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Royal Dutch Shell Company (LON: RDSA) (Shell) is one of the largest private sector energy companies in the world. The company is engaged in the exploration and production of oil and gas, refining and marketing of liquefied natural gas as well as manufacturing, marketing, and shipping of oil products and petrochemicals. The company also deals in renewable/alternative sources of energy including wind and solar energy. It operates primarily in Europe and the US.

The company's in all stages of the supply chain enables it to reduce its costs. The company’s refineries sell their end product to retail consumers, which enables it to earn higher revenues and improve profitability, as the commissions paid to middlemen in the supply chain are eliminated. This gives Shell an advantage over competitors like Valero Energy (VLO), which do not have exploration and production businesses.

Shell's reserves total 11,920 million barrels of oil equivalent; however, its oil and natural gas reserves have been declining for the last three to four years owing to competition from public companies, operations in politically unstable regions, damages from natural disasters, and, possibly, the advent of peak oil. Sustaining long-term growth will be a challenge for the company if its reserves continue to decline. This decline assumes especial significance in the face of competition from rivals such as ConocoPhillips, whose oil reserves have increased since 2004.

Even though Shell is a large company, it faces intense competition from national or state-owned public companies. These large national oil companies are backed by their home governments and exercise greater control over access to oil and gas reserves, which makes it difficult for private companies such as Shell to access these reserves.

Shell operates in countries, such as Nigeria, which are experiencing social and political unrest, thus exposing the company to the risk of political instability. The company had to close four of its plants in Nigeria to ensure the safety of its employees; as a result, its production in Nigeria declined by 90 percent.

Damage caused to the refineries by natural disasters (such as hurricanes – Katrina and Rita) is an additional problem that the company needs to confront from time to time. For example, oil production as well as refining in its exploration platforms and refineries situated in the Gulf of Mexico had to be ceased during hurricane Katrina.

Contents 1 Company Description 1.1 Losses at Kashagan Oil Fields in the Caspian Sea 2 Business Segments/Products 2.1 Strategy and Expansion 3 Business Drivers 3.1 Oil Prices Rise, Natural Gas Prices Fall 3.1.1 Higher Oil Prices Strain Refinery Profits 3.2 Weather 3.3 Regional Instability and Oil 3.4 Shell Often has to Pay Recompense for Environmental Damages 3.5 Shell is getting into Renewable Energy 4 Competitive Landscape 5 Global Oil Industry Operational Data 6 Notes

[edit] Company Description

Shell is one of the largest of the "oil majors", a group of giant, vertically integrated oil and gas companies that dominate the hydrocarbon market and include Exxon Mobil, ConocoPhillips, Total, BP, and ChevronTexaco. The company's 2007 revenues grew from 2006 levels of $318.845 billion to $355.782 billion, and its reported income grew by 23%, to $31.331 billion^[1].

In the first quarter of 2008, Shell's income grew 12% to a record $7.8 billion, thanks to oil prices averaging almost $100/bbl over the period. It increased its production by 13,000 boe/day from 1Q07, to 3,522 boe/day, while increasing its refinery availability to 92% from 85%.

The company has made a series of acquisitions to increase its size and expand its operations across different regions. On September 21st, 2007, the company announced that its Motiva Enterprises sector would spend $7 billion jointly with Saudi Arabia to expand a Port Arthur refinery to, by 2010, have an output of 600,000 barrels per day (b/d) and be the largest oil refinery in the U.S. In the first quarter of 2008, the company spent $2.1 billion while bidding on over 270 blocks of reserves in the Chukchi Field off the Alaskan coast.

Shell increased its focus towards acquiring alternative sources of energy in 2003. It entered into a partnership with General Motors to make hydrogen fuel cell vehicles. It also entered the Spanish wind market and the German solar energy market by acquiring a 40 percent stake in La Muela Wind Park and entering into a partnership with Gesellschaft für Solarenergie (GEOSOL), respectively. The company entered into a mutual agreement with GEOSOL to jointly build the world’s largest solar power station in Germany.

Shell has divested its refining and marketing operations (also known as downstream operations) in Nigeria (Nova Chemicals (NCX)), Uruguay, and Paraguay.

[edit] Losses at Kashagan Oil Fields in the Caspian Sea

Shell has seen major losses in the Kazakhstan-controlled Kashagan oil fields, as massive delays and overspending have sunk the company, along with project partners ConocoPhillips, Exxon Mobil, TotalFinaElf, Eni, and [[Ipex]. The Kazakh government is now demanding compensation for damages to its property, and appears to have consulted U.S. attorneys on how best to induce the companies to pay up; so far, a total of $19 billion among the companies have been sunk into the project. In the first quarter of 2008, Shell agreed to reduce its stake in the project by 1.7%, selling its shares to KazMunaiGas in order to ensure that the Kazakh government would let it continue to operate in the region. The other project parters were forced into similar arrangements.

