Managing a global business in turbulent times

Over ten years at my current school I have been hugely fortunate to hear some tremendous speakers on a tremendously wide range of issues. Few have impressed me as much as Simon Henry, CFO of Shell plc in his talk to our Keynes (Economics) and the newly-formed Management Society last night. His talk was beautifully paced and considered; the responses to questions were candid and rooted in a deep understanding of energy industries where volatility has become the norm. Future shareholder value will depend largely on successfully breaking the cycle of volatility.

Shell remains more or less the largest EU business by market capitalisation. Its strategy involves a long-term shift away from oil - to gas and to wider energy supplies including next generation biofuels and other renewables, but not nuclear, they have got their fingers burnt in the past perhaps. Simon Henry focused on the crucial importance of human capital in developing and maintaining a competitive edge - from the thousands of geologists employed across the world to those at the forefront of operations management and the new technologies needed to get energy supplies to the final customer.

The spend on research and development is vast. So too are the fixed costs of drilling for oil and gas - in the Gulf of Mexico it costs around $150million to put down one exploration well. Borrowing long term for capital projects that can extend over 40 and fifty years requires a complex and wide ranging analysis and assessment of as many external aspects of a project as can be covered. The TECOP approach was explained:

T - technical issues including those surround finding the most attractive locations for exploration
E - economic issues including choices over which markets to target and the prices to set
C - commercial aspects including agreements and possible joint ventures with many other commercial and government stakeholders in different countries
O - operations - usually the aspect over which a business like Shell has most control
P - politics, inescapable, often highly sensitive and unpredictable even in countries where ‘good governance’ is taken as the norm

Questions from the floor were exceptionally wide-ranging and covered some of the following issues:

Does Shell use collaborative strategies to harness the human capital of geologists and other experts who do not necessarily work for Shell?
How likely is a liquid gas cartel in the next few years?
How important is nuclear energy to Iran? - Iran may be better served with nuclear power, allowing her to export her oil and gas
Why is Shell in favour of cap and trade rather than a carbon tax?
Is Shell’s multi-million pound sponsorship with Ferrari worth it? Might the money be better spent elsewhere?
Where next for oil prices? Answer - in the short term, look at all of the oil tankers waiting outside Rotterdam, prices likely to fall further before they pick up again
What are the minimum internal rates of return that Shell looks for before finally committing to a project .... in excess of 10%

For students of business strategy this talk was an illuminating and fascinating insight into the massively expensive and complex deals that a multinational such as Shell engages with on a daily basis.

Our next meeting is on Thursday 1st October with Chris Coleridge, one of the Founders of V-Water.