Executive Summary

This report provides an analysis and evaluation on the overall performance of

HengYuan Refining Company Berhad, one of the biggest refining and manufacturing
of petroleum products in Malaysia. This report is prepared based on the strategic
management process.
This report shows an analysis done on the company’s vision and mission statement.
Besides, it also provides the company’s corporate social initiatives over the years.
Methods of analysis such as PEST, Porter’s Five Forces and SWOT analysis and
frameworks were used to evaluate the company’s performance throughout the years.
This report carries the company’s internal and external environment analysis using the
above mentioned frameworks. Furthermore, it also includes an evaluation of the
company’s core competence, unique resources and capabilities. Moreover, this report
contains three year’s financial analysis on the company’s financial statements for the
years 2014, 2015, 2016.
There are strategic issues affecting the company which has been identified that would
influence the company’s future performance such as price adjustment affecting
company sales, threat of substitute products, lack of advertising, marketing and
promoting, culture issues in Malaysia and threat among competitors. There are some
recommendations proposed that are, producing own materials, improve operational
efficiency, adding more varieties of products, and increasing the productivity of the
employees.
Lastly, it shows that the company has its ups and downs. It does not affect much to the
company as it has loyal customers. All the issues affecting the company’s future must
be taken seriously if the company wants to continue its existence for more coming years.
All the Proposed recommendations would be great enough to the company to step up
in their market and gaining more profits and customer’s satisfaction. Everything
mentioned above would tremendously help HengYuan company to stay competitive in
the market without losing its customers and the reputation of the company.
Vision, Mission, & Corporate Social Initiatives

Vision statement

For the Shell’s vision is “To be the Top Performing and Most Admired Refinery in
Asia”. Shell had set a target to become the Top Company in Asia. The company gives
a clear statement to the stakeholders and its employees. Their employees know the
company target and it has given a lot of motivation to them achieve and hit the target
easily.

Mission statement

The first mission for Shell is “Manufacturing and supplying oil products and
services that satisfy the needs of our customers. The company wants to provide the best
products to all their customers which can satisfy their needs. The company wants their
product be the first choice for the customer to purchase. However, the company did not
mention how good are their products compare with other company products.

For the next mission is “Employing a diverse, innovative and results-oriented team
motivated to deliver excellence.” The company employ team to improve the company
selling results which can increase their profit. By doing this mission, it can increase the
stakeholders confidence to this company and also will motivate more stakeholders to
invest money to this company.

Based on this two mission, we know that Shell wants to improve their products and
management better than before. They will keep doing research about their products so
that they can provide the best to their customers. They also want gain trust from their
stakeholders to invest more money into the company by employing teams which have
more experience about oil products.
Corporate Social Initiatives

Responsibility for Community

In 2016, Shell had maintained a high level of social and community investments.
The company invest in programs and be a partner with Port Dickson Residents
Association, local communities and schools within their areas.
The programs is about organize a gotong-royong events with the communities to
create a clean environment. The company also donate money to Yayasan Munarah
which is a company that helps underprivileged youths in Negeri Sembilan. The
company donate foods and drinks for underprivileged Indian families when Deepavali.
Lastly, the company organize a Health, Safety, Security and Environment (HSSE) for
the community to enhance the home safety awareness.

Responsibility for workplace

Shell organized formal multi-skilling training and learning sessions for their
employees. The programs more focus on communication and effectiveness and time
management. This can make a good relationship with their employees and the
employees also can learn new things from the training.
Shell organized many types of activities during the year which include Goal Zero
Walk, safety campaigns and emergency response campaign. This activities help the
employees increase the knowledge about their personal safety and process safety.

Responsibility for environment

According to Shell’s annual report, the company ensures to reduce any negative
impacts by managing wastes responsibly. The company will use all the assets they have
and try to not waste any of it.
Moreover, the company ensure the health and safety of employees and neighbors.
They also reducing disruptions to the community and impact on biodiversity.
External Capabilities Analysis

