Royal Dutch Shell
Mihai Andronic, Raul De Grandis, Gustav Augier, Rodion Divin, Albert Strauchman, Demir Onel Group 5: Tutorial 10-IBA-19/-20
24th of November, 2024
Firm Description
Founded in 1907, Shell is a global energy leader in oil, gas, and renewables.
CEO:
Wael Sawan
Opportunities
Internationalization
Key Figures: Revenue: $386B Net Income: $42B Employees: 86,000+
LNG Expansion:
- Targeting Asia (China, India) / Collaborating with firms and governments in Africa and Asia
- Increasing LNG capacity by ~11M tonnes/year by late 2020s.
- 25% growth from current capacity
EV Charging Expansion:
- 2024: ~60,000 charging points
Hydrogen Energy Growth:
- 2025: 500+ hydrogen refueling stations
- NortH2: Large-scale hydrogen via renewables
- Supports net-zero by 2050.
Challenges
$10-15B invested in low- carbon energy solutions.
$19.9B loss in 2020 due to asset write-downs, compared to $15.3B profit in 2019.
Market Structure & Game Theory
The Oil and Gas market
Major competitors:
Atomicity assumption:
Free entry/exit
Shell plc, ExxonMobil, Saudi Aramco, PetroChina, Chevron
Not met due to presence of major players
Not met due to high startup capital required
Perfect information
Product homogeneity:
Type of market:
Not met due to uncertainty in supply chains and geopolitical influences
Mostly met after refining due to regulations
Closely aligned with oligopoly
Shell-BG : Acquisation and Strategic Commentary context
Shell acquires BG Group for $70.1 billion in 2015, making it the worldide chief in LNG. Goal: Expansion in LNG market
Options available: High prices: 7-10% margin, tight market. Low prices: Margins decreased to 4- 5% danger of fee wars.
Key Gamers: Shell, EXxonMobil, TotalEnergie.
Result: Shell's dominant role mitigates the hazard, however,the ability for aggressive fee reduction stays.
Prisoner's Dilemma: A capacity fee battle in LNG
Merger impact: Increased charges for brand spanking new players becoming a member of. Interest: Shell: massive market electricity in LNG, margin safety. New entrants : Profit capacity is low, entry expenses are excessive.
Entry Game: Blocking new entrants in LNG
Agency theory
The 2004 scandal :
For Royal Dutch Shell was a significant turning point in the company's history.
Shell declared recategorization of approximately 23% of its oil reserves at the end of 2002.
The company's reputation and internal monitoring were severely affected.
Goal-Interest Misalignment:
- Principal-Agent Conflict:
Shell executives misreported reserves to benefit financially, misleading shareholders interests.
- Impact of Stock-Based compensation:
The lack of checks accuracy in reporting led to this harmful behaviors of the agents.
Agency Theory
Moral Hazard (2004 crisis)
- Prioritized Personal Interests: Shell executives misreported reserves for financial gain.
- Consequences: Shell faced £17 million (UK) and $120 million (US) fines.
- Shareholder Compensation: In 2007, Shell allocated £250 million for compensation. In 2009, the Dutch court ordered an additional $352.6 million payout to non-US shareholders.
- Corporate Reforms: Shell improved governance to enhance compliance.
Information assymmetry
- Reserve Misstatement: Reported 19.4 billion barrels; later cut by 23% (4.47 billion barrels).
- Shareholders: Shocked by hidden information. Stock price fell by 8% .
- Consequences: Fines: £17 million (FSA) and $120 million (SEC). Leadership changes; dismissal of top executives.
- Reforms Implemented: Third-party audits (90% reserves audited by 2005). Adoption of SEC and SPE standards for transparency.
Transaction Cost Economics (TCE)
Royal Dutch Shell transacting with Microsoft, US Tech giant – 2018 - today
Why ?
Shared goal of achieving net-zero emissions energy through the adaptation of advancing technologies.
Employee Training
Microsoft Power Apps + AI → Training over 800 devs/year
Do it Yourself (DIY) Software Dev. Program
Over 75 DIY apps created (improved downstream manufacturing: refining, processing, selling petroleum products) → $35 million saved
Creation of Shell Inventory Optimizer
→ $25 million in cost savings
Transaction Evaluation
Shell using Microsoft’s services instead of internalizing the services instead, creating a potential ‘lock-in’ scenario.
