case 2 shell gabon

Topics: Peak oil, Petroleum, Costs Pages: 26 (3074 words) Published: April 2, 2014
ISSN 1940-204X

Activity-Based Management in Shell Gabon*
Shahid Ansari
Babson College

Jan Bell
Babson College

Background

Table 1
SG’s 2000 OPEX Cost Forecast 2

During the 1990s, world events, such as Russia’s increased oil production and Asia’s economic meltdown, caused excess oil supply. In fact, by mid-2002, there was over 6 million
barrels per day of excess production capacity. Oil prices,
much like any other commodity prices, respond to supply
conditions with wide price swings. As a result, during this
period oil prices were low; in fact, prices reached an all-time low of $12/barrel in 19981. Many companies in the industry
focused on cost reduction efforts to achieve profits. This
case reports efforts by Shell Gabon (SG), a wholly owned
subsidiary of Royal Dutch Shell (RDS), a major Dutch oil
company, to control its costs in order to obtain necessary
funding for capital expenditures for new oil exploration.
SG’s primary business is the exploration and production
of oil. Located primarily in central West Africa, it has field operations in Angola, Congo, and Gabon, and owns pipelines
and terminals in the southern part of its region. In its
northern region, SG contracts for pipeline capacity owned
by other companies. In addition to wholly owned operations,
SG also has joint ventures with other major oil companies
operating in its region. Until 2002, SG produced most of
its oil from land-based operations supplemented by a few
shallow water platforms off the coast of West Africa.
From 1965 until 1995, SG experienced high growth and
profitability. By 1996, most of the oil on land in its region was depleted, and the number of barrels produced had decreased
without a corresponding reduction in operating costs.
Accordingly, the unit operating cost (UOC) increased. Table 1 provides SG’s budget by department for 2000 operating costs (OPEX) associated with the production of 120,000 barrels per day.

IM A EDUCATIONAL CAS E JOURNAL

Operating cost @120,000 barrels/dayAmount

Percent

Office of the President

$ 5,886,720

4.2%

Business Management

15,197,000

10.8%

Community Relations

4,204,800

3.0%

Human Resource Management

1,191,360

0.8%

Production Management

112,828,800

80.2%

Exploration Management

280,320

0.2%

Health, Safety, and Environment

1,051,200

0.7%

$140,640,200

100.0%

Total Operating Expenses (OPEX)

Shell’s Cost Management Program
Concerned by industry reports that warned that companies
in the upstream segment of the crude oil industry should
structure their business to be able to operate expecting the real3 price of oil to be below $16.71 per barrel at least half of the time, RDS decided to become world-class in managing
its costs. RDS didn’t have prior experience with cost
management. Prior attempts at cost reduction within RDS
had been mostly “balloon squeezing” exercises where

This case is designed for teaching and learning purposes only. It is not intended to demonstrate effective or ineffective management practices. The case is based on work done with a Royal Dutch Shell subsidiary in Gabon, West Africa. However, the data provided is adapted from SG’s actual data. We are grateful to RDS for permitting us to study its oil exploration and production business.

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VOL. 1, N O. 4, ART. 4 DECEMBER 2008

cost reductions by one department or business unit simply
increased expenditures for another department or business
unit or resulted in cost decreases one year followed by
increases in subsequent years.
To establish world-class competency in cost management,
RDS established a program in its Learning Center that
combined the talents of knowledgeable Shell employees
with outside academic thought leaders and charged them
with developing cost management materials appropriate
for Shell’s business units. The Learning Center developed
the...
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