Industry Life Cycle
Shell belongs to the oil and gas industry. The industry life cycle in this respect is described by the stages that an international oil exploration and production company undertakes starting from the time it enters into the country to the time it depletes the hydrocarbon reserves. In the entire process, Shell aims to transform its contribution to oil life cycle to yield sustainable value to its immediate community. Appendix 1 illustrates the life cycle stages, the revenue they generate and the approximate time each stage takes.
The first stage of undertaking an oil exploration is to obtain a licence from the country in which the company wishes to invest. The company identifies the country after carefully evaluating the geographical and operational risks. The company looks for hydrocarbons in both familiar and under-explored regions.
Exploration and Appraisal
This process begins with collection and interpretation of seismic and geophysical information to assess the possibility of oil underneath. The company drills an initial well and later an appraisal well in case oil was discovered. Additional exploration wells are drilled to assess the size, extent and quality of the reserve. If the quantity discovered is not commercially viable, the well is plugged and abandoned (Forehead & O’Kelly, 2013). At this stage, the company may establish social investment projects such as the provision of water sources or improvement of infrastructure.
After the ascertainment that the oil discovered is commercially viable, the plan of development kicks off. The company extensively engages the stakeholders considering the social, economic, environmental and operational aspects. The concerned governments and regulatory bodies approve these plans and carefully monitor their implementation. The value created at this stage includes job creation and sourcing supplies from the locals.
Oil production depends on the type of oil or gas, environmental conditions, water depth and location. The exploration is conducted in cost effective means, observing high safety standards and conserving the local environment. Production may last for many years. The value created at this stage includes payment of tax and royalties, employment creation and sourcing supplies from the surrounding community.
At some point, production may become uneconomical as operating costs rise and exceed revenues. Production ceases at this stage. The company decommissions the facilities and remedies the location. Decommissioning ensures that the site is restored to economic use.
Strategic Group Analysis
The main strategic objective of Shell is to reinforce its position as a leading corporation in the oil and gas industry and satisfy global energy through sustainable means. Shell strives to generate attractive returns for shareholders. Shell aims at conducting its activities in a safe and environmentally and socially responsible way (Reuters, 2012b).
Shell faces intense competition in accessing upstream resources and exploring downstream markets. To counter this competition, Shell differentiates its business through the use of cutting edge technology, operational excellence and ability to deliver various projects. In Upstream, Shell focuses on exploring new reserves of liquids and natural gas. Shell also seeks to develop major new projects using its advanced technology to add value to the shareholders (Bloomberg, 2012).
Shell focuses on various strategic themes that require distinctive technologies and exceptional capabilities in risk management. Its downstream and upstream engines are viable businesses that generate a lot of revenue. They are the major determinants of Shell’s future financial performance. Shell prioritizes its investments to selective growth positions. The company applies its operational efficiency and distinctive technology to enhance the longevity and profitability of its assets. Deepwater and integrated gas provide viable growth opportunities. Shell uses its advanced technology and ability to unleash large-scale operations to explore these highly competitive resources. The third area of strategic application is the unconventional resources. These resources which include Shale oil gas and heavy oil have significant reserves potential. The developmental pace of these resources is driven by the operating conditions in their locations and the market (Kwee, Van & Volberda, 2010)
The major strategic challenge for Shell and the entire energy industry is to meet the growing global energy demand in environmentally friendly and socially conservative ways. Shell aims at improving energy efficiency its operations, developing energy efficiency technologies and supporting consumers to manage their energy demands. Shell also aims at researching technologies that reduce emissions in the production of natural gas and liquids.
The core strategy of Shell is a commitment to achieve advanced technology and unveil innovations. The energy projects are increasingly becoming become more complex technically demanding. Shell believes that its engineering expertise is a determining factor in their growth endeavors. The key strengths of the company include the development and use of cutting-edge technology, its exceptional skills in project and financial management, the ability to deliver vast field development projects, and prudent integrated value chains management.
SWOT Analysis of Shell
Vertically Integrated Operations
Shell is a worldwide energy company that serves the major world markets such as Europe, North America and Asia (Goey, 2002). Shell’s is actively involved in creating acquisitions and mergers as a strategy of vertical integration. For example, Shell and Saudi Aramco created a joint venture called Motiva Enterprises. The venture is North America’s largest which has increased the market power of the two companies and reduced competition.
