The emergence of sizable Internet-based electronic markets in the last three or four years – and in the energy industry in the last 18 months – is arguably the most important single development we have seen in business in decades.
These markets and technologies offer the opportunity to cut costs, drive competitive advantage, and create new products and services that our customers want.
Shell has a wide range of online corporate and e-business plays. We also have a new organizational unit - we call it our Internet Works - to stimulate and coordinate our global efforts - and to act as our window on a fast-changing world.
We are involved as stakeholders in procurement sites including Trade Ranger, which will handle the whole spectrum of energy-related goods and services , and Ocean Connect, which relates specifically to marine fuels.
These sites are likely to have significant impact in the longer term. They are going to cut substantial cost out of the system and streamline procurement processes.
Shell is also involved in a number of online trading exchanges: Level Seas (in vessel chartering), the Intercontinental Exchange (in trading derivatives) and Houston Street.com (in physical oil) – among others .
There are said to be about 700 energy exchanges at the moment. As in the early days of the oil industry, when there were hundreds, if not thousands of companies, natural selection is going to take place - with liquidity playing a key role. It will be interesting to see how many survive.
Will the present physical markets survive – or will they merge with their rapidly growing online rivals? Some of the online markets are already playing serious roles, including trading marker cruds. There is likely to be a lot of consolidation, which could go quite fast.
Personally I have no doubt that these new electronic marketplaces will make for more transparent, efficient trading which will, in turn, lead to increased competitiveness. As a company we are taking these opportunities very seriously.
All of these developments sit, of course, in the broader context of global trade. We are clearly in a period of liberalization, rapidly changing industry structure, and globalization.
Liberalization – in the sense of markets opening up, fast growing trade and a growing role for private companies is one of the main economic vectors of our age.
Personally, I am a great believer in the benefits of liberalized markets. But, I think we must all remember that benefits - real and tangible benefits– must be delivered. Liberalization is not an end in itself – it is a way of delivering a better economic life to a greater number.
We are all on a learning curve – the recent fiasco in the California power market earlier this year provided a timely reminder.
We shouldn’t impose symmetrical solutions on ourselves. Some solutions work in some markets, others work elsewhere. Almost every market has different features.
Industry structure is also changing – a continuous process. But the rate of structural change sometimes accelerates markedly – the origins of OPEC are a good example and the emergence of the three super-majors towards the end of the last decade.
Today we can see two separate trends – consolidation in the vertically integrated majors and also a rapid fragmentation at various horizontal levels. I’ll explain what I mean by that.
We’ve already seen the number of majors decline – that is, the number of multinational, fully integrated companies. Consolidation has taken place – ExxonMobil, BPAmoco and a range of other mergers and takeovers at other levels on the scale. These have been largely driven by the pursuit of scale and consequently lower costs.
At the same time we have seen the emergence of vast numbers of companies specializing in special – horizontal – parts of the chain. These range from companies that focus purely on seismic analysis, to drilling companies, pipeline maintenance specialists - and on and on.
These developments leave companies like ours with two challenges – remaining cost-competitive in tough markets, and segmenting our business in a way that enables us to generate acceptable returns on all our activities.
Globalization is the hot-button political issue of the moment. Where business, finance or economic leaders meet, the street demonstrators are now sure to appear. There is a real backlash.
They are against globalization – but quite what they mean by that is not clear. The technologies we have today – particularly the information technologies – mean that it possible for someone in the Middle East to chat to someone in England, in China or just about anywhere else.
What’s more they can do that at – relatively – little cost. And, of course, we have the Internet. In such a world it makes no sense to talk of rebuilding 19th Century style barriers between nations and communities.
Globalization is here to stay. Former U.S. President Bill Clinton called it a force of nature. To try to stop the overall direction of technological, commercial and social development would not only be futile, it has the potential to lead to serious conflict.
The evolution of information technologies and eBusiness, about which I spoke earlier, is just one aspect of globalization.
But, it is already having considerable impact and we have seen a fairly rapid move from businesses based on production processes to businesses organized around particular types of customers and their needs. Often these groupings are global. Let me give two examples from our own business.
Within Shell, Shell Trading is a genuine global enterprise. Previously trading activities were organized within regions, markets or national operating units.
The new global Shell Trading leverages global economies of scale and can develop opportunities – particularly cross business ones - which our previous smaller trading groups could not.
Why didn’t we do this earlier? Partly because the right combination of cost-efficient information technologies, markets and trading counter parties did not exist. Now they do.
Our Aviation fuels business, which lives in a world of global customers and competitors, is also now organized on a global basis.
These structural trends within the global economy may, at first sight, seem remote from the traditional mechanics of oil markets.
However, in developing our thoughts on how markets are likely to evolve, we should not overlook the potential impact they will have on the development of both supply and demand. Tomorrow’s markets will be both more transparent and more complex at the same time.
In conclusion, I’d just like to recap some key points. In the coming decade crude oil supply from the Middle East will meet most of the new demand in the fast growing economies of the Asia Pacific countries.
The quantities of Middle East oil going into Western markets will likely stay stable – but market share may decline.
Present refining over-capacity in the Middle East and Asian Pacific regions is likely to continue for some time. This has already reversed the historical flow of light products from West to East.
The emergence of eBusiness platforms – online markets in particular – is likely to have a significant impact on how oil is traded within the next decade.
Cost efficiencies will improve as we take advantage of the new technologies to restructure and build closer links with customers. We will be moving from producing hydrocarbons towards providing energy solutions in markets that are becoming increasingly global.
Paul Skinner, Group Managing Director & Chief Executive, Oil Products, Royal Dutch/Shell Group at the Middle East Petroleum and Gas conference, Dubai
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