Political

Carbon emissions are to be accused of penalties and taxes, oil and gas organizations
have been compelled to settle government pressures through partnerships to support
their operations by offering an incentive to the legislature as the improvement of the
economy. Besides that, Free trade agreements among the European and America
enable Shell to greater profit by taking part in export of oil. Russia is a center of oil
saves and Shell accepted on the opportunity to abuse the stores in Russia to address
the difficulty of its growing demand, and its expanding absence of ordinary oil
reserves around the world. Russian government, who had a high export obligation on
oil imports, had decreased it by 2.6%, which profiting Shell and other oil
organizations with their plants in Russia to trade the oil items to their home countries
and respective countries where they offer the fuels. (Shell, 2010 [online]).
Furthermore, most of the governments of the oil creating nations through their
National Oil Companies control over 90% of the proven oil reserves and more than
75% of worldwide oil and gas production. It can be seen from the Graph below.
The presence of the significant amount of oil and gas reserves in a nation can start
common wars, and increment corruption. These reactions are known to the world as
"resource curse." All of the above, clearly showed the barriers for foreign oil and gas
organizations to put invest into these countries.

Economics

The petroleum industry consists of exploration of oil and upstream in the production
industry and the downstream refinery industry. The economic factors have the
influence of the supply and demand of the oil prices along with supplementary goods,
substitute resources and the exchange rate of American dollar in the market.

Firstly, oil prices have increased the world over, it resulting the substantial taxations
from the government because of which costs of production have risen. It cause the
overall profitability of Shell had been decreased. Besides, there is a growing demand
for renewable energy and it is expected to increase by 57% in the following 20 years.
This turns into a challenge to Shell when there are less natural reserves of oil and gas
left to meet of this demand. Shell has utilized its scenario planning efforts to invest
into new projects in order to extract oil and gas from unconventional reserves to have
the capacity to meet the growing demand in future. However, it will result a higher
prices for customers. As growing demand of renewable energy, more advance
technology is required in order to follow the economic trend. Thus, Shell’s Research
& Development requires large amount of investment and it further forces the
organizations to charge high prices for fuels.
Social

Social factors express migration, cultures, religion, demography, income and

ideological views on the oil and gas industry in Malaysia. Current social trends
significantly affecting the industry. Population of Malaysia in year 2017 estimated at
32million which have a constantly growth rate yearly. According to research, the
number of passenger cars in use increased rapidly on the past few years which results
increases in consumption of vehicles. Malaysia’s oil and gas policy has historically
focused on providing affordable commodity to population through subsidizing fuel. It
resulting in increasing oil and gas consumption levels due to the increases. Recently,
issues about green energy resources are getting more focus of attention by Malaysian.
People were increasing their awareness and focus on more friendly fuels and
decreasing in the use of “dirty” fossil fuels such as shale gas, oil sands and coal. Oil
and gas industry have been a mainstay in Malaysia for more than 100 years. There are
sufficient skilled labor and professional workers in the sector with good paid and
working hours. It brought changes in the living standards of people.

Technological

Technology provided a wider and more sustainable mix of energy resources for the
world’s growing population. Thousands of scientists, engineers and researches are
working to develop a better method in technology, collaborating with specialists. A
web based visualization platform provided as companies can manage and track all the
data coming from the oilfield for example wellhead conditions and mechanical
systems. Information analyzed by computer and send to operations centers for
adjustment to minimize problems. Remote environments are connected with oil and
gas industry. VSEE Labs provides video conference and collaboration software used
by Shell Oil. Technological advancements in equipment of drilling and extraction of
oil and gas from unconventional reserves. For example, improve pipelines technology
by making them more environmentally friendly and cheaper as pipelines are
 extremely expensive to install and maintenance. Technology makes oil and gas
cheaper to extract, easier, cleaner and safer, hence quality of life could improve.
Extraction innovation minimizing the harm of hydrocarbons fuel rather than making
alternative fuels commercial. There have some barriers being faced in bringing new
technology to the oil and gas industry.

Porter Five Forces

1) Threat of new entrants

The threat of new entrants in the oil and gas industry is significant low, and the reason
is a result of the abnormal state of protectionism practiced in the business through
government policies and the high financial demand that is essential for setting up an
oil and gas firm in the Malaysian market. It requires monstrous financial investments
in extremely costly infrastructure. Immense capital investment is important to cover
costs, for example, building pipelines, drilling wells, building access streets and
acquiring land. As such of the cost of market entry and economies of scale in the
industry the threat of new entrance is low.

