Global LNG Market and Contractual Trends
by Fidan Aliyeva
May, 2009
Due to the rapidly evolving energy market trends, today we witness diverse and changing LNG industry. Royal Dutch Shell plc. is a market leader during 45 years since 1964. The multi-pronged approach assisted in maintaining leading position and allowed company to balance its long-term goals with the commitments on shareholder value. The R&D spending, that is the highest in petroleum industry, helped to develop the company core competence – technological innovation.
This paper attempts to evaluate the external environment of the LNG market and current strengths and weaknesses of the market leader – Royal Dutch Shell plc. It reviews the latest contractual issues that reflect market trends and legislative concerns.
University of DundeeCentre for Energy, Petroleum and Mineral Law and Policy
MBA in Oil and Gas Management Programme
TABLE OF CONTENTS
TABLE OF ABBREVIATIONS
1. Executive summary……………………………………………………………………..5
2. Overview of LNG market development…………………...…………………………....6
2.1. Historical Background……………………………………………………………..6
2.2. LNG Chain…………………………………………………………………………7
2.3. World Natural Gas reserves and consumption……………………………………..7
2.4. Current market trends: co-existence of spot and long-term markets………………8
2.5. New market arrangement and emergence of arbitrage……………………………..9
3. External Environment analysis…………………………………………………………10
3.1. Barriers to entry……………………………………………………………………10
3.2. Competitor analysis………………………………………………………………..11
3.3. Bargaining power of buyers and suppliers………………………………………...12
3.4. Substitutes………………………………………………………………………….13
4. Royal Dutch Shell in LNG industry…………………………………………………….14
4.1. Value Chain……………………………………………………………………….. 15
4.2. LNG projects……………………………………………………………………….15
4.3. Innovation as a core competence…………………………………………………..18
4.4. Role of Patents……………………………………………………………………..20
4.5. The company updated strategy, March 2009………………………………………21
4.6. Stakeholder Analysis……………………………………………………………….24
5. Conclusion………………………………………………………………………………26
APPENDIX I
Figures……..………………………………………………………………………………..30
APPENDIX II
Royal Dutch Shell plc. General Business Principles………………………………………..34
REFERENCES AND BIBLIOGRAPHY
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TABLE OF ABBREVIATIONS
ACQ Annual Contract Quantity
CCGT Combined cycle generation turbine
CEO Chief Executive Officer
CO2 Carbon Dioxide
EIA US Energy Information Administration
FLNG Floating Liquified Natural Gas
GTL Gas-to-liquid
IEA International Energy Agency
IP Intellectual Property
LNG Liquified Natural Gas
ROACE Return on Average Capital Employed
Tcf Trillion cubic feet
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1. Executive Summary
The purpose of this paper is to reveal briefly the main trends of the current LNG industry, as the
rapidly evolving market due to advanced technological innovations and its significant role in
resolving one of the burning issues of the day – steady increase in world energy consumption. The
external environment using M. Porter’s five forces will be analysed as well as the strengths and
weaknesses of the business strategy of Royal Dutch Shell as LNG market leader. Some
recommendations will be made to the stakeholder policy of Shell since it represents one of the main
parts of company business strategy that requires particular attention in the context of today’s
business environment.
Overview of LNG market development
Significant changes of the industry: emergence of the spot market and arbitrage, introduction of the
flexibility clause in the long-term market, were caused by few factors one of which is the need to
develop this industry as energy alternative source with extensive potential.
External Environment analysis
LNG industry features high barriers to entry. Current trend in shifting bargaining power from
suppliers to buyers and price volatility makes this business more risky. There are two main market
competitors, Royal Dutch Shell plc. and ExxonMobil, who follow identical company strategy. The
closest substitute to LNG is coal, which is the least favorable energy source because of its CO2
emissions what makes it less competitive with LNG.
Royal Dutch Shell in LNG industry
Royal Dutch Shell plc. developed strong LNG Value Chain. Company multi-pronged strategic
approach is aimed at adding shareholder value through long-term investments. Company R&D
spending are the highest in the industry and successfully facilitate the development of its core
competence – technological innovation.
Conclusion
Though Royal Dutch Shell plc. adapts regularly its business strategy to market trends, its
stakeholder policy and company mission do not reflect the important changes what makes company
more vulnerable in its market leading position. Stakeholder Audit process should be performed
constantly to maintain leading market position.
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2. Overview of LNG market development
2.1 Historical background
The Liquified Natural Gas (LNG) technology is not new as the LNG first commercial
facility was built in the United States in 1941 in Cleveland as a peak load shaving facility.
The commercialization of a gas field by either LNG or direct pipeline depends on the
distance to market from the gas reservoir. (Chandra 2006)
It was in January 1959 when the first LNG tanker delivered the first LNG cargo from Lake
Charles, Louisiana to Canvey Island in the United Kingdom. The first liquefaction plant that
started the commercial transportation of LNG into Europe was built in the 1960s at Arzew in
Algeria. The further LNG industry development was impeded by the development of gas
transportation by pipeline. Thus, until recently LNG industry mostly comprised only of
regional gas transportation market. (King & Spalding LLP 2006)
The following forces stimulated the recent interest to the international LNG market: (Jensen,
2004)
• Innovation of combined cycle generation turbine (CCGT) plants and their use for
growing electric power markets.
