Royal Dutch/Shell: a Shell Game with Oil Reserves

Royal Dutch/Shell: A Shell Game with Oil Reserves

Corporate governance is a system of rules, practices and processes by which a company is directed and controlled. It provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate structure.

Question 1 - Prior to 1990

In 1959, Royal Dutch/Shell Group underwent a complete restructuring to cope with the scale and complexity of its operations and to prepare for further growth. The restructuring was designed by consulting firm McKinsey & Company, which instituted a matrix organizational structure. The matrix structure gave operating authority to local managers based on geographical region, while the responsibility for strategic planning and allocation of capital for exploration and production was held by the central offices in London.

The company also utilized scenario planning to examine a range of potential outcomes based on date collected through its global operations. By using scenario planning, the company was able to prepare for a drop in oil by boosting its refining operations.

There are several disadvantages of the matrix organizational structure.

(1) It can result in internal complexity.

(2) Dual authority and communication problem may cause division among employees.

(3) It can be expensive to maintain, overhead costs may increase due to double management

(4) Lack of clear line of accountability

Question 2

In the 1990s and early 2000s, Royal Dutch/Shell faced new pressures that presented new challenges to its business model. The low oil prices made it difficult for oil producers to replace reserves in a cost-effective manner. Royal Dutch/Shell acknowledged this issue by cutting back on exploration as the risk-reward payoff became disadvantageous. The company’s reserve replacement ratio fell below 100 perfect, which...