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PETRO-CANADA INTERNATIONAL ASSISTANCE CORPORATION

- ~AND

THE WORLD BANK

1988 CHINA CONFERENCE

'DECENTRALISED COHESION'

THE STRUCTURE OF THE ROYAL DUTCH/SHELL GROUP

By

T. P. BRENNANDSHELL CHINA LIMITED

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'Decentralised cohesion'

the structure of the Royal Dutch/Shell Group

(VUGRAPH 1)

(VUGRAPH 2)

Part I Group Structure

Part II history of organisational changes

Part III the 'logic' of multi-functional/multi-national

enterprise

Part IV upstream organisation

Part I Group structure

The unique structure of the Royal Dutch/Shell Group of Companies stems

from the alliance made in 1907 between Royal Dutch Petroleum Company

and The 'Shell' Transport and Trading Company, Limited whereby the

companies merged their interests but retained their separate iden-

tities.

(VUGRAPH 3)

Royal Dutch Petroleum Company has a 602 interest in the Group and The

'Shell' Transport and Trading Company p.l.c a 402 interest. These

two, publicly quoted, companies are known as parent companies. Each

has a separate board of directors and is responsible to its own

shareholders.

(VUGRAPH 4)

The Group consists of three holding companies - Shell Petroleum N.V.,

The Shell Petroleum Company Limited and Shell Petroleum Inc - together

with those companies in which they directly or indirectly hold inter-

ests.

(VUGRAPH 5)

In over 100 hundred countries, operating com_panies are engaged in

various branches of oil and natural gas, coal, chemicalg, metals and-

other businesses. Every one of these companies is a distinct and

separate entity. Many are joint ventures with shares held by other

companies, governments or private citizens. Those with a 51% or more

Shell interest are known as 'Group companies t and those with less as

'associated companies'.

Certain standards are upheld throughout the Group - these include

business ethics, accounting practices and safety and environmental

protection standards. The business principles on which the-conduct of. - -

the Group is predicated is contained in a 'Statement of General

Business Principles?. Individual operating companies may elaborate

their own statements to meet their national situations, but the

general statement serves as a a basis on which Shell companies pursue

the highest standards of business behaviour.

(VUGRAPH 6)

Other Group companies in London and The Hague are known as service

companies. Their main business is to provide advice and services to

the holding companies and to operating companies. Some of them also

conduct trading activities.

(VUGRAPH 7)

Responsibilities within the service companies are organised in a

matrix system into regions, sectors and functions:

(VUGRAPH 8)

regions are responsible for coordinating business plans in

different areas of the world (business in the People's

Republic of China is the responsibility of the

East and Australasia regional organisation);

(VUGRAPH 9)

- sectors provide technical advice and services

within key business sectors (advice and services to

companies involved in the 'upstream' is provided by the

Exploration & Production coordination);

(VUGRAPH 10)

functional organisations are responsible for specialist

advice and services - such as on purchasing, legal,

personnel or safety matters.

(VUGRAPH 1l)

The members of the Board of Management of Royal Dutch and the'managing

Directors of Shell Transport are full-time executives who have spent

most of their working lives within Shell companies. They hold office

as the managing directors of the holding companies. As such they are

known as Group managing directors.

The four main service companies have established a joint committee

known as the Committee of Managing Directors (CMD) which considers,

develops and decides upon overall objectives and long-term plans to be

recommended to operating companies. Each Group managing director is

on the board of one or more service companies and is also a member of

the CMD, which is composed entirely of Group managing directors.

The current chairman of the CMD is Mr L C van Wachem, the President of

Royal Dutch. The vice-chairman is Mr P F Holmes, the Chairman of

Shell Transport.

Each managing director is responsible for a 'portfolio' of spheres of

interest normally covering a geographical region, a business sector

and one or more functions. The managing director responsible for the

Exploration and Production sector is Mr J S Jennings whose portfolio

also includes the Materials function. Mr J H H van Engelshoven is

responsible for the East and Australasia region and also oversees the

Natural Gas, Coal and Metal sectors.

4-

Part II history of organisational changes

The Group is a complex and dynamic organisation which, because of

changes in the business environment and in the Group's strategic

direction, has changed greatly over the last 30 years. This section

will highlight only the most important changes, particularly those

which took place in the late 1950's and in the middle to late 1970's -

two significant milestones in the Group's history.