[edit] Business Segments/Products

The main business divisions of the company include exploration and production, gas and power, oil sands, oil products, and chemicals. Shell offers a wide range of products, including liquefied natural gas (LNG), electricity, gasoline, low-sulphur diesel, lead replacement fuel, marine lubricants, chemicals (such as ethylene, propylene, aromatic chemicals, detergent alcohols, and fuel additives), and other fuels.

The operations of the exploration and production segment (also known as upstream activities) are spread over 38 countries. These operations include searching for oil and gas reserves, drilling wells, and extracting crude oil and natural gas to sell on international markets or use for refining. This segment is supported by a research and development center that is responsible for improving the cost efficiency and performance of the company’s exploration and production activities. Shell's oil sands business can be included with exploration and production because the end goal of both are the same: get crude oil. Together, these segments made up 55.4% of Shell's CCS earnings in 2007. These earnings grew over $100 million from 2006, because of rising oil prices over the course of 2007 more than making up for decreasing production and increasing exploration costs^[2].

The gas and power segment also forms a part of its upstream business. This segment is responsible for transporting natural gas, developing power plants, and marketing gas and electricity on a worldwide scale. The gas and power produced by this segment is primarily used for consumption by industries, business units as well as residential and government consumers. This segment made up 10.1% of Shell's 2007 CCS earnings, with over $100 million in growth from 2006 due to higher gas prices (because of increasing demand) and gains from divestments like the fourth quarter sale of shares in a German transportation venture with BEB Erdgas und Erdoel GmbH^[3].

The company’s downstream oil products business includes the refining and marketing of petroleum products including fuels, lubricants, and petrochemicals. Shell has ownership interests in 46 refineries around the world and manufactures oil and petroleum products, such as gasoline, diesel, heating oil, aviation fuel, heavy heating oil, lubricant, and bitumen. This segment accounted for 25.2% of the company's CCS earnings, and decreased from 2006 levels by almost $75 million because of lower refining margins. Net earnings increased by almost $3 billion, however, due to increased sales from higher international demand^[4].

Shell sells its products to both retail as well as business customers. Shell has 45,000 retail gas stations across the world operating under a single brand name. Its products include low-sulphur diesel, lead replacement fuel, liquefied petroleum gas (LPG), and differentiated fuels (differentiated fuels are tailor-made to meet growing customer needs for improved engine and environmental performance) including Shell Pura, Optimax, V-Power, V-Power Racing, and V-Power Diesel. It has convenience stores at more than 10,000 locations. A range of products including fuels, lubricants, and specialty products are sold to a wide range of business customers through five sub-segments of the company – Shell Aviation, Shell Marine Products, Shell Gas LPG, and Commercial Fuels and Lubricants.

The chemicals segment is a part of the company’s downstream business and accounted for 6.1% of 2007 CCS earnings. The chemicals division is mainly involved in producing and marketing petrochemicals, and saw CCS earnings growth of over $550 million in 2007 because of higher margins^[5].

[edit] Strategy and Expansion

As a vertically integrated company, Shell is able to control the entire supply chain, the operational efficiency of the company improves. In addition, owing to its direct access to customers through its retail gas stations, it does not need to pay any commissions to intermediaries; this, in turn, increases the profitability of the company, leading to higher revenues and profit margins.

Shell's current expansion strategy is to eliminate low-potential-growth segments and focus on high-potential sectors and investments. To this end, 3Q07 was a productive one; the company sold a number of facilities in France, Austria, and Australia, and expanded joint operations in Port Arthur and the Pluto LNG fields in Australia. The company is also focusing on expansion in Russia.

Shell is a global company with operations in more than 140 countries. As the company is not dependent on any single market for its revenues, it is not affected by fluctuations in any one of the markets, which results in stable revenues and good margins.

Shell is focusing on expanding its refining and marketing operations, specifically in the growing markets of Asia Pacific including Singapore and China. It has become the leading lubricant manufacturing company in China by acquiring one of the largest lubricant manufacturers in the country. The company is also expanding its refining operations in the U.S. by expanding the refining capacity of its center in Port Arthur.

