Royal Dutch/Shell Group

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Royal Dutch/Shell Group

Royal Dutch Petroleum Company
30 Carel Van Bylandtlaan
The Hague
The Netherlands
Telephone: (70) 377 9111
Fax: (70) 377 4848

The “Shell” Transport and Trading Company P.L.C.
Shell Centre
London SE1 7NA
United Kingdom
Telephone: (20) 7934 1234
Fax: (20) 7934 8060
Web site: http://www.shell.com

Public Company
Incorporated: 1890 as Koninklijke Nederlandsche Maatschappig Tot Exploitatie van Petroleumbronnen in Nederlandschindie and 1897 as The “Shell” Transport and Trading Company, Ltd.
Employees: 90,000
Sales: $135.21 billion (2001)
Stock Exchanges: London New York Amsterdam
Ticker Symbols: RDA (Amsterdam); RD (New York); SC (New York); SHEL (London)
NAIC: 324110 Petroleum Refineries

The Royal Dutch/Shell Group is the world’s third largest oil and gas company. It has a complex corporate organization consisting of hundreds of companies worldwide, ultimately controlled by two publicly traded parent companies. The “Shell” Transport and Trading Company, a U.K.-registered company, has a 40 percent interest in the group, and the remaining 60 percent is owned by the Royal Dutch Petroleum Company, a Netherlands company. Collectively, the group is involved in oil and gas exploration, production, refining, transportation, and marketing. It also has interests in chemicals and diversified activities in coal and metal mining, forestry, solar energy, and biotechnology.

Late 1800s: Two Oil Companies Get Their Start

The Royal Dutch/Shell Group was formed in 1907 when a merging of the interests of Royal Dutch and “Shell” Transport took place, in which each company retained its separate identity. Royal Dutch was established in The Hague in 1890 after receiving a concession to drill for oil in Sumatra, in the Dutch East Indies. It had the support of King William III, hence the name Royal Dutch. The promoters of this venture had found oil in 1885, but needed funds to exploit their discovery. In the early years the firm was directed by J.B. August Kessler under whom, in 1892, it exported its first oil. In 1896 a 30-year-old bookkeeper, Henri Deterding, joined the company and in 1901 he became its chief executive. The predominant use for petroleum in the late 19th century was as paraffin or kerosene, which was used for heating and lighting. However, Sumatra’s oil was particularly rich in gasoline, the product used by the internal combustion engine, and it was therefore well placed to take advantage of the growth in demand for oil which the automobile was to bring.

Deterding was one of the great entrepreneurial figures of the 20th century. He combined remarkable strategic vision with acute financial awareness born of his early training as a bookkeeper. His ambition was to build a company to rival the world’s largest oil enterprise, John D. Rockefeller’s Standard Oil Company of the United States. Deterding preferred to achieve this ambition through alliances and agreements rather than competition. In 1903, as part of this strategy, he formed a marketing company, the Asiatic Petroleum Company, owned jointly by Royal Dutch, Shell, and the Paris branch of the Rothschild family, the last of which had substantial Russian production interests. A crucial intermediary figure in making this alliance was Fred Lane, who had been one of the original directors of “Shell” Transport, but who had become closely identified with the Paris Rothschilds and, by the early 1900s, with Deterding.

The “Shell” Transport and Trading Company’s origins lay in the activities of a London merchant, Marcus Samuel, who began his career in the 1830s selling boxes made from shells brought from the East. The business gradually expanded the number of commodities in which it traded. When Marcus Samuel, Sr., died in 1870, his son Marcus continued to be involved in Far Eastern trade. In 1878 he established with his brother Samuel a partnership known as Marcus Samuel & Co. in London, and Samuel Samuel & Co. in Japan, which became a leading shipping and trading enterprise in the Far East. During the 1880s the Samuels, through intermediary Fred Lane, began selling the Russian oil of the Rothschilds to the Far East, breaking the monopoly previously held by Standard Oil. In 1892 the Suez Canal Company was persuaded to allow oil tankers to pass through the canal, which lowered the cost of Russian oil in the Far East, and allowed the Samuel partnership to rapidly increase its market share. Later in the 1890s fears that Russian supplies might be reduced led the Samuels to search for a secure source of oil nearer their Far Eastern markets, and in 1898 a major oilfield was discovered in Dutch Borneo, a year after the launch of “Shell” Transport and Trading.

