ROYAL DUTCH PETROLEUM COMPANY THE "SHELL" TRANSPORT AND TRADING COMPANY P.L.C.

1870–1907

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The Royal Dutch/Shell Group forms one of the world's largest businesses. It has a complex corporate organization which consists of more than 2,000 companies worldwide ultimately controlled by two parent companies. The "Shell" Transport and Trading Company, a U.K.-registered company, has a 40% interest in the group, and the remaining 60% is owned by the Royal Dutch Petroleum Company, a Netherlands company. Collectively, the group is involved in oil and gas exploration, production, refining, transportation, and marketing. It has large interests in chemicals--it was probably the world's ninth, largest chemicals business in the late 1980s--and diversified activities in coal and metal mining, forestry, solar energy, and biotechnology.

The Royal Dutch/Shell Group was formed in 1907 when a merging of the interests of Royal Dutch and Shell Transport took place, in which each company retained its separate identity. Royal Dutch was established in The Hague in 1890 after receiving a concession to drill for oil in Sumatra, in the Dutch East Indies. It had the support of King William III, hence the name Royal Dutch. The promoters of this venture had found oil in 1885, but needed funds to exploit their discovery. In the early years the firm was under the energetic direction of J.B. August Kessler under whom, in 1892, it exported its first oil. In 1896 a 30-year-old bookkeeper, Henri Deterding, joined the company and in 1901 he became its chief executive. The predominant use for petroleum in the late 19th century was as paraffin or kerosene, which was used for heating and lighting. However, Sumatra's oil was particularly rich in gasoline, the product used by the internal combustion engine, and it was therefore well placed to take advantage of the growth in demand for oil which the motor car was to bring.

Deterding was one of the great entrepreneurial figures of the 20th century. He combined remarkable strategic vision with acute financial awareness born of his early training as a bookkeeper. His ambition was to build a company to rival the world's largest oil enterprise, John D. Rockefeller's Standard Oil Company of the United States. Deterding preferred to achieve this ambition through alliances and agreements rather than competition. In 1903, as part of this strategy, he formed a marketing company, the Asiatic Petroleum Company, owned jointly by Royal Dutch, Shell, and the Paris branch of the Rothschild family, the latter of which had substantial Russian production interests. A crucial intermediary figure in making this alliance was Fred Lane, who had been one of the original directors of Shell Transport, but who had become closely identified with the Paris Rothschilds and, by the early 1900s, with Deterding.

The "Shell" Transport and Trading Company's origins lay in the activities of a London merchant, Marcus Samuel, who began his career in the 1830s selling boxes made from shells brought from the East. The business gradually expanded the number of commodities in which it traded. When Marcus Samuel Sr. died in 1870, his son Marcus continued to be involved in far eastern trade. In 1878 he established with his brother Samuel, a partnership known as Marcus Samuel & Co. in London, and Samuel Samuel & Co. in Japan, which became a leading shipping and trading enterprise in the Far East. During the 1880s the Samuels, through intermediary Fred Lane, began selling the Russian oil of the Rothschilds to the Far East, breaking the monopoly previously held by Standard Oil. In 1892 the Suez Canal Company was persuaded to allow oil tankers to pass through the canal, which lowered the cost of Russian oil in the Far East, and allowed Samuel to increase rapidly its market share. Later in the 1890s fears that Russian supplies might be reduced led Samuel to search for a secure source of oil nearer his Far Eastern markets, and in 1898 a major oil field was discovered in Dutch Borneo, a year after the launch of "Shell" Transport and Trading Ltd.

Heath attempted to use the British government's 51% shareholding in BP to force that company to supply Britain first, but BP declined.