2) Bargaining power of buyers

Oil and gas are fundamental items in any economy. Economic production processes in
an economy make utilization of oil. This clarifies why in some developing nations oil
supply is under state offices. Moreover, the oil business is portrayed by organizations
meeting up to shape cartels that would empower them to control the market
(Bloomberg, 2012). A part from this, the items offered by players in the oil and gas
industry are regularly not much different from those offered by their rivals. As a
result, buyers have a tendency to pick items with either lower prices or that have
better terms. On the flipside, buyers are many; henceforth regardless of whether a
cross segment utilizes the results of their competitor; Shell's operations would not be
significantly be affected. Thus, the bargaining power of buyers is medium.
3) Threat of substitute products

The main alternative sources to oil and gas for producing energy which utilized for
power, transportation, warming, and so forth are Nuclear Energy, coal, hydrogen,
Biofuels and also different renewable sources, for example, solar and wind energy.
While the threats of solar and electricity has been recognized highly in home and
office utilizations, such threats have not reached out down to the transportation
business as such advancements are still on its infancy and development stages over
the world. Indeed, even at home, gasses are as yet the most favoured source of energy
for cooking since they are more reasonable than solar or electricity. These alternative
sources of energy can replace a high measure of hydrocarbons use in the worldwide
energy mix as according to their performance, quality and cost but this strategy
requires a major measure of investment in R&D and producing procedures, so the
likelihood for substitutes to dominate the global energy mix until 2040 is very small.
Therefore, the threat of substitute products is low but can significantly change in the
future.

4) Threat of suppliers

The oil and gas industry have significant number of suppliers extending from private
enterprises to governments. As Shell has grasped a vertical integration growth
strategy which includes acquiring and merging with organizations at various levels of
operation, hence it has significant effect on its supply network. Besides, the
organization has improved its technological capacity through the projects and
innovation segment of its business (Reuters, 2012). Therefore, the bargaining power
of suppliers is low.
5) Industry rivalry

The oil and gas industry is dominated by gigantic companies that produce various low
differentiated items. Key competitors, for example, Chevron, Total and BHP have
built up very much perceived brands with noteworthy customer base. Rivalry with
these organizations is high because of marking differentiation strategies applied by
the organizations in their operations universally. The organizations have set up brands
recognized internationally and huge clientele which makes rivalry in the business
high. These factors combined with low threats of both substitutes and new entrants
make competitive rivalry high.

SWOT ANALYSIS – (Opportunities & Threats)

Opportunities

Infrastructure world class

Malaysian Government has hugely fully support by giving great strategies on Oil and
Gas and petrochemical enterprises. A good governance of long term vision by
Malaysian Government has elevated the businesses. It gives an opportunity to Shell to
more emphasis on Research & Development.

Carbon emission

The awareness and concern for environment sanity are increased in Malaysia where
decreased carbon emission is an important consideration for most oil-related products.
Thus, the demand of liquefied natural gas as a source of clean energy are likely to be
increase in future. This is probably going to expand the organization's revenues from
liquefied natural gas. There are also an opportunities for the organization to expand to
the developing economies like China through joint ventures, mergers and acquisitions
like acquisition of Neste Oil Oyj in Poland.
Threats

Government run companies

Government-run organizations control vastly greater amounts of oil and gas resources
than most of the oil and gas companies nowadays. Government-run entities have
access to huge assets and might be motivated by political or other factors in their
business choices. It becomes a threat to Shell because it will affect the competitive
position of Shell and form a barriers of entry to Shell to access into desirable projects.

Increasing strict environmental regulations

Environmental regulations become more strictly is also a threat to the current and
future operations of the company which will require more efficient and more
effectiveness operations and environment friendly exploration and manufacturing
technologies. It might cause the administration expenses increase and hence resulting
decrease the profit of Shell.

Asia Middle Eastern

The complex and mega refining capacity surge and fluctuating interest rates in the
Asia Middle Eastern are also a threat to the company due to its global operations. This
is changing the supply-demand balances in such a way that refining margins are under
pressure and affect the profitability of the company.
Internal Capabilities Analysis

Value Chain Analysis

Primary Value Chain Activities

Inbound Logistics

Shell is currently in contract with Cosan, a Brazilian company to supply ethanol.

