Shell and the National Gallery–welcome to a Moral Maze

 

I went to the superb exhibition “Rembrandt: The Late Works” at the National Gallery yesterday. The exhibition is sponsored by Shell - quite strongly as it happens. There are a couple of prominent Shell promotional displays and the Shell emblem is visible all over, though not within the actual gallery where the works are to be seen. This suggests that the Shell sponsorship was financially quite large, even that the event, in straightened times for the Arts, might not have gone ahead without it.

A couple of days earlier those opposed to the National Gallery’s involvement with Shell mounted a protest in Trafalgar Square. There had also been protests also when the exhibition opened in October (see photo above). In a democracy we have to allow peaceful protests by individuals or groups opposed to things they consider wrong. The protestors against Shell are quite within their rights and the things they complain about - from oil spills and gas flaring in the Niger Delta to tar sands projects in Canada are legitimate areas of concern. In the minds of many  Shell is an extremely unethical choice of sponsor for the National Gallery. But there is a moral maze here.

During the latter part of my Shell career I was responsible for a number of Shell sponsorships and the related PR activity in the Middle East. It was my job, but I did it willingly in the main. The overriding objective was to associate Shell with events and activities that conferred value or prestige on the brand. The reverse was also often true. Shell’s sponsorship of something often added some legitimacy to an event. But this was in a region where an Oil Major such as Shell is broadly well thought of anyway! Here in Britain that is far from necessarily the case.

In the case of the National Gallery Shell’s involvement is far from gratuitous. There is actually a connection with Shell and the restoration of masterworks which is as interesting as it is surprising. Shell’s case for being involved, in the official programme, is persuasive. I am not buying the official line completely - the altruistic element of Shell’s involvement is only one reason and so is the technical and scientific case. For Shell the major benefit is prestige and the boost to their less than lilywhite reputation that the sponsorship seeks to create.

But what of the protestors? Their goal is to use the high visibility of the exhibition to publicise their causes and to give a focus to their campaign to persuade Arts bodies like the National Gallery not be financially supported by the likes of Shell. (There is a similar campaign in respect of BP and the Tate Gallery) . This is very polarising. Despite my Shell career and status as an (active) pensioner) I am a critic of the Corporation in some of what it does and how it does it. But I am also a supporter the Arts and if exhibitions like the Rembrandt would only be possible with money from Shell or BP then I can see the case to be made in their favour. Especially if the rationale for involvement is more than tenuous - as does seem to be the case for Shell and the National Gallery. I personally remain open-minded on the subject. It is a moral maze and I’m sure that I’m not the only one struggling top find my way around !

The changing world of Oil and Energy. Interesting times!

There is an almost perfect correlation between Multinational Oil company profits and the price of Crude Oil. The higher the latter, the higher the former. Changes within the business operations, cost reduction exercises and other reorganisations and the like, can affect financial performance on the margins. And instituting such changes can give Directors the feeling that they are “doing something” to justify their windfall level remuneration. But, in truth, it’s the traded value of Crude which really drives the dosh. So falling prices are bad for Shell, Exxn and the rest of them Arguably, however, they are good for the rest of us.

There are those who argue that the higher the oil price the stronger the drive for diversification will be. Renewables become more relatively viable if Crude prices are high. But Shell, having established Wind, Solar, Forestry and other unconventional energy businesses got out of most of them despite the rise in Oil prices. Even the (highly questionable) Governments’ subsidies for renewable energy were insufficient to keep Shell in the game. And falling prices make it unlikely that they will return.

One of the drivers of falling prices is the gradual increase in production – especially in the United States – of hydrocarbons (mostly Gas) from Shale. Fracking is changing the face of the energy scene, and not just in America. The US could become self-sufficient in Energy as a consequence, an extraordinary turnaround. The energy business is a classic example of where price is a direct consequence of the interplay of supply and demand. As supply of oil and gas from new non OPEC production such as shale increases the price falls. For the first time for a while the Sheikhs and their friends are not telling us how much we’ll pay for our gasoline!

The prediction of oil price trends is a dodgy old game and one major shock can lead to panic and price rises. That said there is reason to be bearish on oil for at least the medium term. There is an uncomfortable dilemma ahead for the Oil Majors. Unconventional oil and gas production – be it via fracking or by moving into environmentally questionable areas like the Arctic – is expensive. And yet if the reliance on Middle East and other traditional producers is to be reduced then this has to happen. But the bean counters are going to be worried about project viability if the Crude price keeps falling. My guess is that the hurdle rate for investment approval slips negative in many cases at $80 a barrel or less.

Consolidation of the energy sector may be the way forward. Rumours of BP and Shell dusting off the merger files sound logical to me. BP is far from out of the mire of the Browne and Hayward years yet. But come the dawn, and if the lawyers confirm that all the lawsuits are behind them, then a Shell/BP merger seems more likely than not. The opportunity to build a great Europe-based Energy multinational around the strong(ish) foundations of RDS and BP would be attractive – not least to the European Union. The nightmare alternative, by which either or both fall into the hands of Russian, or Chinese or Arab predators is not! 

“Follow the money” is never bad advice. And along with “Who benefits” I’d recommend it at this time. The next few years will see major changes, some surprising, to the global energy scene. The power is shifting. Interesting times. The prizes are high! Who will win? We’ll see.

