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“When I look at an investment proposal now,” says Marvin Odum, president of Shell Oil Co., “it still covers the technical issues, of course. It certainly covers the financial issues. But fully half of that proposal deals with what I would call the nontechnical risk: social performance and sustainability issues.”
“Here’s where it gets even more interesting,” he continues. “As you get better companywide at exploring, understanding and addressing those nontechnical risks, it drives innovation. Because mitigating those risks often drives you right back into the technology loop — back into asking how can you solve novel problems in novel ways, and how can you do it at affordable cost? At this point, it may be the number one driver of our innovation program.”
Like other energy companies, Shell is in a classic “between a rock and a hard place” situation. The world wants what Shell provides, but it wants it when it wants it, at a price it likes to pay, and with positive or at least neutral environmental and social impact. That’s forced the company to adapt its traditional innovation approach — and even its overall organizational structure — in some surprising ways.
The need for those changes has also been heightened by the environmental damage and public relations disaster of the BP oil spill in 2010, Odum says. “What the Gulf of Mexico spill shows us is we are dependent on how the whole industry performs; it affects a part of our license to operate.” That is true even though Shell enjoys a reputation for sustainability performance that is stronger than that of most other energy companies. For the last two years, respondents to MIT Sloan Management Review’s annual sustainability survey have named Shell Oil among the top 10 companies that are “world class” at paying attention to the issue.
Still, dealing with the broader public perception and wariness that greets energy companies, says Odum, has become a major focus of the company. Today, managing the concerns of external stakeholders has prompted changes in management approaches and strategy internally, and sustainability issues have moved in Shell from being a company “priority” to a “core value.”
Odum’s responsibilities at Shell Oil include exploration, new business development and venture management as well as stakeholder management and sustainable development. He spoke with Michael S. Hopkins, editor-in-chief of MIT Sloan Management Review, about what a shift in “core values” really means for company operations and management.
Your peers and competitors each have different stances about how they think about sustainability strategically, and all of you have been scrutinized more since the Gulf of Mexico blowout. How has Shell been affected?
We as a company provide energy resources around the world, in some cases working in controversial places. You’d almost like to think that as a company you could sit back and rely just on your own performance to determine the public’s perception of you. But what the Gulf of Mexico spill shows us fairly dramatically is that we are dependent as well on how the industry performs overall. It affects our “license to operate.”
And so a company, particularly one with the size and capabilities of Shell, has to not only develop internal performance that makes us really stand out to our investors and the communities we operate in, but we have to take steps to drive the industry as a whole to the right level also. That’s really accelerated because of the spill in the Gulf.
So we’re participating in the president’s oil spill commission to review what happened and what should happen from here. We’re recommending new baseline standards for the industry going forward.
For instance, the natural gas supply in North America has gone through a complete transformation in the last three or four years, to where it’s now probably in a long-term sense the key energy element in our system for North America. We have over 100 years of supply there. As Shell starts to take a very large position in natural gas in North America, the question I ask myself leading this business is not what is Shell going to do in terms of our own performance, but how do we set baseline performance and regulatory standards in this business so it becomes attractive to everybody involved and we secure that critical license to operate? How can I help create those standards? Which governors do I need to speak to? Which members of the administration? Collaboration is crucial.
In this past year, in the wake of the Gulf accident, what has surprised you?
Well, timelines have gotten longer. When I was an engineer back in the ’80s working for this company, when you moved into a new project you focused on the technical aspects — getting the permits involved, figuring out if you could actually drill in water this deep, could you produce in this type of environment.
Those are all still big parts of the equation, but they’re maybe half of the equation. The other half is about communities and stakeholders. What are the needs of communities where you want to work? What do they think and how involved are they?
This is a shift from being a company where you basically looked at the world and said, “Trust me. I’m going to do it the right way.” Now we have stakeholders whose point of view is, “Show me and involve me. Make me part of this. I’m going to be part of these decisions going forward.” It changes everything. It changes the way we think as a company. It raises our performance. And it changes the timeline of these projects.
In what ways do the timelines change? And how much?
Dramatically. The timelines change dramatically. The way I would frame the macro that I take to the business is that if the community doesn’t ultimately want us there, then it’s not going to work. We’re on the front lines of environmental issues and in some of the more remote parts of the world. We deal quite a bit with native groups, with indigenous people, first nations and others. We’ve learned a lot in this process about not only how we should approach those areas, but what the values are in those kinds of communities.
When I look at an investment proposal now, it still covers the technical issues, of course. It certainly covers the financial issues. But fully half of that proposal deals with what I would call the nontechnical risk. The social performance, the sustainability issues — how have those been taken into account? What are the headline issues? How are we dealing with them? How will we mitigate the risk associated with those? What’s the cost of that, and how long does that take?
The reason I use the word “dramatic” is that the timeline of these projects now is largely driven by those social performance and sustainable development issues, as opposed to the technical and other commercial issues.