Early 1900s: Merger of Royal Dutch and “Shell”

“Shell” Transport grew rapidly. By 1900 the company possessed oilfields and a refinery in Borneo and a fleet of oil tankers. However, Marcus Samuel was above all a merchant, lacking organizational skills and ignorant of the technicalities of the oil business. After 1900 he lost interest in the details of the business, and in 1902 became lord mayor of London. By the early 1900s “Shell” Transport had made a series of costly mistakes, including a disastrous involvement with Texas oil. When Texaco hit a large oil gusher in 1901, Samuel agreed to buy the oil. The flow of oil was not continuous and stopped altogether in the summer of 1902. The formation of the Asiatic Petroleum Company left Deterding in control of Shell’s sales in the East. By 1906 Shell’s financial situation was so bad that Deterding was able to impose his own terms for a merger of the two concerns, with the Dutch holding 60 percent of what came to be known as the group.

The combined group expanded rapidly under Deterding’s leadership. The total assets of Royal Dutch and “Shell” Transport grew by more than two and a half times between 1907 and 1914. Major production interests were acquired in Russia in 1910 and Venezuela in 1913. The group also moved into Standard Oil’s homeland. In 1912 the Roxana Petroleum Company was formed to operate in Oklahoma, and in 1913 California Oilfields, Ltd. was acquired. By 1915 the group was producing nearly six million barrels of crude oil a year in the United States.

World War I brought mixed fortunes for the group. Its properties in Romania were destroyed, and those in Russia were confiscated after the Russian Revolution in 1917. Shell’s exploitation of the Venezuelan oilfields was delayed until late in the war due to difficulties in importing equipment. Shell’s cosmopolitan structure was also held in suspicion by some civil servants and ministers within the U.K. government, who feared that it was pro-German and engaged in supplying oil to the enemy through subsidiaries in neutral countries. Various proposals were made by civil servants and several businessmen to merge the group with the Anglo-Persian Oil Company, Burmah Oil, or other U.K. interests in order to make it truly British. However, these wartime proposals were unsuccessful, and regardless of its mixed ownership, the group played an important role in the Allied war effort. In 1919 an agreement was initialed by Deterding and a representative of the U.K. government that provided for an internal rearrangement of the group to allow U.K. interests majority control, but the agreement was never implemented, chiefly because of the delays caused by incoherence and confusion in the official U.K. oil policy of the period. Royal Dutch retained the larger interest in the group.

1920s–40s: Ups and Downs

The 1920s were a decade of growth. In 1919 Shell purchased the large Mexican oilfields controlled by the U.K. oil company Mexican Eagle, led by Lord Cowdray. In 1920 a marketing company was set up in the United Kingdom, Shell-Mex, which represented the Shell and Mexican Eagle interests. Venezuelan oil production expanded very rapidly, much of it controlled by Shell. In 1922 the Shell Union Oil Corporation was formed in the United States to consolidate Shell interests there with those of the Union Oil Company of Delaware, and the American business increased rapidly. By 1929 its U.S. activities had spread to the Atlantic Coast. This decade also saw the first steps in product diversification. In 1929 a new company, N.V. Mekog, was established in the Netherlands to produce nitrogeneous fertilizer from coke-oven gases. This was the group’s first venture into chemicals. In the same year the Shell Chemical Company was formed in the United States to produce nitrogeneous fertilizer from natural gas.

The Depression years brought problems. From the late 1920s there was a chronic problem of overcapacity in the oil industry. Deterding’s response was to form a worldwide cartel, and in 1928 he organized a meeting in a Scottish castle at Achnacarry with the heads of Standard Oil of New Jersey and the Anglo-Persian Oil Company to achieve this goal. The Achnacarry agreement became an infamous example of cartel exploitation in the oil industry, but the large oil companies were actually unable to control all sources of supply in the world. Achnacarry and subsequent cartel agreements did not last long. The group’s oil interests in Mexico were nationalized in 1938—an early warning of later problems in developing countries. Meanwhile Deterding’s leadership of the group became suspect. Some managers felt that his leadership style had become very erratic. After his marriage to a German woman in 1936, he resigned as general managing director of Royal Dutch and went to live in Germany.

Company Perspectives

The aim of the Royal Dutch/Shell Group is to meet the energy needs of society in ways that are economically, socially and environmentally viable, now and in the future.

During World War II and the invasion of the Netherlands, the head offices of the Dutch companies moved to Curaçao in the Dutch West Indies. Once again, Shell played a major role in the Allied war effort. The refineries in the United States produced large quantities of high octane aviation fuel, while the Shell Chemical Company manufactured butadiene for synthetic rubber. All of the group’s tankers were placed under U.K. government control, and 87 Shell ships were lost in enemy action.

