Thursday, December 20, 2007

Big Oil lets sun set on renewables

Comments on article in "The Guardian" 11th December 2007:

This report should not come as a surprise to anyone who knows Shell well. Over the past thirty years or so Shell has tried a variety of diversifications but failed to make any of them work:

Minerals: Billiton …………..…...SOLD
Nuclear: General Atomic…..……SOLD
Coal: Shell Coal…………….……SOLD
Power Generation: Intergen……SOLD

The reasons for these failures are not particularly complex. At the top in Shell there is a culture which is really only comfortable with the familiar – not for them the challenge of “unknown unknowns”. There is a bias for the scientific, technological and the quantifiable and an aversion to uncertainty. So the people who rise to the top are not original thinkers or creative – they are the apparatchiks who play the corporate games most successfully. As these top executives have rewarded themselves more in more in recent times there has been an increase in the safety first mindset. The huge remuneration and pension packages that are on offer do not encourage originality or risk taking – they cause retreat to the familiar where income streams can be more accurately predicted. This sheer lack of imagination is well illustrated by the share buyback schemes which continue – essentially Shell is saying that it has no capital investment, acquisition or diversification opportunities so the only thing it can think of doing with the windfall earnings from $90+ oil is to buy its own shares.

The other force in play at Shell at the moment is the continued centralisation of decision making. The traditional upstream oil and gas businesses do need central decision making but other areas (Renewables is one) are substantially local in character and far smaller in scale. Shell does not have the processes in place to manage decentralised businesses any more. In the past strong and independent country based “operating companies” often stepped out into non traditional activities where they saw a local opportunity. Since the power of these local companies has been curtailed there is no longer the organisation in place to encourage such experiments.

The changing Shell culture is placing one of its historically traditional businesses at risk – the huge network of petrol stations around the world. There is no more local business than retailing as any retail professional will tell you - the great retailers (McDonalds for example) really do “think global and act global”. There is always hands-on local management in every country or region in which McDonalds operates with globally developed products, services and offers being tailored to the local market. Shell used to do that in the past when the operating company structure was in place. But since its demise “Retail” (that most local of businesses) has been centralised and now has to kow-tow to the ridiculous nostrum that it is really a “global business”. Shell is gradually walking away from hands-on Retail in many markets and it would be no surprise if the business is not disposed of entirely in time.

The irony of all of these changes is that the centralisation of decision-making and the narrowing focus has not brought better corporate governance. There was nobody more adverse to risk and to delegation that Phil Watts – a hands-on manager if ever there was one - but the facts now emerging about the reserves scandal over which Watts presided showed that this centralisation was one of the causes of the problems. How ironic that in the post Watts era the centralising trends have continued with so-called “global businesses” now existing across the board. One of the reasons for this is the fear of legal actions and the presumption that the risk of these is reduced by not delegating or placing trust in subordinates. There are now far more lawyers in Shell than there ever were in the past and there is hardly a business decision made without the lawyers being consulted. So whilst the executive directors of Shell richly reward themselves this is not in recognition that these rewards are partly a compensation for the directors for having to take greater personal risk. How close Phil Watts has been to following the Enron directors, the Nat West three and Conrad Black into the criminal courts we don’t know – but you can be sure that the current Shell board will be very conscious of the need to avoid personal liability. Again this means that they are reluctant to move away from the very familiar.

The one area where Shell has been willing to go public and try and differentiate itself has been in its corporate communications and its green posturing. As Terry Macalister rightly points out Shell has “trumpeted its commitment to a low carbon future by signing a pre-Bali conference communiqué” – in my opinion an astonishing act of hubris. There can be little doubt that Shell is only in Renewables at all because they believe that this will paint them greener than in reality they are. Let’s be clear about this – the whole business imperative of Shell is to exploit hydrocarbon resources. That is what they do. Every hydrocarbon molecule that they find, produce, refine, transport or market contributes to global warming and climate change. My view is that there is nothing immoral in this – oil and gas are the main drivers of economic growth and prosperity and will remain so for the foreseeable future. Shell’s considerable skills in this business, combined with their good track record in reducing there own carbon emissions at refineries etc., should be a source of pride. There is really no need to be apologetic about Shell’s strong position as a global player in the oil and gas exploration and production world and Greenpeace’s suggestion that Shell “…needs to become not just an oil company but an energy company” with a strong commitment to Renewables is wishful thinking. Shell has neither the competences nor the inclination to move away from its traditional businesses – on the contrary all the signs are that they are retreating back to familiar ground rather than being creative or genuinely diversifying in their investments.

Friday, December 07, 2007

Corporate Social Responsibility - an oxymoron...

I think that it is very important to make a distinction between State power over the individual and state power over institutions – especially private sector businesses. In an ideal world, I agree, that it would be good if individuals were free to pursue their lives peacefully and lawfully with the minimum of intervention from authorities. This does, of course, require that there is a code of behaviour which people follow that goes beyond what the law says they should do. But it doesn’t always happen. For example, the hope that pub or restaurant customers who smoked would be sensitive to the feelings and comfort of other customers who did not smoke was shown to be a forlorn one! The banning of smoking in public places came about, at least in part, because too many smokers could not be relied upon to care about others. Some might argue that the legislation was anti-libertarian – I would argue the opposite. My freedom, and the freedom of the majority population who don’t smoke, was hugely enhanced by this legislation of which I approve wholeheartedly.

