The Oil Monarch’s New Clothes

How Royal Dutch Shell lost its regal power and title

On Nov. 15, 2021, Shell dropped a bombshell: the company no longer wants to be royal. Founded in 1906, Shell has long been based in England, with its tax domicile and headquarters centered in the Netherlands. Now, Shell is moving its headquarters, including its tax domicile, from the Netherlands to London and unifying its share structure. These steps will result in the loss of its traditional label, “Royal Dutch,” which Shell has carried for more than one hundred years. The realignment is intended to allow Europe’s largest oil and gas group to be repositioned.

Many were pleased with the move, and the stock market rewarded the decision – Shell shares rose more than 2 percent after the announcement. Less happy, was the Dutch government, which was unpleasantly surprised by Shell’s choice, even though key business and production areas are to remain in the Netherlands.

Since the announcement (and the formal name change in January), there has been wide speculation as to the reasons for this parting. Some believe its motivation was tax-related; others see the separation as a reaction to hostility against the corporation in the wake of the climate debate.

In the following, the focus is widened, and some answers are sought on a longer time axis. Whatever the specific reasoning behind it was, from a broader perspective, the breakup of Royal Dutch Shell has to do with the fact that the 21st century is fundamentally different from the 20th century in terms of the oil industry, provoking oil companies to respond accordingly. Even though oil is expected to be consumed for decades to come, it is widely believed that the era of Big Oil is irretrievably over. Its demise began in the final decades of the 20th century and has accelerated in the 21st century against the background of the energy transition and climate crisis.

Big Oil

The culture of petroleum has become deeply ingrained in the social subtext of the (predominantly Western) world, whether in the politics and diplomacy among nations or the economic patterns of sustainable growth and development around the world.

When oil replaced coal as the main energy source in the mid-20th century, many societies culturally inscribed themselves into an era of fossil fuels. This shift was brought about by the coal crises that emerged during World War I and World War II. At that time, “black gold” had already been known and used for 100 years. However, the rapid demand for energy by the post-WWII generation led to a rapid increase in access to oil. From then on, crude oil was essential for the perpetuation of modernity and shaped modern history like no other energy source.

Throughout the 20th century, crude oil was the material basis of global economic and cultural life. Today, it is the largest source of global energy supply and accounts for one-third of consumption. We move thanks to oil, we clothe ourselves in oil, we feed on oil via artificial fertilizers, and we pay with oil. Even more, modern consumption and our values and convictions, ideologies and political orders are determined by the potential of fossil energy sources.

In sum, big oil is everywhere.

Image Caption

Figure 1. Trading route of M. Samuel & Co. between Europe and Southeast Asia, late 19th century. From “The Prize,” by Daniel Yergin

Please log in to read the full article

On Nov. 15, 2021, Shell dropped a bombshell: the company no longer wants to be royal. Founded in 1906, Shell has long been based in England, with its tax domicile and headquarters centered in the Netherlands. Now, Shell is moving its headquarters, including its tax domicile, from the Netherlands to London and unifying its share structure. These steps will result in the loss of its traditional label, “Royal Dutch,” which Shell has carried for more than one hundred years. The realignment is intended to allow Europe’s largest oil and gas group to be repositioned.

Many were pleased with the move, and the stock market rewarded the decision – Shell shares rose more than 2 percent after the announcement. Less happy, was the Dutch government, which was unpleasantly surprised by Shell’s choice, even though key business and production areas are to remain in the Netherlands.

Since the announcement (and the formal name change in January), there has been wide speculation as to the reasons for this parting. Some believe its motivation was tax-related; others see the separation as a reaction to hostility against the corporation in the wake of the climate debate.

In the following, the focus is widened, and some answers are sought on a longer time axis. Whatever the specific reasoning behind it was, from a broader perspective, the breakup of Royal Dutch Shell has to do with the fact that the 21st century is fundamentally different from the 20th century in terms of the oil industry, provoking oil companies to respond accordingly. Even though oil is expected to be consumed for decades to come, it is widely believed that the era of Big Oil is irretrievably over. Its demise began in the final decades of the 20th century and has accelerated in the 21st century against the background of the energy transition and climate crisis.

