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Royal Dutch Shell

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Royal Dutch Shell is one of the world's three biggest independent oil and gas companies, jostling BP and ExxonMobil for leadership. However the public face of the company is provided by its vast global network of service stations. With around 43,000 retail outlets in every corner of the globe, it is the world's largest branded retailer, and according to the group's extensive annual research survey, Shell has been for many years the world's "favourite" fuel brand. That reputation was dented in 2004 when the group shocked shareholders by cutting its estimates of proved oil reserves by almost 30%. In a reversal of the company's long-running advertising slogan, it seemed suddenly that you couldn't be sure of Shell, after all. Performance has stabilised since then, and the company has begun to make significant moves to broaden its focus beyond oil into gas and other energy sources.

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Brand & Activities

Shell remains one of the world's big three oil companies, and has enjoyed substantial profits for several years as a result of the surge in oil prices. It is also a leader in liquefied natural gas (LNG), which is likely to play an increasingly important part in global energy consumption, because of its lower carbon emissions, and the group derives enormous benefits from its massive retail estate. Yet worrying questions remain over Shell's ability to keep up with its two principal competitors in the exploration and production of new reserves, and the industry as a whole remains vulnerable to political upheavals in all of its main oil and gas producing territories.

In April 2015, in the largest ever deal involving two British companies, Shell agreed to acquire its UK rival BG Group for £47bn. BG is the exploration and production division of the old British Gas group, spun off as a separate business in 1997. The merged Shell/BG would become the world's biggest independent gas producer and the global leader by far in liquefied natural gas (LNG). The deal also boosts Shell's own proved oil reserves, because of BG's two huge new development fields in East Africa and Australia. Subject to approval, the deal is expected to complete in early 2016.

Until 2005, the business generally known as Shell was actually not a single company but a partnership between two separate businesses, Netherlands-based Royal Dutch Petroleum and the UK's Shell Transport & Trading. (FMCG giant Unilever and business and scientific publisher Reed Elsevier were structured along broadly similar lines). These two holding companies jointly owned a large collection of businesses involved in the discovery, refinement and marketing of energy products. The Dutch company effectively owned a 60% stake in the group of operating businesses, to the UK company's 40%. However following the group's embarrassing management problems during 2004, the group took steps to simplify its structure, merging the two holding companies into a single corporate entity in June 2005.

Shell's principal operating businesses are divided into two main groups comprising "upstream" activities such as the exploration and production of raw energy resources, and "downstream" activities of refining and marketing. Shell's Exploration & Production unit searches for and collects oil and, to a lesser extent, natural gas around the world. It has operations in 37 countries, and currently produces fuels in around half of them, in most cases in a joint venture with another company. Production has been greatly affected in recent years by hurricanes in the Gulf of Mexico, including Katrina in 2006, and by security concerns in Nigeria, another important site. However, Shell's most productive fields in 2014 were in the US and Oman. Oil production in Nigeria has been severely compromised by terrorist activity, though it remains the group's third largest territory. Production levels for 2014 slipped from 3.2m barrels to day to 3.07m. A massive project to develop fields off Alaska has encountered repeated regulatory and technical problems. Despite investments in excess of $5bn it had yet to open a single well by Spring 2013.

This aggressive expansion is a welcome turnaround from poor performance midway through the first decade of the 2000s. Although the move had no effect on the group's profitability, Shell shocked the market at the beginning of 2004 by cutting its estimate of the proved reserves of oil and gas left within the fields it controls by 20%, or around 4bn barrels. All the oil companies were finding it more difficult to find new reserves of oil to exploit, but Shell had arguably found the going harder than its competitors. However the 2004 announcement of the reduction in its reserves was badly handled - group chairman Sir Philip Watts was not present at the original press conference and was very slow to deal with the subsequent furious reaction from investors. That mismanagement led to his early retirement, and the revision of reserves prompted the SEC and regulators in the UK and Holland to commence an investigation. After only a few weeks external auditors discovered further "disappointing and embarrassing" mistakes and forced the group to cut another 250m barrels off its reserves, bringing the total revision to almost 30%. By the end of 2008, proved reserves were estimated at 10.9bn barrels, down from 11.9bn in 2004, placing Shell third behind ExxonMobil and BP. Nevertheless, new CEO Peter Voser's aggressive exploration programme began to reap results from 2009. By the end of 2011, proved reserves had risen to 14bn barrels, though they have slipped back since then, to 13.1bn barrels by the end of 2014.

To offset the problems associated with traditional oil resources, Shell has pushed more aggressively than its main competitors into less conventional forms of oil exploration and production. In 2006, it offered around $2.2bn to acquire BlackRock Ventures, a Canadian company specialising in oil sands, a much heavier form of bitumen oil mixed with sand or clay. In 2008, the group agreed to pay around $5.9bn to acquire Duvernay Oil, which despite its name works in the discovery and extraction of "tight gas", a form of natural gas trapped in rocks. Two years later it agreed to pay $4.7bn for the tight gas assets of independent explorer East Resources. It also made substantial increases in its investment in exploration & production.