• Cost reduction due to advanced technology, that made previously uneconomic trades
more attractive
• environmental concerns and regulations. By comparison with the coal-fired boiler,
gas-fired CCGT plants can cut CO2 emissions by 40%.
• increased energy demand of developing countries, for example, India and China
• increased concern for security of supply in the face of growth, example of Spain that
entered LNG import market in order to diversify its reliance on Algeria gas imports.
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• phenomenon of the 'stranded gas'
2.2 LNG chain
There are specific features of LNG industry that are important in order to understand the
industry structure and operating businesses.
According to Paul Griffin, 2006, the LNG business consists of at least three large
infrastructure projects:
(1) upstream oil and gas project
(2) a liquefaction plant for the production of LNG for loading onto LNG tankers
(3) a regasification plant for the receipt of LNG and its regasification so as to make
natural gas available for delivery to consumer.
These three projects along with the LNG tanker transportation represent the LNG Value
Chain, each element of which is capital-intensive and delay in any part of the chain
adversely affects capital recovery. (Jensen 2004).
2.3 World natural gas reserves and consumption
The current proven world natural gas reserves according to the US International Energy
Agency are 6,254.364 trillion cubic meters (International Energy Agency (IEA) 2009). Due
to the geographic imbalance between the sources of supply and demand, the trade relations
and importance of transportation are extremely important in natural gas industry. (Considine
& Rose 2001).
Due to the rapid growth in worldwide natural gas demand, a substantial increase in world
gas trade is anticipated by all the forecasters. According to the International Energy Outlook
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2009, world natural gas consumption increases by an average of 1.6% per year, from 104
trillion cubic feet in 2006 to 153 trillion cubic feet (Tcf) in 2030. (EIA 2009). According to
the Official Energy Statistics from the US Government, provided by the Energy Information
Administration, natural gas consumption in 2008 reached 23.2 trillion cubic feet, a near-
record level, second only to the volume consumed in 2000.
2.4 Current market trends: co-existence of spot and long-term markets
The traditional structures of the LNG business are in the form of long-term inflexible
contracts. (Griffin 2006). These are characterised by rigidity: (IEA 2002).
1. long-term Taker-Or-Pay contracts
2. liquefaction capacities booked under long-term contracts
3. no supply flexibility
4. no ships available for released spot volumes.
The huge infrastructure investments and long lead times were required for LNG production.
The new challenges and opportunities for buyers and sellers appeared recently as a result of
market deregulation in many East Asian and European countries. Thus, the new LNG
market has emerged and became competitive with the piped gas. The further cost reductions
in the gas chain and its major alterations have made it possible for LNG sellers not to bind
all their production to fixed counter-parties under long-term contracts and to sell spot to
other partners. (IEA 2002).
The short-term LNG market has grown rapidly in the past several years. During the 5-year
period from 1997 till 2002 the short-term international LNG trade increased sevenfold, from
1.5% to 8.9% of international LNG trade. (Jensen 2004) (see Figure 1, App.I). The short-
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term market has the relative disadvantages of volume risk, price risk and infrastructure risks.
( Mazighi 2004).
However, while growing, the short-term LNG market still remains at less than 9% of total
trade. Thus, the long-term contract in LNG will remain a major part of international LNG
trade but even so, their particular clauses will undergo substantial change, including
flexibility of the destination clauses (Jensen 2004).
2.5 New market arrangement and emergence of arbitrage
In the near future the North America and Europe will emerge as the largest target for LNG
imports due to the growing gas demand. This is caused by the declining prospects for North
Sea production and the increasing demand in Canada, who was earlier a major US supplier.
Thus, the balance of LNG growth will be shifting to the Atlantic Basin from the Northeast
Asian markets and Pacific Basin. Qatar and Iran are the major suppliers in the Middle East
whereas Nigeria, Egypt and Algeria became today important players in LNG market.
(Jensen 2004)
The emergence of arbitrage between markets is also the new trading pattern. It enables the
trading company to divert cargoes to more profitable markets. However, this pattern requires
sufficient excess capacity in tankers and receipt terminals. (Jensen 2004)
The developing character of LNG market, along with the above-mentioned features,
provides the general picture of the current trends of LNG market. The successful strategy of
Royal Dutch Shell is based on the constant monitoring of market trends what is fundamental
for further restructuring of company strategic policy.
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3. External Environment analysis
3.1 Barriers to entry
The analyses of the external environment are evaluated using M. Porter’s five market forces
(1980).
The specific features of LNG business make this market extremely difficult for entry. These
features operate as barriers to entry (Porter 1980) for new market players. As per Paul
Griffin, these features are (i) the remote nature of source of production and the markets of
consumption and (ii) high capital costs of the infrastructure development that required for
the upstream part of the project, construction of the liquefaction and regasification plants.
As a result there are only few numbers of the leading competitors (see Figure 2, App.I).
