THREE DECADES OF SCENARIO PLANNING IN SHELL

GROUP II
SANJEEV RALLI SARMA PAI SANGA RANJITH

SHELL
ROYAL DUTCH SHELL GLOBAL OIL AND GAS COMPANY HQ IN NETHERLANDS, REGISTERED OFFICE IN LONDON FIFTH LARGEST COMPANY IN THE WORLD SECOND LARGEST ENERGY COMPANY

SHELL
OIL EXPLORATION AND PRODUCTION

REFINING
DISTRIBUTION AND MARKETING PETROCHEMICALS POWER GENERATION TRADING

RENEWABLE ENERGY

SCOPE
INTRODUCTION FORECASTS vs SCENARIOS BRIEF HISTORY OF SHELL SCENARIOS SCENARIOS AS INTEGRAL PART OF STRATEGIC PLANNING SELECTING PROJECTS USING REAL OPTIONS COMBINING SCENARIO ANALYSIS AND REAL OPTIONS

CONCLUSION

INVESTMENT RISKS DUE TO EXTERNAL UNCERTAINTIES

INVESTMENT STRATEGY
MAJOR SHIFTS IN BUSINESS ENVIRONMENT EXTERNAL ENVIRONMENT

FOR EXAMPLE US FOREIGN POLICY WAS FUNDAMENTALLY ALTERED POST WTC ATTACK IN 2001

FORECASTS vs SCENARIOS
FORECASTS
BASED ON TODAYS REALITIES DOES NOT ACCOUNT FOR UNCERTAINTIES ARE DANGEROUS AS THEY ARE WRONG WHEN NEEDED THE MOST

FORECASTS vs SCENARIOS
SCENARIOS
ARE NOT PROJECTIONS, PREDICTIONS OR PREFERENCES COHERENT AND CREDIBLE ALTERNATIVE STORIES ABOUT THE FUTURE

TAKE INTO ACCOUNT VARIOUS UNCERTAINTIES

DESIGNED TO HELP COMPANIES TO DEVELOP STRATEGIES AND TEST THEIR PLANS

FORECASTS vs SCENARIOS
SCENARIOS- SERVE MULTIPLE FUNCTIONS PRESENT A BACKGROUND FOR DESIGN AND SELECTION OF STRATEGIES HELP MAKE MANAGERS AWARE OF ENVIRONMENTAL UNCERTAINTIES BY CONFRONTING THEM WITH DIFFERENT FUTURE STATES PROVIDE A TOOL TO IDENTIFY WHAT MIGHT POSSIBLE HAPPEN AND HOW CAN ONE ACT OR REACT TO FUTURE DEVELOPMENTS OFFER POSSIBILITY OF COMBINING QUANTITATIVE DATA WITH QUALITATIVE INPUT HELP MANAGERS MENTAL MODELS BY CONFRONTING THEM WITH THEIR OWN BIASED VIEWPOINTS

FORECASTS vs SCENARIOS
THE PRESENT THE PATH THE FUTURE

FORECASTS

CURRENT REALITIES (MENTAL MAPS)

ALTERNATIVE FUTURE IMAGES MULTIPLE PATHS

SCENARIOS

SCENARIOS COMBINED WITH REAL OPTIONS ANALYSIS

EMPHASIZES THAT MANY INVESTMENTS CREATE FOLLOW ON OPPORTUNITIES SCENARIOS CAN CONTRIBUTE TO REAL OPTIONS IN THREE LEVELS
HELP IDENTIFY OPTIONS IN THE FUTURE HELP TIME THE DECISION TO EXERCISE REAL OPTION PROVIDE AN IMPORTANT INPUT IN THE PROCESS OF EVALUATING IT