Up to the late 1950's, the Group was organised on activity lines into

'marketing' operations and 'production' operations. However, with the

rapid expansion of the Group's activities in the late 1940s and the

1950s, this structure became difficult to manage effectively. Three

particular problems were noted:

the need to integrate refining, marketing and production

activities;

the need for a 'functional' role as distinct from 'line'

management and 'staff' activities;

the advisability of further decentralisation of

responsibility and authority from the central organisation

to operating units.

As a result a study carried out in 1958 a fundamental change in

management philosophy occurred - towards management of the Group as a

real 'group of companies' rather than a 'single company with many

branches'.

The study recommended that the operating unit in each country should

.in future to be treated as a separate, self-governing unit with a

general manager accountable for results. Group coordination should be

exercised by establishing overall objectives, plans and programmes; by

developing a single pool of professional personnel; and by

establishing an integrated Group-wide system of financial control.

Among specific recommendations of the study were:

the creation of a single integrated central organisation

-5-

('one office in two places') by the establishment of service

companies in The Hague and London. (For historical reasons

the Group's central offices have been divided between London

and The Hague. This adds an element of complexity in

practice but does not affect the theory of running a large

multi-national, multi-functional group of companies.)

the central coordination of business on a geographical basis

through regional coordinators.

The new organisation was implemented in April 1959, when the new

service companies were created. The Committee of Managing Directors

was also established at this time.

This organisation structure remained essentially unchanged until the

middle 1960s, when a Natural Gas coordination was added to oil and

chemicals, reflecting the Group's developing interests in natural gas.

During the 1960's the oil industry was dominated by the vertically

integrated companies which produced their own oil, moved it to theirown refineries in their own tankers, and distributed and sold the

products in their own marketing network or processed them in their own

chemical plants. The oil price shock of 1973 and the emerging

power of the producing countries shattered the old system.

At the same time, the Group was diversifying from being an oil, gas

and chemical enterprise into metals, coal and nuclear power.

These two events placed new demands on Group organisation, so that by

the middle of the 1970's the structure had again become in need of

review. Discussions took place at that time and a number of require-

ments were identified. Among these were:

the need to ensure local harmony of the various sectors of

the business and to present a unified Shell approach to

governments and other bodies;

- the need for principal activities of Group companies to be

allowed to develop as separate businesses;

-.6-

- the need for single points of reference at the centre for

operating company chief executives.

At the same time, financial institutions had begun to require com-

panies to report their earnings by sector. There was also a growing

realisation of the need for each business to think and plan strate-

gically while retaining day-to-day decision-making power in the

operating companies.

To meet these requirements, it was decided to develop the concept of

the business sector.

The role of the regional organisations was widened further in 1978,

when their responsibilities were extended to embrace all Group activ-

ities in their geographical area. The concept of the 'Shell Represen-

tative' for a particular country was also introduced, witK-a= direct - -

relationship with the regional coordinator, to harmonise and represent

the various business streams in that country.

Part III the 'logic' of multi-functional/multi-national

enterprise

The structure of the Royal DutchtShell Group, like that of any enter-

prise, is obviously determined by history and particular circum-

stances. However, as a way of analysing the organisational needs of

any company engaged in multi-functional (or multi-national) activities

a theoretical framework of 'logics' - or forces acting on the organ-

isation - can be developed.

a. Corporate Logic

The corporate logic is that which is needed to keep the parts together

as a coherent group. Key features are:

the need for cohesion so that the whole is greater than the

sum of the parts;

the need for a central point for decisions over the alloca-

tion of resources and the spreading of risks;

-* - 7-

- - cthe need for some commonality of procedures, for example, in

budgeting and accounting;

- the need for a common code of business ethics and standards

of health and safety practices,

the need to clearly define areas of responsibility,

accountability and authority..

These areas cover the traditional responsibilities of corporate

functions.

b. National/Regional Logic

In each country there are laws, politics, fiscal regime and culture

which, together with the underlying business environment,-will affect

the way business is carried out. Similarly, at a supra-national level

particular regions have their own logic which may affect business

within and between countries.

c. Functional Logic

The performance of any enterprise is critically dependent on its

business and technical knowledge. How it accumulates this, deploys it,

keeps it up-to-date and develops it is a fundamental determinant of

continuing health.

d. Business Logic

In the oil industry, in particular, there are global market in-

fluences, which may clash with national, but which cannot be disre-

garded. These influences will play a part in determining priorities,

the allocation of physical, financial and human resources and, for a

multi-national enterprise, the choice of geographical area.

