Royal Dutch Shell, Case Study Example

For Royal Dutch Shell, or Shell for short, the customer value in this case can be based on the stockholders’ equity as investors in the company. Consumers of the liquid natural gas or (LNG) products also represent a significant part of customer value. (Fortune 2014)

Although each of these groups has both common features such as differential between them and these also vary from one country to another, usually have a recent past of customer value that should not necessarily mark the relationship with them but if you must be taken into account by the company. In any case, there are international or national organizations responsible for the identification and attention to these groups by what they have, with their professional profiles. It may be useful for the company to identify its presence as it will be, in some cases, their employees, and others, its suppliers or partners or simply will be the communities close to the area of operations of the company or their potential customers. (Oberling 2012)

The value proposition of the Shell Company is based on their production of LNG. LNG has been remarkably beneficial for the economy. The use of LNG has stimulated manufacturing practices, with investors financing and strategizing hundreds of billions of dollars. As noted in their report from the Fortune Global 500, LNG is a rapid growing product on a global scale and it has accounted for the primary part of Shell’s sales revenue in previous years. The world needs to run off of effective and safe sources of energy and LNG is in demand for this purpose. Since Shell Company has acquired BG Group, they are now the world leader in the production for LNG. This gives Shell Company the opportunity to corner the market and establish the prices for the industry. Being that they are now the global leader in the production for LNG, the Shell Company will most likely have the most competitive prices for the consumer market. (Fortune 2014)

The Shell Company now carries a huge responsibility in being the global leader of LNG production. With this responsibility come both opportunities for the company as well as threats and management problems.

Although numerous other countries throughout the world might envy this catalyst for domestic development, they will not be able to replicate it, because only the Shell Company these unique and necessary ingredients to fully develop resources of LNG following their BG Group acquisition. A legal system which preserves private ownership of land and any resources under it, along with any open capital markets and a generally accepted standard system, has led to the development of thousands of independent natural gas and oil companies, all of which are engaged in intense competition with each other. As a result, nearly four million natural gas and oil wells have been drilled into the US, along with the 1.5 million drilled throughout the rest of the world. The clamor of active drilling in the US has also led to an increase in innovation within the industry on an order of magnitude which other countries are simply incapable of. (Manna 2014)

Although other countries, such as Russia and China have reasonable shale resources, they do not possess the entrepreneur-friendly system that is necessary to develop such resources quickly and efficiently. Just as long as politicians do not interfere with industry growth, the US will profit greatly from the shale revolution for decades still to come. This means for the Shell Company that they carry bargaining power against US based oil and gas companies. (Manna 2014)

Oil and natural gas producers strategize their projects predicting to redeem their initial investment needed to locate the oil and plant the well. This accounts for their fixed costs. The costs of actually extracting the gas itself which are primarily attributed to labor costs and electricity are what account for variable costs. In this business, companies only choose to invest when they are able to forecast impending prices much greater than the total disbursement of both variable and fixed costs with hopes of generating large profits. Prices of energy continually decline much less than what is needed to return the full cost, making it hard to generate a profitable return. Thanks to technological advances with natural gas and oil production, this revolution makes use of a combination of methods for production such as hydraulic fracturing and horizontal drilling. Such advances in technology along with the increased gas and oil prices have led to increases in production of the ample oil and natural gas resources. (Mitchell 2015)

With these factors in mind, it is important to consider the fact that oil and gas production dropped by about 4 percent from 2013 through 2014 for the Shell Company. However, when the price of gas dropped in the early 2000s neatly all of the conventional wells continued to operate. This is because variable cost of lifting crude oil is still much lesser than the prices it carries on the global market. Wells that are ten years old usually have variable costs of only 20 to 30 dollars per barrel. So, their owners continue to produce at prices ranging from 60 or 80 dollars, even though it would need 100 dollars of gas to receive an adequate return on their initial investment. In other words, the money spent to drill the well is rendered irrelevant. The only thing that matters is that the funds they are able to generate more than what is needed to syphon out the crude oil every day. As a result, the world supply of gas is what most economists refer to as inelastic. Even if the prices fold, the producers continue to pump steady quantities. They will only discontinue as prices fall below the variable cost. This rarely happens with most wells however. (Thornton 2014)