BRIEF HISTORY OF SHELL SCENARIOS

PIONEERS IN SCENARIOS PLANNING

FIRST SCENARIOS DEVELOPED IN 1972

SIX SCENARIOS WHICH INCLUDED ECONOMIC GROWTH, OIL SUPPLY AND OIL PRICE OPTIONS SUITED TO ADDRESS MEDIUM TERM CONCERNS

BRIEF HISTORY OF SHELL SCENARIOS

IN 1974
THE RAPIDS EMERGED AS FRAMEWORK TO BUILD SPECIFIC SCENARIOS

WORLD OF INTERNAL CONTRADICTIONS (WIC) WERE FIRST COMPREHENSIVE LONG TERM SCENARIOS ON ECONOMIC AND ENERGY MARKET PREDICTIONS CONSTRAINED GROWTH WAS DEVELOPED IN 1975 AS PART OF WIC
RECOVERY WOULD BE SLOWER THAN PREVIOUS UPSWINGS

BRIEF HISTORY OF SHELL SCENARIOS

IN 1980s, THE SHELL SCENARIOS ELABORATED SOCIOPOLITICAL ANALYSIS
NEXT WAVE SUGGESTED THAT BY 1986/87 THE PRICE FOR OIL COULD DROP TO USD 18/BBL DEVOLUTION SUGGESTED GRADUAL OPENING UP OF CENTRAL AND EASTERN EUROPE DUE TO NEED FOR TECHNOLOGY AND CONSUMER GOODS

BY 1987 SHELL SCENARIOS HAD GROWN IN SIZE, COMPRISING THREE SEPARATE VOLUMES ON OIL, ENERGY AND SOCIO-ECONOMIC TRENDS
FIRST TIME SCENARIOS IDENTIFIED POSSIBLE TENSIONS ARISING FROM GLOBALIZATION AS A FUNDAMENTAL TREND

BRIEF HISTORY OF SHELL SCENARIOS

IN 1990s THERE IS NO ALTERNATIVE (TINA) EVOLVED DUE TO DISMANTLING OF ECONOMIC BORDERS AND LIBERALIZATION
THE NEW GAME (A TINA ABOVE) EMPHASIZED GLOBAL GOVERNANCE PEOPLE POWER (A TINA BELOW) EXPLORED EFFECTS OF GROWING NUMBERS OF PEOPLE BECOMING WEALTHIER AND EDUCATED

IN 2000s PEOPLE AND CONNECTIONS STRESSED THAT PEOPLE WANT GOVERNMENT REGULATIONS TO ASSURE UNINTERRUPTED SUPPLY OF GOODS

SCENARIOUS - INTEGRAL PART OF STRATEGIC PLANNING

TYPES OF SCENARIOS IN STRATEGIC PLANNING
GLOBAL SCENARIOUS
DESIGNED TO HELP COMAPANY FORMULATE OVERALL TACTICAL STRATEGY
PERMIT MANAGEMENT TO EXPLORE NEW IDEAS BY MOVING AWAY FROM GROUP THINK

FOCUSSED SCENARIOS DEAL WITH COUNTRY SPECIFIC ISSUES OR INDIVIDUAL

PROJECTS ALLIGNED TO IMPROVE JUDGMENT OF INDIVIDUAL MANAGERS ON INVETSMENT DECISIONS

PROJECT SCENARIOSHELP ASCERTAIN ROBUSTNESS OF INVESTMENT DUE TO GLOBAL AND FOCUSED SCENARIOS

SCENARIOUS - INTEGRAL PART OF STRATEGIC PLANNING

STEPS TO EFFECTIVE STRATEGIC PLANNING

GLOBAL SCENARIOUS KEPT AT CENTRE OF THE PROCESS

COMBINED WITH OTHER APPLICATIONS TO IDENTIFY RISKS AND OPPURTUNITIES

STUDY DEMAND TRENDS AND ANALYSE COMPETITORS BEHAVIOUR

DEFINE THE GROUPS CUSTOMER VALUE PROPOSITION

ARRIVING AT STRATEGIC DECISIONS

SELECTING PROJECTS USING DCF APPROACH

ALLOCATE RESOURCES BASED ON HIGHEST NET PRESENT VALUE (NPV)
CALCULATED USING DISCOUNTED CASH FLOW (DCF)