-8-

Part IV upstream organisation

Shell companies have interests in hydrocarbon production in some 30

countries around the world and in exploration for oil and gas in 50.

They are operators for these ventures in over 30 countries and as such

are responsible for nearly 6% of world oil production and 7% of gas

sales. The following slides give an indication of the dimensions of

this upstream business.

(VUGRAPHS 12-16)

It is an essential part of the Group structure that operating com-

panies are distinct and separate entities. Operating company manage-

ment are motivated by being responsible for the performance and

long-term viability of their operations. Being sensitive to local

conditions they are able to respond quickly to changing circumstances.

However, through the service companies they are able to draw on the

fund of technical and operational experience of Shell companies

worldwide. The next slide shows the relationship with the service

companies.

(VUGRAPH 17)

(VUGRAPH 18)

The Exploration & Production coordination in The Hague is the focus of

technical advice and services to upstream operating companies. It is

organised into three main divisions: exploration which provides

geological and geophysical advice and services; liaison and operations

which is responsible for liaison with established operating companies,

and production development which provides advice and services con-

nected with petroleum engineeering, field development and E&P comput-

ing.

As well as providing services to operating companies, the E&P coor-

dination is responsible for recommending new upstream business oppor-

tunities to the holding companies and for the technical evaluation of

plans submitted by operating companies to shareholders..

-9-

(VUGRAPH 19 & 20)

In providing technical advice, these divisions work closely with Group

research laboratories, in particular the specialised E&P research

laboratory at Rijswijk near The Hague.

(VUGRAPH 21)

From the point of view of the operating company chief executive, the

major role of the service companies is to provide technical advice,

technical and other services and experienced professional staff.

One of the key ways in which the Group's technology is transferred to

operating companies is through the pool of expatriate professional

staff. The E&P coordination together with the personnel function are

responsible for recruiting, training and developing a cadre--of-

professional and managerial staff for operating companies. As well as

'international staff' who spend their careers moving between different

operating companies, an important element in the professional staff

pool is 'regional staff' from operating companies who gain experience

through 'cross-postings' to other countries.

Specialised training for operating company staff is provided by the

personnel function's training organisation.

Decentralised cohesion'the structure of the

Royal Dutch/Shell Group

1 Group structure2 history of organisational changes3 the logic of multi-functional

/multi-national enterprises4 upstream organisation

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'Decentralised cohesion'the structure of the

Royal Dutch/Shell Group

1 Group structure2 history of organisational changes3 the logic of multi-functional

/multi-national enterprises4 upstream organisation

GROUP MANAGING DIRECTORS

L C van Wachem P F Holmes J S Jennings

-~~~~~~~ ~~~~~~ ~~~~~~',-~ 7 '-

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MWH van P-F de Ruiter D R WeihamEngelshoven :

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coordinator _______

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Finance.

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SERV|ICE COMPANES RGANISATINI

i -___ _ - REGIONS'

East and Australasia

Europe

East Europe

Middle East, Francophone Africa & South Asia

UK and Ireland

Western Hemisphere & Africa

IXERVCE C: MINIE:SI:

Shell Inemationale Petroleum Maatscnappij B.V.Shell lntemationale Chemie Maahppj B-V.Shell Inrational Petrlem Company UmIte-Shell In emational Chenical Company Umited-Bliton I tenaonal Metals B.V.Shell Int Irnatonal Marine UmitedShell In eraffonale Research MeateChapplj B.V.

X Shell Int sn l Gas UmHtedShell Coal Interational Umited

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{ t |SECMORS N. ORG N Alt\ \i1Upstream (oil and gas) -natural gas.downstream dil (manufacturing.marine. suppl/ymarketing). ' R' .

* | chemicals. coai, metals c

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.1~~~ ~unOuubMPANIES)

Shell leum N.V. -The Shell Petroleum Company LimiUbd

Operating Companies are engaged in:various branches of the oil and natural gas,chemicals, coal, metals and otherbusinesses in more than 100 counries.

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1982- 1983 - 1984 1 9 1986end vear

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