Access to the reserves and involvement of governments as buyers through national
companies are additional barriers to entry what make threat of entry of new players very
low. Furthermore, the transfer of market power from sellers to buyers and price volatility
(Ross 2009) add more risk for entering this market.
It is noteworthy that though there might be consideration of a rivalry for new international
markets, the existing market players operate in co-operative manner. The reason for such
approach lies in the complexity of LNG contracts and their legally binding obligations.
One of the significant developments in LNG contracts is the flexibility of destination clause.
However, since seller has a binding obligation to deliver the fixed annual contract quantity
(ACQ), he must supply the undelivered amount to the fixed counter-party within the year.
There was practice when producer was unable to meet this obligations and it was covered by
another major market player. (Professional traineeship 2009). Such practice might be
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regarded as an evolutionary problem that features industry developing stage and it
emphasizes the importance of co-operation between market competitors.
3.2 Competitor analysis
The major market competitor to Royal Dutch Shell in LNG industry is ExxonMobil
corporation. With current production level of 35 million tons per year, company anticipates
its increase to almost 65 million tons per year by 2010 with further increase up to 100
million tons per year. Currently company in cooperation with Qatar Petroleum is building
integrated LNG ‘chains’ to serve customers in Europe, Asia and United States. ExxonMobil
achieved breakthrough results in LNG transportation design due to the efforts of teams of
experts who optimized ship propulsion. As a result, ship delivers more LNG to market as
processing technology has been installed on the ships to re-liquefy LNG. (ExxonMobil
2009)
LNG is playing an increasing role in company activities in the US. The Golden Pass LNG
regasification terminal in Texas built by ExxonMobil is scheduled to start up in 2010 and
company is developing project on new LNG terminal offshore New Jersey. (ExxonMobil
2009)
In Europe, ExxonMobil has ownership in many key assets in the Netherlands, Germany and
the North Sea. In Asia Pacific, company is one of the largest suppliers of gas in Australia
and Malaysia. It sells gas in Thailand, far east Russia and Qatar. Company LNG ventures in
Indonesia and Qatar supplies European and Asian markets, including Japan, South Korea,
Taiwan and India.(ExxonMobil 2009)
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Thus, considering the strategic position of ExxonMobil to sustain a leading global role in
LNG Value Chain, company’s strategy is similar to the strategy of Royal Dutch Shell.
Though technological innovation is also the core competence of ExxonMobil, company’s
R&D expenditures are lower than Shell’s expenditures. (see Figure 3, App.I)
Such approach might change in future as according to the statement of company Chairman
and Chief Executive Officer (CEO), Mr. Rex Tillerson, technological innovation are vital to
solve today’s industry challenge that is targeted at meeting world energy demand while
reducing environmental impact. (ExxonMobil 2008).
3.3 Bargaining power of buyers and suppliers
Taking into account that the total natural gas consumption increases by an average of 1.6%
per year and world oil prices assumed to return to previous high levels after 2012, buyers
opt for the less expensive natural gas whenever possible. (US Energy Information
Administration (EIA) 2009).
The prices for LNG have fallen for three main reasons, which are (1) the economic
recession, (2) several new LNG export projects; (3) announcement of very large commercial
reserves of shale gas in US. Consequently, these events led to the transfer of market power
from suppliers to buyers. (Ross 2009).
Furthermore, since gas demand in some part of the world is seasonal and it increases in
countries with limited storage capacity, price volatility is likely to become a common factor
in LNG market. However, it will encourage the balanced distribution of market power by
shifting LNG market to regions that will become more valuable and important for
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investment. (Ross 2009) As this presents an attractive growth opportunity, it might be
recommended to constantly observe and implement comparative analysis for the demand of
various buyers.
3.4 Substitutes
As seen from the Figures sourced from the Energy Information Administration, (2008), the
closest substitute for LNG today is coal. (see Figure 4, App.I) Considering that global
energy demand is projected to rise at an unprecedented rate, the world's vast coal reserves
are attracting growing interest from governments in Europe, the US and Asia. (Euractiv
2007)
Though the consumption of coal is projected to rise (see Figure 5, App. I), the fact that it is
the dirtiest of all of the fossil fuels makes it the least favourable energy source. (see Figure
6, App.I). Natural gas is not only much cleaner than coal, but it also is better adapted to
meet electricity peak demand. (Ross 2009).
Environmentalists argue that since the environmentally-clean coal is not expected to become
economically viable before twenty years and with the growing sense of emergency
surrounding global warming, coal is simply not the answer to the energy source issue.
(Euractive 2007). Thus, it cannot be considered as a serious substitute for LNG in the near
future.
In summary, considering current market power distribution, capital intensity of LNG
business and price volatility as well as contract complexity, it can be stated that this industry
is still undergoing its development and has not achieved its mature stage of the lifecycle
(Hill & Jones 1989).
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The long-term strategic goals and technological investments assisted Royal Dutch Shell Plc
to attain a leading market position. As stated above, company R&D expenditures are the
highest in the industry under question what might be considered as a key to company
success.