Essentially the test should be to ensure that the worth of legislation is determined by its contribution to overall utility - there has to be judgment about the point at which you curtail freedoms. You cannot, of course, conceive of an “anything goes” world without laws. Commercial organisations – especially big businesses tend to argue for self-regulation. They want to be free to police themselves – but there is no evidence that this ever works. The imperative of a company is overwhelmingly a shareholder driven imperative – indeed the law states that it must be. So for a corporation to suggest that it follows self-imposed “Corporate Social Responsibility” rules is so much poppycock. When faced with the choice between profits and principles they will choose profits 99% of the time! So government HAS to legislate to curb the powers of business and ensure that they serve more than the narrow self-interest of their shareholders. Nobody else will do it!

(c) Paddy Briggs December 2007

Shell says “No to Yes”

Just when you thought it was safe to buy a newspaper or a serious magazine again up pops Shell with more of its absurd corporate advertising. The “Say No to No” campaign, running again this week, almost defies belief in its self-congratulatory and disingenuous copy and tone. Let’s first take a look at one of the ads – the one with the teacher writing on the blackboard – here, word for word, is what it says:

"Say No to No

Isn't it high time someone got negative about negativity?Yes it is.Look around. The world is full of things that, according to nay-sayers, should have never happened."Impossible.""Impractical.""No."And yet "yes."Yes, continents have been found.Yes, men have played golf on the moon.Yes, straw is being turned into biofuel to power cars.Yes, yes, yes.What does it take to turn no into yes?Curiosity. An open mind. A willingness to take risks.And, when the problem seems most insoluble, when thechallenge is hardest, when everyone else is shakingtheir heads, to say: let's go."

The tag line is “Real energy solutions for the real world” and the implication is that Shell has these solutions because of the position it takes (as described in the copy). So Shell is not negative then? Shell is up there with those who found continents and played golf on the moon. With Columbus and Neil Armstrong. With NASA. With the fifteenth century Spanish court of Ferdinand and Isabella. Shell is a risk taker just like they were? What arrant nonsense.
Shell is one of the most risk averse, short-sighted and cautious enterprises of modern times. And especially in its energy category. When other companies made acquisitions (Exxon for Mobil, BP of Amoco, Chevron of Texaco, Total of Elf…) Shell stayed nervously out of the fray. When opportunities arose Shell said “Yes to No”. They shook their heads and said not “Lets’ go” but “let’s not”.

Shell always says “No” to diversification – to the risks of getting out of their comfort zone. Here’s an (incomplete) list to prove this point:

Minerals: Billiton ……………...SOLD
Nuclear: General Atomic………SOLD
Coal: Shell Coal…………………SOLD
Power Generation: Intergen……SOLD

As far as alternative energy (Renewables) is concerned can their be the slightest doubt that it would go the way of the other diversifications – if it wasn’t for the phoney “green” kudos it brings to Shell’s reputation?

The comfort zone of Shell gets narrower as the years roll by not wider. All of the daily emphasis is on the traditional businesses and in particular on the upstream – the search for oil and gas. Old world, old energy, old core competences. I don’t mind this at all either as a small shareholder or as a pensioner – but I do object when I am being bamboozled into believing something that patently isn’t true.

And isn’t it pretty negative to sell or franchise your brand – your most valuable intangible asset? And Shell is selling its brand – for example in Ireland where the Shell branded petrol stations now have little or nothing to do with the company at all. The Shell logo stands over petrol stations that Shell has sold and which it no longer controls. Here is what Shell in Ireland says about this:

“In July 2005, Shell announced that it had signed sale and purchase agreements with Topaz Distribution and Logistics for the divestment of the majority of Shell’s oil products businesses in the Republic of Ireland and Northern Ireland. The agreements relate to Shell’s retail, commercial fuels, lubricants, marine, and supply and distribution businesses.

Topaz will continue to use the Shell brand and Shell UK will continue to supply high quality fuels and lubricants to the company, which means that the Shell brand will remain visible in Ireland and service to customers, dealers, and distributors will be maintained.”

So the “Shell brand will be visible” – as if this, in itself, is something that consumers could be concerned about. A brand is more than a logo – it stands for a total commitment to the customer. Shell has walked away from its customers in Ireland and divested itself of this commitment. Shell is also walking away from a host of other markets, because it perceives that it cannot operate these businesses profitably. Who is being negative now? Who is saying “Yes to No” again not “No to No”?

One of the cases for the powerful multinationals is that their very financial strength should allow them to be long term in their outlook. They ought to be able to ride the waves of the squally world of business. Shell was built up on this very philosophy – risks were really taken in the past – new ventures, new countries, new markets, new technologies. Not all worked, but the sheer size of the organisation meant that it could ride the storms and tolerate the failures that will inevitably happen when you really do take risks. The Shell of today is utterly different from this – far more short term in its thinking and far more risk averse. And yet they have the supreme arrogance to think that they can credibly preach the virtues of “a willingness to take risks” and to suggest that they are on the moral high ground – an organisation that rejects negative thinking. It isn’t true – and I, for one, am sick and tired of being lied to by those who want me to believe that it is.

© Paddy Briggs December 2007