The following analysis evaluates the challenges faced by Royal Dutch Shell Oil Company involving their monumental proposed investment into their Nigerian operations. When global companies experience extreme criticism such as Shell, they are usually tasked with identifying optimum solutions to reverse the negativity. In addition to assessing the challenges, this analysis provides some potential strategies that can be implemented to resolve the issues within this case.
Royal Dutch Shell Oil Company proposed to execute the largest industrial investment ever made in Africa. Their proposal was a response to three separate issues. However, there were problems with the proposal. A major problem was that two critical entities that Shell proposed to share in the investment, made it clear that it would take some time before they could even consider Shell's proposal. Other major problems included political and social instability within regions where Shell operated. Shell acquired a very negative public image, and it was primarily due to the following: Shell had also been accused of waging an ecological war against natives and the natural habitat. Furthermore, the company was accused of being responsible for the deaths of natives from the land in which Shell procured oil.
Shell Oil is one of the largest oil traders in the world. With extensive international operations their largest African operation existed in the country of Nigeria. In this case, Shell's operations in Nigeria created a very complex situation, thus creating numerous factors for the various components included in the environmental scanning analysis.
The economic factor consists of Shell proposing an $8.5 billion integrated oil and natural gas investment, making it the largest industrial investment ever made in Africa. Shell estimated that their proposal would bring an additional $20 billion to the government of Nigeria over a 25-year period. The proposal also called for 70 percent of the cost to come from private companies (mainly Shell), and the other 30 percent from the Nigerian government. A government owned company named the Nigerian National Petroleum Corporation (NNPC), which is a joint venture partner in all Nigerian petroleum projects contributes to Nigeria having more foreign direct investment than any other country in Africa. Another important economic issue is that the European Union actually withheld $295 million in aid to Nigeria while protesters attempted to boycott the purchase of Nigerian oil, and while considerations were being made to implement an embargo on business with Nigeria.
The political, legal, and regulatory issues are closely related in this case, and therefore are grouped together. Many companies including Shell Oil have often been skeptical about doing business in Nigeria because of the political and social instability that exists in the country. This instability creates optimum opportunities for corruption to occur, contributing to Nigeria being one of the most corrupt countries in the world today. This instability also made doing business risky within Shell's existing Nigerian facilities. Shell had been severely criticized outside of Nigeria for its Nigerian political activities and environmental policies. This criticism was more than likely caused by the knowledge of unethical business practices in Nigeria. The NNPC also plays a role in the political component, being a government owned business.
The natural resource issues include Shell selling in Nigeria as early as the late 1920s. In 1937, Shell formed a joint venture with British authorities that had exclusive rights to explore for oil. This venture found oil for the first time in Nigeria in 1956. This oil was found in a 404-square-mile area in the southern part of the country near the delta of the Niger River known as Ogoniland. Shell's oil procurement operations took place in a large number of countries. However, the Nigerian operations were quite significant, accounting for about 10 percent of the company's petroleum sources. The Shell joint venture included nearly 100 oil wells, two refineries, and a fertilizer plant all in the area known as Ogoniland.
The cultural and social issues involved in this case are extensive and quite complex. Nigeria was a British colony until 1960, and has a population of over 115 million, making it the most populous country in Africa. Nigeria's former colonization could have been a key reason why Shell Oil, a British company had such a vested interest in the country. Nigeria's government has the serious challenge with trying to unite 250 different ethnic and linguistic groups. An interesting issue with the Nigerian culture is that the country continued to be wiling to sell almost unlimited oil supplies, even though their reserves were not nearly as ample as countries such as Saudi Arabia, which is more prone to limit supplies.
Additional cultural and social issues included the problems that native Ogonis had with Shell Oil Company. Even though Shell used the land in this area to run their operations, very little of the revenues were reinvested to help maintain the land. As a result of the lack of attention given to Ogoniland, a group of natives led by author Kenule Saro-Wiwa, formed the Movement for the Survival of Ogoni People (MOSOP).
MOSOP began campaigning for a greater share of oil revenues to restore the environment of Ogoniland, and compensation for losses from Shell's activities. For example, Shell was accused of damaging farmlands and fishing areas due to oil spills. Shell has also been charged with their oil flares at refineries affecting health, and the laying of pipes destroying freshly planted crops. Furthermore, MOSOP demonstrations have resulted in extreme violence. And Ogonis even began sabotaging Shell facilities causing Shell to discontinue operations in that part of Nigeria. MOSOP members were eventually arrested and executed for their involvement in the Shell Oil violence. Worldwide critics charged Shell with allowing the executions to occur although the company publicly denounced the executions. These executions and increased instability influenced consumer's behaviors as boycotts against Royal Dutch Shell Oil were being held worldwide.
The technology component included the technical tools that were used for predicting where oil might be found. Technology improvements enabled these tools to become sophisticated and allowed the development of rating schemes.