The group's strongest competitive position is in natural gas, a smaller but faster growing sector. Much of the world's natural gas production is now mainly converted to LNG (liquefied natural gas) for easier transportation, and Shell Gas & Power, a separate unit from Exploration & Production, is the world leader in production and conversion of natural gas. The company recently completed what is now the world's biggest plant for GTL (gas to liquid) conversion, in Qatar. In 2014, the group acquired part of the LNG operations of Spanish oil group Repsol, boosting LNG sales in 2014 to 24m tonnes.

After production, the crude oil or gas is sold on. Around half is sold to sister company Shell Oil Products, the division responsible for the refinement of oil and its conversion into fuels, lubricants and other products (see below); the rest is sold to other refiners. Shell Chemicals manufactures and sells petrochemical building blocks and polyolefins to industrial customers for use, for example, in the manufacture of everyday plastics and synthetic materials. Shell Renewables is involved in "green" energy production from solar, wind and other renewable power sources.

The group's single biggest and main customer-facing division is Shell Oil Products, which supplies around three-quarters or more of combined net group revenues. Shell has interests in 24 refineries worldwide, and produces a wide range of products ranging from aviation fuel to liquefied petroleum gas, and from industrial lubricants to automobile petrol or gasoline.

The group offers a wide range of products. Its main car fuels are now mainly sold under the high-performance V-Power banner. come in different grades. Shell Regular, Shell Plus and Shell Premium are the core three sold throughout the network, but the group has also added high performance differentiated brands such as Pura, Optimax, Defenda and V-Power to provide optimum performance from different types of car engines. It is also the global market leader in branded lubricants, sold as Shell Advance throughout Europe, Shell Rotella, FormulaShell, ShellZone antifreeze and others in the US. As a result of the acquisition of Pennzoil-Quaker State in 2002, the group controls the best-selling US motor oil, Pennzoil, and #4 Quaker State, as well as more than 2,200 Jiffy Lube oil change centres and a large portfolio of other car care products including The Outlaw, Black Magic, Rainx, FixAFlat and Gumout.

The group's mammoth retail network has grown dramatically with the full acquisition of Texaco's US filling stations and Germany's DEA. Both have now rebranded as Shell. This created a network of more than 44,000 service stations. However, in 2014 the group began selling off some outlets to dealers and franchisees. By the end of the year it still had 43,000 outlets in more than 70 countries, or roughly 9,000 more outlets than McDonalds. It is the leading service station network in both Europe and the US, and serves around 10m customers a day. The company currently operates more than 15,000 gas stations in the US, either directly or, in the east and south east of the country through Motiva Enterprises, a joint venture with Saudi Aramco. That partnership is being dissolved in 2016, with Shell and Aramco splitting the assets between them. In Europe the group has a network of around 14,000 sites in 28 countries. During 2003, the company acquired further outlets in eastern Europe, although it has also exited some markets, such as Iceland and Sweden, and Spain. There are also 5,500 retail outlets in Japan, owned through the Showa Shell refining and marketing joint venture. There is a joint venture in China with Sinopec, and the group negotiated the first national retail license in India to be granted to an international company during 2005. In some countries, following the general trends in the industry, selected stores are run as a partnership with a local convenience store operator, for example Coles in Australia, and Sainsbury in the UK.

Financials

As if to demonstrate that the size of its proven reserves had little effect on financial performance, Shell reported substantial increases in profitability between 2004 and 2007, reflecting the soaring price of oil. Performance peaked in 2007 with net attributable income of $31.3bn, up 23% on the year before. Sales and profits have fluctuated widely since then, reflecting the rise and fall in oil prices as well as increased investment in exploration. Revenues hit a new high of $470.2bn before slipping back in 2012 to $467.2bn. Net attributable income was $26.6bn.

Falling oil prices have caused a continuing decline in revenues, which slipped to $421.1bn in 2014. Net attributable income has fallen accordingly, down to $14.87bn in 2014. Almost 91% of revenues, but less than 20% of profits, are generated by downstream refining and marketing.

Background

In 1833 Marcus Samuel, the son of a Jewish immigrant, opened a small shop in London to sell sea shells to natural history enthusiasts. M Samuel & Co soon became a thriving import-export business trading rice, grains, sugar and semi-precious stones as well as exotic sea shells, and after his death in 1878 the business was inherited by Marcus's sons, Marcus Jr and Samuel. They began to dabble in more lucrative ventures such as trading coal from Europe in the Far East. On a visit to the Caspian Sea coast, Marcus Samuel recognised a huge opportunity to export oil for lamps and cooking. He commissioned the building of the first oil tanker in 1892, and subsequently delivered 4,000 tonnes of Russian kerosene to Singapore and Bangkok. At the time, the oil trade in Asia as well as everywhere else was dominated by US giant Standard Oil. However Samuel & Company plunged into the fray, eventually assembling a fleet of tankers to chip away at Standard's share. Shell Transport & Trading was formed in 1897, and Samuel named each of his new ships after a different shell. In 1900 he adopted the image of a rather nondescript mussel as part of the company's logo. This was altered to become the now familiar Pecten or scallop shell in 1904.