Cutting edge technology
Shell uses and continues to unveil cutting edge technology in its operations such as exploration. It invests to the tune of $ 1.5 billion per year in research and development. Shell has made key developments in wind and solar energy in anticipation of a major shift to renewable energy.
Shell has failed to meet the environmental expectations in several instances. For example, the oil spills in the Niger Delta attracted a lot of criticisms from environmental conservationists which eroded the image of the company (Reuters, 2012). Though Shell claims that oil spills result from theft and sabotage, the environments maintain that Shell has not exerted enough efforts to combat the problem.
Shell has faced several allegations of corruption that tarnish its image. An example is an allegation where employees of Panalpina paid bribes to foreign citizens on behalf of Shell. Shell later allegedly requested the employees of the Nigerian organization to fabricate invoices to mask the scandal (Hennchen, 2014).
The size and scale of global operations
Shell undertakes vast global operations which complicate the desire of the company to maintain high quality and standardized products. This could be weakness due to the various difficulties that arise in maintaining quality and also the standard of its products. The corporation operates in different countries and regimes with varying operational conditions, hence, cannot formulate uniform policies for all its global operations. The large scale operations also introduce diseconomies of scale such as administrative inefficiencies (Ekatah, et al., 2011). Shell also suffers high exploration costs, higher depreciation and currency exchange losses.
Innovation and Technology
Shell aims to take advantage of technology and innovation as a strategy to maintain its lead in the industry. Shell is exploring advances in technology and renewable energy. The exploration of renewable energy responds well to the recent call for environmentally friendly energy sources. Shell intends to improve the communities in which they operate through spurring economic development such as paying taxes, creating jobs and trading with local suppliers.
Rising Global Demand for Energy
The globe is experiencing a rapid rise in demand for Liquefied Natural Gas. Shell has increased the production of the clean source of energy. The company can generate more revenue by expanding into various economies. The available opportunities for expansion include creating joint ventures and acquiring companies in rapidly expanding economies such as China.
Delivering new projects
Shell has a great potential to unveil new projects in the global market. One of the recently unveiled projects is the Carmon Creek, which achieves an average daily production of 80,000 barrels. The project was launched in Alberta and will potentially provide reliable energy that will benefit Alberta and Canada for many decades. Shell also ventured deep water exploration in 2014 which is projected to yield 300000 barrels of oil per day (Matusitz & Cowin, 2014). Appendix 2 shows the projects Shell is in the process of delivering.
The exploration of oil and natural gas could be adversely affected by environmental laws. Different countries place restrictions on oil exploration as an intervention on environmental conservation. These restrictions threaten the current and future activities of Shell because successful operations require an enabling environment.
Shell suffers great pecuniary losses as a result of weak refining conditions. Oil spills from burst pipelines is a perfect example of the weak conditions. The annual loss due to this risk amounts to about 65,000 barrels. These losses could potentially lead to a fall in share price and a cut in dividends. Terrorism also affects most countries in which shell conducts exploration and will increase the cost of operation for the company.
The prices of oil and gas are fluctuating rapidly in the world market. The most recent cause of this phenomenon is the production of Shale gas in the U.S, which has caused a fall in the price of crude oil. The fall in the price of oil products is also a threat to the revenues of Shell.
Shell faces high competition from other companies such as Exxon Mobil that produce more barrels of oil. The competitors have established a global presence like Shell. Shell faces stiff competition from other more sustainable and environmental; friendly sources of energy. Such sources include solar and wind energy. The substitutability of oil and natural gas is a factor that Shell should watch and consider investing in renewable sources.
Porter’s Five Forces Analysis of Shell
Threat to New Entrants
Shell has a low threat of new entrants. Investment in oil exploration requires a heavy investment of capital in terms of setting up plants and procurement of advanced technology. The entry into the business requires the company to invest heavily in fixed assets and wait for returns after realizing economies of scale. Royal Dutch Shell is an established corporation with large-scale operations in 80 countries that enjoy economies of scale (Kwee, 2011). The corporation has a strong brand with global image which makes entry into the market hard. The high capital required to set up operations reduces the threat of new entrants.