Azherbaijan and Russian suppliers are also used to supply oil and gas reserves (Shell,
2010 [online]).Besides that, Shell enter into a 5-year crude oil supply agreement
(COSA) with Shell International Eastern Trading Company (SIETCO) to ensure the
continuity of supply of crude oil after completion of the share sale. With this
agreement, SHell will acquire raw crude oil mostly from SIETCO on the terms and
conditions set out in the COSA for an underlying period of five years. The minimum
amount which must be bought from SIETCO will decrease every year during the
above mentioned five years.

Operations

Shell’s performance strategy involved restructuring and reorganizing the operations of

the company to upstream and downstream where priorities were towards performance
focus, competitive growth and new project investments. As a result, the overall
operational performance has also met with improvement due to efficiency rates have
rose. The reorganization helps the company in the way of faster implementation of
future growth strategies.

Outbound Logistics

Shell has an extensive global outbound logistics network which allows it to distribute
the refined oil in the most cost efficient manner. It uses light transportation. For
example, Shell distributed their product through multiproduct pipeline (MPP) to the
Klang Valley Distribution Terminal (KVDT) and the Kuala Lumpur International
Airport (KLIA). Furthermore, Shell also dispatch products through road to more local
customers and via sea to more remote Malaysia area such as Sabah and Sarawak.
Apart from that, Shell entered into a 10 year term products offtake contract to
securing our sales of gas, flight fuel and diesel in the nation.

Marketing and Sales

Shell markets itself as the largest fuel provider, where its service centers are located in
90 countries worldwide. It adds the image of an innovation and quality-focused
company which does not compromise on performance. Although, Shell has previously
received an excellent amount of sales revenue, recently, there has been a decline, due
to rise in oil prices, rising social exposure of the workforce exploitation and
environmental degradation by the company.

Service

Shell uses its helpline service to address customer complaints and queries. Other than
that, there is no extensive or special form of service that Shell offers to customers
with regard to complaints and queries. Shell service stations have the direct
interaction with the customers and the company makes sure that the employees
address to customers appropriately and offer services in the standard way.
Support Value Chain Activities

Procurements

Shell is now engaged in e-procurement, using the help of SAP's support systems to
enhance its supply chain activities. SAP's support offers an ERP system that allows
procurement to be done online (SAP, 2017).

Technology Development

Over $1.2 billion have recently been spent by Shell in research and development of
new technologies to gauge the most benefit out of the reserves of oil and gas and find
new opportunities for investments (Shell, 2017). Technological innovation
development in extracting energy is a key strength of the company and it is
continually engaged in investing in new technologies that would give it an edge over
its competitors.

Human Resource Management

Human resource activities are the most challenging for Shell as it has to face several
employment issues starting from health, and work environment to safety issues. These
are true for factory workers who work in high danger zones. In Nigeria, a high rate of
people dying in the factory has become common.

As shell is a global competitive company, it seeks highly talented and experienced

people who seek innovation and growth for the company for its management. Shell
offers learning and development opportunities for its diverse workforce. It offers
monetary and non-monetary forms of incentives to employees. The human resource
management uses online application system for interested candidates and uses
simulation based testing tools for hiring appropriate employees for middle
management and senior management posts.
Firm Infrastructure

Shell's infrastructure is heavily reliant on technological support, by means of ERP,

data management, research and development, marketing, procurement, human
resource management, extraction and production operations. This allows a strong
network of coordination and communication to be maintained globally.

Resources Based view

1) Tangible resources
Resources that can touch, see, and smell and normally made by human to
improve the business’s operation activities become more efficient. Shell
have its own lab and professionals to conduct its Research & Development
process. Shell had invested large amount of money in R&D in order to have
technology competitive advantages. Thus, the advance technology equipment
and professionals who operate the equipment are the tangible resources of the
company. It enable Shell to achieve the operation efficiency and effective and
also having dynamic capability because advance technology helps Shell renew
constantly and recreate strategic capabilities to meet the need of changing
environment and satisfy the customers’ needs.
2) Intangible resources
Efficient management in the company is the intangible resources of Shell. It is
because Shell have a very good human resources management and customer
complaints management. Good allocation of resources during the upstream
and downstream activities enable Shell to reduce the cost and having a good
waste management. Besides, Shell fully committed in public complaints to
ensure a safe and healthy environment for our community. Every complaints
are attended and initiate investigation if necessary to ensure customers
satisfaction. Recently, Shell won Energy Company of the Year” and
“Commodity Excellence Award for Natural Gas’’ due to its performance at
the top of a sector in fundamental and innovative ways. Therefore, Good
 management in Shell consider is an intangible resources because it had built
up the company’s reputation and also achieved cost effectiveness.