The Samuel family were not alone in chasing the Asian market. Royal Dutch Petroleum had been formed in 1890 to exploit a new oil field in Sumatra, and under the management of Henri Deterding, it too steamed into the Far East. In 1902, Deterding engineered a marketing alliance between the two companies under the name Asiatic Petroleum to sell Samuel's Shell Spirit and Royal Dutch's Crown Oil. This was then extended in 1907 to an effective merger of the two companies' operations to mount a combined assault on Standard and other rivals. By 1910, the popularity of Shell Spirit was such that the two companies abandoned the Crown brand to sell all their produce under the Shell brand. By this time, the Samuel brothers had stepped back from the business, leaving Deterding in charge of the development of the increasingly extensive global business. Knighted in 1898, Marcus Samuel later became the first Viscount Bearstead and also served as Lord Mayor of London. He died in 1927. (M Samuel & Co continued as a separate business, eventually becoming a merchant bank. In 1965 it merged with another bank to form Hill Samuel, now part of Lloyds TSB Group.)

Demand for fuels soared during the first decades of the century, led first by the development and popularisation of motor cars, and then of aircraft. The group expanded dramatically, acquiring other businesses and energy fields in Europe, Africa and the Americas. A key development was the break-up of Standard Oil by the US government in 1911. Initially Royal Dutch Shell simply imported quantities of Sumatran oil into the US market, but began buying a string of refineries and producers in 1916. In 1922, it acquired Union Oil of Delaware and consolidated its interests in the country as publicly held Shell Union Oil. By 1929 Shell's products were available nationwide in the US.

By the 1960s, continuing expansion made Shell a global giant in the oil industry, supplying almost 15% of all the world's oil products. During the 1970s the company made important discoveries of oil and natural gas reserves in the North Sea off the coast of Scotland, just as the world was facing an oil crisis triggered by price rises from the fast-expanding Middle Eastern producers. The group took its US business, the former Shell Union Oil, private in 1985, buying out the minority shareholders. (They later successfully sued the company, arguing Shell had undervalued the value of their shares). Around the same time the company was a pioneer in the development and launch of unleaded petrol, and discovered huge new oil reserves in the Gulf of Mexico, an area abandoned by other companies.

During the 1990s fierce competition forced the world's oil companies to adopt new strategies. In 1995, Shell began gradually integrating its numerous different operating companies, many of which had operated virtually as independent companies, and reformed its complex and Byzantine management structure. It also formed marketing alliances and partnerships with competitors. One of the first of these had been created in 1985, when the group merged its Japanese refining and marketing interests with those of Showa Oil to form Showa Shell. In 1997 Shell formed separate joint ventures with Amoco and Mobil to explore and produce oil resources in the US. Along similar lines to the Japanese operation, Shell and Texaco combined their refining and marketing operations in the Western US in 1998 as Equilon; a similar partnership on the East and Gulf coasts was named Motiva, with Saudi Aramco recruited as a third partner. A year later Shell and joined forces with UK gas explorer and producer BG Plc to take control of Brazil's biggest gas distributor Comgas for around $1bn, and merged its refining and marketing operations in Germany with those of RWE-DEA.

In 2001, Texaco was forced by regulators to withdraw from both US marketing ventures as a condition of its merger with Chevron. Shell took control of Equilon, which it renamed Shell Oil Products US, while Motiva became a 50:50 joint venture between Shell and Aramaco, now Saudi Refining. Shell consolidated its position in the US in 2002, acquiring Pennzoil-Quaker State for $1.8bn and then independent UK explorer and producer Enterprise Oil for $5bn. It also bought out RWE-DEA's 50% of Shell & DEA Oil for $1.35bn. In 2003 it announced a $4.2bn plan to develop the world's largest natural gas to liquids (GTL) plant in Qatar; in 2004 it began construction of the world's biggest solar power station in Germany, in partnership with Geosol.

Sir Philip Watts, chairman of the Royal Dutch/Shell management committee and of UK parent Shell Transport & Trading, came under severe pressure over the shock restatement of the group's reserves at the end of 2003, and especially over what was perceived to be poor handling of the announcement and a lack of regard for shareholders' concerns. As a result he was obliged to resign his position in March 2004. Walter van der Vijver, CEO of the group's Exploration & Production businesses, also resigned. Shell subsequently agreed to pay $151m in fines to the US Securities and Exchange Commission and the UK's Financial Services Authority. It still faces a number of other hurdles, including a criminal investigation by the US Department of Justice, investigation by Dutch regulators and several class action lawsuits from shareholders, as well as a $1.5bn claim from the government of Nigeria for environmental damage. In 2004 the group raised around $615m by agreeing to sell its natural gas pipeline in the Gulf of Mexico to Enbridge of Canada.

Last full revision 19th July 2016

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