and made lines of accountability clear. Mr Van der Veer has also moved to address other perceived shortcomings at Shell.
He set up a "project academy" to improve the way in which Shell executes large projects. Then he established a "commercial academy" to train staff to negotiate more effectively with governments that control oil and gas resources.
"You have to be more sophisticated in how you make proposals to host governments who have oil or gas in the ground," Mr Van der Veer says. "We have simply to do a better commercial play in the future than we did in the past."
Mr Van der Veer has also taken steps to improve Shell's record on technology and innovation, by boosting the level of in-house expertise. He is extending the average time that people spend in a post to between four and six years, from two to three years previously. And he has created 10 chief scientist positions to promote people with technical expertise higher in the company.
"These senior positions will be for our top specialist in a field, not necessarily our best manager," he told Shell executives this year. "They will be our visible ambassador of that technology, known in universities and as a role model in Shell."
Finally, Mr Van der Veer is prepared to increase its $553m annual research and development budget substantially in response to worthwhile new proposals.
Whether all these changes manage to reverse the company's fortunes remains to be seen. But amid the deep gloom of the past two years, there are those who say there is a light at the end of the tunnel.
Earlier last month, the investment bank Goldman Sachs said Shell's stock had been unduly punished over the past couple of years. Calling Shell "unloved, unfashionable, undervalued", Goldman Sachs said it thought the worst period was now over and recommended that investors buy its stock.
The investment bank concluded: "Having 'got it wrong' over the past decade, we believe Shell is back on track strategically."
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