Projected growth of AI market => ~476% in the next 10 years. = Opportunistic behaviour by Microsoft
Risks
Internalize or not?
Shell’s reliance on Microsoft poses an incentive for Shell to reduce the need for internalization, benefiting from economies of scale.
- Opportunity to keep their focus on their primary sector of energy production instead of deviating to other technological branches.
- Vertical integration of cloud infrastructure would be very demanding
TCE principles -> due to low-to-mid asset specificity = Outsource
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Raul De Grandis
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Transcript
Royal Dutch Shell
Mihai Andronic, Raul De Grandis, Gustav Augier, Rodion Divin, Albert Strauchman, Demir Onel Group 5: Tutorial 10-IBA-19/-20
24th of November, 2024
Firm Description
Founded in 1907, Shell is a global energy leader in oil, gas, and renewables.
CEO:
Wael Sawan
Opportunities
Internationalization
Key Figures: Revenue: $386B Net Income: $42B Employees: 86,000+
LNG Expansion:
EV Charging Expansion:
- 2030: ~200,000
Hydrogen Energy Growth:Challenges
- Energy Transition:
$10-15B invested in low- carbon energy solutions.- COVID-19 Impact:
$19.9B loss in 2020 due to asset write-downs, compared to $15.3B profit in 2019.Market Structure & Game Theory
The Oil and Gas market
Major competitors:
Atomicity assumption:
Free entry/exit
Shell plc, ExxonMobil, Saudi Aramco, PetroChina, Chevron
Not met due to presence of major players
Not met due to high startup capital required
Perfect information
Product homogeneity:
Type of market:
Not met due to uncertainty in supply chains and geopolitical influences
Mostly met after refining due to regulations
Closely aligned with oligopoly
Shell-BG : Acquisation and Strategic Commentary context
Shell acquires BG Group for $70.1 billion in 2015, making it the worldide chief in LNG. Goal: Expansion in LNG market
Options available: High prices: 7-10% margin, tight market. Low prices: Margins decreased to 4- 5% danger of fee wars.
Key Gamers: Shell, EXxonMobil, TotalEnergie.
Result: Shell's dominant role mitigates the hazard, however,the ability for aggressive fee reduction stays.
Prisoner's Dilemma: A capacity fee battle in LNG
Merger impact: Increased charges for brand spanking new players becoming a member of. Interest: Shell: massive market electricity in LNG, margin safety. New entrants : Profit capacity is low, entry expenses are excessive.
Entry Game: Blocking new entrants in LNG
Agency theory
The 2004 scandal :
- The event:
For Royal Dutch Shell was a significant turning point in the company's history.- The outcome:
Shell declared recategorization of approximately 23% of its oil reserves at the end of 2002.- Consequences:
The company's reputation and internal monitoring were severely affected.Goal-Interest Misalignment:
- Principal-Agent Conflict:
Shell executives misreported reserves to benefit financially, misleading shareholders interests.- Impact of Stock-Based compensation:
The lack of checks accuracy in reporting led to this harmful behaviors of the agents.Agency Theory
Moral Hazard (2004 crisis)
Information assymmetry
Transaction Cost Economics (TCE)
Royal Dutch Shell transacting with Microsoft, US Tech giant – 2018 - today
Why ?
Shared goal of achieving net-zero emissions energy through the adaptation of advancing technologies.
Employee Training
Microsoft Power Apps + AI → Training over 800 devs/year
Do it Yourself (DIY) Software Dev. Program
Over 75 DIY apps created (improved downstream manufacturing: refining, processing, selling petroleum products) → $35 million saved
Creation of Shell Inventory Optimizer
→ $25 million in cost savings
Transaction Evaluation
Shell using Microsoft’s services instead of internalizing the services instead, creating a potential ‘lock-in’ scenario.
Projected growth of AI market => ~476% in the next 10 years. = Opportunistic behaviour by Microsoft
Risks
Internalize or not?
Shell’s reliance on Microsoft poses an incentive for Shell to reduce the need for internalization, benefiting from economies of scale.
TCE principles -> due to low-to-mid asset specificity = Outsource