FUTURE DISCOUNTED VALUE OF CASH FLOWS

PRESENT VALUE ADJUSTED FOR BOTH TIME AND RISK

SUITABLE WHEN UNCERTAINTY IS LOW

MORE CONSERVATIVE APPROACH

SELECTING PROJECTS USING REAL OPTIONS

REAL OPTION ANALYSIS
USEFUL TOOL WHEN UNCERTAINTY IS HIGH

EVOLVED FROM FINANCIAL OPTION PRICING MODELS

REAL OPTIONS ENHANCE DCF ANALYSIS

RECAPTURES PROJECT VALUE LOST BY DCF ANALYSIS

BASED ON THE ASSUMPTION THAT THERE IS A TRADED SECURITY WHOSE PAYOFFS AND RISKS ARE SIMILAR TO THE REAL PROJECT

HISTORY AS PREDICTOR OF FUTURE

Factors imparted by Firms Decision Factors outside firms control

DISCONTINUITY

Historical Behavior of Source Uncertainity

Potential Future Behavior of Source Uncertainity

SCENARIO ANALYSIS & REAL OPTION COMBINED

IN HIGHLY UNCERTAIN ENVIRONMENT, REAL OPTION ANALYSIS IS PARTICULARLY SUITABLE BECAUSE-

PROJECTS VALUE CHANGES OVER TIME AVAILABILITY OF NEW INFORMATION ABILITY TO ACT ON THAT INFORMATION

SCENARIO- GAS EXPLORATION IN WEST AFRICA

DISCOVERY OF SIGNIFICANT AMOUNT OF NATURAL GAS IN WEST AFRICA

REQUIRES PIPING / LIQUIFICATION / TRANSPORTING / REGASIFICATION INVOLVES SIGNIFICANT COST FOR ALL THESE ACTIVITIES

1990s
GAS MARKET LARGELY DECONTROLLED MEAN GAS PRICE $2.0/MMBTU WITH AN ANNUAL VOLATILITY OF 57.2% UNDER THIS CONDITION COMPANY WILL NOT CONSIDER DEVELOPING WEST AFRICAN GAS FIELDS DUE TO HIGH COST ASSOCIATED AND YIELDING NEGATIVE NPV

OPTION DURING 2000s NORTH AMERICA

NATURAL GAS PRICE MORE THAN DOUBLED BETWEEN 2000 AND 2005 AT $ 4.6 /MMBtu WITH 100% VOLATILITY CONCERN FOR POLLUTION, PREFERRED FOR DOMESTIC HEATING MASSIVE INVESTMENT IN CCGT PLANTS FOR ELECTRIC GENERATION RESTRICTION IN EXPLORATION eg UNCONVENTIONAL METHODS, AREA, etc, IMPORT WILL BE REQUIRED TO MEET HIGHER DEMANDS UNDER SUCH CONDITIONS

SCENARIOS COMBINED WITH REAL OPTIONS ANALYSIS EMPHASIZES THAT MANY INVESTMENTS CREATE FOLLOW ON OPPORTUNITIES SCENARIOS CAN CONTRIBUTE TO REAL OPTIONS IN THREE LEVELS
HELP IDENTIFY OPTIONS IN THE FUTURE

CONCLUSION
SCENARIO PLANNING IS AN IMPORTANT TOOL FOR UNDER STANDING CRITICAL UNCERTAINTIES INTER-RELATIONSHIPS OF THE UNCERTAINTIES SCENARIO ANALYSIS IS COMBINED WITH REAL OPTION ANALYSIS TO CHOOSE PARTICULAR PROJECTS TO ALLOCATE CAPITAL EFFICIENTLY IN THE BEST INTEREST OF THE SHAREHOLDERS

Thank You