1950s–80s: Expansion and Diversification

The 1950s and 1960s were golden years of growth for oil companies, as demand for petroleum products expanded. The Shell group and the rest of the “seven sisters” of leading international oil companies—British Petroleum, Exxon, Texaco, Chevron, Mobil, and Gulf—retained a strong hold over petroleum production and marketing. The group supplied nearly one-seventh of the world’s oil products in these decades. After Deterding’s departure, the group was run on a committee basis with no single dominant personality. A stable and respectable image was projected, symbolized by the advertising slogan “You can be sure of Shell.” Few Americans, for example, realized that the Shell Oil Company of the United States was not a wholly American oil company.

During the 1950s and 1960s Shell diversified into natural gas and offshore oil production and further expanded its chemicals operations. In 1959 a joint Shell/Esso venture found natural gas in the Netherlands in Groningen. This turned out to be one of the world’s largest natural gas fields, and by the early 1970s it provided about half of the natural gas consumed in Europe. Shell was active in the exploration of North Sea oil, and it found oil in the northern North Sea in 1971. In the same year a major offshore gas discovery was made on the Australian northwest shelf. By the end of the 1960s the Shell group was also manufacturing several hundred chemicals in locations all over the world.

In the late 1960s the group, as well as British Petroleum, attracted widespread criticism because, despite the application of U.N. sanctions, the illegal regime in Rhodesia continued to obtain oil products which were supplied from South Africa. South Africa, of course, made no secret of its support for the illegal regime and did not apply United Nations sanctions.

In the early 1970s it was revealed that the U.K. government had become a party to this discreditable behavior. The Shell group later became the subject of public criticism because of its substantial investment in South Africa.

The structure of the world oil industry was radically altered during the 1973 oil crisis when the Organization of Petroleum Exporting Countries (OPEC) unilaterally raised crude oil prices. The oil companies found themselves forced to allocate scarce oil supplies during the crisis, causing severe problems with several governments. In the United Kingdom, Shell and British Petroleum (BP) had a major clash with the Conservative government led by Edward Heath. Heath demanded that the United Kingdom receive preferential supplies of oil, which the oil companies were attempting to ration between countries. Heath attempted to use the British government’s 51 percent shareholding in BP to force that company to supply Britain first, but BP declined. The Shell group, like all the Western oil companies, had much of its crude oil production in developing countries nationalized. The search for oil in non-OPEC areas was stepped up successfully and in the late 1980s it remained responsible for producing 5 percent of the world’s oil and 7 percent of its gas.

In response to the problems of the oil industry, the Shell group diversified its business in the 1970s, acquiring coal and metal interests. In 1974 Shell Coal International was established. In 1970 the company acquired the Billiton mining and metals business in the United Kingdom. Chemical manufacture was particularly expanded. This expansion proved unfortunate, since world economic growth after 1973 was much slower than anticipated, with the major recession of the late 1970s and early 1980s causing acute problems. As a result, severe overcapacity developed in the chemical industry. The U.K. company Shell Chemicals experienced problems and was obliged to restructure and reduce capacity. Similar overcapacity occurred in the oil refinery business throughout most of the 1980s. In the 1980s the group rationalized its exposure to chemicals and other noncore businesses. However, the group remained the world’s largest producer of petrochemicals and a leading supplier of agrochemicals, in particular insecticides, herbicides, and animal health products and substantial profits were made in the chemicals business.

Key Dates

1878:: The Samuel brothers establish trading companies in London and Japan, which soon begin selling Russian oil to the Far East.
1890:: Royal Dutch Petroleum Company is established in The Hague.
1892:: Royal Dutch exports its first oil.
1897:: The Samuel brothers establish The “Shell” Transport and Trading Company and begin searching for oil in the Far East.
1898:: “Shell” discovers oil in Dutch Borneo.
1907:: Royal Dutch and “Shell” merge, with Royal Dutch holding 60 percent of the group.
1910:: Royal Dutch/Shell obtains production properties in Russia.
1912:: Company begins operating in the United States.
1913:: Company acquires production properties in Venezuela.
1922:: Shell Union Oil is formed in the United States, consolidating Shell’s U.S. interests with Union Oil Company of Delaware.
1929:: Shell Chemical Company is formed.
1959:: Joint Shell and Esso venture discovers one of the world’s largest natural gas fields, in the Netherlands.
1971:: Shell finds oil in the North Sea.
1974:: Shell Coal International is formed.
1995:: Shell initiates restructuring.
1998:: Shell unveils five-year plan for reducing costs and improving bottom line.
2002:: Company acquires Pennzoil-Quaker State.

As the Shell group entered the 1990s, it was an enormous business enterprise and, alongside Unilever, one of the few examples of a successful venture owned and managed by more than one country. The group was the most highly decentralized enterprise in the world oil industry, with its nationally based, integrated operating companies given almost complete autonomy.

