case 2 shell gabon
ISSN 1940-204X
Activity-Based Management in Shell Gabon*
Shahid Ansari
Babson College
Jan Bell
Babson College
Background
Table 1
SG’s 2000 OPEX Cost Forecast 2
During the 1990s, world events, such as Russia’s increased oil production and Asia’s economic meltdown, caused excess oil supply. In fact, by mid-2002, there was over 6 million barrels per day of excess production capacity. Oil prices, much like any other commodity prices, respond to supply conditions with wide price swings. As a result, during this period oil prices were low; in fact, prices reached an all-time low of $12/barrel in 19981. Many companies in the industry focused on cost reduction efforts to achieve profits. This case reports efforts by Shell Gabon (SG), a wholly owned subsidiary of Royal Dutch Shell (RDS), a major Dutch oil company, to control its costs in order to obtain necessary funding for capital expenditures for new oil exploration.
SG’s primary business is the exploration and production of oil. Located primarily in central West Africa, it has field operations in Angola, Congo, and Gabon, and owns pipelines and terminals in the southern part of its region. In its northern region, SG contracts for pipeline capacity owned by other companies. In addition to wholly owned operations,
SG also has joint ventures with other major oil companies operating in its region. Until 2002, SG produced most of its oil from land-based operations supplemented by a few shallow water platforms off the coast of West Africa.
From 1965 until 1995, SG experienced high growth and profitability. By 1996, most of the oil on land in its region was depleted, and the number of barrels produced had decreased without a corresponding reduction in operating costs.
Accordingly, the unit operating cost (UOC) increased. Table 1 provides SG’s budget by department for 2000 operating costs
(OPEX) associated with the production of 120,000 barrels per day.
IM A EDUCATIONAL CAS E
Activity-Based Management in Shell Gabon*
Shahid Ansari
Babson College
Jan Bell
Babson College
Background
Table 1
SG’s 2000 OPEX Cost Forecast 2
During the 1990s, world events, such as Russia’s increased oil production and Asia’s economic meltdown, caused excess oil supply. In fact, by mid-2002, there was over 6 million barrels per day of excess production capacity. Oil prices, much like any other commodity prices, respond to supply conditions with wide price swings. As a result, during this period oil prices were low; in fact, prices reached an all-time low of $12/barrel in 19981. Many companies in the industry focused on cost reduction efforts to achieve profits. This case reports efforts by Shell Gabon (SG), a wholly owned subsidiary of Royal Dutch Shell (RDS), a major Dutch oil company, to control its costs in order to obtain necessary funding for capital expenditures for new oil exploration.
SG’s primary business is the exploration and production of oil. Located primarily in central West Africa, it has field operations in Angola, Congo, and Gabon, and owns pipelines and terminals in the southern part of its region. In its northern region, SG contracts for pipeline capacity owned by other companies. In addition to wholly owned operations,
SG also has joint ventures with other major oil companies operating in its region. Until 2002, SG produced most of its oil from land-based operations supplemented by a few shallow water platforms off the coast of West Africa.
From 1965 until 1995, SG experienced high growth and profitability. By 1996, most of the oil on land in its region was depleted, and the number of barrels produced had decreased without a corresponding reduction in operating costs.
Accordingly, the unit operating cost (UOC) increased. Table 1 provides SG’s budget by department for 2000 operating costs
(OPEX) associated with the production of 120,000 barrels per day.
IM A EDUCATIONAL CAS E