Shell Case Analysis
- Length: 1842 words (5.3 double-spaced pages)
- Rating: Excellent
Royal Dutch/Shell officially opened an oil extraction facility on June 19, 2003 in Alberta, Canada where an estimated 180billion barrels lie beneath the tar sands. With the plant rolling out less than 200 000 barrels per day at $12 each, the company faces increased competitive pressures and a growing number of uncertainties. At this point in time, the strategic decision must be made of whether to expand capacity in the tar sands and if so, when.
This study identifies key uncertainties and situational analysis tools to be used by Royal Dutch/Shell to answer the question of capacity expansion (See Figure 1). Uncertainties are classified into four levels with level one being low through to level four; the situation of true ambiguity (Courtney, Kirkland & Viguerie, 1997). “Residual uncertainties” which cannot be accurately predicted even with extensive analyses are of concern REFERENCE/cut out.
Figure 1: Table displaying major uncertainties faced by Royal Dutch/Shell, respective levels of uncertainty and situational analysis tools.
2. UNCERTAINTIES FACED BY ROYAL DUTCH/SHELL
2.1 The Price of Oil and Investor Interest In Alberta
Oil price and investor interest can have a significant impact on the success or failure of oil production ventures in Alberta. With the cost of production remaining relatively stable it is the primarily the price of oil that determines the profitability of the oil industry in Alberta and investor interest. In this situation the price of oil and investor interest are intrinsically linked. Advocates pro utilization of this vast and largely untapped resource have assumed that oil prices will remain stable when evaluating the future viability and potential investor interest in the Alberta industry. However, assumptions such as this can be disastrous if they are without sound basis.
Key factors that may influence the price of oil in the future:
Saudi Arabia’s vast reserves and low costs giving Saudi the ability to manipulate prices and in the past has instigated price collapses scaring investors away from marginal projects such as the tar sands project.
Political and social unrest in the Middle East potentially jeopardizing oil and forcing prices upwards. This would encourage increased investment in less volatile regions such as Alberta.
Global demand for oil; developing countries such as China have the potential to drive demand for oil and put inflationary pressure on prices as supply outweighs demand.
The price of oil and investor confidence represents a level two uncertainty. There are a few distinct outcomes which define the future, one of which will occur.
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Scenario planning can be used to determine a set of outcomes by identifying business decisions and driving forces behind the uncertainty. This analysis tool requires users to develop consistent scenarios, identify resulting implications and strategies and establish an on-going scenario planning process. The steps in the scenario planning tool are outlined in Figure 2.
Figure 2: Scenraio Planning Process
Outcomes/scenarios derived from applying this tool to the situation above regarding the price of oil and investor interest in Alberta and Royal Dutch/Shell’s decision whether or not to expand its operations in Alberta:
Outcome 1: Price of oil remains stable – In this situation it is likely investor interest will remain stable and Royal Dutch/Shell would likely keep its operations at similar levels to those currently in place.
Outcome 2: Price of oil decreases – In this situation investor interest would decline and Royal Dutch/Shell’s operations in Alberta may no longer be viable.
Outcome 3: Price of oil increases – In this situation investor interest is likely to increase as the viability of extracting oil from the tar sands increases. Increased investor interest leads to an expansion of production capacity.
2.2 Costs of Production
The cost and complexity of producing oil from tar sands represents a future uncertainty. New technologies have cut production costs from $30 to $12 a barrel. Current extraction methods are complicated and labour-intensive. Some experts have suggested that $12 remains too high for Alberta compete successfully as an oil producer with Saudi Arabia REFERENCE
Supposing existing technology and extraction methods remain unchanged, future per barrel production costs can be rationally predicted. The only factors to change would be increases in the cost of labour, infrastructure and transport. These factors can be projected using economic forecasting techniques. This places the level of uncertainty at level one – a clear enough future REFERENCE!!!.
However, technology has been improving rapidly improves with time – given that there is the need (and hence investments) for new technology as a result of the high oil prices REFERENCE. The performance of new technologies and methods of extraction developed over time is a factor of uncertainty in the future cost per barrel produced and how this cost compares with Saudi Arabian oil production costs and efficiency.
The outcomes may be simplified and interpreted as having a level-2 uncertainty. Possible future scenarios include
i) lower costs of production due to technological innovation
ii) unchanged production costs
iii) continual advancements in Saudi Arabian oil production that cannot be matched
2.3 Environmental Impacts of Production
Current methods of oil mining and extraction from tar sands require copious quantities of water and are more greenhouse gas intensive than oil production in Saudi Arabia. Environmental impacts correspond to level two uncertainty (REFERENCE). The uncertainty depends on how well any new technology will be able to improve the environmental friendliness of producing oil from tar sands. A comparative factor must also be taken into account – how the future environmental performance will compare between Alberta’s oil productions to that of Saudi Arabia’s, with possibly new technologies available to both sides. Achieving similar performance on greenhouse emissions legitimise the traditionally more carbon-intensive process adopted in Alberta. Again, this can be classified as a level-2 uncertainty with a few possible outcomes.