SWOT ANALYSIS – ( Strength and Weaknesses)

Strength

With over 900 service stations, Shell has the leading market share in the petroleum
retail business in Malaysia. Shell’s fuels are tailored to improve engine and
environmental performance. Not only that, Shell is the only petrol retailer in the
country to offer premium fuels through Shell V-Power Racing and Shell Diesel with
Fuel Economy formula. In Malaysia, Shell make and sell more than 600 different
lubricants for the automotive sector, heavy-duty transport, food processing and power
generation. Shell are also the lubricants market leader in Sabah and Sarawak.

Shell has obtained competitive advantages in terms of technology. Strong Research &
Development in Shell enable the company access new resources and better meet the
needs of our customers. Shell continuously focus strongly on technologies that
support our various businesses and reduce the environmental footprint of our
operations and products. As a result, its form a strong exploration and technological
capability as an internal strength coupled with a diversified portfolio of products in
the upstream and downstream segments of the company.

Shell has 20% brand preference which is the highest among its competitors. Besides
that, Shell has obtained 'first mover advantages' by using unconventional oil reserves
which has given its cost benefits.

Weakness

The size and size of the worldwide operations of organization might be a weakness
for Shell because of the difficulties of the company to control quality and standard of
its products since the operational conditions of various refinery sites differ. This likely
to bring unfavorable impacts on the authoritative efficiency and effectiveness of the
organization's management. Exposure to various regulatory regimes through the
global presence of the organization presents difficulties in detailing uniform strategies
applicable to the worldwide operations of the organization.

Apart from that, Shell have to ensure that all employees and contractors comply with
their principles and code in order to maintain their reputation. Failure to do so or
failures of governance or regulatory compliance could serious affect Shell’s
reputation. It could be a weakness for Shell because it is very difficult that ensure all
the employees and contractors follow the same directions.

Lastly, Shell currently has a severe lack of association with bio fuels, which are
growing in demand. There is also lack of substantial countering of the social pressures
and the media exposures on part of Shell.

Core Competency

The competitive advantages of Shell would be the Strong Research & Development in
terms of technology. Shell have a very strong professional engineers to carry out their
operation with efficient and safety. Besides, Shell largely invested and it enables Shell
improve the quality of the product as well as the productivity. For example, liquefied
natural gas (LNG) technologies of Shell enhance energy efficiency and advance LNG
as a transport fuel for trucks, ships and locomotives helps Shell improve their
operation activities. In nutshell, strong R&D enables Shell produce the products that
meet customers need’s and flexible to change to meet the need of changing
environment. As a result, Shell able to reduce the cost and time in the production
cycle as well as the quality of the product to increase customers satisfaction.

Benchmarking Analysis

Benchmarking is a system to determine the improvements of the company by analyze

how other organizations achieve their high performance levels. We found out that
Petronas is having more competitive advantages compare with Shell even though they
are the main competitor for each other. It is because Petronas is the main player and
local market leader in terms of reserves, production and acreage in Malaysia retail oil
& gas finish products due to its capability to sustain by backed by the Malaysian
Government. Not only that, Petronas has attained the benchmark position as an
industry leader in Malaysia Oil & Gas industry. Furthermore, Petronas also has
various international partnerships such as Formula One racing teams for its retail and
lubricant businesses. These helps Petronas having more resources and more capacity
to growth in future. In order to minimize this competitive disadvantages from Shell
point of view, Shell should continue maintain itself as the cost leadership and keep
investing to bring a high quality R&D for the benefit of its customers with its
premium and known quality products and also expand wider market share for Shell.