Social performance and sustainability issues are what set the bar on these projects?
They’re the ones that set the timeline, yes.
The real crux of this discussion, though, is that if you don’t do this work the right way on the front end, you actually never get a good project. It never works out in the long run.
So you have to do this work upfront. What I have to do as a company leader is push the education and the thinking of our project managers, our project developers, in that direction.
If we can get our people thinking sufficiently from that point of view, not just working with stakeholders and listening to what they say but actually anticipating their needs, anticipating these “nontechnical” risks and opportunities — and if we can get more people skilled in that way — then the more successful we’ll be, the shorter these project timelines will be, the more trust in Shell there will be. And all of that will continue to improve over time. This change will be catalytic.
Is that what you’re referring to when you say that addressing these new pressures “raises our performance?”
Yes, partly. But here’s where it gets even more interesting: As you get better companywide at exploring, understanding and addressing those nontechnical risks, it drives innovation. Because mitigating those risks often drives you right back into the technology loop — back into asking how can you solve novel problems in novel ways, and how can you do it at affordable costs? At this point, it may be the No. 1 driver of our innovation program.
As an example, I’ll use Alaska, where there are massive sea ice movements, and where you have to think through the technology it takes to have a structure sitting in the Arctic where the force of that multiyear ice moving through it presents a huge viability challenge. Obviously, that prompts a lot of research and development work — but now it also prompts an exploration from the social performance perspective, and a whole new kind of collaboration. We’ve studied Arctic ice for years. But what we hadn’t done as much as we do now is work with indigenous people who have lived in that ice for millennia. They have what they would call traditional knowledge about how this ice changes over decades and centuries, and they have deep knowledge about what you have to really be prepared for. I as a project manager need to be in Alaska with Alaskans on my team, with people who really understand what happens there.
Finding ways to bring that traditional knowledge to our team, creating joint science collaborations that link indigenous people and our scientists, leads us to different answers.
And it builds consensus to move forward.
If you had to give executives at other companies one or two pieces of advice on how to create linkages between all these business considerations, their P&Ls and sustainability, what would you say?
Lay out on a piece of paper all the factors that you have to consider. Then lay out all the risks you can imagine. And then, how do you mitigate those risks? That often gets you into the right mind frame.
Businesses are often surprised because something that wasn’t on their original list is what stopped them two years later. When you build that list of risks, you have to be looking externally. You can’t do that in an internal-operations bubble.
What all this does is define the total suite of what you have to deal with. Then you’ll come to the questions of whether you can actually succeed in mitigating these risks and making that project work for all stakeholders. What do the mitigations cost? How much time do they cost? At that point, ultimately, you have to stand back and ask, “Is it still a viable project?” Sometimes it’s not, and that’s the hard part. Sometimes it’s not a viable project.
Do you think companies — and let’s imagine even non-engineering companies — are bad at accurately imagining the broad list of risks that they face?
I find it hard to speak for other companies. But if I’m perfectly open with you, I can point to cases of major investments, multibillion-dollar investments by Shell, that haven’t gone as smoothly or as quickly as we would like because we underestimated some of the social performance issues or just flat missed them as considerations that needed to be taken into account.
Again, think of Alaska, which is clearly a very controversial area for offshore drilling and development in the Arctic. We were ready — technologically, commercially, operationally, in all respects — we were ready to drill wells in offshore Alaska three years ago, and fully expected to be doing so. This is a venture that we’ve put about $3 billion into. Every year that we gear up to drill a well in Alaska, it costs us several hundred million dollars. And now for three years, we have not drilled.
We underestimated some of the challenges. We underestimated some of the concerns people had. We now believe we can address them, but we hadn’t taken the step of understanding those concerns, addressing them, getting people’s buy-in before moving forward. Instead, we just pushed forward as a company. We don’t do that anymore.
Part of your job is communicating these things to stakeholders outside the company, yes?
Certainly. And the first thing that comes to my mind in that respect is the word “transparency.” The only way to approach the situation that we’re in is for a company like Shell to be a complete open book in terms of what we do, how we do it. And we have to be able to stand up to the criticism as well as reap the benefits that we get from being that transparent.
We try to do that by publishing a sustainability report every year. It’s on our website, it’s available to everybody. It goes into great detail about the performance of this company, environmental and otherwise.
Trace for us how you’re going about getting your own company’s people focused on these social and sustainability issues — these areas of “nontechnical risk,” as you describe them.
I think this arc of change for us has to do with developing those skills throughout our business. It doesn’t solve the problem to have the leaders of the company thinking about it in a bubble. That has to translate all the way to the people having the face-to-face conversations, the developers in this company whose initial thinking at the local level might be, “Well, we’re going to provide some great benefits to the community because we’re going to provide jobs and we’re going to provide some infrastructure and other things, isn’t that enough?” We’re still on that educational path, I would say.