Shell is increasing its capacity to produce natural gas by setting up additional LNG plants in Australia, Malaysia, Brunei, Nigeria, and Oman to take advantage of the increasing demand. The company has set up .

With world energy demand increasing faster than world oil and gas production, Shell is exploring alternative methods of production, including investing $739 million in an Australian coal seam gas project owned by Arrow Energy Ltd. As part of the deal, Shell will also buy 10% of Arrow.

In July, 2008, Shell announced it would acquire the Canadian Duvernay Oil Corp for $5.85 billion - a 42% premium on the company's share price. The deal will give Shell access to Alberta's tar sands, though Devernay's primary production thus far has been natural gas.^[6]

[edit] Business Drivers

[edit] Oil Prices Rise, Natural Gas Prices Fall

Although Shell has oil and gas reserves of 3,270 million barrels, declining reserves are a major concern for the company. Shell’s oil reserves have declined continuously over the last few years, from 3,745 million barrels in 2004 to 3,270 million barrels in 2006. Natural gas reserves stood at 25,050 billion cubic feet in 2004 and increased to 30,058 billion cubic feet in 2006. Production has also declined, from 3.473 million boe per day in 2006 to 3.315 million boe per day in 2007^[7]b. in 2007 In this scenario, sustained growth will be a challenge for the company. The decreasing supply of oil and the increasing supply of natural gas has lead to the recent trend of rising oil prices and falling gas prices; while the rising price of oil could benefit the company, the increasing difficulty of extraction could damage extraction and refining margins, while the declining price of natural gas could be offset by better extraction margins. Shell believes that these price changes are cyclical; the company is betting that prices will shift again, and so is spending in order to prep for future benefits. They are betting that increased demand from developing countries like India, Malaysia, Brazil, Turkey, and Indonesia will drive up margins. If decreasing oil margins are a product of decreasing absolute oil reserves, however, these trends might not be cyclical Shell could face future losses as well.

The table provides information on the oil and natural gas reserves and production of Royal Dutch Shell Company during 2004-06.

Historic Performance

	2004	2005	2006	2007
Oil Reserves (Millions of barrels)	3,745	3,466	3,270	N/A
Natural Gas Reserves (Billions of cubic feet)	25,050	24,912	30,058	N/A
Oil Production (Millions of barrels)	710	599	563	1,818
Natural Gas Production (Billions of cubic feet)	2,343	2,204	2,227	8,214

Source: Company Data

[edit] Higher Oil Prices Strain Refinery Profits

As the price of oil increases, companies involved in petroleum refining see their costs skyrocket. Shell, one of the world's largest refiners, currently has this predicament, as its record profits in its upstream segment are being offset by losses in its downstream segment - CCS income for the "Oil Products" segment fell $500 million from 1Q07 to 1Q08. Currently, it is more profitable to be a producer than a refiner, which may explain why Shell has been on a refinery-selling binge; in the first quarter of 2008, the company sold three French refineries with total capacity of 300,000 BPD for $1.8 billion (to be received during the second quarter).

[edit] Weather

Companies operating in the oil and gas sector face a major threat from hurricanes as the risk of damage to their oil exploration and production infrastructure increases. In 2005, the company’s oil platform located in the Gulf of Mexico ceased production and two of its oil refineries were damaged in the U.S. due to the hurricane Katrina. As a result, the company’s sales and profits were severely affected. A more frequent trend, however, can be viewed in Q3 earnings, as refining margins and revenues are usually lower than in Q2 because of damage to facilities in the Gulf of Mexico region. In 3Q07, however, it should be noted that refining capacity did not decline, though they are expected to for 4Q07.

[edit] Regional Instability and Oil

Political instability is another major threat for oil and gas companies having international operations. Shell has a significant share of its operations in Nigeria, which is experiencing political turmoil due to militant activities. As a result of this, the company had to vacate 4 production facilities in Nigeria to ensure the safety of its employees, cutting production by 400,000 BPD (or 2.25 million BPD). Another attack in on a far offshore rig in June 2008 forced the company to shut down operations in the Bonga field, cutting remaining production by another 225,000 BPD.^[8] Shell is also negotiating with the Iraqi government to develop natural gas fields in the south of the country; the Iraqi government says it loses $40 million a day because it does not have the ability to export or consume produced gas, but Shells involvement could change this. The Iraq War, however, means Western companies like Shell will be in danger of terrorist attack.^[9]