Financial analysis

Profitability Ratios

 Gross Profit Margin of Shell in 2014(15.15%) had dropped compared to

2015(11.57%) but in 2016 increased sharply to 18.27% due to increasing of
the cost of goods sold. Shell do not hold competitive advantage that made
company charge more its products.
 Operating Profit Margin of Shell had decreased in 2015(1.2%) compared to
2014(4.7%) and slightly increased to 3.7% in year 2016 which succeed in
sales and management controlled costs and considers as one of the strength of
Shell.
 Net Profit Margin of Shell in 2015 is 0.8% which dropped compare to 2014
which is 3.5% and increased back to 2% in 2016. It suggests that create RM
0.05 for every Rm 1 of revenue generated by the company shareholders. These
lead investors would quit investing in Shell and turn to become a weakness.
 Total return on assets of Shell in year 2014 is 4.2% and decreased to 0.7%
on 2015 and slightly increased to 1.2% in year 2016.
 Net Return on Total Asset (ROA) of Shell is lower down in 2015 which is
0.7% compare to 2014 which is 4.2% and increased back to 1.2%. Shell in
generating RM 0.005 in net income for every Rm1 of company assets. This
 low ratio means that the Shell is not able to generate earnings efficiently by
using its assets.
 Return on stockholders’ equity (ROE) of Shell in year 2014 is 8.1% and
falls sharply to 1.3% in year 2015. 2.6% in year 2016.
 Return on capital employed (ROCE) of Shell in year 2014 was 7% and
dropped sharply to 1% in year 2015 and slightly increasing to 1.8% in year
2016. It indicates that Shell have low profits can be invested back into the
company for the benefit of shareholders.

Liquidity Ratios

 Current Ratio of Shell in 2015(1.32 times) had decreased as compared to

2014(1.16 times) and decreased in 2016(1.17 times). So, Shell may not face
liquidity problem in 2016, 2015 and 2014 because the ratio is more than one.
They have enough assets to cover their current liabilities in 2016, 2015 and
2014.
 Working Capital in year 2014, 2015 and 2016 are 13,566, 22410 and 12744.
Positive working capital is the excess of current assets over current liabilities.
In short term, receivables of a company is more than its payables.

Leverage Ratio

 Total debt-to-assets ratio of shell in 2014 is 0.13times and increasing slightly

in 2015 which is 0.17times and 2016 which is 0.23times. The total liabilities
account is low than total assets. The strength of Shell is using small amount of
financial leverage, which reduced its financial risk in the form of fixed interest
payment.
 Debt-to-equity ratio of Shell in decreased slightly which is from 0.5 to 0.36
and 0.27 from year 2016 to 2015 and 2014. However, since it is lower than
one, a little debt to equity ratio indicates that Shell can generate enough cash
flow to satisfy its debt obligations.
  Times-interest-earned ratio of Shell is decreased sharply which is from
138.13 to 4.25 in year 2016 to 2014. The higher the figure indicates that the
less chance a company failing to meet its debt repayment obligation. This
indicated Shell is generated few earnings compared to its interest obligations.

Activity Ratios

 Days of inventory of Shell in year 2014 is 20days, 2015 is 26days and 2016
is 41days. Inventory turned over times increase indicates the number of days
that it took to sell the inventory held during the period increased.
 Inventory turnover of Shell is decreased slightly which is from 18.14 to
14.08 and 8.78 from year 2014 to 2016. Higher calculations indicate stock is
able quickly converted into sales and cash during the accounting period. It
means Shell getting poor in covert stock into sales and cash.
 Average collection period of Shell was 35 days in 2014 and had increased 5
days in 2015. It suggests a deficiency in the collection process. In year 2016, it
continues to increase 15 days compared to 2015, which is 55 days, Shell are
poor in ability to collect money from the customers.

Investor Ratios

 Dividend payout ratio is increased from 0.9 to 2.69 in years 2014 to 2015
and continues raised to 3.69 in 2016. Shell announces a increases in annual
dividend payments to shareholders.
Key Issues

1) Declining, Expensive Reserves

During the past few years (2011-2015), Shell has facing problem to maintain their
reserve base. At the same time, the company’s proved, probable and possible reserves
dropped by 10%. Those drop might not be completely the fault of Shell because
proved reserve estimates are tied to the price of that commodity. Result, the huge drop
in natural gas prices, especially in the United States country showing up on the
financial position but might not be the major threat in the long term. Shell’s
exploration plans are not going as it hoped. The company has shelved its exploration
plans in the Beaufort Seas and Chuckchi after a drillship ran aground. The grounding
process has spent about $5 billion in exploring the region with nothing really showed
for it.

Not surprising that finding oil is becoming more and more expensive. However, Shell
really stands out to contribute a high capital to replace its reserves. According to
researches (Ernst & Young studies), the average reserve replacement costs for 50 oil
and gas exploration and production companies was spending &19.44 to replace a
barrel of oil but Shell is paying $41.76 as reserve replacement costs.

