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Unformatted text preview: 6. The Oil Wars: The Rise of the Royal Dutch/Shell and the Fall of Imperial Russia 1 Some Major Themes Oil business is a quest for balance Management is critical, strategic mistakes can be fatal Political unrest & oil supply disruptions
2 – Vertically integrated business – So investment in a new field requires downstream transport, refining & distribution Shell’s Quest for Crude Oil Contract with the Rothschilds’ Russian oil would run out in October 1900 Threatened from Royal Dutch in the East & Standard Oil elsewhere Shell needed its own production field Samuel was able to obtain rights to a concession in Borneo
3 Shell Enters the Jungle Sent his nephew, Mark Abrahams The opposite of John D Extremely difficult environment Oil discovered Feb. 1897 – Oil yielded little kerosene – But could be used directly as fuel
4 Samuel’s Vision Oil as a fuel Cultivated from personal experience in Russia
– – – Pure necessity drove innovation Samuel tried to get the Royal Navy to switch to oil
5 Coal was expensive due to transport Russia began to use oil for ships on Caspian Later used fuel oil in TransSiberian RR Shell Emerges Marcus Samuel’s rise to prominence
– Became Justice of the Peace in Kent – Master of the Spectacle Makers’ Co. – Knighthood and Lord Mayor of London Formed Shell Transport and Trading Co. in 1897 – ensuring loyalty of his various trading houses Stratagem: Talked up Borneo to get a good deal with Rothschilds – it worked 6 Shell’s Difficulties 18981900 oil boom & high prices, Shell rode the wave Major problems arose in early 1900s:
– Boer War in South Africa in 1899 pushed prices up – Depression and famine in Russia – Boxer Rebellion in China against foreigners – Oil prices and freight rates plummeted – Borneo falling short of expectations Samuel rode his horse like his business Fires, explosions, technical malfunctions, accidents7 Fortunes & Crude Supply Royal Dutch’s Sumatra wells were beginning to produce salt water instead of oil Royal Dutch’s shares plummeted Hugo Loudon led an expedition to Perlak, Sumatra
– Very vulnerable for pick up – Group included several professional geologists – Substantial new supplies of highquality oil
8 Former Dutch East Indies (Indonesia) Former Dutch East Indies (Indonesia) showing Borneo and Sumatra 9 Henri Deterding Installed at age 34 as “interim manager” after Kessler died Deterding offered a job with Royal Dutch in 1895 His soul purpose of interest with Royal Dutch: To make money Did not use price cutting as a competitive tool
– Worked out pricesetting arrangements 10 10 Deterding’s Talent Had John D.’s knack for numbers Mastered accounting and finance in Amsterdam “You will go a longway in business if you train yourself to be able to appraise figures almost as rapidly and as shrewdly as a good judge of character can sum up his fellow man.” His working theory: reduce each problem to its simplest terms or essential elements 11 11 Simple Idea: Unite “Unity gives power” Shell and Royal Dutch controlled over half of Russian and Far Eastern oil exports The two began talks to combine but needed a middleman (Fred Lane) Couldn’t come to an agreement, matters got even more complicated with Samuel talking with Standard Oil
12 12 Video: Royal Dutch QuickTime ™ and a YUV420 codec decompressor are needed to see this picture. 13 13 Discussion What were some of Kessler’s challenges? Does oil production really exist in a cultural vacuum? What were some of Deterding’s unique attributes? 14 14 Royal Dutch + Shell Result from series of joint ventures Strategic mistakes by Shell
– – – – British Dutch, Shell & Royal Dutch – Asiatic, included above & Rothschilds in June 1902 Samuel as Lord Mayor (interview lunatics) Spindletop fiasco Failure to secure Navy contract Shell was weak & Royal Dutch was strong – RD discovered Borneo crude also suitable for fuel oil
15 15 Royal Dutch/Shell Group Royal Dutch/Shell Group Amalgamation, 1907
– The value of the Union Jack to Deterding – Royal Dutch (60% of stocks) and Shell (40%) – London: financial and commercial center of the company – The Hague was the technical center – Business run by: Deterding; Hugo Loudon; and Robert Waley Cohen – Chairman: Marcus Samuel 16 16 Defensive Expansion In 1907 two giants Standard Oil & Royal Dutch/Shell Group Deterding knew SO could cut prices in Europe & make up with higher prices in America So his strategy was to expand in America to diminish SO’s market power – Went west directly into California – Midwest: Tulsa, OK “the Oil Capital of the World” – Events soon proved his strategy wise!
17 17 Russia in Turmoil Widespread corruption & repression of non Russian minorities Hotbed of rebellion, Baku Lenin’s, revolutionary paper, Iskra, smuggled through oil distribution network Czar thought a war would unite the country RussoJapanese War – Decisive victory for Japan – Japan now a major power 18 18 RussianJapanese War, 190405 19 19 First Oil Supply Disruption Strikes rampant Fall of 1905 open conflict in Baku Tartars attacked Baku – set the oil fields on fire First violent upheaval that interrupted the flow of oil The Russian oil industry lay in ruins Standard Oil quickly moved to regain Far East markets lost to Russian oil
– – Armenian Christians vs. Moslem Tartars 20 20 The Political Fallout Czar agreed to a Parliament, the Duma The model of revolutionary activism was developed Lenin called the rebellion the great rehearsal Stalin emerged as an effective organizer of workers
21 21 Commercial Impacts Damage above & below the ground Russia needed capital to repair the industry but political instability created a risk premium Emergence of Rumanian oil Rothschilds sold their Russian assets for shares in Royal Dutch Shell
22 22 Russian Oil: Marginalized Royal Dutch and Shell became some of the biggest shareholders in the world Portfolio included: – 53% of the East Indies – 17% of Rumania – 29% of Russia Russia’s share of oil continued to decrease Russian oil ‘s greatness was now nostalgia Even Stalin looked back, “Three years of revolutionary work among the workers of the oil industry tempered me as a practical fighter and as one of the local practical leaders.” 23 23 Points to Note in Video Samuels’ mistakes Problems in imperial Russia Financial problems of Shell The merger 24 24 Video QuickTime ™ and a YUV420 codec decompressor are needed to see this picture. 25 25 Discussion Was Samuel spread too thin or did he make too many mistakes? Why torch the oil fields? What are the elements of risk? What were the advantages of the merger?
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This note was uploaded on 04/19/2011 for the course EGEE 120 taught by Professor Considine,timothy during the Spring '07 term at Pennsylvania State University, University Park.
- Spring '07