By John Kemp
LONDON Feb 4 "All political lives, unless they
are cut off in midstream at a happy juncture, end in failure,"
wrote Enoch Powell, a former member of Britain's parliament who
held controversial views on immigration and national identity.
Much the same could be said of business careers, as Shell's
former chief executive Peter Voser has learned the hard
way. His strategy of continuing to invest in complex
megaprojects through the oil industry cycle is now blamed for
the company's recent profit warning and underperformance.
In May 2013, when Voser's retirement was announced, he was
described by Reuters as having been Shell's "renaissance CEO".
According to my colleague Andy Callus, "his exit from a role he
is seen to have excelled in surprised investors, analysts and
people inside Europe's biggest oil company" .
Fast-forward eight months and Voser's successor stunned the
market with a profits warning. "Our 2013 performance was not
what I expect from Shell," Chief Executive Ben van Beurden told
investors and promised a more disciplined approach to investment
as well as better operational performance and project delivery.
It was a remarkably quick fall from grace for both the
former chief and the company, though no swifter than many other
chief executives and businesses have endured.
FROM HERO TO FAILURE
Speaking to Reuters in May 2013, Voser warned: "You spend
capex through the cycle. Don't try to read it, don't slow down.
It will cost you more when you want to grow afterwards.
"I know a lot of investors and analysts. They all think they
can read the market ... but one thing in our industry is very
clear; it takes you five to seven years to recover (from) a
strategic slowdown," Voser explained.
"The market changes its views in three to six months, and
you can't change that fast in our industry."
Just a few weeks after Voser stepped down, Shell has finally
succumbed to cyclical pressure. Van Beurden insists the
company's overall strategy is sound, but has promised to cut
investment and enhance returns by making hard choices about new
Shell's abrupt turnaround has prompted questions about
whether the company's strategy was mistaken, poorly executed, or
if the company was the victim of changed circumstances beyond
It has also prompted unflattering comparisons with BP
, which emphasised spending discipline much earlier, and
is now the darling of analysts and investors.
Contrasting the strategy, leadership, culture and
performance of the two London-listed oil majors is a favourite
pastime of writers about both companies.
In the standard caricature, Shell is more conservative,
bureaucratic, technology-driven and controlled by engineers. BP
is reputedly more entrepreneurial, innovative, risk-taking and
controlled by financially focused managers.
The two have regularly swapped places as the favourite of
the media and investors over the last two decades depending on
which set of characteristics is in fashion.
Legendary Chief Executive John Browne, who played a leading
role consolidating the oil industry, pushing into post-communist
Russia and building up a formidable oil trading division, made
BP the favourite in the late 1990s.
But in the wake of accidents like the Texas City refinery
explosion and Macondo well blowout in the Gulf of Mexico, BP's
alleged lack of engineering expertise, reliance on external
contractors, obsession with short-term financial results, and
criticism of its safety procedures, drew adverse comparisons
with Shell's boring but predictably safe operations.
BP suffered a near-death experience following the 2010 Gulf
oil spill, and is still paying out tens of billions of dollars
in fines and compensation.
But Shell too has had its ups and downs. The company's Pearl
gas-to-liquids project in Qatar has proved to be enormously
profitable. Shell's advanced engineering is admired across the
industry. And Shell was the first of the major oil companies to
exploit the shift from oil to gas.
But the company's misstatement of its proven reserves early
in the century landed it with a multi-million dollar fine from
stock market regulators and forced the departure of its chairman
as well as shocking investors. Shell has had its own
environmental problems in Nigeria. Now it is being severely
criticised for overspending.
In practice, the long-term performance of the two companies
has been remarkably similar. The attached chart shows the share
price performances of Shell and BP since 1994 ().
At times, BP has outperformed its more staid rival, but its
shares have also been much more volatile, and the two companies'
performance over the whole period has ended up remarkably
If reinvested dividends are taken into account, the total
return on Shell's shares has averaged 8.64 percent per year
since 1994, only marginally less than the 8.96 percent return on
BP shares. Which company comes out ahead is sensitive to the
period chosen for analysis, suggesting underlying performance is
That is not really surprising. Both companies face the same
fundamental forces - including exploration and development
costs, political risks, price risks, and technology challenges.
The fact the two companies' financial performances have been
similar over the long term suggests the fundamentals they have
in common are more important than the cultural, strategic and
leadership factors that differentiate them.
Journalists, financial analysts and investors tend to focus
on human factors like strategy, leadership and culture because
they make for a more interesting story. But the fundamental
factors the two rivals have in common are probably more
important in explaining medium and long-term performance.
Voser was right to observe that in a capital-intensive
industry like oil and gas it makes no sense to keep changing
spending and investment plans in response to short-term demands
from investors and analysts. But he was most definitely wrong to
think the market would reward Shell for taking a rational
Nearly all political, business and financial careers end in
failure and recriminations because as they mature leaders become
more rigid, less adaptable, and less open to new thinking, and
they must live with the consequences of past decisions when
The only leaders to escape with their heroism intact tend to
be those who leave early before the external environment shifts.
Voser retired early but he was unlucky to do so just as the
industry's investment climate was turning.
Shell's strategy was not wrong, and it certainly was not
worse than BP's, however it was not well aligned to the
prevailing phase of the cycle, and the company did not adapt
quickly enough to keep investors and commentators happy.
But the cycle will keep on turning. In a few years BP will
be out of favour again, and everyone will be writing about how
Shell is a much more solid and reliable performer, with a good
long-term investment portfolio, and crediting its lucky CEO.