4. Royal Dutch Shell in LNG industry
Since natural gas is becoming an increasingly important environmentally-friendly source of
cleaner energy, the expansion into LNG industry is bringing new opportunities.
Royal Dutch Shell position in LNG market comprises not only of the leadership in the
upstream part of LNG business, but also as leading company in liquefaction, regasification
and transportation parts. (Royal Dutch Shell plc. 2002)
(see Figure 2, App. I)
At the end of 2008, Shell was producing 3% of the wolrd’s gas. Oil and Gas production
totalled 3.2. million barrels a day, with 45% of it of natural gas. (Royal Dutch Shell plc.
Sustainability Report 2008).
The leading roles in energy supply and energy shipping industries is stipulated by the
significant experience and expertise in both types of activity developed since 1964, when
company shipped over 8,500 cargoes without loss (Royal Dutch Shell plc. 2002) and
developed world’s first commercial liquefaction plant at Arzew, Algeria (Royal Dutch Shell
Plc. 2009).
1
4.1 Value Chain (Porter 1998)
Today, company meets successfully its long-term supply obligations and responds flexibly
to short-term changes in demand. Shell International LNG Supply (SILS) buys and sells
LNG to and from Shell, its partners and third parties. Additionally, SILS manages the
shipping fleet to support the gas supply business. (Royal Dutch Shell plc. 2009)
Shell International Trading and Shipping Company Limited (STASCO) maintained
continuous involvement in LNG shipping for over 40 years, securing the safe delivery of
company cargoes worldwide. (Royal Dutch Shell plc. 2002)
Currently Shell is one of the largest LNG vessel operators in the world managing more than
30 LNG carriers. As a result of partnership with Nakilat Shipping (Qatar) Limited the fleet
will be increased by 25 world’s largest LNG carriers that belong to Nakilat Shipping
company. Shell’s technical expertise is applied in the design, tender, construction or
reintroduction into service of more than 55 of the world’s LNG carriers (Royal Dutch Shell
Plc. 2009).
Thus, Royal Dutch Shell successfully created an LNG Value Chain (J. Jensen) and, as can
be seen from Figure 2 (see App.I) there are only six companies in the world that can
compete at this level of LNG business.
4.2 LNG Projects
Royal Dutch Shell’s objective states the efficient, responsible and profitable engagement in
oil, gas, chemicals and other selected businesses and participation in the search and
1
development of other sources of energy to meet evolving customer needs and the world’s
growing demand for energy. Simultaneously, company seeks a high standard of
performance, maintaining a strong long-term and growing position in the competitive
environments in which it operates. To achieve these targets, company aims to work closely
with customers, partners and policy-makers to advance more efficient and sustainable use of
energy and natural resources. (Royal Dutch Shell plc. 2005).
Company is also committed to contribute to the sustainable development through the
balancing its short and long-term interests. (Royal Dutch Shell plc. 2005).
One of the company’s strategic goals is to achieve and sustain a world leading position in
LNG business. In pursuing this goal, company is committed to develop new markets.
In 2005, Shell was the first international oil company that delivered LNG to India. IN 2006
the first LNG was delivered by Shell to Mexico. Additionally. company was involved into
the first delivery of LNG to China through the North West Shelf Venture. (Royal Dutch
Shell plc. 2009)
According to the 2008 Annual Report, several following activities were undertaken within
LNG business development strategy (Royal Dutch Shell plc. 2008):
- Shell signed an agreement with Petrobras on supply of LNG to two regasification
plants in Brazil;
- Shell signed a Sale and Purchase Agreement with PetroChina and Qatargas to supply
LNG to Chine for over 25 years;
- Shell will develop a floating LNG facility at World Jebel Ali Terminal in United
Arab Emirates;
- Shell signed an agreement with Iraq’s Ministry of Oil to establish a joint venture for
1
procession and marketing of natural gas in southern Iraq;
- Shell and PetroChina signed a binding long-term agreement on LNG supply to
China.
Additionally, the significant achievement of 2008 includes the start-up of North West Shelf
LNG Train 5 in Australia what increased Shell’s global LNG production capacity to 15.9
million tonnes a year. Earnings for 2008 were 61% higher versus 2007 showings, mainly
due to strong LNG and Gas-to-Liquid (GTL) product prices, strong LNG and GTL plant
reliability, LNG supply optimisation and higher marketing and trading contributions in
North American and Europe. (Royal Dutch Shell plc. 2008).
Consequently, Shell has supply projects in seven countries: Australia, Brunei, Malaysia,
Nigeria, Oman, Qatar, Russia. Additionally, Shell has major interests in regasification plants
in Mexico (Altamira), and India (Hazira). Each of the projects is committed to supply
different market, but most of supplies will serve North America (Qatargas 4, Nigeria LNG),
North-East Asia (Malaysia LNG, Brunei LNG, North West Shelf Venture Australia) and
Europe (Nigeria LNG). Sakhalin II will cover both the Asia-Pacific region and the West
Coast of North America. (Royal Dutch Shell plc. 2009)
Currently, company’s major LNG projects are Sakhalin II and Qatargas 4. Sakhalin II LNG
plant will have a capacity of 9.6 million tonnes per year from its first two trains. All the gas
from this project has been sold under long-term contracts to the Asia-Pacific and North
American markets. (Royal Dutch Shell plc. 2009)
1
A single LNG train of Qatargas 4 project forecasted to yield approximately 7.8 million
tonnes of LNG per annum. LNG from this project will be shipped to the Elba Island
regiasification facility in Georgian in the United States and to terminals in China and Dubai.
