Globe & Mail (Canada): Royal Dutch better think twice about sending Shell team south

DEBORAH YEDLIN

CALGARY — On the off chance the top brass at Royal Dutch Shell are thinking about packing off the Shell Canada executive suite to Houston, they would be well advised to visit the oil patch archives to see how similar moves fared.

There is some speculation that, as a result of Royal Dutch’s $7.7-billion bid to buy the 22 per cent of Shell Canada it doesn’t already own, the next step will be to rationalize operations in one central North American location.

And because the firm’s presence in the United States is much more significant than in Canada, Houston is the most likely place to locate the decision making.

Casting aside the fact that Shell Canada has just spent a significant amount refitting its offices, this would not be a good idea.

First, let’s remember what happened with Gulf Canada Resources back in 1996 when swashbuckling J.P. Bryan led the company. Mr. Bryan got it into his head that Gulf would be far better off headquartered in Denver, because that would give the firm greater access to the capital markets as well as potential acquisitions. The executives moved and the operations folks did not, and when Mr. Bryan resigned in 1997, the Denver crew packed up and came running home.

It could easily be argued that Calgary is one of the world’s energy centres. And this means that access to the capital markets — not to mention the assets that are for sale — is just as easy here as it is in Houston, London or New York.

But there’s more to the argument against moving only some employees elsewhere.

According to Coleen McKeon, a Calgary-based human resources consultant, handpicking a few people to set up executive offices far from the operations centre causes a number of problems.

“It creates an ‘us versus them’ mentality, which isn’t good for any organization,” she says.

Another issue Ms. McKeon points to is that inefficiencies are created within an organization when the decision makers are not on the ground where operations take place.

She notes that when Gulf executives relocated back to Calgary, things were so “broken” internally that an office retrofit tore down all the walls so nothing could go on behind closed doors; even chief executive officer Dick Auchinleck didn’t have a door to close.

Nova is another example of a Calgary company that hived off its executive team. They went to Pittsburgh, on the theory that it was between the company’s European markets and key spots in North America.

Relocation to Pittsburgh was meant to cut down on flying time and make things more efficient. This may have been accomplished, but to this day — and Nova left town in early 2000 — the morale of the folks left behind in Alberta isn’t exactly high.

There’s also a human resources element to consider in all this: career growth.

By splitting the operations and the executive suite, companies limit the mentoring of promising employees, which Ms. McKeon says doesn’t aid in career development.

“In this type of environment, where everyone is competing for people, it’s very important for companies to develop their own talent. And having the executive office miles away makes it harder.”

One could argue that Shell Canada has figured out how to function in this way because the parent company is headquartered in the Netherlands. It has also had its own board, chief executive officer and is publicly traded.

Relocating the Canadian decision-making authority at a time when huge challenges loom in the oil sands could make matters difficult. Shell Canada is estimating that costs for the expansion of its Athabasca oil sands project could go as high as $12.8-billion, and there’s no guarantee that it won’t go higher.

Moreover, there are the oil sands leases Royal Dutch Shell bought in February for more than $550-million that need to be integrated into the overall company’s strategy.

If this move to buy up the minority Shell Canada stake is truly a play on the oil sands, keeping executive decision-making power in Calgary makes far more sense than sending it to Houston.

It goes back to having the decision-making power geographically aligned with the assets in question.

Is there another alternative out there if Royal Dutch wants to do some asset rationalization? Sure. It could hive off all the conventional upstream assets and leave the oil sands and refining in Canada. But this too doesn’t make a lot of sense — only because Royal Dutch is short natural gas in its portfolio, and Shell Canada has lots of it. And with a reserves scandal not too long ago, Royal Dutch needs to have more real reserves on its books.

Royal Dutch may choose to try to save costs with its soon-to-be wholly owned subsidiary, but that will prove to be a very expensive decision.

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