Impact of the Nigerian Business Environment on Shell

Impact of the Nigerian Business Environment on Shell ABSTRACT Since the advent of crude oil production half a century ago in Nigeria, other parts of the productive economy such as agriculture and manufacturing have been neglected by the government and also the countrys poor and shambolic infrastructure has made doing business too costly for investors. There is a major exodus of Manufacturing companies from Nigeria presently as the rising cost of running their business is eating deeply into their profits for example Michelin, closed its operations in Nigeria two years ago citing the high cost of production, while chocolate maker, Cadbury has found it cheaper to move production to neighbouring country (like Ghana) and re-import its goods. Cheaper imports from China have closed a high percentage of factories in Nigerias once-thriving textile industry. Investors who bought equipment with foreign exchange component said they now need more naira to pay for their loans. They linked what is happening to their investment now to the Structural Adjustment Programme (SAP) or pre-SFEM days when importers suddenly had huge accumulated debts resulting from the adjustment of the exchange rate, over dependant on foreign goods, and high level of corrupt within the system. The micro and macro economic factors impacting on the running costs of manufacturing and production companies doing business in Nigeria makes it difficult for continued business activities in Nigeria by expatriate companies unless they are really making profit or they have a business that do not depend largely on the infrastructural amenities in Nigeria or can build a mini city that generates and produces its own power and other resources necessary to run its business such as Royal Dutch Shell. This report looks at the impact of the Nigerian business environment on Shell Plc and analysed the risks involved with macro-environmental factors. The report also analysed the strengths and weakness of shell Plc and strategies employed to take advantage of its strengths and opportunities in dealing with the various challenges they face. CHAPTER ONE INTRODUCTION 1.0 NIGERIA The Federal Republic of Nigeria comprises thirty-six states and one Federal Capital Territory (Abuja). The country is located in West Africa and shares land borders with the Republic of Benin in the west, Chad and Cameroon in the east, and Niger in the north. Its coast lies on the Gulf of Guinea, a part of the Atlantic Ocean, in the south. The three largest and most influential ethnic groups in Nigeria are the Hausa, Igbo and Yoruba (see appendix, fig 1). Nigeria has a population of almost 148 million and is the most populous African country and the 9th most populated country in the world. It has about 400 Languages (Hausa, Yoruba and Igbo Etc) and its official Language Is English but its Lingua Franca in the North Is Hausa, Yoruba in the West, Ibo in the East and Pidgin English in the South. The Nigerian currency is Naira and Kobo (see appendix, fig 2). Nigeria has a dual economy with a modern segment dependent on oil earnings, overlaid by a traditional agricultural and trading economy. At independence in 1960, agriculture accounted for well over half of GDP, and was the main source of export earnings and public revenue. The oil sector, which emerged in the 1960s and was firmly established during the 1970s now making Nigeria the 12th largest producer of petroleum in the world and 8th largest exporter is now of overwhelming importance to the point of over-dependence: it provides 20% of GDP, 95% of foreign exchange earnings, and about 65% of budgetary revenues. Competition between ethnic and regional groups for power and access to the countrys oil wealth has been at the root of politics in Nigeria. The per capita income of Nigeria is $2,300 as at 2008 base on the reports from the World Fact book. Nigeria is governed by a democratic government but not politically stable because Nigeria is a country of extremes. Great wealth and great poverty sit cheek by jowl, and tensions between different communities can boil over into civil strife especially in the delta region. While a few parts of the country remain problematic, the vast majority is as warm and welcoming to visitors as anywhere. The country have an image problem as corruption seems to be the order of the day, also email scams (419) has become known as a lot of innocent yet greedy people have been a prey to this scam. Conducting business in Nigeria is characterized with so many factors and this report will critically analyze the business environmental factors, degree of risk involved and the advantages of operating in such an environment (Nigeria). 