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Shell Oil Company, Essay Example

Pages: 12

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Abstract

Under the conditions of severe competition dictated by the globalized and internationalized business world, companies have to be inventive in their development and orientation within their field of specialization. In this regard, various companies have their distinctive approaches to building success. The aim of this paper is to explore the performance and success of Shell Oil Company. The attention is paid to company’s background and history, overall profile, primary rivals in the target market segment, leadership characteristics and comparisons with two primary competitors. Company’s overall performance is evaluated at the end of the paper.

Key word: petroleum industry, Shell, oil and gas, business organization, competition.

Shell Oil Company

Nowadays, the business world is characterized by various trends that stimulate further competition and the necessity of being on top of industries’ development. While middle-scale companies have to concentrate on the uniqueness and distinctiveness in the target market segment, the global corporations think in terms of expansion and internationalization of their business. Under such conditions companies have to think systematically and responsibly about their growth since it is aimed at long-term, presence on the global scale. The aim of this paper is to explore the performance and the context of the leadership of Shell Oil Company. Thus, the emphasis is placed on company’s background and history, overall profile, primary rivals in the target market segment, leadership characteristics and comparisons with two primary competitors. In the end, company’s overall performance is evaluated.

Company’s background

Shell Oil Company is a subsidiary American company of the Royal Dutch company In one of the largest oil companies in the world. As of 2013 estimates, it operates in in more than 70 countries, with an average number of employees around 94,000, sold 24 million tones of Liquefied Natural Gas (LNG) equity; produced 3.1 million barrels of oil daily during that year and serviced more than 43,000 Shell petrol stations. It is one of the largest oil and gas companies in the world in regard to market share, cash flow operations and resources production. The company works on the development of oil and gas resources from the main known fields. According to estimates, as of 2012, revenue was $421.1 billion, income – $14.7 billion, capital investment – $23.9 billion and R&D investment – $1.2 billion.[1]

The history of the Shell Oil Company in US began in 1912, when American Gasoline Company was founded by the Royal Dutch/Shell Group aimed at supplying the Pacific coast with gasoline, while the paternal company formally developed in 1890 as Royal Dutch Petroleum by Marcus Samuel and began its oil orientation from developing oil fields in Sumatra. In 1915, Shell built the first continuous process Refinery – Shell’s Martinez refinery, which was the etalon for all of the American refineries to follow.[2] In 1928, the company was further formalized resulting in the diversification of its products to producing various chemicals related to by-products of refinery gases. In 1931, in terms of Shell Chemical, the first ammonia plant was opened. Further years were characterized by spreading of company’s expertise to new aspects related to oils and gas production and constant innovations into technologies to increase productivity of oil extraction:

“1972 – Shell pioneered testing of the CO2 injection process, and enhanced recovery technique, by becoming the first to inject CO2 in a West Texas oil field. 1979 – Shell introduced a second grade of unleaded gasoline and upgraded its existing unleaded gasoline to the highest octane unleaded it has ever marketed. 1983 – Shell’s leadership in seismic exploration was embodied in the 1983 launch of Shell America. 1988 – in a world record 1,350 feet of water, Shell installed the Bullwinkle platform in the Gulf of Mexico.”[3]

Thus, the history of Shell demonstrates it orientation at being on top of the innovations in its field as a core of its success and production performance. In terms of financial and competitive perspectives, in 1997, Shell and Texaco created two joint ventures Equilon and Motiva, which resulted in further strengthening of company’s potential. After 2001 merge of Chevron, one of the rivals, with Texaco, Shell about out Texaco’s shares from the joint ventures and invested into refurbishing of previously Texaco’s petroleum stations into the Shell brand.[4]

In terms of business organization, the company prints on the entire cycle of the extraction of crude resources to the actual distribution and business-to-business sales. On the first stage is the exploration of oil and gas resources both offshore and onshore. The second stage of developing and extraction is characterized by developing fields, producing oil and gas, and extracting bitumen. The third stage of manufacturing and energy production includes refining oil into fuels and lubricants, producing petrochemicals, liquefying gas by cooling (LNG), converting gas to liquid products (GTL) and upgrading bitumen. The fourth stage is transport and trading, which envisions shipping and trading, degasifying of LNG, and supply and distribution. Separately related to this stage are the components of producing biofuels and generating power. The last stage is retail and B2B sales.[5]