Big Oil

The culture of petroleum has become deeply ingrained in the social subtext of the (predominantly Western) world, whether in the politics and diplomacy among nations or the economic patterns of sustainable growth and development around the world.

When oil replaced coal as the main energy source in the mid-20th century, many societies culturally inscribed themselves into an era of fossil fuels. This shift was brought about by the coal crises that emerged during World War I and World War II. At that time, “black gold” had already been known and used for 100 years. However, the rapid demand for energy by the post-WWII generation led to a rapid increase in access to oil. From then on, crude oil was essential for the perpetuation of modernity and shaped modern history like no other energy source.

Throughout the 20th century, crude oil was the material basis of global economic and cultural life. Today, it is the largest source of global energy supply and accounts for one-third of consumption. We move thanks to oil, we clothe ourselves in oil, we feed on oil via artificial fertilizers, and we pay with oil. Even more, modern consumption and our values and convictions, ideologies and political orders are determined by the potential of fossil energy sources.

In sum, big oil is everywhere.

Founding Years

The Shell company has made a fundamental contribution to this worldwide embrace of oil, as has been sprawled out by Jan Luiten Van Zanden and colleagues in a three-volume tome in 2007. The account starts with M. Samuel & Co., a London-based company that initially was active in the import-export sector, then opened its first oil trading branches in various port cities in East Asia in the 1880s, and gradually built up an oil trade between Europe and East Asia (figure 1). Rapidly the owners supplemented their trade with their own crude oil production and refineries. In 1897, they reorganized the company for the first time, setting it up as Shell Transport and Trading Company Ltd.

In parallel, enterprising merchants grew active in the Netherlands. In 1890, Dutch bankers set up a corporation to prospect for oil: the Royal Dutch Petroleum Company was born. In 1892, the company successfully extracted crude oil for the first time.

To secure and strengthen their positions, the owners of Shell Transport and Trading Company Ltd. and Royal Dutch Petroleum Company held negotiations as early as 1900 to merge the two businesses. These settlement talks resulted in the formation of the Asiatic Petroleum Company Ltd. in 1903, which became active throughout Asia. The Briton Marcus Samuel took over the chairmanship of this new company, the Dutchman Henri Deterding was appointed director, and the Rothschild banking house, which was heavily involved in the Russian oil business, was also a partner. The main tasks were initially the distribution of petroleum products in Asia and the worldwide trading of products from the company’s own refineries on Sumatra and Borneo. The Asiatic Petroleum Company Ltd. became the most important competitor against the largest corporation in the United States, Standard Oil (now survived by ExxonMobil, Chevron and other companies), founded by John D. Rockefeller, an oil tycoon turned philanthropist.

In 1907, the two companies grew further intertwined – the Financial Times once called it an “elephant wedding” – when the Royal Dutch Petroleum Company in The Hague merged with Shell Transport and Trading Company Ltd. in an effort to compete in the international market. Royal Dutch Petroleum claimed a 60:40 advantage in the alliance and control over management. At the same time, the combined company presented itself as British and adopted Shell’s brand and logo for its global products and operations. Both Royal Dutch and Shell became holding companies for the three basic operating companies: N.V. De Bataafsche Petroleum Maatschappij, the Anglo-Saxon Petroleum Company and the Asiatic Petroleum Company. Each of these companies and their subsidiaries were legal entities that together formed the Royal Dutch Shell Group. Thus, Royal Dutch Shell established its reputation as a global company in what became the Century of Oil.

Growth and Development

This shift toward substantial oil consumption began when Winston Churchill, as British first lord of the Admiralty, switched warships from domestic coal to oil from the Persian Gulf as fuel in the run-up to the First World War. The use of oil and its supply routes became a geopolitical factor, and oil companies were able to grow permanently in the years that followed. Royal Dutch Shell was sorely tested during the First World War; however, the group’s unorthodox corporate structure proved remarkably flexible and resilient.