1.1 ROYAL DUTCH SHELL PLC The Royal Dutch Shell Plc is a global group of energy and petrochemical companies founded by Alfred Donovan, was formed in February 1907 with the amalgamation of the Royal Dutch Petroleum Company (legal name in Dutch, N.V. Koninklijke, Nederlandsche Petroleum Maatschappij) and the Shell Transport and Trading Company Ltd of the United Kingdom, a move largely driven by the need to compete globally with the then predominant US petroleum company, John D. Rockefellers Standard Oil in the ratio of 60:40. Royal Dutch Shell (Shell) is engaged in oil and gas exploration and production, transportation and marketing of natural gas and electricity, marketing and shipping of oil products and chemicals. The company also has interests in renewable sources of energy such as wind and solar; and hydrogen. The company has extensive operations in more than 140 countries around the world. Its headquartered is in The Hague, the Netherlands and employs more than 300,000 people across the globe. The company recorded revenues of $318,845 million during the fiscal year ended December 2006, an increase of 3.9% over 2005. The operating profit of the company was $45,777 million during fiscal year 2006, an increase of 0.3% over 2005. The net profit was $26,311 million in fiscal year 2006, an increase of 0.2% over 2005. The current supplies earnings for year 2008 were $31.4 billion compared to $27.6 billion for year 2007 with an increase of 13.7%. 1.2 Management The Non executive chairman of Shell is Jorma Ollila, former Chairman and CEO of Nokia, he was appointed on the 1 June 2006. Ollila is the first Shell Chairman to be neither Dutch nor British. Other non-executive directors include Maarten van den Bergh, Wim Kok, Nina Henderson, Lord Kerr, Adelbert van Roxe, and Christine Morin-Postel. Jeroen van der Veer is the present CEO of Shell. 1.3 Shell Plc in Nigeria Shell Petroleum Development Company of Nigeria Ltd (SPDC) started onshore operations in Nigeria since 1958 as part of a consortium led by NNPC (The Nigerian National Petroleum Corporation) with 55 percent and including Shell (30 percent), Elf (10 percent) and Agip (5 percent). SPDCs operations concentrate in the Niger Delta and offshore shallows nearby, where it holds oil mining leases covering an area of 31,000 km2. There, it has installed more than 6,000 km of pipelines and flow lines, 87 flow stations, eight gas plants and more than 1,000 producing wells. In 1997, SPDC produced 899,000 barrels per day from this system (about 40 percent of Nigerias OPEC crude oil quota). The SPDC workforce stands at more than 10,000 people of whom 4,500 are employees; the remainder work for contractors and of total workers, 98 percent are Nigerians (see appendix, fig 3 for Niger delta oil field in Nigeria). Shell also has three other companies which are NLNG (Nigeria Liquefied Natural Gas) a gas company to produce Liquefied Natural gas and natural gas liquids for export. Shell is in joint venture with Nigeria with a 25.6% interest in NLNG (Nigeria Liquefied Natural Gas) together with NNPC (49%) while SNEPCO (Shell Nigeria Exploration and Production Company) and SNG (Shell Nigeria Gas) are both 100% owned by Shell. SNEPCO comprise Shell Plc, Total, Exxon Mobil, and Chevron Corporation. CHAPTER TWO 2.0 SHELL PLC AND OIL INDUSTRY IN NIGERIA 2.1 Oil and Gas The Oil and Gas Industry has played a major role globally. It has always been a central global player in international development and geopolitics and because of the critical importance of hydrocarbon based energy as the engine of rapid industrial growth in modern economy, either capitalist or communist. Due to the intrinsic dependence of this centurys growth model on access to ever-greater reserves, the industry has had to deal with increasing complexity in its relations with developing countries and environments. This in turn has led to increased cost of operations to match the growth models demands (Meadows et al, 1972; Nordhaus, 1973). WCED (1987) agreed that since 1970s, continued hydrocarbon-based Growth model is only justifiable if profits are ploughed into technological advances that would ensure a timely and less painful transition to alternative energy. 2.2 Challenges Faced By Shell Plc in Nigeria Since Shell started producing Oil in Nigeria, it has faced a lot of challenges in dealing with the government, micro and macro economics factors in Nigeria and most especially the communities, as Shell production led to oil spillage, gas leakage and so many more. It has affected the soil and water which is the main source of earnings for people in the Niger delta, as the agriculture and fishing has almost become impossible which is source of living for the people. This has raised a lot of community clashes with Shell so much so that their operations in Nigeria has been globally criticised and has also affected the image of company. In 1995, the company faced two major challenges; firstly, the Greenpeace occupied its Brent Spar platform in the North Sea to prevent its being decommissioned by sinking. Secondly, the Nigerian government executed Ogoni human rights activists: Ken Saro Wiwa, the head of the MOSOP (Movement for the survival of Ogoni people) a campaigning organization representing the ogoni people in their struggle for ethnic and environmental rights