Based on this cycle, the organizational division consists of three organizational units: Upstream, Downstream and Projects and Technologies. The role of Downstream business deals with activities related to refining and marketing of oil products and related chemicals. Consequently, Projects & Technology organization is responsible for the development and implementation of the main projects and directs research and innovation in order to create the most advanced technological solutions to existing problems. While, on the global level, there is a distinction between Upstream International and Upstream Americas, in terms of the American subsidiary, the company deals mainly with Upstream Americas organizational unit:

“Our Upstream Americas business manages Shell’s Upstream activities in North and South America. It explores for and receives crude oil, natural gas and natural gas liquids, transports oil and gas and operates the upstream and midstream in frastructure necessary to deliver oil and gas to market… extracts bitum from oil sands that is converted into synthetic crude oil… Additionally, it manages the US-based wind business. It manages its operations by line of business, supported by activities such as Exploration and New Business Development.”[6]

In terms of company’s position in the oil industry, it is one of the primary corporations that control 85 % of the world resources of gas and oil. Thus, the main competitors of the overall Royal Dutch Shell are British Petroleum (UK), Chevron Corporation (US), Total SA (France), Exon Mobile Corporation. In this regard, the very notion of rivals and partners is mutually replaceable since all of the companies cooperate in various joint ventures and projects.[7] This is largely conditioned by the global scale of the industry and the devising of global oil and gas sector between these companies. Consequently, although the competition between the main companies exists, it is mainly directed on the development of the most effective technologies of resources extraction, processing and finding solutions for their future substitution.

Leadership position of the company

As it was outlined above the company is one of the very few leaders in the oil and gas industry on the global scale. In other words, it is considered to be a leader in the industry due to the fact that it has established a strong position in the sector through its global presence in all aspects of oils and gas business cycle and continues to expand its influences in the new markets through participation in joint ventures, buying shares of other companies and investing into exploration of the new areas of oil and gas resources. One of the leading characteristics of the company is that it does not concentrate only on the oil extraction and processing, but also promotes and stimulates the use of natural gas and alternative sources of energy. In this regard, among all oil companies, Shell Oil Company looks into future of scares oil resources and invests into technological and scientific exploration of the future market of resources.[8] Company’s diversified specialisation is reflected in the structure of its investments shown in the Graph 1.

Just as the history of the company demonstrated its commitment to advanced technologies, nowadays, the company is committed to investing in cutting edge technologies as its primary competitive advantage of its rivals in the sector. In this regard, R&D investments are oriented towards accessing new resources to the satisfaction company’s clients and business partners.[9] The main emphasis of technological advancement is to reach resources that were previously considered to be economically unprofitable or technologically unreachable. In this regard, research is conducted in the field of seismic activities, and software to find previously unnoticed geological characteristics of the explored areas, drilling-rig equipment to make the process more efficient, method of oil recovery aimed at the increase of fields’ production capacity. Other technologies are targeted at improving efficiency and eco-friendliness of refining processes of crude oil and natural gas liquefying. For this purposes, the company invest in R&D more than any other oil company in the world:

“Since 2007, we have spent more to research and develop innovative technology than any other international oil and gas company. In 2014, research and development expenses were $1,222 million, slightly down from $1,318 million in 203 and $1,307 million in 2012.”[10]

Thus, having established itself in the current oil industry, the company invests in the future potential of the industry and the market expectations under the conditions of scarce energy resources. On the other hand, due to company’s attention to alternative energy resources and innovations, it is not in the top five leading oil companies by daily oil extraction, as of 2014. In this regard, in the first place is Saudi Aramco extracting 12 million barrels per day, followed by Russian Gazprom – 9.7 million, Iranian NIOC – 6.4 million, Exxon Mobile – 5.3 million, PetroChina – 4.4 million, British Petroleum – 4.1 million, and finally on the seventh place is Royal Dutch Shell as a single unity with daily extraction of 3.9 million. It is further followed by Petroleos Mexicanos – 3.6 million, Chevron – 3.5 and KPC (Kuwait) – 3.2 million.[11]