(Royal Dutch Shell plc. 2009) (see Figure 7).
Thus, by pursuing company strategic objective mentioned above, Royal Dutch Shell is truly
committed to create a shareholder value through diversification within the energy industry.
Company acquisition policy in underdeveloped oil and gas resources (North America) or
downstream position in growth markets (China, Europe) adds value with integration,
investment, technology and scale. However, reviewing the showings of Return on Average
Capital Employed (ROACE) for the period of 2008 and 2004 there is a steady decline after
the peaked level in 2005 (24.8% vs. 18.5% in 2008 and 19.6% in 2004). (Royal Dutch Shell
plc. 2008).
These results might be regarded as contradictory to company goal aimed at adding value to
shareholders, while on the other hand, they evidence on the company commitment to invest
in long-term projects, including LNG.
4.3 Innovation as a core competence (Hamel and Prahalad 1990)
The approach on use of technological innovations helped company to pioneer new markets
and maximize production. LNG industry is capital-intensive and the cost minimisation is an
important issue in order to maintain the sustainable development of the project (Royal
Dutch Shell plc. 2009). In this regard, the technological innovation facilitates the significant
reduction of capital cost of the project.
1
The innovation on the cooling process of LNG, which usually involves several cooling
stages, helped Shell to build the first LNG plant in extremely cold climates such as the plant
on Sakhalin island, Russia, where company’s design of the cooling process used a mix of
refrigerants in the first cooling stage rather than just the one, as was used previously. Thus,
LNG production could be maximised due to the varying concentrations of the refrigerants
that helped to compensate very high fluctuations in outside air temperature. (Royal Dutch
Shell plc. 2009).
Floating LNG (FLNG) concept is today’s one of the most advanced and sophisticated
technological innovation. Shell Gas and Power Development BV is working on a project of
FLNG development with the total LNG capacity of 3,5 mtpsa with total liquid production
over than 5 mtpa. The Prelude field in the Browse Basin of Western Australia was chosen as
a location to deploy FLNG. (Voskresenskaya 2009).
Since innovation is a core competence of Shell, commitment to technology and research is
the core of company business strategy. The technical expertise is considered to be telling
factor in the growth of the business. (Royal Dutch Shell plc 2009)
Shell peaked its expenditure in this area by $1.3 billion in 2008 – the highest spending in
petroleum industry. The main goals of R&D activity are as follows (Royal Dutch Shell plc.
2008):
- improve ability to find, develop, recover and process greater volumes of oil and
gas at lower cost
- improve the efficiency of converting oil, gas and, more recently, biomass into
products with cost and performance benefits
1
- reduce the environmental impact of our operations and products with a focus on
the reduction of greenhouse gas emissions
The above mentioned information supports the fact on company commitment to the
innovative approach as a key to realization of its strategic goals. However, there are some
disadvantages and risks in pioneering new technology. One of them is the copying the
innovations by the followers. In this regard, is it noteworthy to elaborate on Shell’s approach
to this problem.
4.4 Role of Patents
Shell’s highly trained engineers and researchers are constantly working on new more
efficient solutions for the oil and gas industry. Therefore, the patents play a vital role in
ensuring Shell-funded innovations benefit the company no its competitors. (Shell
Exploration and Production 2008). Shell’s Intellectual Property Services has a number of
specific objectives in using the patent system. One of the main objectives is to protect R&D
investment by getting exclusivity. In 2007 R&D budget was in excess of $1.2 billion and the
worldwide technical staff was more than 30,000. (Shell Exploration and Production 2008)
The secrecy is an increasingly risky alternative to the patent, and its main disadvantage is
that if competitor comes up with the same idea, and starts to patent it, it is not possible to
use the innovation any more. The Shell’s history on patenting starts since October 1910
when company applied for a UK patent for an improved treatment of acid tar. Currently,
company has 30,000 patents and pending patent applications. The company division on
Intellectual Property (IP) ensures that Shell’s patent portfolio supports and helps achieve
1
strategic business objectives through proper IP asset management. (Shell Exploration and
Production 2008)
The Patent Scorecard ranks corporate innovation using a series of metrics to determine
patent quality, technological strength and breadth of impact. As per the data from Patent
Board dated January 2009, that ranked patent scorecard leaders, the Royal Dutch Shell
moved to the first place from the third place in 2008 to resume the leading position in the
energy & Environment sector. (Shell Exploration and Production 2009)
Thus, as commented by the spokesman from the Patent Board, Shell’s patents have over six
times the impact compared to the Energy and Environmental industry average. (Shell
Exploration and Production 2009). Such approach might be considered as one of the
fundamentals in maintaining long-term market position and to defend company’s core
competence (Hamel & Prahalad 1990).