1900–1938

Shell Transport grew rapidly. By 1900 the company possessed oil fields and a refinery in Borneo and a fleet of oil tankers. However, Marcus Samuel was above all a merchant, lacking organizational skills and ignorant of the technicalities of the oil business. After 1900 he lost interest in the details of the business, and in 1902 became lord mayor of London. By the early 1900s Shell Transport had made a series of costly mistakes, including a disastrous involvement with Texas oil. When Texaco hit a large oil gusher in 1901, Samuel agreed to buy the oil. The flow of oil was not continuous and stopped altogether in the summer of 1902. The formation of the Asiatic Petroleum Company left Deterding in control of Shell's sales in the East. By 1906 Shell's financial situation was so bad that Deterding was able to impose his own terms for a merger of the two concerns, with the Dutch holding 60% of what came to be know as the group.

The combined group expanded rapidly under Deterding's leadership. The total assets of Royal Dutch and Shell Transport grew by more than two and a half times between 1907 and 1914. Major production interests were acquired in Russia in 1910 and Venezuela in 1913. The group also moved into Standard Oil's homeland. In 1912 the Roxana Petroleum Company was formed to operate in Oklahoma, and in 1913 a U.K. oil company, California Oilfields, Ltd., was acquired. By 1915 the group was producing nearly six million barrels of crude oil a year in the United States.

World War I brought mixed fortunes for the group. Its properties in Romania were destroyed, and those in Russia were confiscated after the Russian Revolution in 1917. Shell's exploitation of the Venezuelan oil fields was delayed until late in the war due to difficulties in importing equipment. Shell's cosmopolitan structure was also held in suspicion by some civil servants and ministers within the U.K. government, who feared that it was pro-German and engaged in supplying oil to the enemy through subsidiaries in neutral countries. Various proposals were made by civil servants and several businessmen to merge the group with the Anglo-Persian Oil Company, Burmah Oil, or other U.K. interests in order to make it truly British. However, these wartime proposals were unsuccessful, and regardless of its mixed ownership, the group played an important role in the Allied war effort. In 1919 an agreement was initialled by Deterding and a representative of the U.K. government that provided for an internal rearrangement of the group to allow U.K. interests majority control, but the agreement was never implemented, chiefly because of the delays caused by incoherence and confusion in the official U.K. oil policy of the period. Royal Dutch retained the larger interest in the group.

The 1920s were a decade of growth. In 1919 Shell purchased the large Mexican oil fields controlled by the U.K. oil company Mexican Eagle, led by Lord Cowdray. In 1920 a marketing company was set up in the United Kingdom, Shell-Mex, which represented the Shell and Mexican Eagle interests. Venezuelan oil production expanded very rapidly, much of it controlled by Shell. In 1922 the Shell Union Oil Corporation was formed in the United States to consolidate Shell interests there with those of the Union Oil Company of Delaware, and the American business increased rapidly. By 1929 its U.S. activities had spread to the Atlantic Coast. This decade also saw the first steps in product diversification. In 1929 a new company, N.V. Mekog, was established in the Netherlands to produce nitrogeneous fertilizer from coke-oven gases. This was the group's first venture into chemicals. In the same year the Shell Chemical Company was formed in the United States to produce nitrogeneous fertilizer from natural gas.

The Depression years brought problems. From the late 1920s there was a chronic problem of overcapacity in the oil industry. Deterding's response was to form a worldwide cartel, and in 1928 he organized a meeting in a Scottish castle at Achnacarry with the heads of Standard Oil of New Jersey and the Anglo-Persian Oil Company to achieve this goal. The Achnacarry agreement became an infamous example of cartel exploitation in oil industry mythology, but the large oil companies were actually unable to control all sources of supply in the world. Achnacarry and subsequent cartel agreements did not last long. The group's oil interests in Mexico were nationalized in 1938--an early warning of later problems in developing countries. Meanwhile Deterding's leadership of the group became suspect. Some managers felt that his leadership style had become very erratic. After his marriage to a German woman in 1936, he resigned as general managing director of Royal Dutch and went to live in Germany.

1959–1985

During World War II and the invasion of the Netherlands, the head offices of the Dutch companies moved to Cura&ccedil in the Dutch West Indies. Once again, Shell played a major role in the Allied war effort. The refineries in the United States produced large quantities of high octane aviation fuel, while the Shell Chemical Company manufactured butadiene for synthetic rubber. All of the group's tankers were placed under U.K. government control, and 87 Shell ships were lost in enemy action.