and eight others, this problem led to boycotts, public outcry and violence against the company. The crises arose soon after Shell began to review its societal relations, and further catalyzed internal support for transformation. Unfortunately, they occurred at a moment when the company was casting about for ways to avoid exactly such crises, leading Shell officials to heed those who internally promoted a new approach. CHAPTER THREE 3.0 ANALYSIS OF NIGERIAN BUSINESS ENVIRONMENTS For management of Shell Plc to apply effective Strategy that will work at international level and which will also reflect the Companys Vision, Mission, and Objectives, they need to understand the international business environment (both internal and external environment) of the host country (Niger delta, Nigeria). A good international strategic planner must recognise all relevant factors within the environment before pushing it through the process of analysing, decisions making and actions taking. Putting the relevant factors into consideration and testing them will help to create sustainable competitive advantages over other competitors. After critical analysis of the international business environment by the team of strategic planners for Shell Plc regarding Nigeria Oil Industry, decision needs to be taken to determine the mode of operation that should be employed by the company in order to compete effectively and efficiently within the oil industry of the host country. Decisions are of no use unless they have been implemented (acted on and monitored); Shell Plc needs competent strategists that will utilize the available resources effectively to bring the intended operations and strategies to reality. Shell Plc has been in Oil business since 1886 and operates around the world. The company has been able to maintain good name (goodwill), good customers loyalty, and strong customer database. The company construct meaningful strategic planning for Nigeria business environment before/after operating in the country, while the strategy is monitored and reviewed quarterly to reflect the companys true vision, mission, and objectives. 3.1 SWOT ANALYSIS The Strengths of Royal Dutch in Nigeria includes SPDC (Shell Petroleum Development Company of Nigeria) is the Oldest Oil and Gas industry in Nigeria. It was the first company to begin the production of Oil and Gas in Nigeria as a result, the company was able to monopolise the Oil Sector in Nigeria for a long period and established herself as a for-runner with a higher percentage than any competitors in the market. SPDC has a long standing name as one of the biggest Oil and Gas Company in the world as such it has the necessary equipment and money to invest in exploration of oil in Nigeria. Shell has been in business for over a century and they came to Nigeria with wealth of experience, technology, innovation and machinery. Shell operates autonomy of Shell Companies in a decentralized structure allowing Shell Offices in different countries to deal with the regulations, culture and behaviour of the communities in the best suitable way to meet their needs and concern. The Weaknesses of Shell Plc in Nigeria are: Shell faces the challenges that most companies encountered when they come into other countries as they have to learn the new rules, regulations and behaviours of the country and this can be a weakness from the start. Shell was not prepared for the challenge of dealing with the expense of ameliorating socio-environmental concerns which escalated and caused a lot of criticism internally and damaged the image of the company globally. The Opportunities of Shell Plc in Nigeria are: Nigeria was a virgin ground and shell Plc had the opportunity of being the first oil and gas to start production of oil and since then more and more oil fields were been discovered in Nigeria which has led to continuous production and increased production and business for the company. Shell had the opportunity for developing new business ideas as Nigeria gave them the licence to do that which led to joint venture between Shell Plc and Nigerian government, then the discovery of Natural gas led to LNG (another Joint venture) with Nigerian government and other opportunities opened up and shell now has SNEPCO and SNG, wholly owned. Also, Shell has the financial background to go into deep water exploration that led to new discoveries and new business expansion. The Threats of operating in Nigeria are: Fear of persistent interruption in their operations or damages to their properties and machineries by the militants in the delta region from which they conduct the drilling. Oil Gas extraction will someday reach a limit point but technical improvements in seismic exploration and extraction efficiencies have ensured continuing growth in reserves at the resource frontier. Growth of alternative sources of energy particularly renewable such as biomass and solar might changed their modus operandi. Continuing criticism on their image globally will increase costs spend on company and brand image. The new oil reform bill that would allow the Nigeria to retake acreage that has not yet been explored by their owners. Fear of new players into the oil sector from China and Brazil that will break its dominance in Nigerian oil and gas sector. It may be the target for other competitors. 