How do you incentivize individual leaders throughout the company to increasingly incorporate sustainability factors in the strategy that drives their business?
I think one of the misconceptions and often missteps on this type of path is that sustainability, social performance, is a hard-to-define area. That’s not exactly right. We build systems and processes into our normal business practice to address these issues.
If you look at it from a total company point of view for Royal Dutch Shell, we have a scorecard. That scorecard drives the annual bonus for everybody in this company. And 20% of that scorecard is driven by sustainability issues, period.
No doubt that’s changed over time, but has it changed recently?
It’s been reasonably stable over the last handful of years, at about that level. What changes over time is how you define that sustainability measure. So it’s been transitioning or evolving, if you will, from something that was largely safety based — not having accidents, not hurting people — to something that’s that and more social performance based.
Beyond those evolving individual incentives, though, we also began transforming our actual organization structure. In 2009, we dramatically reorganized this company. Big-company reorganizations are typically around types of business, geographic issues and so forth. But one of the key drivers of our reorganization this time around was sustainability issues.
What we used to have was a centralized, very smart core group of experts that tried to drive sustainability around the company. But we found that that was not the way to succeed as fast as we wanted to. We need to put these skills directly into the project teams. That’s where all this needs to happen, not in some centralized thought group. That aim drove our reorganization.
That maps to what we’re discovering among leading companies — the move is toward integrating sustainability into the fabric of the business as opposed to siloing it. It’s often hard to do, though. You’ve got line people who have P&Ls to make. Do they always appreciate the integration of sustainability-related concerns?
I’m actually very encouraged and proud of the progress that we’ve made in this area. More and more people here recognize that sustainability, broadly speaking, is an area where they have to be very, very good in order to get profitability. They’re beginning to understand that this is not an add-on that strips away profitability because it lengthens the timeline and adds cost, but that it’s simply not possible to have a successful project if you don’t do this right.
Ultimately, of course, you have to find a way to translate that discovery into rigorous business-case thinking, right? You have to integrate these nontechnical risk and sustainability considerations into the analyses required to make investment decisions project by project, strategy by strategy. Do you think that at Shell you have a clear business case for significant and increasing sustainability-related investments?
Oh, absolutely. I mean, it comes from a core — I sit on the executive committee for Royal Dutch Shell, which looks at the major investment proposals around the world. And I can tell you that we spend a lot of our time scrutinizing those very large investments — and these are almost piece by piece multibillion-dollar investments that cover decades of time, 10, 20, 30, sometimes 40 years of time. What we have to do from technical and commercial profitability and sustainability standpoints is take a view over that period of time for this size of dollars at risk. We spend a tremendous amount of our time on the sustainability issues to determine whether or not this is something we can go forward with.
We do scenario planning. Shell’s somewhat famous for its scenario planning. We’ll look a half a century into the future, and we ask ourselves, “Where is the world going to go?” We’re not looking to define a definitive answer; we’re looking to define the spread of options that the world has, that governments have, how priorities will change and how things will be implemented. And then we’re looking to understand how we would perform in each of those possible worlds. Then we bring it all the way back to today to see now what we need to do to drive toward being successful in that spread of potential outcomes.
It’s why you see a company like Shell advocating on a global level for things like appropriate management of CO2 emissions and why we say the world really needs a price on carbon to start to make a market-based case for reducing carbon emissions around the world. If you’re talking to someone who’s not particularly close to the energy industry, that person might think, “What are these guys talking about? Why are they advocating putting a price on that?” But it’s because we understand where the world needs to go, where it will go over time and we know what will drive the right sort of behaviors over time.
Is it getting easier or harder to think long term? Competitive and economic pressures compel so many managers toward a short-term view, but, as you say, scenario thinking assumes that a long-term view is imperative.
I don’t know how to answer that question because it just sort of is. Over the last 15 or so years of working in this business, when I get out into the world or into the media or some of my public sessions, I’m asked questions like, “What do you think the oil price will be in six months or a year, and how is that changing your business?” And the truth is it doesn’t change my business at all because we’re looking over 10, 20, 30, 40, even 50 years.
Nobody predicted the size of the financial crisis we’ve had. Does it change cash management and other type of things in the short-term picture? Yes. Does it really change the direction of this business? No. We keep enough in reserve that when we go through a couple of years like we just did, we can continue to invest. We invest on the order of $25 billion to $30 billion a year, and we can continue to invest at that level in the harshest economic conditions because we know that we take this long-term view.
The financial crisis didn’t drive any change in our view of sustainability or the money that we spend on sustainability. It’s like safety in the company. Safety is a core value for people in Shell, and if it’s not, you don’t last very long. We’re seeing the same thing start to develop with sustainability issues. We want that as a core value.
Sustainability’s clearly a priority, but it’s not enough for it to be a priority. Priorities change with conditions, they change with financial performance and maybe the economy. Core values don’t. And that’s the way I want people to think about sustainability. It’s core.