4.5 The company updated strategy, March 2009
In response to the recent market trends, particularly the economic slowdown, Royal Dutch
Shell updated its strategy policy accordingly. The main challenge faced by the industry was
a sharp downturn in energy prices at a time when costs are high by historical standards.
The company strategy reflected the industrial trends and focused on consistent view of
industry landscape; more upstream, profitable downstream; and capital discipline, portfolio
approach. (Royal Dutch Shell plc. 2009).
As stated by Mr. Peter Voser, the company new CEO since 1 July 2009, the strategic goal is
a long-term obligation to create value that should be optimised along the whole value chain
2
and time line. He underlined that timescales and public agendas are usually short term while
technology and R&D agendas in general are long term. (Voser 2009)
The current challenges in Upstream business is to produce new barrels to offset natural field
decline and create growth, while in downstream – to balance the continued demand from
customers and governments for cleaner products with the challenges to the industry from the
cost of supply.
In order to survive during the recent recession, company focused more heavily on cost
structure to dispose late-life fields and small refineries without access to Shell marketing
positions. However, following its long-term strategy, selective acquisitions were made.
(Royal Dutch Shell plc. 2008)
Due to the balance sheet flexibility to maintain investment and grow dividends in the
downturn Shell was the only company in the sector to have already announced dividend
growth plans for 2009. Company will invest some $31-$32 billion to create the industry-
leading portfolio (Voser 2009). Among the major investments underway today is a 40% (6.8
million tonnes per year) increase of LNG capacity over 2008 levels and development of oil
and gas fields with some ~ 1 million barrels oil equivalent per day of capacity, which will
generate 2-3% annual production growth early in the next decade, to 2012. The strong
balance sheet with gearing indicator of 6% at the end of 2008 underpinned this investment.
The increase in dividends for 2009 is expected to be some $10 billion, which constitutes a
5% increase for the 1st Quarter of 2009 compared to the previous year. (Royal Dutch Shell
plc. 2009)
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In summary, this multi-pronged approach (Voser 2009) not only assisted Royal Dutch Shell
in realization of its strategic goals, but helped company to recover rapidly after the recent
recession peak.
4.6 Stakeholder Analysis
Today energy issues are the burning issue of the day due to the increasing demand and
environmental concern. LNG business is not an exception. Moreover, it attracts particular
attention because of the political aspect. Government participation in this business signifies
its strategic importance. Consequently, there are many stakeholder groups, but it is
important to identify those, whose power and influence might directly affect company
strategy.
Royal Dutch Shell’s areas of responsibilities reflect company’s obligations to meet needs
and expectations of stakeholder groups.
Company responsibilities are part of the Business Principles (see Annex II).
There are five areas of responsibilities (Royal Dutch Shell plc. 2005):
1. To shareholders. To provide their investment and provide a long-term return
2. To customers. To win and maintain customers by developing and providing
products and services which offer value in terms of price, quality, safety and
environmental impact
3. To employees:
- to respect the human rights of employees and to provide them with good
and safe working conditions, competitive terms and conditions of
employment
2
- to promote the development and best use of the talents of employees
- to encourage the involvement of employees in the planning and direction
of their work
4. To those with whom company does business. To see mutually beneficial
relationships with contractors, suppliers and in joint ventures to promote the
application of these Shell General Business Principles or equivalent
principles in such relationships.
5. To society:
• To conduct business as responsible corporate members of society
• To comply with applicable laws and regulations
• To support fundamental human rights
• To give proper regard to health, safety, security and the environment
As suggested by Freeman and Reed (1998), the Stakeholder Strategy Process and
Stakeholder Audit Process are integral part of the strategy process. These processes
represent a systematic analysis of the relative importance of stakeholders, their cooperative
potential and competitive threat within the framework of the effectiveness of current
organizational strategies. Considering the current environmental concern of energy projects,
the latter is critical as reflects how stakeholder can prevent the corporation from achieving
its objectives.
In this regard, repositioning of the society group might be recommended to Royal Dutch
Shell in the light of the recent market trends. Moreover, considering the negative
experiences company encountered from the competitive threat of this group, for ex. case of
Brent Spar in 1995 (Greenpeace 2009), it is suggested to pay more attention to this issue.
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Society represents the largest stakeholder group and involves governments and pressure
groups. It is the only stakeholder group whose relations with company are not driven by
monetary interests, but involve the life interests of nations and every person. In addition,
control of strategic resources and possession of knowledge (skills) are the important
indicators of the source of power for the government, which is the part of society group,
and resource dependence makes society extremely powerful. (Johnson and Scholes 1997)
These factors should relocate this group from ‘C’ square, with high power but low interest,
into the ‘D’ square of the power/interest matrix, where key players are identified by the high
level of interest and high level of power. (Johnson and Scholes 1997) (see Figure 8, App. I)
Additionally, all other stakeholders are the sub-group of the society group. Through
meeting needs and expectations of the society group, company will not only avoid some
duplication in the areas of responsibilities, but also will expand its scope of responsibilities
to other stakeholders.