[edit] Shell Often has to Pay Recompense for Environmental Damages

Every stage of oil production, refining, and use have aspects that are damaging to the environment. Drilling leads to deforestation and groundwater contamination on land and coastal ecosystem damage offshore, refining leads to chemicals being released into groundwater and harmful fumes being released into the air, and the burning of oil and its products leads to the release of particulate emissions and greenhouse gases into the air. When the environmental damages caused by Shell's operations occur to the extent that they break environmental protection laws, the company is often sued by NGOs or government agencies like the Environmental Protection Agency. These lawsuits are usually settled out of court; on May 7th, 2008, for example, Shell, BP, ConocoPhillips, Chevron, Marathon Oil, Valero, and Sunoco agreed to pay $423 million in damages for contaminating groundwater with methyl tertiary butyl ether, an oxygenate used to increase octane levels in gasoline that has been replaced in recent years with ethanol. Exxon Mobil, along with five other companies named in the lawsuit, are not settling and will continue to contest.

[edit] Shell is getting into Renewable Energy

Shell is promoting renewable sources of energy. The company is funding businesses developing on renewable or alternate sources of energy, such as wind and solar power, and is also exploring opportunities in hydrogen and fuel cell technology. It is also researching second-generation biofuels, and investing in biofuels producers. The company has a research partnership with Hawaii-based HR Biopetroleum to develop Algae-produced biofuels. In July 2008, the company announced it had doubled its stake in cellulosic ethanol producer Iogen Energy Corp, to 50%, and is considering funding an ethanol plant to use the Iogen's technology.^[10]

[edit] Competitive Landscape

Shell competes with global players Exxon Mobil (XOM), Chevron, BP (BP), Total S.A., Sunoco, Valero, Petrobras, Eni, LUKOIL, and ConocoPhillips. The table provided below compares the Royal Dutch Shell Company with its competitors for the year 2007.

Comparison to Competitors - 2007

	CONOCOPHILLIPS[11]	ROYAL DUTCH SHELL[12]	EXXONMOBIL[13]	CHEVRON[14]	BP[15]	LUKOIL[16]	Eni S.p.A[17]	Total S.A.[18]
Reserves
Oil and Gas Liquids (Millions of barrels)	N/A	N/A	7,744	4,665	5,492	15,927	3,219	6,778
Natural Gas (Billions of cubic feet)	N/A	N/A	32,610	19,137	41,130	26,597	18,090	26,730
Production
Oil and Gas Liquids (Thousand b/d)	770	1,818	2,616	1,544	1,304	1,926	1,020	1,609
Natural Gas (Million cf/d)	5,087	8,214	9,384	4,799	7,222	1,545	4,114	4,839

Refining Industry 2007 Metrics

	SUNOCO[19]	CHEVRON[20]	VALERO[21]	EXXON MOBIL[22]	Royal Dutch Shell[23]	SINOPEC[24]	WESTERN REFINING[25]	ConocoPhillips[26]	BP[27]	LUKOIL[28]	Eni S.p.A[29]	Total S.A.[30]
Refinery Capacity (Million BPD)	0.91	2.115	3.10	6.4	3.953	3.42	0.234	2.7	3.81	1.162[31]	0.544	2.71[32]
Number of Refineries (including partial interests)	5	19	17	38	Over 40	17[33]	4	17	17	7	N/A	40
Number of Retail Gas Stations	4,684	25,100	1,962	Over 35,000	46,000	28,885	155	10,350	24,100	5,793	6,441 (in Europe)	17,000

Private companies such as Shell face intense competition from national and state-owned oil and energy companies. Governments of oil-rich countries support these companies and give them access to reserves by stopping direct foreign investment in oil exploration and production projects. In addition, owing to the heavy taxes and restrictions imposed by the government, foreign investment becomes unattractive. Private oil and gas companies such as Shell face problems in gaining access to oil reserves and starting operations in spite of their large size.

Strong oil and gas reserves provide a platform for growth of oil and petroleum companies. However, reserves of Shell have been decreasing continuously over the last few years as the company has been unable to replace its depleting and declining reserves (measured as the reserve replacement ratio, i.e., the rate at which a company replaces its used reserves with new reserves) at a rate higher than that of its competitors. In 2005, the company’s reserve replacement ratio was only 70-80 percent, while its competitors, ConocoPhillips and ChevronTexaco, had average reserve replacement ratios of 100 percent or more.