Comparison with two other companies

The chosen two companies for comparison are Exxon Mobil and Chevron Corporation. These two were chosen because they both are American companies being both based and oriented primarily in the American market context. Another reason was that these two companies are the main competitors/partners of Shell in the USA unlike the companies mentioned before being rivals of the entire Royal Dutch Shell Group. All three chosen companies are specialised in oil and gas industry together with manufacturing of the supporting by-products and chemicals.[12]

Due to the similar orientation of the companies, their mission statements are relatively the same, stating the primary aim of each company to become a leader in the oil industry both in American and global contexts. On the other hand, all three companies have different perceptions of how to achieve it. Exxon is convinced that it can achieve industrial superiority through advancement in financial and operational modifications within an ethical framework. In this regard, the company uses administrative and structural approaches to the achievement of the posed goals. Chevron makes it’s “the Chevron way” to superiority by uniting its performance with people and existing partnerships. In other words, the company thinks in terms of making its profit through the investment in qualified staff and commitments to the existing and potential partnerships.[13]

While the two companies’ mission statements are targeted primarily at the internal dimension of changes and orientation on cooperation between other companies in the sector, Shell applies a different approach. It does not deny its desire to become a leader in the industry, but it want to do it not only efficiently and profitably for the company, but also responsibly and sustainably for the global community and eco-system.[14] In this regard, the company follows the recently popular trend in the global business of getting engaged with the local communities and doing business eco-minded as much as it is possible in the oil and gas industry. Therefore, the company targets to achieve the same goals as its rivals but in a more sophisticated and ecological manner using advanced technologies. In a long run, the company aims at investing into alternative sources of energy and contributing to the future of energy, which is given in Shell’s strategy:

“Our strategy seeks to reinforce our position as a leader in the oil and gas industry, while helping to meet global energy demand in a responsible way. We aim to balance growth with returns, by growing our cash flow and delivering competitive returns through economic cycles to finance a competitive dividend and fund investment for future growth. Safety and environmental and social responsibility are at the heart of our activities.”[15]

Although all three companies are in the same industry, their products and services still have certain differences. In this regard, Exxon has the most narrow product specialisation on oil and gas exploration, their production, means of transportation and marketing schemes. Thus, Exxon does not orient as much as the other two on the by-products and diversification of chemicals production. It orients strictly on the gas and oil. On the other hand, Chevron expanded its expertise in the related industries of various chemicals, power production and mining. The company does not only concentrate on products but also on the development of infrastructure and supporting technologies. Thus, the products and services it provides are more diverse than in the case of Exxon.[16] As it was shown before, Shell has even more diversified products and services’ provision spectre since it targets the entire oil and gas cycle through its organisational structure and also orients at the development of alternative sources of energy like production of biofuels and generating power. Consequently, Shell diversified its products and services in terms of the future characteristics of the energy market.

In terms of social innovations, all three companies conduct them, yet in different ways. Exxon Mobil donated Stanford University with $100 million in order to run the program aimed at finding new technological solutions of proving the world with more energy in eco-friendly way reducing the greenhouse effect. The contract was signed in 2002 and was aimed to last 10 years.[17] The initiative was aimed at supporting the most advanced minds at Stanford University and stimulating practical thinking in terms of environmental safety and efficiency of the energy production.

Chevron went the same path of social innovations but in a cheaper way. Instead of donating a vast amount of money to academic institutions, it decided to effect a young minds at an early stage and orient them at thinking globally and responsibly from the very start. For these purposes, in 2012 Chevron has introduced “Social Innovation Camp” initiative. In the framework of this initiative, various workers of Chevron Corporation meet with students from High School and discuss contemporary global problems like world hunger, climate change, scarcity of resources and potential creative ways of their resolution.[18] In this regard, the primary contribution of the program is that it makes students think creatively and systematically about existing real-life problems of a global scale. For the company, it is also an opportunity to spot talents and student with an unconventional thinking at an early stage of their development.

Unlike its competitors, Shell has a long history of innovations including its social dimension. It has diverse initiatives targeting climate change and development of new technologies through various research and higher education institutions. On the other hand, there is one initiative which distinctive to this company. Shell’s GameChanger programme was created in 1996 aimed at open innovations and ideas exchange from various sources. For this purpose, 12 selected technical and scientific experts discuss with various people their ideas, which are mostly unproven or unusual. This innovation gives an opportunity for people to see how their creativity can have practical dimension, while the company gets a whirlpool of new ideas for further innovations. During its existence from 1996 till 2014, the initiative resulted in company’s cooperation with 1,700 innovators, and successful implementation of 100 ideas.[19]

What happened to the company?

