The main purpose of this report is to identify and appraise the international expansion strategy of Royal Dutch Shell. This report comprises analysis of the method of Shell’s international expansion he has used, critical appraisal of its current strategy, as well as recommendations for the future development.
Royal Dutch Shell is energy and petrochemical companies in Netherlands, with overseas business all over the world. During its international market entry process, Shell employs different modes of market development to gain and enlarge the share in the local market. The results prove that most of its mode choices based on different situations are appropriate and successful, which is vital for its position as a leader in the oil and gas industry.
The report also investigates the differences among several different models of market development, as well as the factors that influence Shell’s entry model choices. Some recommendations for further development are also discussed.
2.0 Introduction
The Profile of Shell and its Growth in the International Market
Internationality is identified as one of Shell’s most distinguished characteristics and some one even regards Shell as “one of the world’s three most international organizations” (Grant 2005, p.550). As one of the leading energy companies worldwide who has a history of over more than 100 years, the Royal Dutch Shell Group was created in 1907 through the full merger of “Royal Dutch” and “Shell Transport and Trading”. The business was run by a group of energy and petrochemicals companies. Since its establishment, this group experienced a fast expansion all over the world, including European, North American and Asian areas. Oil exploration and production were developed in Romania (1906), Russia (1910), United States (1912) and many other parts. ¼ˆShell, 2010, internet¼‰. By 1938, its crude oil production per day accounted for more than 10 percent of the world total production (Grant 2005, p.549).
In the 1980s it expanded overseas business through acquisition. The acquisition of 30% shares of Shell Oil in 1985 consolidated Shell’s operations and business in the U.S. market. During this period, offshore exploration technology and projects were developed, such as the Troll in Norway and the Gulf of Mexico.
With the collapse of Communist regimes in Eastern Europe in 1989, Shell gained access to markets in these regions. The first operation was started in Hungary though the joint venture structure. Soon the business expanded at a quick speed to many other Eastern European countries, including Russia. In this time, the “gas to liquids” technology was widely applied, which played a significant role in its later development in the following decades. The opening of its plant in Bintulu, Malaysia marked a new chapter for Shell in terms of the liquefied natural gas production.
In the new century, Shell began to expand business into China and Russia. At Salym, Russia, some large oil and gas projects are established and developed. In China, to meet the increasing consumption demands for oil and gas, Shell has built a massive joint venture company with China National Petroleum Corp. (CNPA)-CNOOC and Shell Petrochemicals Company Limited.
Until the first quarter in 2010, its business across the world continues to grow in a steady and favorable tempo. In Australia, Shell Energy Holdings Australia Ltd. and his partner Petro China International Investment Company Ltd have reached an agreement with Australia-based Arrow Energy Limited, in which Arrow decides to sell out his 100% shares to Shell and PetroChina at a total price of 3.5 billion dollars (Arrow Energy, 2010, internet). The acquisition of good quality assets together with high quality employees from Arrow would benefit Shell, PetroChina, as well as the Queensland Coal Seam Gas in the long term. In the Gulf of Mexico, Shell has started his oil and natural gas production in the Perdido Development Project, which is characterized by the operation of the deepest offshore oil platform. At the same time, Shell obtains permission for exploration activities in Pakistan, Egype, Tunisia and French Guiana.
3.0 Situational Analysis of Shell’s International Market Entry Modes
It is evident that until now the Shell’s internationalization process is quite successful. Its success stems from its appropriate choices on the market entry modes and expansion strategies. Shell chose and applied different market entry modes according to different situations.
3.1 Joint Venture
Joint venture plays an important role in Shell’s international expansion, even in the early development stage. The structure as a joint venture distinguishes Shell from most transnational corporations. Its establishment, based on the merger of the British-based Shell Transport and Netherlands-based Royal Dutch, is regarded as one of the oldest joint ventures (Grant 2005, p. 548).
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In Brazil, Shell formed a joint venture with the biggest ethanol producer in the local-Cosan S. A. (Barreto¼†Rivras, 2010, internet). The vision of Cosan is to establish his position as a leader in the global renewable energy market. However, it seems that things do not progress in the anticipated way. In 2009, Brazil’s ethanol export was limited at only a little more than three thousand million liters, much lower than the expected number. Slow growth in ethanol exports disappointed the Brazil government. So Cosan’s humble reflects his urgent needs for a right hand which would help exploit his growth potential. And this joint venture is expected to expand local ethanol business into the world market through the global infrastructure and broad sailing network of Shell. Brazil’s leading position in the global bioethanol market would be strengthened with the help of Shell. For Shell, it would get benefits from this joint venture by developing business in the bio-fuels field, which is of great potential and profits.