1990s: Restructuring

The early 1990s saw higher costs associated with finding and developing oilfields and with refining operations, which had to operate under increasingly stringent environmental controls. At the same time, an abundance of oil on the world market kept prices depressed. While many oil companies scaled back their spending, Shell continued to pump money into both upstream and downstream growth. With Shell aggressively jumping ahead and its competitors drawing back, in 1991 the company overtook Exxon to become the world’s largest public oil company.

In 1993, Cornelius Herkstroter became Shell’s chairman. He was not in office long before he began to make some radical changes. Despite the fact that Shell was highly profitable—earning a record net profit of $6.3 billion in 1994—it was not performing as well as it should have been. The company’s return on average capital employed, which is the key success indicator in the oil industry, had fallen well behind the returns of its competitors. Herkstroter became convinced that Shell’s longstanding, extremely decentralized management structure was no longer giving it an advantage. Although the structure had once provided a strategic agility in independent units, it had come to be an unwieldy, inefficient, and expensive bureaucracy.

Herkstroter called in a team of consultants to evaluate the business. The result was a major restructuring that eliminated almost one-third of the jobs at Shell’s headquarters. The reorganization also removed some of the power from Shell’s dozens of country-specific operating companies—which were accustomed to functioning more as independent companies than as affiliates—and made them accountable to global committees appointed to oversee major areas of operation.

Meanwhile, Shell was coming under heavy fire from environmental groups. In 1995, the company tangled with Germany’s Greenpeace group when it attempted to sink its Brent Spar, an offshore oil platform that was no longer used, in the Atlantic Ocean. Enraged environmentalists protested the sinking of the large storage buoy, with its attendant masses of waste that would pollute the waters. As Shell made preparations to tow the Brent Spar from its original location in the North Sea to its planned dumping ground, Greenpeace activists occupied the platform in protest. On land, the group organized a massive boycott of Shell products. Facing a public relations nightmare, Shell ultimately relented, agreeing to dismantle the platform on land—a project that cost exponentially more than sinking it would have. Just a few months after the Brent Spar incident, Shell was again the target of the environmentalists’ ire. In November 1995, the Nigerian government executed Ken Saro-Wiwa, an author and activist who had protested the environment-exploiting activities of the oil multinationals in Nigeria—in particular, Shell. Saro-Wiwa’s supporters subsequently accused Shell of colluding with the Nigerian government.

The year 1998 was a difficult one for Shell. The company posted its largest ever annual loss—$2.47 billion. On top of that, consolidation in the industry—the British Petroleum-Amoco merger, and the planned merger of Exxon and Mobil—bumped the company from its post as the largest oil company in the world.

Near the middle of 1998, Cornelius Herkstroter retired from his position as Royal Dutch/Shell’s chairman, and was replaced by Mark Moody-Stuart. Under the new leadership, Shell’s move toward a more centralized, global structure was immediately accelerated. In December 1998, Moody-Stuart unveiled a five-year plan aimed at streamlining operations, lowering costs, and improving returns. As part of the restructuring, the company announced plans to sell off almost half of its chemicals business, focusing primarily on those chemicals that were most tightly linked to oil refining. It also began consolidating functions wherever possible, more closely integrating its globally far-flung businesses and eliminating some 6,000 jobs in 1999. Along with the divestitures and job cuts came a scaling back in investment; the company reduced overall capital spending by 41 percent in the first three quarters of 1999.

One of the byproducts of the company’s more tightly integrated, global structure was its ability to make more consistent and better environmental decisions. In 1997, Shell made a public commitment to contributing to sustainable development. In 1998, it released its first Shell Report, an annual publication that documented the actions the company had taken to meet its environmental and social responsibilities.

2000 and Beyond

Shell’s efforts to reduce costs proved very effective. While the company had originally expected a $2.5 billion annual savings from its 1998 restructuring, in late 1999 it raised that estimate to $4 billion. The company also continued to cut thousands of jobs and to sell off noncore businesses.

In 2001 and the first part of 2002, although oil and gas prices were volatile, Shell reported solid earnings. In March 2002, the company made a significant acquisition, obtaining Pennzoil-Quaker State Company for $1.8 billion. Pennzoil-Quaker State, the world’s largest independent lubricants company, gave Shell a global leadership position in lubricants.

Principal Subsidiaries

Shell Holdings (U.K.) Limited; Shell Oil Company (U.S.A.); Shell Petroleum Inc. (U.S.A.); Shell Petroleum N.V.; Shell U.K. Limited; The Shell Petroleum Company Limited.