Question

write an essay not less than 800 words about the key drivers that influence sustainable business practices in Royal Dutch Shell.

Answer 1

Sol:

Royal Dutch Shell is an Anglo-Dutch group that comprises over 1700 companies in 90 countries. 60% of the conglomerate is owned by Royal Dutch Petroleum Company of Netherlands and the rest by The Shell Transport and Trading Company of United Kingdom. The group has the headquarters in The Hague, Netherlands. It employed 97,000 people on average in 2010.

Economic Dimension Discussion

1. Product type: Shell is an energy and petrochemical corporation that has three main areas of business: gas and electricity; refined oil products; and chemical products. These areas can also be classified as either Upstream or Downstream activities. Upstream business deals with exploring and producing oil and gas; mining oil sands, extracting bitumen and liquefying gas; transporting oil and gas by pipeline; and generating wind power. Gas, electricity, and refined oil products mainly come from Upstream. Downstream refers to the side of business that deals with manufacturing and producing supplies, oil, and chemical products, such as biofuels and petrochemicals.

2. Net income: For the fiscal year 2010, net income was $20.5 billion, up 61% from $13 million in 2009. $16 billion came from Upstream (78%) and the remaining from Downstream and Corporate activities. As it can be noticed, Upstream provides the majority 50 source of income. In addition, the 61% increase is in the advantage of the company, however, the majority was due to Upstream activities, meaning oil and gas. This means that the company relies heavily on oil exploitation and not petrochemicals or biofuels.

Economic Dimension Findings

To sum up, the economic indicators have provided a clearer image of the corporation. Although the contribution to world, Europe, and USA GDP seems small because it is under 1%, this is only because Shell is presented by itself. In fact, the corporation is one of the largest in the world based on sales, thus its impact and influence in the world are anything but negligible. In our view, it was necessary to analyze the above indicators in order to make an idea of the required efforts for sustainability. The most important highlight here is the continued reliance on exploiting non-renewables. On one hand, one might say that sustainable development actions serve their purpose and have a positive impact. However, on the other hand, another might argue that engaging in more sustainable actions only to be able counter-attack the negative effects from exploiting more non-renewables, serves no purpose. It is in fact a vicious circle. The oil and gas giant is expected to match sustainable development actions to its size and impact on the environment and the society

Environmental Dimension Discussion

1. Total environmental investment: As expected, this indicator is part of the GRI framework. Based on their definition it includes ‘all expenditures on environmental protection by the reporting organization, or on its behalf, to prevent, reduce, control, and document environmental aspects, impacts, and hazards. It also includes disposal, treatment, sanitation, and clean-up expenditure’. Shell does aggregate this expenditure at global level, it only reports the decommissioning and restoration provisions. On one hand, we recognize it is difficult to aggregate such an indicator, but on the other hand we find it necessary and possible. As GRi indicates ‘it is possible to establish a full environmental management system within an organization’. In addition, the fact that the social investment is calculated and this is not, raises a question of why it is partially reported on. In our view, Shell’s actions appear contradictory in light of this indicator.

2. Environmental partnerships and alliances: The corporation works with over 100 scientific and conservation organizations in 40 countries, while operating in over 90 countries as of 2010. These environmental partnerships are aimed mainly at protecting and restoring biodiversity. In 2010 alone, Shell has collaborated with the IUCN (International Union for Conservation of Nature), Wetlands International, The Nature Conservancy (TNC), and Earthwatch in over 30 environmental projects (Royal Dutch Shell Plc 2011b, p.5). Apart from strategic alliances and partnerships with environmental organizations, Shell has also active collaborations with several governments and industry-specific associations for environmental protection and restoration. While these facts are to be admired, we believe Shell should extent its collaborations to include more than half of the countries in which it operates.

3. Total waste disposal: For 2010, the total waste disposal was estimated at 2 million tonnes, out of which almost half is hazardous waste. This means that the waste disposal went up from 1.3 million tonnes in 2005. However, compared to 2009, the waste disposal decreased by 5 % going down from 2.1 to 2 million tonnes. In others words, the waste disposal increased by 58% in just five years. A partial reason for this might be the increase in production for the same period of time. But given newer technologies the situation should have been reversed. Waste from drilling and production which includes contaminated water, chemicals, hydrocarbons, and other materials are disposed of in the following ways: by being dumped into pits or landfills; through thermal technologies (incineration) or underground injection. In our view, although Shell strives to improve its waste disposal, it fails to rise up to the challenge of improving its environmental performance from this indicator’s perspective. This is because the amount of waste gas gone up, but also because the methods of disposal have great long-term environmental damage. However at the same time, most players in the same industry employ the same methods and technologies.