3.2 PEST ANALYSIS AND RISK ASSESSMENT If organisation is able to know that only one thing that constant in this world is change, it would be able to make plan for emergent situations by understanding its business environment. It is very important for any organisation that intends to operate in Nigeria business environment to conduct environmental analysis before and after starting a business. In fact, continuous process should be applied to all aspects of planning because Nigeria business environment is not predictable despite its attractiveness. The companys strategic planners must be able to identify its marketing environment that is made up of the following: The internal environment is the staff (or internal customers- hired contractors), office technology, finance, wages etc. The microenvironment is the organisational external customers, suppliers, distributors, other competitors etc. Company with strong internal forces can still set up strategies to dictate the mode of its operations. The macro-environment cannot be control but company can set up strategies that will help in adapting to the business environment, which is known as PEST FACTORS- Political Factors (and Legal), Economic Factors, Socio-cultural Factors, and Technological Factors (see appendix, fig 4). 3.2.1 POLITICAL/ LEGAL FACTORS political/legal factors influences the environmental regulations which participants in the oil industry must comply with. As with many factors in the general environment, changes that benefit one industry may damage others. For example, on the political front, government legislation can affect oil production by increasing the leasing charges on oilfield and then charge taxes per barrel produced. In a broader view, the following constitutes the numerous political and legal issues to be considered in any business environment: Political stability Risk of military invasion Legal framework for air pollution Intellectual property protection Industrial safety regulations Anti-trust laws Pricing regulation Taxation and incentives Wages legislation Hours work per week Mandatory employee benefits RISK ASSESSMENT ON POLITICAL/LEGAL FACTORS Nigerian political/legal history was characterised by military intervention, civil war, ethnic sentiments, and marginalisation. The country has a bad record in democratic set up and abuse of human right practices. The high level of corruption and political instability did not allow the rule of law to reflect in the society and also, the problem of instability in government policy due to lack of continuity in governance. Shell Plc assessed Nigerian business environment and capitalised on the corruption practices of the people. The company involvement in the execution of environmental activist (Ken Saro-wiwa) and eight Ogoni people that protested against the company reckless operations on their farm lands (in Niger Delta) cannot be dismissed. The political/legal factors do not possess any risk to Shell Plc if it knows is way. It is not necessary also for the company to follow all the legislations laid down for the Oil Industry. Legislations on industrial safety, air pollution control, wages, maximum hours work, mandatory employee benefits etc were not observed by the company. 3.2.2 ECONOMIC FACTORS the economy has an impact in all industries, from suppliers of raw materials to manufacturers of finished goods and services as well as all organisation in the service, wholesale, retail, government and non-profit sectors of economies. Key economic indicators include the following: Interest rates Unemployment rate Type of economic system in countries of operation Government intervention in the free market Comparative advantages of host country Exchange rates and stability of host country currency Efficiency of financial markets Workforce and labour cost Business cycle stage (e.g. prosperity, recession and recovery) RISK ASSESSMENT ON ECONOMIC FACTORS Nigeria operates mixed economy system which helps Shell Plc to manipulate the system because of government intervention in the economy. The interest rate does not pose any threat to Shell Plc because it did not take loans from any Nigerian banks. The companys bankers (the foreign banks) finance and support all their financial activities which favour Shell Plc because of devaluation in Nigerian currency. The major economic risk assessment to Shell Plc operating in Nigeria is increase in unemployment rate (especially in Niger Delta) due to exploitation of crude oil in that area that leads to job lost. The effect of this action has turned thousand of youths into militant groups that kidnapped foreign workers employed the company in exchange for money while some stole extracted oil from Shell. Despite the problem encountered from the militants, the company still operate in Nigeria because of prosperity attached to Oil Industry in Nigeria. 