Threat of Substitutes
Shell has a high threat of substitutes. Many companies produce oil- related products, natural gas and chemicals. The company’s products are highly substitutable. Further, the development of alternative sources of energy is on the rise. The increased use of bio fuels, wind and solar energy raise the threat of substitutes. These alternative sources of energy receive more preferences to oil because of environmental conservation concerns (van den Broek, Berghout, & Rubin, 2015).
Bargaining Power of Suppliers
The industry where Shell operates experiences a low bargaining power of suppliers. Royal Dutch Shell has a growth strategy of vertical integration which involves conducting acquisitions and mergers. The buying of other businesses and combination with other companies gives it influence in the value chain. The company also has a highly developed technology and has launched high capacity projects.
Bargaining Power of Customers
The bargaining power of customers in the petroleum energy industry is medium. There are many companies which offer perfect substitutes to the products that shell offers. This makes the bargaining power of customers relatively low. However, oil and gas are important commodities in any economy because of their contribution to production. For this reason, some countries control the supply of oil through state agencies. Oil producing companies form cartels that enable them to control the market. The major buyers of oil and related products buy in large quantities. Hence, the loss of one buyer significantly affects the revenue of the company.
Level of Competition
The level of competition in the oil and gas industry is high. Shell’s main competitors include BP Plc., Exxon Mobil and Total (Hoovers, 2012). These companies have a strong global presence the same way as Shell. The companies have a high rivalry due to differences in branding and product differentiation. The brands of the companies are recognized in the global market, and each company has major clients.
Shell has shown great success in increasing its production and reserve base. In 2014, the company increased its reserves by over $1 billion. The high reserve base and high technology refineries are expected to increase the portfolio of Shell (Coate, Holly, & McAllister, 2014).
Shell differentiates itself from competitors by its advanced technology, established research and development and launching of high-profile projects. These aspects create the unique strategy of Shell.
Shell enjoys a first mover advantage in the global oil and gas market. It also has a high capital base that enables the company to venture into capital intensive projects. Shell has a strong exploration capability both in the upstream and downstream segments (Shell Plc, 2012). In all these segments, Shell achieves significant cash flows as shown in Appendix 3.
Shell has an integrated approach which gives it a competitive advantage in the entire value chain of the oil and gas industry. Shell efficiently conducts all operations in the survey, exploration, production, refining, and marketing. All these segments are highly profitable and make the company non-substitutable.
Feasibility, Acceptability and Suitability Analysis
Shell serves a wide range of customers in different economic conditions. Companies serving a diverse customer base respond to consumer demand by slightly lowering prices about the competitors. Low prices not only make oil products affordable but also healthy for the economy. Oil products are essential sources of energy in the production sector and a reduction in the prices of the product reduces the cost of production and inflation. The acceptability and feasibility of providing oil products at an affordable price lie in enabling production and increasing employment opportunities.
Shell’s products have already a significant market share in the global market. The products have an existing market. The challenge that Shell needs to counter is to increase the market. The shell can achieve market expansion by exploring alternative energy and offering oil and natural gas products at affordable prices. Currently, Shell aims to grow the market using existing products in its current market segments. Penetrating unexploited markets will potentially increase the revenue of the company.
The exploitation of new markets would have a great cost implication on Shell. It implies that Shell should research on oil reserves in the prospective markets and establish exploration equipment in the respective regions. However, the company can cover the cost by the high revenue from the sale of the oil products in the new markets. To operate more conveniently, Shell should process the oil products and sell a greater proportion of the product in the host country. The cost reduction will be a significant marketing tool as the company will reduce the price of the products about importing competitors (Alqudah et al., 2015)
Though Shell has built a strong brand and gained the largest market share, it needs to increase its innovativeness, explore more advanced technology and develop alternative energy. The company should continue to develop its research and development arm to come up with more innovations. Shell should develop advanced technology to improve its exploration capability and make production more cost-effective. Shell should also increase research on more sustainable and environmentally friendly energy sources. As the demand for these alternative sources increases, Shell will maintain steady revenue.