2) Somber Shale Production

Shell took some major hits from low natural gas prices just like every other shale
producer in United States. However, unlike the others, thought, the company hasn’t
been able to recover since the reduction in prices of natural gas. The past performance
of shale become another disappointment for Shell as it took a $2 billion write down
on its liquids rich shale assets. Other than that, the company has announced that it will
have to sell its holdings on both the Eagle Ford and the Mississippian Lime
formations since it has struggled so mightily on its shale assets. Decreases in prices of
shale was effectively affected the business of Shell. Compared to many of the players
in big oil and gas company, this has been norm rather than the exception. For
example, Exxonmobil has seen its return on capital employed in its upstream United
States operations drop to a paltry 8% which affected by the disappointing result from
its acquisition of XTO Energy company. Shell is facing problem as many of these
major companies are finding that their assets are not in the prime locations in these
shale formations and the economics are not attractive.

High risk projects was ill-suited to the nimble needs of shale as it requires drilling
hundreds of wells and injecting water at high pressure to break the rock that holds oil
and gas. The procedures scrap are costly and complex such as deepwater projects.

3) Nigeria Operations Issues

Shell has been in Nigeria since 1937, its operations amassed in the Niger Delta and
bordering shallow offshore zones where it operates in an oil mining lease territory of
around 31,000 square kilometres. It has more than 5,000 kilometres of pipelines and
flow lines, 77 flow stations, 10 gas plants and employing more than 3,500 workers.

In their Nigeria operations they confronted various risk and unfavourable conditions,
which could have a material adverse impact on their operational performance,
income, cash flow and financial condition. These risks and conditions incorporate
security issues encompassing the well-being of their employees, sabotage and
burglary, capacity to uphold existing legally binding rights, litigation and restricted
infrastructure. They have been plagued by oil robbery, vandalism, and attacks on oil
infrastructure that brought about the loss of somewhere in the range of 100,000
barrels every day during the second quarter. Shell isn't the only one in this regard; the
burglary and harm issue in Nigeria has been severe to the point that few foreign
organizations have been compelled to either downsize interest in the nation or even
withdraw altogether.
4) Supply Chain Management Issue

When it comes to oil and gas development with all of its moving parts, an ineffective
supply chain management process can lead to worker productivity issues, wasted
money and ultimately, lower production levels and profits. Challenges can creep into
any part of the supply chain and create problems with ripple effects, whether it’s with
delivery of in-bound drilling materials such as mud, water or sand; transporting
produced oil or gas from the field to its targeted location; or getting workers to remote
locations equipped with supplies not only needed to do their jobs but also needed to
sustain life and protect health. Supply chain challenges in upstream sector of oil and
gas also include health, safety, security and environment management and complex
operations with multiple stakeholders. Fragmented supply chains or mismanagement
in supply chain invite disconnects, delays and unclear accountability, materials
monitoring and optimizing purchasing. But of these issues, logistical coordination for
large projects as well as visibility of materials and predictability working with
multiple stakeholders at numerous drilling sites are of top concern to O & G
companies. Inefficient SCM leads to wastage of resources and waste management is
another area of concern in the upstream industry which causes unavoidable overheads.

5) Workforce Challenges

An aging workforce coupled with a boom in new oil and gas development is creating
challenges for energy companies in the areas of recruitment, retention, and training.
The oil and gas industry is facing a shrinking talent pool for those with specialized
expertise. A large percentage of the individuals who have the institutional and
technological “know-how” of their organization’s specific risks and operations are
looking toward retirement. 2% percent of the workforce having retired last year and
28 percent being over 45. An even more concerning prospect, however, is that 31
percent of respondents claim that they are likely to leave the sector and seek
employment elsewhere. Nearly 90 percent of senior human resources executives at 22
top international oil and gas companies believe this problem is one of the top business
issues facing their companies. The lack of skilled personnel and manpower or main
 operations requiring high tech processes in the oil and gas industry is a challenge in
most parts of the world especially in the upstream sector of the industry. Processes in
the upstream sector such as exploration and production requires high technicality and
therefore there is need for skilled manpower.