4. Total fresh water use: The fresh water use in 2010 totaled 202 million cubic meters, slightly up from 198 in the previous year. This indicator has been aggregated globally and reported on only since 2007. That year, the water use was 235 million cubic meters, 16% higher than it is now. Shell recognizes that its industry is one of the biggest consumers of fresh water. They have several measures, programs and technologies in place in order to reduce their water usage; however they admit that their consumption may increase with the development of non-conventional resources, such as biofuels. Biofuels require growing crops, which means competing for water and land. As the biofuel market increases, more water is expected to be used. Although Shell uses modern technologies to economize water, it only started to calculate and report its consumption since 2007. In our view, this represents a step forward but also a delay. All is all, Shell is not expected to have a good performance on this indicator, since water consumption is expected to go up, thus it puts the company in an unfavorable position.

5. Total water recycled: This indicator is also part of the GRI framework and it represents an important pivot to calculate in the oil and gas industry. In Shell’s case, the company does not report or aggregate it at global corporate level. Shell states this does not make for a meaningful measure for a corporation operating in over 90 countries. However in its sustainability report, the company highlights that it does recycle and reuse fresh water in their operations. For instance, they have teams designed to assess the availability of water where they operate. In addition, wherever possible, Shell states their operations are designed to run in such a way to reduce water consumption. Mining bitumen from tar sands is known to require a large quantity of water. For this reason, it voluntarily uses less fresh water as allocated to them from the Athabasca River in Canada. In addition, some water is recycled from the collection ponds for tailings and used for bitumen extraction at the same location. In 2010, 74% of the water used at the Musked River and Jackpine mines was recycled. In Qatar, no fresh water is taken from the dessert. The Pearl GTL plant produces water as a by-product of transforming gas into liquids. In Oman, the company uses reed beds to clean the water produced while extracting oil. In this way, energy is saved and the water is reused by locals in agriculture after being cleaned by microorganisms living in the reed beds.

All in all, there are many such examples, however the fact that this indicator is not reported on, raises a red flag. It is possible to be calculated or at least estimated, otherwise it would not be part of the GRI standard. On one hand, we have seen many good examples of ways in which Shell recycles, reuses, and reduces the water consumption. On the other hand, the corporation does not calculate this indicator. In our view, the oil giant’s commitment to this aspect seems overstated in reports, in light of the non-reporting stance.

6. Breakdown of energy consumption: This GRI indicator is partially reported on by Shell. The reason invoked is that most of the energy used comes from oil and gas produced on site. The total energy consumption is not aggregated at global level; rather it is calculated based on the type of activity. The numbers cannot be added up or compared since they are expressed in different measurements or indices. It is important to mention that energy creation is costly, money and energy-wise. More specifically, based on the EROEI (Energy Return on Energy Invested), the average world energy input is 22 to 1. This means that it costs about one barrel of oil to extract 22 other barrels. Regarding the oil sands, the EROEI is 3 to 1, thus one barrel of oil as energy input is used to extract only 3 others. In the future, as the reserves are expected to further deplete, it will become even more expensive to access and exploit oil. This indicator is only calculated per industry, however it points out the importance of reducing energy consumption and focusing on renewables. On one hand, oil sands operations and chemical plants have become more energy efficient for Shell. On the other hand, energy consumption of Upstream excluding oil sands and that of refineries has gone up. Considering that Upstream will remain the focus of Shell and not biofuels and renewables, the overall energy consumption will increase, thus putting the corporation in an unsustainable position from this indicator’s perspective.

Environmental Dimension Findings

The environmental indicators of the Green Model have helped us in shedding more light on the direction of Shell’s sustainability path. To sum up, some of the most important facts moving the balance towards unsustainability are the following: non-reporting stance on certain indicators; disproportionate representation and inclusion of locations into environmental projects and actions; high waste disposal increase in 5 years; expected increase in fresh water and energy consumption; a wide range of persisting problems at the Nigerian operations; reliance on natural gas as main future energy output; unsteady hand on safety of operations due to fluctuation of oil spill volume; compromise for middle ground in order to mimic other market players and increase profitability. Considering these facts, there is a sense of disregard for the environment for the benefit of profit. But, there are also positive facts that could weigh in the balance towards sustainability, such as: many partnerships and alliances with organizations for environmental causes; many technologies in place to reduce waste, fresh water usage, and energy consumption; well-developed procedures and measures for conservation and biodiversity protection; downward GHG emissions trend; lobbying for introduction of a cap-and-trade incentive; less oil spills incidents; gradual progress on developing and including more biofuels; and although debatable, reliance on more cleaner fuel, even if it is still from a non-renewable source. To conclude on this dimension, Shell’s commitment to environmental sustainability cannot be denied, no matter what the underlying motives are. However, the balance seems to weigh in more towards negative facts, rather than positive ones.