3.2.3 SOCIO-CULTURAL FACTORS -socio-cultural forces influence the values, believes, and lifestyles of a society. Examples include a higher percentage of women in civil service and more men engineering related jobs, holidaymaker, dual-income families, night out orientation, increases in the number of temporary workers, greater concern for healthy diets and physical fitness, greater interest in the environment, and postponement of having children. Some of these factors affect Oil Industry in Nigeria. RISK ASSESSMENT ON SOCIAL-CULTURAL FACTORS The risks that associate with Social-Cultural factors are many especial to the indigene of Niger Delta where eighty percent of the population are illiterate and have strong believed in their local tradition. Most of the indigene want to work for Shell Plc as a security officer or domestic assistant but their level of literacy does not matched the companys requirement. Shell Plc has employed some of the indigene on temporary basis and gives them opportunity to integrate within the system. The company give out scholarship to the indigene of Niger Delta to increase their level of literacy and give them sound orientations that meet the companys standard in order to tackle some of the problems associated with these factors. 3.2.4 TECHNOLOGICAL ANALYSIS development in technology leads to new products and services and improve how they are produced and delivered to the customers. Innovations can create entire new industries and alter boundaries of existing industries. Issues to be considered in technological analysis include the following: Recent technological development Technologys impact on product offering Impact on cost of production Impact on value chain structure Rate of technological diffusion RISK ASSESSMENT ON TECHNOLOGICAL FACTORS The only major risk on technological factors is problem of electricity power supply which can hinder technological advancement. This problem has been taken care for by using Power Generator to support the power system but add to the cost of production. There are no standard infrastructural facilities in place when Shell Plc moved to Nigeria but the government is now committed to modern technological development. Shell Plc imports most of its equipment with foreign expertise that operate it and then arranged with the expertise to train home workers. This process improves technological adoption and diffusion which also reduce the cost of production in long run. The company have used different methods to attract young talented graduates (in all disciplines but priority to engineering students) and trained them to become an expert. The number of Macro- environmental factors is virtually unlimited. In practice, the oil producers must prioritise and monitor those factors that influence the industry. It may be difficult to forecast future trends of any international business environment base on the macro-environmental factors with an accurate level of acceptability because of its complexity. 3.3 STRATEGIES EMPLOYED BY SHELL PLC FOR DEALING WITH CHALLENGES Shell Plc used corporate alliance strategy to shed off threats from competitors and to maintain its dominant position. The company operates joint venture with Nigerian government (NNPC) and also in partnership with Total, Chevron Corporation, and Exxon Mobil Corporation to form Shell Nigeria Exploration and Production Company (SNEPCO). The company was also in partnership with Globacom (a Nigerian telecommunication company) to create employment impact that will enhance the companys operations (Shell Plc) in Nigeria. Their strategy involved helping communities to leverage income and improve their quality of life in conventional ways, such as creating jobs and assisting to defray costs of social overheads such as roads, schools and hospitals. The company set up a committee that look into complain by the farmer(s). The committee assessed complains and compensate appropriate to their loss. The company also support the government initiative on amnesty by giving support to militants that submit their gun(s). The company want to support training or education of militants that surrendered their ammunition for to better life (see appendix, fig 6 for the images of militants surrendered their guns). The company is using Corporate Social Responsibility (CSR) to build its image locally and globally to show more concern on corporate governance and sustainable development. The CSR campaign by Shell Plc is to accelerate developmental and employment-generating opportunities across the Nation but especial Niger delta. Two special partnerships have been entered into by the company with USAID (United States Agency for International Development)- a 5 year worth $20 million agreement to develop Nigerian capacity in agriculture, health and business enterprise; and with Africare- a 3 year worth $4.5 million partnership that focus on reducing deaths