Shell: investments in digital transformation to reduce impacts of COVID-19
Energy companies have continuously invested on new technologies. Digital transformation will play a critical role to reduce the negative impacts of COVID-19 and future external shocks.
Company background
Shell is an international energy company with revenues of $345 billion and net income of $16.4 billion. The company, with 83,000 employees in more than 70 countries, has set three ambitions: thrive in the energy transition, provide a world-class investment case, and sustain a strong societal license to operate [1]. The company creates shareholder value by i) exploring for crude oil and natural gas, ii) developing new crude oil and natural gas from major fields, iii) cooling natural gas to produce liquified natural gas, iv) supplying and trading oil, gas, and other energy products such as electricity, and v) having a portfolio of refineries and chemical plants that produce a wide range of products. In this article, I discuss how COVID-19 impacts Shell’s business and recommend how the company can leverage digital innovation to continue growing.
Impact of COVID-19 on Shell’s business
COVID-19 has impacted importantly operations-intensive companies like Shell. Social distance norms to reduce the propagation of COVID-19 affect the way in which Shell operates its businesses. Digital technologies will play a critical role on keep operations running and on boost the efficiency of Shell’s traditional business.
In addition, COVID-19 has impacted the demand for oil, resulting in plummeting oil prices [2]. This effect is amplified by the Russia-COPEC price war. The impact of COVID-19 on the demand for oil, brings an opportunity for Shell to continue diversifying its portfolio. In the last decades Shell has invested in new businesses to reduce the impact of external shocks. The effects of COVID-19 reinforced the need to diversify its business. In fact, amidst the virus outbreak, Shell announced that the company has set itself an ambition to become, by 2050 or sooner, a net-zero emissions company. To diversify its portfolio and become less dependent on oil prices, digital technologies will play a critical role.
Leveraging digital innovation to grow
Digital innovation will help the company to improve its growth in the traditional and new business and reduce the impact of COVID-19.
Traditional business
In the traditional business, digital innovation can help to keep operations running and boost its efficiency.
- Provide technology to support to ensure employees can work from home. Shell has invested on technology to help 70,000 to work from home every day [3]. Providing software platform for videoconferences has been critical for maintaining supporting the operations. Going forward I recommend testing remote work on key areas of the business for increasing the efficiency of the processes. Remote work will increase the profitability of the business and the retention of the employees [4].
- Improve efficiency of the traditional business. Since the demand for oil has been reduced due to the economic shock, improving the efficiency of the business is critical for boosting the net income of the company. To illustrate, Shell can digitalize its logistics to improve its inventory tracking [5]. This initiative will allow the company to improve its inventory planning capabilities and reduce the operating costs of the company. At the same time, Shell can improve offshore operational performance. Offshore projects develop oil and natural gas deposits located under the ocean [6]. Due to the challenging circumstances of developing projects offshore, the efficiency is still lower than the efficiency of onshore projects. The use of advanced analytics techniques such as natural language processing can increase the efficiency of the operations. Those techniques can predict unexpected events, improve well placements, and detect equipment failures [7].
New business
To reduce the impact of COVID-19 and future external shocks, Shell should continue diversifying its business. Shell has already advanced towards its goal of becoming a net-zero emissions company. To illustrate, in 2019 Shell acquired ERM Power, one of the largest Australian commercial and industrial electricity retailers [1]. The entry of Shell into this new sector brings important challenges for the company. For example, matching supply and demand of electricity is a critical activity for electric utilities. In this context, the digitalization will allow the company to entry into new business, reduce the dependency on oil, and reduce the impacts of COVID-19.
- Smart meters and distributed energy. Due to the increasing penetration of intermittent energy sources such as wind and solar energies, the prediction of customer demand is critical to successfully plan electricity generation. Shell can use data generated from smart meters, grid equipment, weather data, and GIS data to forecast energy consumption [8]. In addition, distributed generation [9], the generation of electricity at or near where it will be used (e.g. houses) will also increase the variability in the supply side of the electricity market. Having real-time data on customers’ behavior is useful for predicting the energy demand and matching it with energy supply.
- Digitalization of processes. Utilities can optimize their processes through digitalization. Shell’s utilities could boost the productivity of maintenance personnel by adding GPS and traffic information to conventional route planning [10]. In addition, the automatization of back-office processes such as billing can reduce costs and increase accuracy.
Implementation
To implement these initiatives, it is necessary to conduct technological and organizational changes in the company. Organizationally, Shell will have to continue investing in top notch professionals. Incorporating more experts in fields related to digital transformation such as data analytics and cyber security will be critical to implement the recommended initiatives. Shell will have to continue adjusting its culture to include agile ways of working [10]. Rapid iteration and experimentation, standardized ways of working, performance orientation, information transparency, continuous learning, and action-oriented decision making are critical characteristics of the agile methodology [11].
In every company, important transformations generate resistance from employees. For the digital transformation of every company, it is important to have an aligned leadership team with a clear vision, to train the employees about both the purpose of the transformation and the required technical skills, and to promote collaboration and transparency.
Since the DNA of Shell is engineering, I am confident that the company will integrate new technologies quickly and successfully. Digital innovation will be critical for reducing the effects of COVID-19 and future external shocks.
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Great article- Shell is an agile organization. I enjoyed reading your points on both the old/traditional business and the new/emergent business. I agree that further technology integration and AI investments can increase the operational efficiencies of the business, but in a world where the price of oil is at an all time low, how do you do that without raising costs or being in a position where the trade off is workers’ jobs?
Secondly, how is Shell thinking about employees who can work from home, and those who can’t? Examples of those who cannot include pump attendants in the developing world, mechanics etc. What’s the strategy for protecting employees who must go to work on site? I believe we could learn from that perspective as well.
Thanks Andres.
Very interesting article on digital transformation!
It’s impressive that 7 out of 8 employees are able to work remotely in such an industrial firm. It shows that Shell has great digital capabilities.
I wondering what it means to be a ‘net-zero emissions company’, if it means exiting the business of fossil fuels for greener energies, this would be an incredible change for the company.
Dear Andrea, thank you for a great post. Thank you for bringing the DIGIT perspective to what it seems to be a very traditional industry. I am actually surprised that such a large organization can be as agile and fast as you mention. I do not know much about O&G, but it seems like the industry as a whole is facing a very tough time, do you think that after covid-19 things will get considerably better for the industry? Putting covid-19 aside, It seems that the sector’s outlook is not very positive. However, covid-19 could be a good catalyst for company’s like shell to start ASAP streamlining their processes, implementing technology to get operational efficiencies and diversifying to other business lines. The challenge of downsizing or optimizing their traditional business unit seems complicated, but I think they are well positioned to face the challenge due to their excellent technical and human capital.