Sustainable Thinking Dimension Discussion

1. First sustainability report: Shell has been reporting on sustainability voluntarily since 1997. It is not to be understood that Shell started to report on sustainability voluntarily, before others had to do it on a mandatory basis. This practice is not mandatory, however it is very popular and most companies publish sustainability reports nowadays. Over the years, it has become the norm.

2. Sustainability reporting policy: Shell reports on sustainability in line with the guidelines of GRI G3 and IPIECA. On the GRI reporting scale, the corporation is considered an A+ level on a scale of six grades going from C to A+. It means Shell reports on specific core and sector-related indicators and it also provides management disclosure together with explanations for indicators not calculated. GRI is an independent network-based sustainability reporting framework that was established in 1997 by a not-for-profit organization called CERES (Coalition for Environmentally Responsible Economies) in partnership with UN’s Environment Programme. Shell is an organizational stakeholder, in other words, a member whose rights include election of members of the Board of Directors or the Stakeholder Council. Shell is also a member of IPIECA, who together with OGP (International Association of Oil and Gas Producers) and API (American Petroleum Institute) formulated the oil and gas industry’s sustainability reporting framework called the IPIECA standards. According to Shell, they are collaborating with GRI in further developing the sector specific indicators for the oil and gas industry. While this initiative is admirable, it raises a question of how objective the company can be in designing indicators that will be used to measure its own sustainability engagement. In addition to the guidelines followed, the annual Sustainability report is audited by an external reviewing committee. This has been done for the past six years in order to ensure transparency. The committee, whose members are changed every year, are experts in fields, such as environmental, conservation, sustainability or ethics. Their job is to assess the ‘content and the process of producing the Sustainability report’, not to verify its accuracy. Although this practice is good, the extension of duties of the external reviewing committee is not sufficient. On one hand, the efforts of alignment to several reporting standards place Shell in a favorable light. On the other hand, the fact that it is voting member in some makes the effort to seem less objective. In addition, the reporting standards of GRI and IPIECA come with three major faults: ‘there is no minimum reporting standard’; companies do not report on targets; and ‘they do not provide a vision’ and a plan for dealing with energy and other concerns in the future.

3. Investment in sustainable research initiatives: The investment in sustainable research is not calculated separately from the total R&D (Research & Development) expense. It amounted to $1.0 billion in 2010. However, Shell highlights that $2.1 billion has been spent on sustainable research (developing alternative energies and CCS) in the past five years. This means that Shell invested 5% of its net income of 2010 in R&D. Over the past 5 years, sustainable research represented 2% of its total net income of $117.89 billion from 2006-2010. Although there is no guideline on how much a company such as Shell should invest in research or sustainable research, there should be a clear report that includes all sustainable research initiatives and the resources allocated to them. 4. Partnerships and alliances in research for sustainable innovations Shell is involved in partnerships with different scientific institutions and companies for the development of alternative energy technologies and sustainable solutions for the future. For instance, Shell has contributed $25 million to a 5-year research project at the MIT (Massachusetts Institute of Technology) in 2010. The research looks into nanotechnology, biofuels, and CO2 management. In addition, Shell was one of the first energy companies to have invested in biofuel research. Given this, it dedicates a lot of time and money in research for more efficient biofuels, such as biofuels from non-edible crops and crop waste. For example, Shell partnered with the Canadian biotechnology company Iogen Energy for the development of a technology that uses enzymes to break down cellulose and turns it to ethanol. It also has another partnership regarding enzymes and ethanol with the American corporation Codexis. In this case, the enzymes are destined for the faster conversion of non-edible crops or plant waste to ethanol and similar chemical components. Another partnership in the US is with Virent. Shell and Virent work together on a technology that transforms sugars directly into fuels. Shell also invests in CCS research since it believes it is one of the main ways of reducing CO2 emissions into the future. According to IEA (International Energy Agency) it is estimated that the rapid development of CCS technologies up to 2020, might lead to a reduction of up to 19% of CO2 emissions by 2050. On one hand, Shell contribution to such research is important and its usage will have a positive impact on the environment. But on the other hand, some environmentalists might argue that developing CCS technologies will lead to an incentive to emit more CO2 with the hopes of capturing it later. As an observation, most research is done in North America. Shell should try to balance the placement of research with the location of its most important operations. In this way, it would be able to share the benefits with the community, while utilizing its resources. It is also important to note that Shell sold its interest in a joint-venture designed to research technologies that convert algae into biofuel. The reason for this is that the corporation wants to focus on other biofuel research that better fits their strategy and vision. Algae are considered to be one of the main prime materials for biofuels of the future. There is a sense of high hopes in the research community regarding its potential, thus many alike companies invest in algae research projects. The corporation’s decision is unpleasantly surprising. Although Shell has research projects in other biofuel materials, this could be seen as a step back on the path of sustainability. In our view, the corporation should invest even more in algae research, because of its potential to improve our future. We believe they made a compromise between medium and long-term interests.