Therefore, in order to reflect the current business trends and evolution of the market
environment it is important to reposition stakeholder groups, making responsibilities to
society as a first priority.
With regard to the LNG industry, considering its high infrastructure costs, one of the main
areas of responsibility is ‘to those with whom company does business’. Since counter-party
is usually national companies, such aspect as their creditworthiness (Professional traineeship
2009) might be significant obstacle in maintaining the ‘mutually beneficial relationships’ as
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stated in the Areas of Respnsibility. The involvement of International Development Banks
or Trade Promotion Agencies of foreign governments usually resolves the issue. (Stickley
2006)
In summary, it can be stated that while succeeding in meeting shareholder interests Royal
Dutch Shell evaluated ‘multi-pronged’ approach (Voser 2009) surmounting the ‘stort-
termism’ view (Johnson and Scholes 1997). Company reviews its strategy periodically to
reflect the market trends. However, the stakeholder groups are still not considered as part of
the company strategy, as appropriate revisions and reorder of priority on company
responsibilities have not been undertaken.
Since no single measure will give a full understanding of the extent of the power held by
external stakeholders, the combined analysis, including stakeholder mapping and power
assessing analysis are required. (Johnson and Scholes 1997)
5. Conclusion
This report attempted to analyse the key strategic factors that assisted Royal Dutch Shell to
sustain a leading position in LNG market.
As discussed above, Royal Dutch Shell successfully developed its core competence (Hamel
& Prahalad 1990) – the innovation. Company’s patent policy successfully defended its core
competence (Hamel & Prahalad 1990) and secured its leading market role. Company is
committed to shareholder value while simultaneously follows a long-term strategy through
investments, that are the highest in the industry (Voser 2009), and efficiently expands its
market. In addition, company successfully attempts to become a market leader in each chain
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of the LNG value chain, whether it is production or supply businesses. Through consistent
development of technological innovations and market expansion, considering the trends of
today’s LNG emerging markets, company follows the main strategic rule that names the
strategic position as a path, not as a fixed location. (Porter 1980)
In the main company strategic policy Shell uses a ‘mixture’ of strategic policies following
two approaches from the dominating schools of thoughts: classical and processual
(Whittington 2001). It is the classical approach that drives the strategy by shareholder value
and, thus, leads to the short-term strategic view whereas the processual is more concerned
with ‘employee value’ and long-term goals. Processual approach suggests focusing on core
competences (Hamel and Prahalad 1990) whereas, as per M. Porter, it is more essential to
connect competitive ends, a company’s position in the marketplace, and means, elements
that allow company to attain that position.
The competitive threat (Freeman and Reed 1998) of the stakeholder groups might be
considered as an element that allows company to attain the leading market position as long
as company meets needs and expectations of the particular group. Otherwise, as mentioned
above the strategic goal will not be achieved and company may loose its leading role. In this
regard, it is vital to reassess the power of stakeholder groups through the Stakeholder Audit
process. (Freeman and Reed 1998)
All of the above analyses imply that Royal Dutch Shell does not view its strategy as the part
of the mission. The main mission of the energy company is to explore the natural resources
for the benefit of society – this is the higher-level purpose which is not stated in the
company strategy: ‘More upstream, Profitable downstream’ (Voser 2009).
2
It is noteworthy to pay attention to the strategic statement of ExxonMobil that does not
reflect company target in the narrow sense, but stipulates the energy needs of society:
“Taking on the world’s toughest energy challenges”(ExxonMobil 2008). Thus, it might be
assumed that with increased R&D spending ExxonMobil will attain the leading role in LNG
market.
Royal Dutch Shell statement reflects company commitment for the benefit of shareholder
what attributes Shell to the first group of companies under the purpose categorization.
(Campbell and Yeung 1998). Since company’s areas of responsibilities recognize the needs
of its stakeholders, it stipulates that company exists to satisfy their expectations – this
attributes Royal Dutch Shell to the second group of companies. Although Shell is
successfully balancing its strategic elements through controlling ‘short-termism‘ and long-
term goals, the equivocal declaration of company purpose might fail to build on the values
and behaviour standards that already exist in the company what in turn will not inspire the
emotions of the managers and employees who are expected to put them into practice
(Campbell and Yeung 1998)
Such pitfalls in the formulation of main company mission extend to all company businesses,
including LNG. Consequently, it threatens the company’s leading position and respective
revision is required.
As stated above the Stakeholder Audit process should be implemented constantly. (Freeman
and Reed 1998). Additionally, as suggested by Campbell and Yeung, (1998), the first steps
for promoting mission planning are similar to the strategic planning process:
(1) ask managers in charge of business units to include issues of purpose, values and
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behaviour standards along with the presentation at the strategy review
(2) as the m whether or not their organization is culturally aligned with their strategy
(3) ask them what t heir three most important behaviour standards are.
At a later stage, mission discussion will be separated from the strategy discussion, and the
corporate mission and mission for each business unit will result in mutual compatibility.