from malaria. Security strategy was used to crush the militants through cooperation between Shell and State Security Forces but proved ultimately counterproductive as youth militancy increased and the security deteriorated across the wider Delta. The militants target (kidnap) the foreign workers and key officers in Shell Plc in exchange for money (compensation) which nearly put an end to Shell operations in that region (see appendix, fig 5 for images of workers kidnapped). The company outlined a new approach of CSR and community engagement which aimed to build a security-development nexus in partnership with local people. This approach has worked well for the company but now it has led to uncivil tensions along gendered and ethnic lines which undermine the prospect of a long term solution. 3.4 NIGERIAN COMPETITIVE ADVANTAGE- Porters Diamond Model SWOT analysis was used to determine the advantages, the level of attractiveness and risk involved in Nigerian business environment in line with the macro environmental factors for Shell Plc to operate in Nigeria (especially in Oil Gas Sector). Despite the problems and criticism encountered by Shell Plc, the company still operate and increase investment in Nigerian Oil and Gas Sector, and also extend partnership across the sector because of Nigerian comparative advantage. The Nigerian business environment possesses most of the qualities and characteristics that determine national competitive advantage as stated by Michael Porter in his theory (see appendix, fig 7 for porters diamond model). He identifies four sets of conditions that are essential in determining country competitive advantage: Factor conditions- human, knowledge, physical, technological and capital resources. Demand conditions- quality and quantity of home demand, demand that internationalised the domestic market will stimulate innovation faster in the domestic market. Related and supporting industries- availability of aid to trade (banking, insurance, transportation, warehouse and telecommunication). Firm strategy, structure and rivalry- local rivals and strategy that works with business environment. There are two other factors that can play an important role for any company to fully enjoy competitive advantage of any nation: chance (war, politics, financial movement and serendipity) and government (government policies, subsidies, training/education, and effective capital market). We have discussed most of these factors in our SWOT analysis and PEST analysis on Shell Plc. CHAPTER FOUR CONCLUSION What is Shell Plc comparative advantage in economic reform, competitiveness and economic governance when viewed in the light of activities initiated by other bilateral and multilateral donors, NGOs, and the Government of Nigeria? Shell Plcs broad comparative advantages are in government institutional strengthening and promoting private sector-led growth. Shell Plc has the most impact when it targets its activities in these areas at operational levels, where they can have sustainable effects, rather than at broad consensus-building (except in public awareness activities). In a vast bureaucratic environment like Nigerias, support must be highly selective, focusing on agencies and institutions in key leverage positions. These activities will complement the comparative advantages of other donors (who are operating at different sector but in partnership with Shell plc like Globacom and USAID). Globacom will continue to focus on telecommunication, and its technical and operational activities in the technology area can coordinate with Shell Plc. The USAIDs comparative advantage is in developing and implementing programs that actually address agriculture, health and business development. Shell Plcs CSR campaigns and partnership with international body (like Africare and USAID) will go a long way to redeem the image of the company internationally and also help to maximise their competitive advantage over others (like BP- British Petroleum). Their support to Nigerian government amnesty to educate and employ militants that surrendered their guns will reduce the number of youth that join militant group to survive. It is very important to be realistic about the strengths and weaknesses of any organisation when using SWOT analysis; it is of most important to identify the organisational current strengths and weaknesses then future chances. The macro environmental factors need to be mirrored with the organisational competitive advantage. Continuing evaluation of organisation strategy will help to check how effective they are in practice and then helps to inform of future environmental challenges. References Best, M. (1990) the New Competition: Institutions of Industrial Restructuring. Harvard University Press, Cambridge Dabbs and Bateson (1998), corporate impact of addressing social issues in projects of the developing world, Pro-Natural. Lima, Peru Davis, J (1998), a Commitment to Sustainable Development, WBCSD, London. 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