[edit] Global Oil Industry Operational Data

Company	Reserves (MM boe)	Current Years of Production	Oil & Gas Production (1000s boe/d) 2006	Oil & Gas Production Growth (%) 2006
BP	17,368	10.4	3,926	-1.9
ChevronTexaco	11,020	10.9	2,667	6.1
ExxonMobil	21,518	11.3	4,238	3.8
Royal Dutch Shell	11,108	6.7	3,474	-1.0
Hess	1,243	7.9	358	7.0
BG Group	2,149	6.2	601	19.0
ConocoPhillips	6,676	8.7	2,359	29.7
ENI	6,406	11.2	1,770	5.8
Marathon	1,262	7.1	377	9.0
Norsk-Hydro	1,916	9.3	573	2.0
Petro-Canada	1,301	8.4	345	-3.1
Repsol YPF	2,600	5.2	1,128	-3.0
Petrobras	11,458	14.2	2,287	4.5
CNOOC	503	3.0	455	11.7
Gazprom	144,668	39.7	9,965	6.0
LUKOIL	18,144	27.2	1,838	4.5
PetroChina	16,260	15.6	2,907	5.0

[edit] Notes

1. ↑ http://www.shell.com/home/content/investor-en/financial_information/quarterlyresults/2007/q4/q4_2007_keyfinancials_31012008.html
2. ↑ http://www.shell.com/home/content/investor-en/financial_information/quarterlyresults/2007/q4/q4_2007_results_31012008.html
3. ↑ http://www.shell.com/home/content/investor-en/financial_information/quarterlyresults/2007/q4/q4_2007_results_31012008.html
4. ↑ http://www.shell.com/home/content/investor-en/financial_information/quarterlyresults/2007/q4/q4_2007_results_31012008.html
5. ↑ http://www.shell.com/home/content/investor-en/financial_information/quarterlyresults/2007/q4/q4_2007_results_31012008.html
6. ↑ MarketWatch: "Shell offers 42% premium for Canada's Duvernay"
7. ↑ http://www.shell.com/home/content/investor-en/financial_information/quarterlyresults/2007/q4/q4_2007_results_31012008.html
8. ↑ Internatonal Herald Tribune: " Shell shuts Nigeria oil field after attack on offshore rig"
9. ↑ Washington Post: "INTERNATIONAL BRIEFING"
10. ↑ The Star: "Shell moves further into non-food ethanol"
11. ↑ COP 2007 10-K
12. ↑ RDS 2007 10-K
13. ↑ XOM 2007 10-K
14. ↑ CVX 2007 10-K
15. ↑ BP 2007 10-K
16. ↑ LUKOIL Company: General Information
17. ↑ E 2007 Annual Report
18. ↑ Total 2007 Results Press Release
19. ↑ SUN 2007 10-K
20. ↑ CVX 2007 10-K
21. ↑ VLO 2007 10-K
22. ↑ XOM 2007 10-K
23. ↑ RDS 2007 20-F
24. ↑ SHI 2006 Fact Sheet
25. ↑ WNR 2007 10-K
26. ↑ COP 2007 10-K
27. ↑ BP 2007 20-F
28. ↑ LUKOIL Company: General Information
29. ↑ E 2007 Annual Report
30. ↑ Total Website: "From Crude Oil to the Consumer"
31. ↑ Conversion factor is 1 BPD = 50 tonnes per year
32. ↑ Obtained by Dividing Total Throughput of 2.413 MMBPD by utilization rate of 89%
33. ↑ Sinopec Refining Overview
34. ↑ ^{34.0 34.1} 2006 BP, 20-F, Item 4, Pg 12
35. ↑ ^{35.0 35.1} 2006 BP, 20-F, Item 8, Pg 201
36. ↑ 2006 BP, 20-F, Item 8, Pg 88
37. ↑ ^{37.0 37.1} CVX, 2006 10-K, Item 15, Pg FS-68
38. ↑ ^{38.0 38.1} CVX, 2006 10-K, Item 1, Pg 5
39. ↑ CVX, 2006 10-K, Item 15, Pg F-27
40. ↑ ^{40.0 40.1} COP, 2007 10-K, Item 8, Pg 185
41. ↑ ^{41.0 41.1} COP, 2007 10-K, Item 18, Pg 184
42. ↑ COP, 2007 10-K, Item 8, Pg 103
43. ↑ ^{43.0 43.1} E, 2006 20-F, Item 18, Pg F-101
44. ↑ ^{44.0 44.1} E, 2006 20-F, Item 3, Pg 3
45. ↑ E, 2006 20-F, Item 18, Pg F-4
46. ↑ ^{46.0 46.1} RDS, 2007 20-F, Item 10, Pg 11
47. ↑ ^{47.0 47.1} RDS, 2007 20-F, Item 4, Pg 26
48. ↑ RDS, 2007 20-F, Item 4, Pg 4

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