These first steps are recommended to Royal Dutch Shell plc. for maintaining its market
leading position in LNG industry.
This report attempted to analyse briefly this issue within the allowed world limit and select
more relevant data from the vast available resources in order to answer the question
completely. However, there is a lot of material that can be used for more detailed and
extensive analysis.
6,126 words
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APPENDIX IFigures
Figure 1. LNG Trade showing the growing role of short term sales
Source: ‘Understanding the LNG Industry’, Presentation to the 2006 AGA Financial Forum, Scottsdale, AZ, May 200, James T. Jensen. Available at http://www.aga.org/Events/presentations/finance/2006/2006finforum/0605JENSEN.htm
Figure 2. LNG Leadership
Source: Royal Dutch Shell Plc., Investor Presentation ‘Building new heartlands, Managing Recession Challenges’ March 17, 2009. Available at: http://www-static.shell.com/static/investor/downloads/news_and_library/2009_strategy_webcast_analysts.pdf
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Figure 3. Research & Development Spending
Source: Royal Dutch Shell Plc., Investor Presentation ‘Building new heartlands, Managing recession challenges’ March 17, 2009. Available at: http://www-
static.shell.com/static/investor/downloads/news_and_library/2009_strategy_webcast_analysts.pdf
Figure 4. World marketed energy demand by fuel type, 1980-2030
Source: Energy Information Administration, Natural Gas, [Online], Washington D.C: International Energy Outlook 2009. Available at: http://www.eia.doe.gov/oiaf/ieo/world.html [Accessed 30 July 2009]
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Figure 5. World coal consumption by country grouping, 1980-2030
Source: Energy Information Administration, Natural Gas, [Online], Washington D.C: International Energy Outlook 2009. Available at: http://www.eia.doe.gov/oiaf/ieo/nat_gas.html [Accessed 30 July 2009]
Figure 6. World energy-related carbon dioxide emissions by fuel type, 1990-2030
Source: Energy Information Administration 2009, Natural Gas, [Online], Washington D.C: International Energy Outlook 2009. Available at http://www.eia.doe.gov/oiaf/ieo/emissions.html [Accessed 30 July 2009]
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Figure 7. LNG Global Portfolio.
Source: Royal Dutch Shell Plc., Investor Presentation ‘Building new heartlands, Managing recession challenges’ March 17, 2009. Available at: : http://www-static.shell.com/static/investor/downloads/news_and_library/2009_strategy_webcast_analysts.pdf
Figure 8. Stakeholder mapping: the power/interest matrix
Low High
Low
A
Minimaleffort
B
Keepinformed
HighC
Keepsatisfied
D
Keyplayers
LEVEL OF INTEREST
POWER
Stakeholder mapping: the power/interest matrix
Adapted from A. Mendelow, Proceedings of the Second InternationalConference on Information Systems, Cambridge, MA, 1991. Cited inJohnson, G. & Scholes K., (1997), Exploring Corporate Strategy, Prentice Hallpp 198Source: Stakeholder Analysis presentation by T. R. Rattray, 2009, CEPMLP, Adapted
from: Mendelow, A., (1991), “Proceedings of Second International Conference on Information Systems, Cambridge, MA. Cited in Johnson, G & Scholes K., (1997), “Exploring Corporate Strategy”, Prentice Hall, pp198.
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APPENDIX II
Royal Dutch Shell Plc., General Business Principles
There are eight main business principles that coordinate company ethical activity (Royal
Dutch Shell plc. 2005):
2. Economic Principle underpins the criteria for investment and divestment decisions as
well as the appraisal of the risks of the investment.
3. Principle on Competition stipulates the fair and ethical competition within the
framework of applicable competition laws.
4. Principle on Business Integrity states that Shell companies insist on honesty,
integrity and fairness on all aspects of our business and expect the same in their
relationships with all those with whom they do business.
5. Principle on Political Activities
a) of companies, i.e. Shell companies act in a socially responsible manner
within the laws of the countries in which they operate in pursuit of their
legitimate commercial objectives
b) of employees – reflecting the opportunity for individuals who wish to be to
engaged in activities in the community where it is appropriate in light of local
circumstances.
6. Principle on Health, Safety, Security and the Environment reflects a systematic
approach to achieve continuous performance improvement. These are the critical
business activities where set targets and standards are measured, appraised and
reported externally.
7. Principle on Local Communities reflects the aim to be good neighbours to local
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communities within which they work. One of the ethical goals is to carefully manage
the social impacts of business and to enhance the benefits to local communities
while mitigating any negative impacts from the activities.
8. Principle on Communication and Engagement is fundamental for the regular
dialogue with stakeholders. Company is committed to report on performance by
providing full relevant information to legitimately interested parties, subject to any
overriding considerations of business confidentiality.
9. Principle of compliance reflects the company’s commitment to all the applicable
laws and regulations of the countries in which Shell operates.
It is responsibility of the management to ensure that all company employees are aware of
these principles and behave accordingly. The application of these principles is underpinned
by a comprehensive set of procedure that ensures that all employees understand the
principles and confirm their act respectively. (Royal Dutch Shell plc. 2005).
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