Despite the decline in oil production between these years, this drop in production occurred just before Shell Company’s acquisition of BG Group. So, Shell Company management is likely to maintain resilience following the drop in oil production due to their acquisition of BG Group which only boosted their company assets with the gain in LNG. The Shell Company is already a multinational corporation as they are one of the lucrative companies in the entire world. They are however in competition with other multinational corporations in the oil and gas industry. This makes strategic management factors necessary, especially since they now hold the title of the global leader in LNG production. (Thornton 2014)

In spite of this, in view of the global expansion and the increase of power of multinational corporations (MNCs), are increasingly required to signatures play a role proactive as agents of global benefit. Studies of management practices as well as the interdisciplinary discourse reveal that the companies have already begun to be part of the solution. In this sense, the companies are going to be part of networks of public work-private in order to seek a better regulation of global affairs play an important role in global governance and in the production of global products assume activities traditionally considered as state or, even, a role similar to that of the government in the protection, facilitation, and implementation of citizens’ rights is committed to self-regulate and define ethical standards in order to fill empty legal and moral guidance. (Oberling 2012)

The Shell Company carries many advantages in going international with their production of LNG. They have the opportunity to generate billions of dollars in sales revenue with the sales of LNG. All of this generated revenue can make up for their drops in profits from the previous years.

So, the main element currently concerning LNG prices is demand. Because the supply typically will not drop with a decline in the global need for natural gas, a decrease in demand generates excessive and exaggerated prices. Naturally, conflicts between natural gas producing countries may cause temporary shortages that cover falling consumptions. However, when the production returns inevitably to regular levels, demand weakens and prices fold. That is currently taking place. US gas consumption has fallen by more than 8 percent since 2010. The decline in Europe is even more significant than that. Meanwhile, India and China have not shown to be nearly as avid as forecasted. The drop in prices of oil from more than 100 dollars in May to 48 dollars has not been the cause of any decline in production. This remains true even in high cost locations such as Canada’s tar sand areas. (Fortune 2014)

As noted in the Fortune Global 500 report, Shell Company faces the threat of environmental concerns regarding their Alaska based oil drilling campaign. Oil drilling is much more related to mining rather than conventional production of oil. In the fracking process, there is significant pressure to keep replacing the production that was lost in the previous year. On average, the break-even cost of US hydraulic shale oil is about 65 dollars per barrel. So, with the present price being 48 dollars, the industry is under badger. (Fortune 2014)

Beyond the costs, fracking has its benefits. The fracking method has enabled a rise in US energy production, access to natural gas and substantial petroleum deposits stuck in shale formations. Stakeholders and the industry seldom complain as energy prices decline. Decreasing importations from unstable nations of the world has a significant appeal. On top of that, natural gas releases about half as much carbon dioxide as that of coal, enabling it to potentially serve as a substitute fuel to cleaner energy which of course is supported by the majority of stakeholders. Despite such advantages, fracking still remains greatly controversial, mostly because of the potential damage it may impose on human health as well as the environment. There are reports of fracking operations that are contaminating aquifers. Research has also found evidence of increased rates of silicosis among the well workers and even heightened risks of cancer due to air pollution. These are ethical and environmental issues that Shell Company will have to handle should they continue with their oil drilling campaign. (Mitchell 2015)

Going global however will not simply resolve any existing problems Shell Company faces, although it would provide them ample opportunities to address such problems in management. The bottom line is that Shell Company, like any other firm in the oil and gas industry, will continue to face problems regardless of the decisions they make. Going global with their LNG production however, opens up doors for them that can provide more opportunities and more benefits that can outweigh the problems that management may face.

Reference

Manna, D. R., Marco, G., Letterman, D., & Mullen, J. (2014). Sustainable Case Study: Chevron Corporation. Journal of Sustainability Management (JSM), 2(1), 31-34.

Mitchell, J. V., & Mitchell, B. (2015). States and Markets in the Oil Industry.States and Markets in Hydrocarbon Sectors, 17.

Oberling, D. F., Obermaier, M., Szklo, A., & La Rovere, E. L. (2012). Investments of oil majors in liquid biofuels: The role of diversification, integration and technological lock-ins. biomass and bioenergy, 46, 270-281.

Royal Dutch Shell. (n.d.). Retrieved November 6, 2015.http://fortune.com/global500/royal-dutch-shell-3/

Thornton, J. (2014). World’s Largest Floating Gas Works. Mechanical Engineering, 136(6), 10.