Scenario planning at Royal Dutch Shell

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Scenario planning at Royal Dutch Shell

On 16 October 1973, a great oil crisis began when Organization of Petroleum Exporting Countries (OPEC) raised the price of oil by 70 per cent and reduced production. This was in response to the decision by the United States to re-supply the Israeli military during the Yom Kippur war, lasting until March 1974. As a consequence, the market price of oil rose substantially — from $3 a barrel to $12. The trend of recessions and high inflation in the world financial systems until the 1980s meant that the price of oil continued to increase198until 1986.²⁴ This, according to Shell, meant that ‘An era of cheap energy had come to an end and oil was no longer a buyer’s market’.²⁵

However, when the oil shock came in October 1973 after the Yom Kippur war, Shell was the only oil major prepared for it. In the early 1970s, Pierre Wack was a planner in Royal Dutch Shell in London, and had calculated the impact of a possible rise in the oil price and a likely increase in the world’s appetite for oil. He and his colleagues had mapped out a scenario in which the OPEC demanded much higher prices for their oil following the 1967 Arab–Israel six-day war. In effect, Shell’s managers were able to plan for this eventuality and apply this planning to the crisis following the Yom Kippur war while other oil companies struggled.²⁶

In order to survive, Shell adopted a policy of diversification, branching out into the areas of coal, nuclear power and metals. Firstly, in 1970 Shell purchased Billiton, an established metals mining company (which it later sold). In 1973, the company moved into nuclear power by forming a partnership with Gulf Oil to manufacture gas-cooled reactors and their fuels. Shell’s success in coal was limited. In the 1970s, the company also continued its work in developing the oil fields in the North Sea. While a huge investment was required due to the adverse weather conditions and the instability of the sea bed, the cost was justified due to the sheer size of the oil fields in the North Sea, as well as the fact that supply from the Middle East was reduced at the time.²⁷

Royal Dutch Shell became a leader in profitability, and continues to use scenario planning as an aid to opportunity-framing and strategy formulation.²⁸ With the world making commendable efforts to limit its consumption of fossil fuels in the face of ‘peak oil’ (the time when demand exceeds supply) and increasing its reliance on wind and solar power, the long-established ‘legacy expectations’ of enduring access to easily accessible oil remain stubbornly fixed in the minds of both developed and developing nations. Scenario planning is using careful research inputs to examine the prejudices of policy-makers and the demands of populations to arrive at sustainable solutions to energy needs, and to avoid the catastrophe of a war over oil. Is such a crisis likely, or even possible? Consider the following somewhat less conservative analysis.

Firstly, we know that drilling for oil in shallow seas is much safer and less technologically difficult (and, therefore, less expensive) than deepwater drilling. When, in 2010, the BP Macondo Deepwater Horizon oil well off the coast of Louisiana blew out and spilled many thousands of litres of oil into the Gulf of Mexico each day for months before it could be shut down, it created the greatest environmental disaster in the history of the United States. An immediate two-year ban on deep-sea drilling in the US gave BP a chance to clear up the damage, although it cost the CEO his job and many people along the Louisiana coast their livelihoods, as their businesses failed amidst the massive pollution. Some say that one failure out of the 5000 wells in the Gulf is not an unacceptable risk, but the Macondo rig was one of the most advanced platforms, operating at the depth limits of deepwater exploration and extraction. Only about 40 other platforms were so complex. Critics respond that odds like that encourage a much more cautious regulation to manage the risks involved. In spite of this, oil companies are embarking on ever more challenging projects, drilling in the Arctic, Russia and the deep waters off Africa.²⁹

Secondly, in the years since Macondo exploded, public opinion has moved towards more opposition to deep drilling, along with a general push to limit carbon emissions and oil consumption. Our motor vehicles are increasingly powered by smaller, more efficient engines, and automobile manufacturers care — committing research and production199resources to hybrid power systems and electric propulsion. The constraints of battery technology are gradually being reduced.

Thirdly, the discovery of vast reserves of coal seam gas in Australia, China and other countries, plus the development of commercially viable technology to extract oil from shale deposits in the US and Canada, is causing a reassessment of the global energy situation. Remarkably, some observers believe that by 2050 the US could be a net exporter of oil — something unanticipated just a few years ago. Alternative sources such as solar and wind power are increasingly attractive to many governments, as profound suspicion about nuclear power in the years after the Fukushima earthquake and tsunami disaster has prompted the shutdown of many nuclear plants worldwide. Where does this leave us?