Royal Dutch Shell in a Changing World: Navigating Uncertainty

Abstract

Ben van Beurden, Chief Executive Officer of Royal Dutch Shell plc, explains how the oil and gas company continues to adapt its business model so that it can thrive in a lower-carbon energy future. The acquisition of BG Group in February 2016—one of the largest takeovers in UK corporate history—was a key strategic move to strengthen Shell’s liquefied natural gas and deep water businesses. It also left the group better-placed to focus on scale, profitability, and potential growth. Van Beurden highlights some of the other, major strategic questions facing companies like Shell, such as how to weave the strengths of a locally driven approach into the fabric of a global company. Increasingly, for example, understanding and anticipating customer needs mean tailoring retail products and services to different markets.

Appendices

Case studies: LNG and Retail

1.1 LNG: Making Innovation Count

Shell helped launch the global LNG industry, providing the technology for the world’s first commercial plant in Algeria to chill and condense natural gas into liquid for shipping to other markets. In 1964, we brought the world’s first commercial LNG cargo to the UK, opening up a global trade.

LNG has reshaped the natural gas business as it allows the gas to be transported around the world. So, for example, a power plant in South Korea can generate electricity with natural gas originating from Nigeria. One-quarter of Japan’s electricity is now generated from imported LNG.

Shell has continued to innovate and improve the technology for producing LNG. For example, when we helped build Russia’s first LNG plant, we introduced a technique that chills the natural gas with a special air-cooled refrigerant system. This takes advantage of the subarctic conditions on Sakhalin Island and makes the LNG plant more energy-efficient than most.

Shell’s innovation in LNG continues today. Prelude, moored some 200 km off the northwest coast of Australia, will be one of the world’s first floating facilities to produce and liquefy natural gas, operating without the need for pipelines and an onshore plant.

We plan to use the technology and techniques we have demonstrated during the construction of Prelude in other floating LNG projects. For example, we are working with our partners on another potential project in Australia.

LNG is an attractive market for Shell because of its high growth prospects. We expect global LNG demand to increase by around 5 % a year well into the next decade, more than double the growth rate of natural gas as a whole.

Some 20 countries currently export LNG to around 30 countries, with those figures set to reach 25 and 50, respectively, by the middle of the decade.

Shell is involved in every stage of the LNG process. Our company finds and extracts the gas, liquefies it, ships it around the world, markets and trades the LNG, and turns it back into gas before distributing it to our customers.

LNG has been used traditionally to heat and light homes and businesses and power industries. But other markets are opening up, including using LNG as a cleaner-burning alternative to diesel and heavy fuel oil in shipping and road transport. This is an emerging sector with enormous potential.

In 2012, Shell bought a Norwegian company which provides LNG fuel for ships and industrial customers primarily around the Norwegian Shelf and the Baltic area. In addition, we have agreed to be the first customer to use the new LNG terminal at the Port of Rotterdam, in the Netherlands.

Maintaining Shell’s position in LNG will require us to develop new gas fields and deliver big projects efficiently and on time. We will also need to drive our growth by understanding and engaging with our customers as the number of uses for gas increases.

Retail: A Local Approach in a Global Network

Shell operates the largest single-branded retail network in the world with around 43,000 sites in more than 70 countries. Around 25 million customers visit these outlets every day.

Understanding and anticipating customer needs, as well as acting on these insights, is critical to our success. Increasingly, that means tailoring our products and services to different markets.

Consumers around the world, for example, want the convenience of being able to buy food while refueling. To help meet this need, we have partnered with companies such as Costa, Starbucks, Migros, and Waitrose to offer products that cater to local markets.

We also aim to provide customers with a locally tailored service, one that will make their visits both welcoming and convenient. For example, we have introduced a program called Welcome to Shell, which encourages staff on Shell-branded sites to offer a more personal and friendly service.

The strategic diversification of Shell’s retail network across different markets and a range of operating models is another part of our strategy.

It’s important to have sites in the most accessible locations. Shell has actively managed its portfolio to achieve a strong presence in key urban markets around the world. Looking forward, we have anticipated rising fuel demand by expanding in future growth markets such as China and India.

Despite our wide global reach, Shell applies different operating models to our sites depending on local market conditions and opportunities. Our most widely used model is a network of sites owned by Shell, which are operated by retail partners under business agreements.

We also use branded fuel supply agreements to partner with independent service station owners and large distributors. By adapting the terms of our agreements to meet specific needs, we aim to ensure that partnering with Shell is an attractive business opportunity, helping us attract strong retail partners.

Another way we have achieved our leading retail position is through continuous innovation of high-performance premium fuels tailored to meet the needs of some customers, such as our Shell V-Power brand. This fuel is a direct result of significant investment in research and development and technical partnerships with leading car manufacturers such as Ferrari.

Our premium GTL motor oils, meanwhile, are based on the conversion of natural gas into clear oils.

Looking forward, Shell is also investing in the research and potential commercial development of alternative fuels such as hydrogen and advanced biofuels that are made with nonedible plants and crop waste.