By 1920, Shell stood at the peak of its power; it was the world’s largest oil producer, accounting for about elevenpercent of global production. Shell was able to leverage British funds for its ambitious global expansion and grew rapidly, with a significant push into research and the chemical industry. The company was now drilling in various regions of the world, not least in the United States. In doing so, the company surpassed its rival, Standard Oil of New Jersey, which focused almost exclusively on U.S. crude oil production. By 1935, the group employed 180,000 people worldwide (figure 2).

In 1928, an agreement was reached between the Anglo-Persian Oil Company, later BP, Royal Dutch Shell and the Rockefeller Group. Since the beginning of the 20th century, they had been competing for concessions and markets. The oil companies agreed on a profit-maximizing, global oil policy, which defined sales quotas on individual markets. The global oil market (including pricing policy) was henceforth dominated by a few companies, the so-called “Seven Sisters”: in addition to Esso/Exxon, Royal Dutch Shell and BP, they also included Mobil, Chevron, Gulf Oil and Texaco. All were vertically-integrated corporations that sought to control oil extraction, its processing in refineries, and the sale of petroleum products, and all were based in industrialized countries.

The narrative of Big Oil, hence, relates directly to the existence of the Seven Sisters.

It was not until after World War II that this supremacy of private oil companies over the governments of oil-producing countries could no longer be maintained, and renegotiations of the sharing of oil revenues took place. The war had dealt severe blows to the businesses, reducing production, manufacturing, and tanker capacity. Nevertheless, Shell succeeded in transforming itself during the war and emerged strengthened overall, with both its operations and managerial structure geared toward achieving new purposes.

After 1950, the world entered an entirely new situation: economic growth, increasing access to raw materials, new technologies and manufacturing catapulted the Western world into an unparalleled reality. The oil industry appeared in the center of this abundance.

Oil discoveries on the Arabian Peninsula in the 1950s, the reduction of transportation costs, a lack of limitations on production volumes and an economic war between East and West accompanying the Cold War – with the USSR threatening to flood the market with its vast oil reserves – led to a reduction of prices and thus a loss of income for oil-producing countries (figure 3).

Concurrently, the epoch signaled the end of colonial empires among European countries. Following this shift, the dominance of the oil industry by the major Western oil companies was no longer accepted; oil-producing countries sought more control over their own resources. When the international oil companies lowered oil prices again in 1960, the crude oil-producing countries reacted indignantly. They decided to take action against the price policy of the oil companies and founded the Organization of Petroleum Exporting Countries. This shift allowed oil-producing countries to secure a position of supremacy, which they skillfully harnessed in the 1970s. The oil embargo of 1973 was only the tip of the iceberg in this scenario.

For Shell, the 1950s and ‘60s were, in many respects, a golden age, full of new products and processes. The need for a continuous expansion to meet rising demand while keeping costs at a minimum in the face of intense competition was met by its strong brand and robust infrastructure, with company managers working hard to achieve better functional and operational integration. Furthermore, the group embarked on a vigorous diversification into petrochemicals, motivated by the desire for a second business, though company leaders realized that chemicals proved to be somewhat less profitable than oil.

The End of the Golden Age

The golden age ended rather abruptly with the oil crises of the 1970s. As U.S. oil fields reached their peak production, the United States became a major buyer on the world oil market, and demand outstripped supply after 1970. This change increased the dependence of Western countries on oil from OPEC countries. Whereas in 1960, they accounted for more than 40percent of world production, by 1973, their share peaked at 55percent. OPEC countries continued to gain more influence and derive more economic benefits from their oil. Consecutively, Saudi Arabia, Venezuela, Russia, Kuwait and Iran transformed their companies into state-owned corporations, nationalizing oil reserves and production facilities. Consequently, the most valuable oil company in the world today is the Saudi company Saudi Aramco.

Royal Dutch Shell felt the effects of this sea change. Like its competitors, the company saw its share of crude oil decline due to these nationalizations. It was forced to explore more inhospitable areas such as the North Sea and experiment with unsuccessful diversification strategies in metals, coal and nuclear energy. It also did a poor job adapting to the challenges posed by the oil price collapse in the mid-1980s; it lagged its competitors in adjusting to low prices and structurally low profits.

