Case For Critical Thinking: Scenario Planning At Royal Dutch

Case for critical thinking Scenario planning at Royal Dutch Shell On 16 Octob

Case for critical thinking Scenario planning at Royal Dutch Shell On 16 October 1973, a great oil crisis began when Organization of Petroleum Exporting Countries (OPEC) raised the price of oil by 70 per cent and reduced production. This was in response to the decision by the United States to re-supply the Israeli military during the Yom Kippur war, lasting until March 1974. As a consequence, the market price of oil rose substantially — from $3 a barrel to $12. The trend of recessions and high inflation in the world financial systems until the 1980s meant that the price of oil continued to increase until 1986. According to Shell, this meant that ‘An era of cheap energy had come to an end and oil was no longer a buyer’s market’.

However, when the oil shock came in October 1973 after the Yom Kippur war, Shell was the only oil major prepared for it. In the early 1970s, Pierre Wack was a planner in Royal Dutch Shell in London, and had calculated the impact of a possible rise in the oil price and a likely increase in the world’s appetite for oil. He and his colleagues had mapped out a scenario in which the OPEC demanded much higher prices for their oil following the 1967 Arab–Israel six-day war. In effect, Shell’s managers were able to plan for this eventuality and apply this planning to the crisis following the Yom Kippur war while other oil companies struggled. To survive, Shell adopted a policy of diversification, branching out into the areas of coal, nuclear power and metals.

Firstly, in 1970 Shell purchased Billiton, an established metals mining company (which it later sold). In 1973, the company moved into nuclear power by forming a partnership with Gulf Oil to manufacture gas-cooled reactors and their fuels. Shell’s success in coal was limited. In the 1970s, the company also continued its work in developing the oil fields in the North Sea. While a huge investment was required due to the adverse weather conditions and the instability of the seabed, the cost was justified due to the sheer size of the oil fields in the North Sea, as well as the fact that supply from the Middle East was reduced at the time.

Royal Dutch Shell became a leader in profitability, and continues to use scenario planning as an aid to opportunity-framing and strategy formulation. With the world making commendable efforts to limit its consumption of fossil fuels in the face of ‘peak oil’ (the time when demand exceeds supply) and increasing reliance on wind and solar power, the long-established ‘legacy expectations’ of enduring access to easily accessible oil remain stubbornly fixed in the minds of both developed and developing nations. Scenario planning uses careful research inputs to examine the prejudices of policymakers and the demands of populations to arrive at sustainable solutions to energy needs, and to avoid the catastrophe of a war over oil.

Is such a crisis likely, or even possible? Consider a less conservative analysis. Firstly, drilling for oil in shallow seas is much safer and less technologically difficult (and less expensive) than deepwater drilling. When, in 2010, the BP Macondo Deepwater Horizon oil well off the coast of Louisiana blew out and spilled many thousands of liters of oil into the Gulf of Mexico each day for months before it could be shut down, it created the greatest environmental disaster in US history. An immediate two-year ban on deep-sea drilling in the US gave BP a chance to clear up the damage, although it cost the CEO his job and many along the Louisiana coast their livelihoods, as their businesses failed amidst the pollution.

Some say that one failure out of 5,000 wells in the Gulf is not an unacceptable risk, but the Macondo rig was one of the most advanced platforms, operating at the depth limits of deepwater exploration and extraction. Critics respond that odds like that encourage much more cautious regulation to manage the risks involved. Despite this, oil companies are embarking on increasingly challenging projects, drilling in the Arctic, Russia, and the deep waters off Africa.

Secondly, in the years since Macondo, public opinion has shifted toward opposition to deep drilling, along with a push to limit carbon emissions and oil consumption. Electrification of vehicles with hybrid and electric systems, along with reductions in battery technology constraints, is reducing reliance on traditional oil-powered engines. Shell employs scenario planning to identify opportunities in this evolving landscape. Thirdly, discoveries of coal seam gas in Australia, China, and the development of oil extraction from shale deposits in the US and Canada are prompting a reassessment of the global energy scenario, with some experts even projecting the US as a potential net exporter of oil by 2050.

Alternatives sources like solar and wind are becoming more attractive as nuclear power faces global suspicion post-Fukushima. The energy policy landscape is shifting toward more sustainable and diverse sources, though each option faces technological, environmental, and political challenges. In this context, the core questions are: As a regulator responsible for energy policy, how should priorities be set? While safety and environmental sustainability are fundamental principles, what other considerations should influence planning? Is scenario planning the most effective approach for managing the complex variables involved, or should other methods be explored? How does scenario planning compare with contingency planning in relation to energy strategy, and which approach offers greater utility in navigating uncertain energy futures?