Strategic Choices

1) Cost cutting - (Declining Expensive Reserve)

Royal Dutch Shell has reported a surge in their cash flow problem one year after a
huge industry downturn dragged it to its worst financial result in a decade. As a result,
the company plans to have more asset sales and cost-cutting over the next few years
as the energy giant adjusts to prolonged expensive reserves of petroleum. The
company announced a new mid-term strategy to transform the company and expected
to save another $4.5 billion from its 35$billion takeover of BG Group, up from earlier
estimate of $3.5billion. Besides, the company confirmed that they were cutting
another 2,200 jobs after the BG deal, on top of the 2,800jobs already announced with
more than 10,000 employee cuts globally over the years. In additional, the company
will forge ahead with asset sales of $30billion over the years. Those savings are
available for Shell to offset against expensive reserves.

By capping Shell’s capital spending in the futures, the company is investing in

compelling projects, driving down costs and selling non-core positions to reshape
Shell into a more focused and more resilient company with better returns and increase
in free cash flow per share.
2) Generate greater return on shale. – (Somber Shale Production)

Shell have major shale assets across the United States. The company need to focus on
the way that can generate a greater return on its assets if Shell hopes to turn the things
around to positive, Increasing domestic natural gas and oil prices can make these
assets slightly more attractive. Buyer must pay more at the consumption of the assets,
leaving less for other purchases. The company could benefit from improving
operational efficiencies as well. Advances in technology meant there was scope to
increase oil recovery from shale rock from today’s 7%-9% by another 1%-3% over
coming years. This energy can be a key growth priority to generate larger profits for
Shell in the next decade along with renewable energy as it have a big market
potential.

3) Nigeria Operation Solutions

To battle these threats, Shell can revamp its strategy in the nation by divesting its
onshore fields and rather concentrate on offshore fields, where the risk of sabotage
and burglary is generously lower. Shell should sell its licenses in the sabotage-prone
area and use that fund to shift its operating into a small and more contiguous area
where the theft is low. Apart from that, technical safeguard is also important in
combating oil theft. The instalment of technical safe guards, such as pipe covers, or
covering them under the ground against oil robberies could be an alternative solution.
However this is not fool proof, but it anyway helps in delaying the thieves from
accessing the oil and also makes it harder to be stolen.
4) Supply Chain Management Solution

Supply chain market intelligence is the process of acquiring and analyzing

information in order to understand the present and future market; support current and
future sourcing and market sector strategy execution; and enable the business to better
anticipate changes in the external marketplace and react before others do. Supply
chain market intelligence is key to any industry, and more so for the dynamic oil and
gas industry. Effective supply chain market intelligence helps oil and gas companies
deal with strategic supply chain challenges, such as constrained capacity,
infrastructure and volatile markets. It also helps companies make the right decisions
about which markets to buy from, how to determine the right price to pay, and what
benchmarks and targets provide the right competitive edge improvement. According
to McKinsey’s North Sea operating benchmark, 2015 lifting costs declined by 20
percent. The oil and gas industry is heavily dependent on suppliers to provide
complex services and critical equipment to support ongoing projects and operations.
More than often, contract management and supplier relationship management are not
up to the mark, and as a consequence, the oil and gas companies take on supplier
risks. To improve supplier relationship management, companies should adopt a
method of supplier benchmarking. Oil and gas companies need to measure the
robustness and performance of different contractors for various spend categories, and
constantly seek dialog with them so that the suppliers are in unison with the necessary
obligations in terms of safety, training, equipment and staffing requirements.
5) Workforce Solution

Oil and gas companies can undertake strategic initiatives to attract a new generation
of workers, including increasing salaries, offering attractive perks, and aggressively
recruiting and training. The companies can identify key university programs, offer
scholarships and sponsorships for top students and their respective universities, and
actively participate in conferences and training workshops. Besides this, employers
should provide extra benefits to their employers such as bonuses, commissions, tax
assistance, pensions, health insurance, and others. This would help in attracting new
talents. Next, adequate training programs is also important to enhance employees’
capabilities to handle day-to-day activities as it plays an essential role in the entire
energy sector. According to a recent survey conducted by Society of Petroleum
Engineers, the majority of the survey’s participants indicated that appropriate training
was critical to employees’ development. In particular, approximately 60 percent of the
respondents indicated that technical training is the most vital training needed in the oil
and gas industry, followed by management/finance training, and soft-skills
development training. As a result, oil companies should increase the percentage of
their budget spent on training and development programs in order to retain and reward
most qualified employees.
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