Meanwhile, the group’s impeccable reputation suffered from a series of revelations, such as its controversial presence in South Africa and its environmental and human rights violations in Nigeria. It was also subject to protests following the sinking of Brent Spar, an oil-storage facility in the North Sea.

In the mid-1990s, the corporation consequently embarked on a process of restructuring, cutting costs and staff, divesting its chemical business, and reorganizing its various functions on a more centralized and global basis.

The 1980s price collapse triggered a wave of mergers in the oil industry – the most extensive restructuring of the industry since the breakup of Standard Oil in 1911. The Seven Sisters of the 1970s became four: Exxon and Mobil merged; Chevron and Texaco merged; and BP grew by acquiring Amoco, ARCO and Burmah-Castrol. Only Royal Dutch Shell remained unscathed.

Rough Landing

By the 1990s, it had become more widely accepted that emissions from the combustion of fossil fuels, among other contributing factors, were damaging the climate. More and more new reports appeared, fed by United Nations Environment Programme and The Intergovernmental Panel on Climate Change, which was founded in 1988. Since then, the debates have not ceased, and all fossil fuel companies – not only Royal Dutch Shell – are under constant pressure to legitimize their actions.

Despite its gradual reduction in oil and gas production, the corporation is finding it difficult to offer a convincing message on combating climate change. In the spring of 2021, Shell was ordered by a Dutch court to set more ambitious climate targets (the group is appealing the ruling). Three years prior, in 2018, the Center for International Environmental Law revealed that the oil company knew early on how much CO2 emissions were damaging the climate. As early as 1958, a senior executive wrote a report mentioning the industry’s research on fossil carbon in the atmosphere, and in 1962, the chief geologist acknowledged potential risks to humans and the environment from global warming. A confidential 1988 report also stated that Shell was responsible for 4percent of global carbon emissions in 1984.

Rather than providing this information, the company kept its findings under wraps, but in 1989 took the first steps to protect its offshore oil platforms from the risks of rising sea levels. At the same time, it joined the oil industry’s efforts to sow public doubt about climate change. Like ExxonMobil and Total, Shell thus had both deep scientific expertise in relevant disciplines and the resources to use that expertise to make long-term developments sustainable for both the company and the world as a whole. The company engaged in few external actions to combat environmental damage, which has led to a significant backlash today (figure 4).

Conclusion

The importance of the strategically most important raw material of the 20th century is rapidly declining with the expectation of a global energy transition and the climate crisis. The era dominated by the oil industry is believed to be over, and Big Oil is expected to become a shadow of its former self.

The shift to more sustainable energy is gaining momentum and, with it, the need to invest in more environmentally friendly activities. Publicly-traded oil companies from the Organisation for Economic Co-operation and Development member-countries are losing their relevance, not so much because fossil fuels are running out, but because the industry has become unattractive and unpopular due to environmental issues and companies’ muted response. Shell is no exception. In November 2021, it drew the consequences.

Comments (2)

Oil and gas in the 21ast century
The article looks good till it jumps to the conclusion. Mankind has insatiable thirst for energy. They have lapped up all forms of energy that came in the way. Real data shows that even the consumption of coal has risen with time. Pollution comes from cultivation too. The unending journey constitutes finding new source of energy and its efficient use to minimise pollution. Ms. Gisler's prediction would be proven wrong.
3/22/2022 11:40:00 AM
Strategic Importance of Oil and Natural Gas
Ms. Gisler writes, "The importance of the strategically most important raw material of the 20th century is rapidly declining....." Based on what we are witnessing over the last couple of weeks with Russia's invasion of Ukraine, the economic crackdown on Russian oil and natural gas, and the roiling of global hydrocarbon markets, it appears that Ms. Gisler's prognostication is a bit off the mark. There is always that 'black swan' event waiting in the wings that tends of confound the conventional wisdom. Hydrocarbon energy will play a far larger roll in the 21st century than many are willing to concede (mainly because we will have no choice).
Show more
3/10/2022 2:12:41 PM

You may also be interested in ...