Once you could be Sure of Shell…

Most of my 37 year Shell career was spent in the “Downstream” but from time to time I had contact with the Upstream operations and in my final assignment in the Middle East I was very close to Upstream issues. Both Shell’s exploration and production activities (the Upstream) and their refining and marketing business (the Downstream) had the Shell emblem (the “Pecten”) flying over them – but that was about the only thing they had in common!

EP is a top down business. The experts in The Hague, mostly products of the best geology and technology Universities, built unrivalled expertise in the tasks of finding and exploiting hydrocarbon assets. They were also pretty good at building the necessary alliances with partners that virtually all upstream operations require. Their world was the world of oil reservoirs, horizontal drilling, fracking and all the other thousand and one technologies and techniques that made the business work.

Refining and Marketing – or at least the marketing bit of it – is bottom up. The millions of motorists, commercial buyers, airlines, shipping companies, domestic consumers etc. etc. who have needs for one or more petroleum products represent the “Market”. The refining bit once had some synergy with the marketing operation (and indeed with the Upstream) in that to sell products you needed to create them in the first place – by cracking Crude Oil into its useful component parts. But over the years the need for an Oil Major to run refineries disappeared. The marketers could buy from independent refineries and the EP people could sell to them either directly or through traders. The benefits of an “integrated” oil well to petrol tank operation went away. Oil Production, Oil Refining and Oil Marketing became three distinct and very different businesses many years ago. There were no economies of scale from being involved all the way along the chain.

In the late 1980s I was working in Shell Hong Kong. This was a medium-sized and highly profitable marketing business. We sold the full range of oil products to customers in the Territory and, increasingly, in China. The Shell brand was strong and we were market leader – indeed in many sectors we had the Boston Consulting Group’s ideal situation where our market share was at least twice that of our nearest competitor! It was a Cash Cow. We invested heavily in the Shell brand through advertising and service – and it worked. It was a heady time for all of us – a company that could be customer-driven with no distractions. Then a change occurred. A new Chief Executive was appointed – a geologist who had been part of the team which had discovered North Sea Oil in the late 1960s and early 1970s. An Upstream man through and through. He knew nothing about Marketing and cared less. It was an odd appointment driven solely by Shell’s ambition to participate in major projects in the Upstream (and Refining) in China. The new CEO’s task was to get alongside the authorities and prospective partners in China and open doors and forge alliances.

The learning experience for me and others in Hong Kong was that to the powers at be at the very top of Shell, Marketing was a foreign subject about which they knew nothing. The idea of sending a non-Marketer to head up a highly successful marketing business was mad, unless you realised that was the way the high-priced help thought. Their Shell was the Shell of Oil Wells and Gas plants not the Shell of petrol stations and ordinary customers. In reality, of course, Shell was both and there were skilled professionals in all the disciplines around the world. But as you moved up the hierarchy interest in marketing declined and at the very top it was rarely a substantive item on the agenda. It was in the 1990s that I realised that to protect its marketing business and to focus absolutely on its huge Upstream business Shell needed to split the two. I wasn’t alone in seeing two distinct corporations emerging. “Royal Dutch”, which would be run from The Hague and which would take over all the Upstream. And “Shell Marketing” which would be run from London and would run all of Shell’s Marketing operations in 130 or so countries around the globe. In fact the main emphasis of “Shell Marketing” would be to delegate to local operating units (as in Hong Kong) on the indisputable grounds that “all markets are local”.

The logic of a split along these lines was strong and it meets virtually every criteria preached by the Business Schools. Why pretend that just because two utterly different businesses both have the Shell emblem flying over them they are the same, require the same skills and could be driven by the same imperatives? It just wasn’t true. But as we all know this was not the reorganisation that Shell pursued. Instead, and in response to the Reserves scandal, it created “Royal Dutch Shell” and moved its governance primarily to The Hague. A Company that clearly was not integrated along the supply chain any more, nor needed to be, stayed in its historical configuration. Decisions about Marketing strategy were taken ultimately by non-marketers for whom, like my once CEO in Hong Kong, marketing was an unknown world. When this happens only Dollars can be the common denominator. So aggressive cost cutting was forced on the marketers. Strange global organisations were created with business heads being arbitrarily located in offices miles, often thousands of miles, for some of their markets. The local operating units, like Shell Hong Kong, lost their autonomy and freedom to act. Investment in the brand declined as did any expenditure which could be described as “discretionary”. The myth that “Refining” and “Marketing” had any synergy was perpetuated and country exits were predicated on Refinery closures with the marketing infrastructure and brand strength not being valued. Market withdrawals gathered pace including in Markets which in which in my time I spent a lot of time – Spain, Australia, Italy, Greece – possibly Canada among many, many others.

The new RDS structure had been contemptuous of local markets. Hardly surprisingly performance in these neglected markets declined which then in too many cases was to lead to market withdrawal. Will Shell have any Marketing operations in ten, even five years time. Maybe not. Could it have been different? Unquestionably if the Upstream/Downstream split many of us supported had been followed. A Board of Directors which primarily focuses on the customer is what the really great brands have in common – ask McDonald’s or Coca Cola. A brand which acknowledges that all markets are local will succeed where one that tries to take local decisions at the centre will fail. A brand which invest in its strength and promotes its benefits will grow whereas one that fails to invest will wither on the vine. If you want to kill an organism then starve it.

When I retired I was presented with a small silver Shell emblem which I still wear with pride from time to time. It once stood for excellence in marketing and was one of the world’s most familiar brand symbols. Now it’s a bit of a collectors item symbolising a world that has long gone…