5. Number of patents in sustainable innovations: Like any other large corporation that invests billion of dollars in R&D, Shell holds my patents worldwide. However, it does not make any reference to patents in its Sustainability report for 2010. Research on the corporate website, led to the conclusion that there is no global account of the patents held. In our view, it is understandable that the company does not aggregate at global level its patent holdings, since the size of the company and everyday activities would make this process challenging. However, we also find it concerning that Shell does not refer to any patents, more or less sustainable in its Sustainability report, which is a document that should contain a company’s most important sustainable achievements. Due to this, in our view, we believe the number of patents for sustainable innovations to be small relative to all patents held. One of the latest and most important patents is owned by Shell Oil, the American subsidiary of Royal Dutch Shell Plc. The patent is for the invention of a new catalyst that removes sulfur from oil and gas, thus making the fuel less harmful for the environment. Although it is a beneficial invention, some environmentalists might argue that this technology would only decrease CO2 emissions while promoting the use of even more fossil fuel. Thus, more investments and patents are needed in renewable energies, rather than improvement of non-renewables.

6. Long-term energy plan The long-term energy plan includes a mix of cleaner non-renewables and renewables. Unfortunately, the focus is on producing more of the former, not the latter. This is because it is estimated that the energy demand will go up as more countries continue to develop.

According to some agencies, most of the energy will be provided from non-renewable sources, namely fossil fuels. Thus, Shell’s strategic energy plan resonates in accordance with this expectation. For instance, deep water extraction of oil and gas ‘will remain crucial’ to Shell. In addition, the natural gas production will be gradually increased, since it is the cleanest fossil fuel. Burning natural gas produces 50-70% less CO2 emissions than a coal plant. In addition, if this is combined with CCS technologies, then CO2 emissions fall by 90% when compared to coal. By 2012, natural gas will account for 50% of Shell’s total energy output. Moreover, it is estimated that the supplies of natural gas are abundant, meaning that they can be exploited at the current rate for another 250 years. To sum up, the long term-energy plan is a mix of the following: natural gas, deep water extractions, advanced biofuels, CCS projects, and improved energy efficiency of own operations. It is worrying that there is no reference made to renewable sources of energy, such as wind or solar power. Although renewables are a part of the strategy, their proportion is very small, making their impact almost negligible. In other view, the corporation’s energy plan for the future resumes to producing cleaner fossil fuel rather than clean energies. So, they are tacking sustainability by exploiting more non-renewables. Although, it is much cleaner, in our eyes, this approach only contributes to the global problems.

7. Environmental and social foundations owned: Besides many partnerships with foundations and programmes for social and environmental improvement, the company also runs its own foundation since 2000, called Shell Foundation (Shell Foundation 2008). Its aim is to fight the challenges of globalization and environmental degradation through an enterprise-based approach. This means that instead of making donations to communities, Shell provides advice and financing support for developing communities (Shell Foundation 2008). After some research into the foundations’ programmes, we realized they are focused more on social issues, rather than both environmental and social. In our view, as a major contributor to environmental degradation, we consider it is necessary for Shell to enhance its actions for the improvement of the environment by dedicating a separate foundation to solving environmental issues. In this case, the focus is not dissipated as we believe it to be in the current situation.

Sustainable Thinking Dimension Findings

To sum up, the 7 indicators of this dimension have helped to provide a better view of the corporation’s sustainable thinking inclination. The company has been reporting on sustainability for the past 13 years. Although, this fact by itself is insufficient to tell us anything, we want to note that Shell’s sustainability reporting has improved every year, in terms of the details captured. Our research into past reports has led up to perceive there is a strong commitment and concern for sustainability from the oil giant. Although, there might be a conflict of interest regarding its membership in bodies formulating reporting standards, Shell’s participation in the development of such a necessary part of the future of sustainability has a positive connotation. Regarding sustainable research, Shell should make a clear and cut distinction between investments into sustainable research and other research. It is not sufficient to provide either a total research amount or a total for the past 5 years of sustainable research initiatives. Regarding partnerships in research, Shell should try to geographically balance its operations and sources of income with research investments. This is because most alliances are with North American companies. In this way, the oil giant can share benefits with societies from which it takes resources. Another distinction that is necessary has to do with the patents held in sustainable innovations. There is no clear account and distinction made between patents for sustainable products or technologies and other patents. This measure might help increase the transparency level in reporting. Moreover, we believe that as one of the oil giant of the world, Shell should dedicate a separate foundation to environmental and climate change concerns. In this way, it will be better able to assess and respond to the ecosystems’ needs.