2.4 Changes to Environmental Policy
Canada signed the Kyoto Protocol in 1998, and ratified it through parliament in 2002. Kyoto was considered a threat in 2002, as oil companies worried that the Protocol would make it hard for Canadian oil companies to compete on a global scale and attract investment. The Canadian government offered oil companies concessions in the form of extended deadlines to meet Kyoto targets. However, analysts still predicted that oil companies would be hit hardest by Kyoto guidelines, with some oil companies already scaling back their operations in the region a this time (NY Times). The Alberta oil fields are currently the biggest source of greenhouse gas emissions in Canada, and election polls show that the environment is the number one concern for Canadians (CBC). The current conservative government however has decided to renege on its commitment to the Protocol, claiming that the goals it sets are unrealistic, and has instead decided to formulate some ‘made in Canada’ solutions to combat climate change. This has, in part, been due to the large role that Alberta’s oil industry has played in bolstering the Canadian economy, and Kyoto targets would adversely affect this industry (Canadaonline).
In more recent times, the United States has been exerting pressure on Canada to increase its oil exports. US and Canadian oil executives met in 2006 and agreed to a fivefold expansion in oil production. Today Canada is the top oil exporter in the US market, as it exports all the oil that is extracts. An increase in production of this magnitude would be able to supply a quarter of the US market, almost halving the current US import level. The US is seeking to lower their dependency on oil from the Middle East, and has defined this as a ‘national security objective’. However, this agreement is by no means final, nor is there a timeline for such expansion (CBC). Due to these recent developments, the Canadian government is keen to work with Shell and other oil companies in Canada to make sure that oil continues to boost the Canadian economy but still maintains a level of environmental conservation.
All oil sites have ongoing environmental impact assessments carried out by the Clean Air Strategic Alliance and other government bodies. The Alberta Department of Environment has also developed a Regional Sustainable Development Strategy to oversee the environmental impact of the Alberta oil fields (Alberta-Canada). No matter what regulatory changes may come to pass in the future, the environmental impact of this sort of enterprise will affect Canada’s pollution levels in the long term, and may in turn impact the long-term viability of Shell’s businesses in Canada.
At the time of the case, environmental regulation represented a level two uncertainty for Dutch Shell, as there were a two distinct ways in which the Canadian government could decide to go, each providing a different outcome for Dutch Shell. If the Canadian government decided to honour its commitment to the Protocol, this would increase production and operating costs. Costs of production were already high, and it was predicted that the Protocol would also discourage investment, resulting in a number of oil companies already scaling back their operations in the region (reference). However, due to the large role that oil plays in the Canadian economy, there was also a high possibility that the Canadian government would make exceptions for the oil industry, or not honour its commitment to the Protocol in an attempt to maintain the momentum of economic growth in Alberta. If the Canadian government decided not to honour its commitment to the Protocol, it would be wise for Dutch Shell to expand its operations in Alberta.
3. SITUATIONAL ANALYSIS TOOLS__________________________________________________
3.2 The Decision Tree
The decision tree (REFERENCE) is a useful technique to perform a preliminary analysis of technological uncertainties: whether increments and/or new developments in oil production and extraction technology have the potential drive down overheads and environmental impacts. Possible outcomes are shown in Figure 3. Addresses questions of uncertainty and suggests possible outcomes. The decision tree may also form the starting point for analysing other uncertainties faced by the company.
Figure 3: Decision tree based on the performance of new technologies
4. THE DECISION TO EXPAND CAPACITY_____________________________________________
Rudimentary analysis of key residual uncertainties suggests that Royal Dutch/Shell should expand capacity in Alberta.
Economically advisable for Royal Dutch/Shell to expand capacity whilst acting in a socially responsible manner to avoid backlash.
Look at the profitability of Saudi Arabian oil industry, Alberta’s oil reserves are larger- look at long term profitability of expansion of operations (cost curve- strategic implications, potential capacity exists)
Technology era- feasible to believe that tech advancements/innovations will overcome tech obstacles- complexity/cleanliness/cost
Follow the money- expected investments of over $100 billion over the next decade (CBS),US is the leading oil consumer (20million barrels per day ) and importer (11.1 million barrels per day) (Gravmag website), close proximity to US
Alberta is considered a stable place to do business- attractive to investors
Reserves estimated to be 8 times larger than Saudi Arabian reserves
Figure XXX: Royal Dutch/Shell Cost Curve
5. WHEN SHOULD CAPACITY BE EXPANDED__________________________________________
Steps towards expanding capacity:
- investment in R&D, source new technologies to improve productive efficiency, align with environmental regulations
Capacity expansion will be capital intensive. Once labour has been sourced/investors committed to expansion/ soured necessary equipment and machinery…..
As soon as possible to prevent threat of potential entrants
Strategic uncertainties article
Case study article