The above from a story in "The Times."
My 40 years in Shell taught me one thing - it is a Corporation that’s very good at oil and gas, but hopeless at anything else! In my time here’s a partial list of things we tried but couldn’t make work:
- Nuclear
- Metals
- Coal
- Forestry
- Solar
- Wind
- Agrochemicals
- Electricity Generation
- Convenience Stores
- Biofuels
- Fast food
- Home insulation
- Natural Gas retailing...
The way to the top in Shell is based on the skills of finding and extracting of hydrocarbons occasionally augmented by those who can refine, market or trade and transport them. If in doubt the top management always retreats to its oily comfort zones. We dipped a toe in many waters but diversification was not really what we did.
Shell is not a conventional multinational that can comfortably diversify. It’s basically an oil company. There is little transfer in of people from outside oil at the higher levels of general management. Virtually all the top jobs are filled from internal promotion. So oil people promote oil people. The performance parameters in oil/gas are subtly different from those of other global businesses. The valued skills are heavily technical knowledge based - engineering, geology etc. In Retail (petrol stations) where I worked for a time we found that above the mid to senior level there was no comprehension at all of what a consumer or a brand was among the Board level top management (or those a rung or two down). Fortunately at my middle/senior level we did know what we were doing. Mostly!
Back in the 1970s and 1980s diversification was underway on a fairly large scale. In 1974 Shell lost about $290 million on its Nuclear Energy joint venture with Gulf Oil. Whilst the scale of this was exceptional the underlying causes were similar to most of the other failed diversifications. Shell simply did not understand nuclear and had few if any competences in house to manage it.
The Metals corporation Billiton was acquired in 1970 the logic of this being that like upstream oil Metals was also a raw material extractive business. You looked for minerals deposits and if you found them you extracted them. You then, again like oil, you converted the raw material into useful products that people wanted to buy. Billiton stayed a Shell company for quite some time but eventually it was sold, largely I think because it was a distraction from the core oil business.
Around the same time as Billiton Shell Coal was created. Here the logic was similar (it’s an extractive business) with the added bonus that there was a logic in the corporation becoming an Energy rather than “just” an oil operation. But, as with metals, there was little corporate memory in Shell on coal and despite some considerable injections of capital it was eventually disposed of. (Concerns about the difficulties of managing the environmental aspects of this increasingly unpopular energy source also played a part).
Shell has been in the Chemicals business for nearly a hundred years but in recent times has moved out of anything, like Agrochemicals, which they determined was not core or which required high capital investment or had high operating costs. Research was significantly reduced and Research laboratories like those at Sittingborne in Kent were closed. The activity in this sector remains significant and it is the one business that endures outside the core oil/gas sector. That said petrochemicals are a logical extension of refining which until recently was also part of Shell's core business.
Multinational oil companies, like Shell, grew on the back of vertical integration. Everything from the wellhead to the petrol station was Shell branded and often Shell operated. In the supply chain Refining was a key link and certainly part of Shell's traditional competences. With closures in the United Kingdom (where Shell once had three refineries but now has none) and elsewhere this is reducing and it remains to be seen whether the corporation will continue to feel that it needs to refine crude oil when others have business models that enable them to do it more efficiently and at lower unit cost. For Shell refineries have always been cost centres whereas for independent refiners they are profit centres. Shell never really managed to make money out of refining.
As far as marketing and trading is concerned Shell petrol stations remain ubiquitous around the world but increasingly country Retail operations are franchised and Shell is no longer hands on - this applies across Africa for example. This is different from diversification exits, but the drivers are similar. Where diversification fails it is often because of an unwillingness to invest or to spend revenue costs in maintaining and/or expanding the business. So it is sometimes in Retail where it is often seen to be preferable to try and keep the brand presence by franchising and let someone else incur the operating costs.
Around 1990 and onwards Shell sought to increase income flows from petrol stations by diversifying into Convenience Stores under the "Select" brand. The strategic logic of this was powerful as was the initial design and branding. The problem was that actually to build a standalone C-Store brand which could potentially be successful in up to one hundred countries would have required a massive effort. Other oil companies built local partnerships with experienced C-Store and Supermarket companies (BP with Marks and Spencer in the UK a good example). Shell's initiative was half-hearted and under-funded and the C-Store policy around the world is now confused and incoherent.
One of the most instructive stories about Shell and diversification was the creation, and eventual sale, of the Power generation company Intergen. This initiative lasted ten years and again it became a victim of not being a core business. Shell is dipping its toe into this water again with its newish "Shell New Energies" initiative. Its worth reading the interview with CEO Mark Gainsborough here. In many ways the enthusiasm he shows is, in my experience, typical of Shell's positioning at the start of a diversification. Maybe this one will be different and last the course, but don't hold your breath !
Shell's biggest diversification success was not a diversification at all really! The growth of the natural gas business has been impressive and Gas is now right at the heart of the corporation's future, and has been for some time. The Gas supply chain, whilst different technically form oil, has many similarities with it. This is home soil for Shell though its attempt to stretch the involvement into the marketing to end users was less successful. Shell Gas Direct marketed gas in the UK for a time before, like so many other diversifications, being sold.
Shell's brief involvement in Forestry throughs some light on one of the motivations for Diversification. PR. This corporate advertisement is instructive. It claims that "One day it [forestry] may be our biggest business". Shell withdrew from Forestry the year after it was aired!
So be sceptical of the Wind Farm initiative. Maybe Shell's return to wind power will buck the trend of many years and be a diversification that endures. But don't hold your breath !
