FIS Presentation Shell

24th of November, 2024

Mihai Andronic, Raul De Grandis, Gustav Augier, Rodion Divin, Albert Strauchman, Demir Onel Group 5: Tutorial 10-IBA-19/-20

Royal Dutch Shell

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

2025: ~70,000

2030: ~200,000

Hydrogen Energy Growth:

2025: 500+ hydrogen refueling stations

NortH2: Large-scale hydrogen via renewables

Supports net-zero by 2050.

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.

Founded in 1907, Shell is a global energy leader in oil, gas, and renewables.

Firm Description

Internationalization

Opportunities

Wael Sawan

CEO:

Challenges

Key Figures: Revenue: $386B Net Income: $42B Employees: 86,000+

The Oil and Gas market

Market Structure & Game Theory

Closely aligned with oligopoly

Type of market:

Not met due to high startup capital required

Free entry/exit

Mostly met after refining due to regulations

Product homogeneity:

Not met due to presence of major players

Atomicity assumption:

Not met due to uncertainty in supply chains and geopolitical influences

Perfect information

Shell plc, ExxonMobil, Saudi Aramco, PetroChina, Chevron

Major competitors:

Entry Game: Blocking new entrants 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.

Prisoner's Dilemma: A capacity fee battle in LNG

Result: Shell's dominant role mitigates the hazard, however,the ability for aggressive fee reduction stays.

Key Gamers: Shell, EXxonMobil, TotalEnergie.

Options available: High prices: 7-10% margin, tight market. Low prices: Margins decreased to 4- 5% danger of fee wars.

Shell acquires BG Group for $70.1 billion in 2015, making it the worldide chief in LNG. Goal: Expansion in LNG market

Shell-BG : Acquisation and Strategic Commentary context

Goal-Interest Misalignment:

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.

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.

The 2004 scandal :

Agency theory

Agency Theory

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.

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.

Moral Hazard (2004 crisis)

Shared goal of achieving net-zero emissions energy through the adaptation of advancing technologies.

Why ?

Royal Dutch Shell transacting with Microsoft, US Tech giant – 2018 - today

Transaction Cost Economics (TCE)

Over 75 DIY apps created (improved downstream manufacturing: refining, processing, selling petroleum products) → $35 million saved

Do it Yourself (DIY) Software Dev. Program

→ $25 million in cost savings

Creation of Shell Inventory Optimizer

Microsoft Power Apps + AI → Training over 800 devs/year

Employee Training

Vertical integration of cloud infrastructure would be very demanding

Opportunity to keep their focus on their primary sector of energy production instead of deviating to other technological branches.

TCE principles -> due to low-to-mid asset specificity = Outsource

Projected growth of AI market => ~476% in the next 10 years. = Opportunistic behaviour by Microsoft

Shell using Microsoft’s services instead of internalizing the services instead, creating a potential ‘lock-in’ scenario.

Risks

Shell’s reliance on Microsoft poses an incentive for Shell to reduce the need for internalization, benefiting from economies of scale.

Internalize or not?