In the context of the above evidence, it can be argued that the company is performing very well in the industry and manages to preserve its leading position. Unlike some of the global oil corporations, Shell Oil Company does try to prove its global status or industrial performance by the number of barrels oil extracted daily. The company remains one of the leaders in its industry because it concentrates not only on the excellent in present performance, but because it does everything in order to perform successfully in the future. In this regard, company’s success is due to its constant investment into R&D and implementation of the cutting edge technologies on various stages of oil and gas cycle. The company also achieves its competitive advantage through diversification of products and preservation of cost-efficiency:

“We face competition in each of our businesses. While we seek to differentiate our products, many of them are competing in commodity-type markets. If we do not manage our expenses adequately, our cost efficiency could deteriorate and our unit cost may increase.”[20]

Thus, the company holds its position among leaders thanks to the balance between present and the future of energy industry, control over finances and cost-efficiency of its performance. Another reason for company’s survival and success is that it adapted to the temporal requirements at each stage of its development. Nowadays, aggressive conduct of business is no longer enough. For the oil company to be successful, it also needs to think systematically about sustainability, ecological and social responsibilities. This is exactly what Shell Oil Company does.

Conclusion

Overall, in the oil and gas industry, there is a certain status quo. The main six-seven companies have the power over 85% of oil resources of the world. In such an environment to remain among leaders requires a systematic and inter-disciplinary approach to business. While most of the companies think about competition in terms of the present day, Shell Oil Company thinks about it in advance. The company managed to achieve its current position because it decided to invest into the future from the very beginning of its creation. Thus, it did right to concentrate on innovations and R&D, since in the oil and gas industry the ability to reach resources your competitors matters substantially.

Shell Oil Company is also an example of the contemporary trend in the business of taking responsibility for its profit making in terms of social and ecological dimensions. In this regard, the company does right that it involves in various social and cultural initiatives. In such a way, it improves its public profile and also helps to gain customers’ support in contrast to other companies like British Petroleum, for instance. Thus, nowadays in order to achieve success in a certain industry, a company needs to think globally, systematically and interdisciplinary.

References

Falola, T and Genova, A. (2005). The Politics of the Global Oil Industry: An Introduction. Westport, CT: Greenwood Publishing.

Inkpen, A. and Moffett, M. (2011). The Global Oil & Gas Industry: Management, Strategy & Finance. Tulsa, OK: PennWell.

Royal Dutch Shell (2014). Strategic Report for the year ended December 31, 2014. Retrieved from http://reports.shell.com/annualreport/2014/servicepages/downloads/files/entire_strategic_report_shell_ar14.pdf.

Shell U.S. (2013). The History of Shell Oil Company. [Web page]. Retrieved from http://www.shell.us/aboutshell/who-we-are-2013/history.html.

Statista (2014). Top 10 companies worldwide based on daily production as of 2014 (in million barrels). Retrieved from http://www.statista.com/statistics/280705/leading-oil-companies-worldwide-based-on-daily-oil-production-2012/.

[1] Royal Dutch Shell (2014). Strategic Report for the year ended December 31, 2014. p. 14.

[2] Shell U.S. (2013). The History of Shell Oil Company. [Web page].

[3] Ibid..

[4] Falola, T and Genova, A. (2005). The Politics of the Global Oil Industry: An Introduction. Westport, CT: Greenwood Publishing.

[5] Royal Dutch Shell (2014). Strategic Report, p. 5.

[6] Royal Dutch Shell (2014). Strategic Report, p. 6.

[7] Falola and Genova (2005). The Politics of the Global Oil Industry, p. 76.

[8] Inkpen, A. and Moffett, M. (2011). The Global Oil & Gas Industry: Management, Strategy & Finance. Tulsa, OK: PennWell.

[9] Falola and Genova (2005). The Politics of the Global Oil Industry, p. 62.

[10] Royal Dutch Shell (2014). Strategic Report, p. 6.

[11] Statista (2014). Top 10 companies worldwide based on daily production as of 2014 (in million barrels).

[12] Inkpen and Moffett (2011). The Global Oil & Gas Industry, p. 44.