The 1950s and 1960s were golden years of growth for oil companies, as demand for petroleum products expanded. The Shell group and the other "seven sisters" of leading international oil companies--Shell, British Petroleum, Exxon, Texaco, Chevron, Mobil, and Gulf--retained a strong hold over petroleum production and marketing. The group supplied nearly one-seventh of the world's oil products in these decades. After Deterding's departure, the group was run on a committee basis with no single dominant personality. A stable and respectable image was projected, symbolized by the advertising slogan "You can be sure of Shell." Few Americans, for example, realized that the Shell Oil Company of the United States was not a wholly American oil company. It had a 30% U.S. shareholding until 1985, when it became a wholly owned group company.

During the 1950s and 1960s Shell diversified into natural gas and offshore oil production and further expanded its chemicals operations. In 1959 a joint Shell/Esso venture found natural gas in the Netherlands in Groningen. This turned out to be one of the world's largest natural gas fields, and by the early 1970s it provided about half of the natural gas consumed in Europe. Shell was active in the exploration of North Sea oil, and it found oil in the northern North Sea in 1971. In the same year a major offshore gas discovery was made on the Australian northwest shelf. By the end of the 1960s the Shell group was also manufacturing several hundred chemicals in locations all over the world.

In the late 1960s the group, as well as British Petroleum, attracted widespread criticism because, despite the application of United Nations sanctions, the illegal regime in Rhodesia continued to obtain oil products which were supplied from South Africa. South Africa, of course, made no secret of its support for the illegal regime and did not apply United Nations sanctions.

In the early 1970s it was revealed that the U.K. government had become a party to this discreditable behavior. The Shell group later became the subject of public criticism because of its substantial investment in South Africa.

1970–1990

The structure of the world oil industry was radically altered during the 1973 oil crisis when the Organization of Petroleum Exporting Countries (OPEC) unilaterally raised crude oil prices. The oil companies found themselves forced to allocate scarce oil supplies during the crisis, causing severe problems with several governments. In the United Kingdom, Shell and British Petroleum (BP) had a major clash with the Conservative government led by Edward Heath. Heath demanded that the United Kingdom receive preferential supplies of oil, which the oil companies were attempting to ration between countries. Heath attempted to use the British government's 51% shareholding in BP to force that company to supply Britain first, but BP declined. The Shell group, like all the Western oil companies, had much of its crude oil production in developing countries nationalized. The search for oil in non-OPEC areas was stepped up successfully and in the late 1980's it remained responsible for producing 5% of the world's oil and 7% of its gas.

In response to the problems of the oil industry, the Shell group diversified its business in the 1970s, acquiring coal and metal interests. In 1974 Shell Coal International was established. In 1970 the company acquired the Billiton mining and metals business in the United Kingdom. Chemical manufacture was particularly expanded. This expansion proved unfortunate, since world economic growth after 1973 was much slower than anticipated, with the major recession of the late 1970s and early 1980s causing acute problems. As a result, severe overcapacity developed in the chemical industry. The U.K. company Shell Chemicals experienced problems and was obliged to restructure and reduce capacity. Similar overcapacity occurred in the oil refinery business throughout most of the 1980s. In the 1980s the group rationalized its exposure to chemicals and other noncore businesses. However, the group remained the world's largest producer of petrochemicals and a leading supplier of agrochemicals, in particular insecticides, herbicides, and animal health products and substantial profits were made in the chemicals business.

The Shell group in 1990 was an enormous business enterprise and, alongside Unilever, one of the few examples of a successful venture owned and managed by more than one country. One of the more immediate challenges for the group concerns increasingly stringent environmental requirements which will have a direct impact on the chemicals and the petroleum industries. The group remains the most highly decentralized enterprise in the world oil industry. The almost complete autonomy vested in its nationally based, integrated operating companies gives strategic flexibility.