In China, Shell also builds joint venture such as The Nanhai Petrochemicals Complex with China National Offshore Oil Corporation (CNOOC). With the increasing impact on global petrochemicals market, China is attracting more and more attention from energy companies, including Shell Group. Since the reform and opening-up in 1978 and the entry into the WTO in 1999, China is experiencing a fast and steady growth in his annual GDP as well as the oil consumption demands. To meet the increasing demands for petrochemicals, on one side, China is paying great efforts in the improvement of domestic production capacity, on the other side it is also introducing and encouraging investment from international companies worldwide. For example, over recent years China has been reducing import duties on many chemical products, including benzene and paraxylene (Yu 2007, p.6). Under this situation, Shell is expanding investment in petrochemicals, natural gas, renewable energy and many other projects in China. It has established partnerships with several major oil and gas companies in the mainland market. Among these partnerships is the 50/50 joint venture between CNOOC and the Shell Group. This joint venture is characterized by the use of design services based on the local situations where possible and appropriate.
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3.2 Wholly Owned Subsidiaries
Building fully owned subsidiaries is another important strategy in Shell’s internationalization process. For example, it has built several subsidiaries in Nigeria. In 1958, Shell exported oil to the Nigeria market for the first time. As the oldest energy company in Nigeria, the business plays a significant role in the development of local economy. Today shell’s operations cover oil and gas production from local lands and swaps, as well as the oil detection and exploration in deep water far off the cost. The productions can not only meet the needs of domestic market but also are exported all over the world.
Among the business developed in this country, Shell Nigeria Exploration and Production Company Ltd (SNEPCO) and Shell Nigeria Gas Ltd (SNG), which were established respectively in 1993 and 1998. SNEPCO is focusing on the detection and production of hydrocarbons from Nigeria’s frontier areas, with the vision of becoming the leader in African market in terms of deepwater oil and gas operations. SNG is aimed to promote the position of gas in energy industries of Nigeria, which is more reliable and cleaner than the traditional liquid fuel. This company has operated a pipeline construction with a length of 80 kilometers, providing reliable guarantee for the gas supply.
3.3 Licensing
To help other refiners to develop business applications of cutting-edge technologies, Shell also expands his business in the form of licensing. Shell Global Solutions is such a company that provides support for its customers through licensing advanced technologies. With a license issued by Shell Global Solutions, the client could get a particular technical assistance or operational consultancy to upgrade its own business performance. There services range from initial and basic consultancy to full guide through all phases in a project. As a leading company in the petroleum refining industry, Shell Global Solutions provides a wide range of lead-edge technologies for other refineries, such as hydrocracking, fluidized catalytic cracking, thermal conversion, distillation and so on (Shell Global Solutions, 2009, internet).
4.0 Factors that Influence the Internationalization Process of Shell
When a firm decides to expand into a foreign market, question like “which is the most appropriate mode for my development” would arrive. So among so many development strategies including exporting, licensing, franchising, turnkey projects, collaborative ventures and wholly owned subsidiaries, which should we use as the best mode. Indeed, the right choice depends on the particular situations and is influenced by different factors such as firm factors and environmental factors. The firm factors refer to the company’s particular features, experience and strategy. The environment factors mean social, cultural and economic conditions in the local market. (Wu¼†Zhao 2007, p.192).
Unique organizational structure is the key factor that affects Shell’s internationalization path. Grant (2005, p.551) classifies the Shell Group into four types of companies: the parent companies including UK-based the Shell Transport and Trading Company and Netherlands-based Royal Dutch Petroleum Company; the group holding companies; the service companies with a total number of 9, which are meant to provide advice to the operating companies, such as Shell International Petroleum Company Limited; the operating companies which are made up of more than 200 companies across the world.
The different types of companies employ different modes in their international expansion. For example, when entering into a new foreign market for the first time, the operating companies tend to take the joint-venture. In this way, the shell could benefit from partner’ detailed knowledge about the local market; in addition, risks and costs could be shared by both foreign investor and local partner. While for the service companies, the licensing is most likely to be employed during expansion process. For this entry mode could help develop business applications of intangible property, like the practice of Shell Global Solutions. In addition, licensing also has some other benefits such as reduction is costs and risks of building foreign companies and immunity against restrictive investment barriers.
Another factor influencing Shell’s entry mode choices is the target country environmental factors. Take the market in China for example, in earlier stage, Shell expanded business into this market using direct or indirect exports, while since the implementation of China’s opening up policy which encourages foreign investment in the mainland market, Shell’s entry model changes from simple exporting into combination of exporting and joint venture.
5.0 Conclusion and Recommendation
5.1 Take a Longer View into the Future
Compared with most companies in terms of development plans, Shell used to take longer-range view on its future development. Their strategic planning concerns about what the situation is 20 year later, rather than 4-5 year planning employed by other companies. These plans consist of many specific and operable responses instead of simple forecasts, aiming to deal with different situations. As the saying goes, people who do not plan far enough for future would inevitably come into trouble at hand. Change is constant in the market, opportunities and challenges may come at any moment. So the company is required to get ready for various situations in which the future unfolds.
5.2 Take the Corporate Responsibility
Appropriate entry mode choice would accelerate the tempo of international expansion. However, a narrow focus on the financial performance is far from enough. As an energy company, the business is expected to be operated in environmentally and socially responsible ways, which is indispensable for its sustainable development. And only the sustainable development could really bring benefits for the company in the long run.
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