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1. Abstract
The landscape of the petroleum industry is rapidly changing and petroleum majors such as
Shell are turning into gas majors than ‘big oil’. Oil price shocks usually bring with them a
flurry of mergers and acquisitions due to the hit on share prices that companies take, thus
making them more attractive to buy or merge with. However, the latest oil price shock has
been accompanied with the rise in prominence of natural gas in the petroleum industry hence
differentiating its own coming flurry of mergers and acquisitions from the bandwagon
transactions that accompanied previous oil price shocks. Research undertaken for this paper
suggests that petroleum majors such as Shell have been ready for this latest oil price shock
and the corporate strategy employed in their recently announced plan to acquire BG, and its
development process, is proof of that.

2. 1
Table of Contents
Abstract............................................................................................................................ 0
Glossary of Abbreviations................................................................................................ 2
Introduction ..................................................................................................................... 3
Shell’s Vision.................................................................................................................... 4
Pertinent Strategy Rationale............................................................................................ 5
Strategic Scope................................................................................................................. 7
Strategic Motives.............................................................................................................. 9
Potential for Value Creation .......................................................................................... 11
Challenges...................................................................................................................... 12
Conclusion...................................................................................................................... 14
Bibliography .................................................................................................................. 15

3. 2
Glossary of Abbreviations
£: Sterling Pounds
APG: Associated Petroleum Gas
BPD: Barrels Per Day
LNG: Liquefied Natural Gas
MTPA: Million Tonnes Per Annum
R&D: Research and Development
SBU: Strategic Business Unit
TCF: Trillion Cubic Feet
WB: The World Bank Group

4. 3
Introduction
There is an old saying in the petroleum industry that goes, “If you find oil, you are lucky. If
don’t find oil, you’re unlucky. If you find gas, you’re really unlucky”. This is because of the
natural state of petroleum gas and the associated financial and technical challenges related to
it in terms of transportation, storage, marketing etc.
Crude oil extraction in some parts of the world is accompanied with some natural gas that is
trapped together with oil in underground reservoirs. These associated natural gases are called
associated petroleum gas (APG) and were considered a by-product of the extraction process
for oil by petroleum producers in the 19th
and early 20th
century. Together with non-
associated forms of natural gas, APG and natural gases as a whole were dealt with through
flaring and venting, hence the familiar site of flare stacks in numerous pictures of oil fields
across the world during the 20th
century.
In search for a more efficient method of dealing with natural gas, technological advancements
in the industry led to the introduction gas re-injection techniques designed to increase
pressure in underground reservoirs in order to boost production of oil.
Further technological developments have uncovered more utilities of natural gas, especially
for energy. Therefore, it has also led to increased investment in the production of natural gas
because demand for energy continues to soar in conjunction with the swelling global
population and as more and more countries strive to develop through various heavily energy
dependant industries. Consequently, recent research suggests that major petroleum companies
are becoming bigger producers of natural gas than oil (Maugeri, 2013). This is evident
through the fundamental shift in corporate strategy among such majors; they are acquiring
more and more natural gas reserves in different jurisdictions directly from governments
and/or indirectly through mergers and acquisitions (Maugeri, 2013).

5. 4
In what the Economist has dubbed “a vote for gas” (‘A Vote for Gas’, 2015), Royal Dutch
Shell (Shell for short) and BG Group (BG for short) announced in April of 2015 that the
former had agreed to acquire the latter for £47 billion. Similarly, numerous other news
sources and analysts have interpreted the deal as Shell’s move towards consolidating itself in
the natural gas sector. Thus, this paper seeks to, essentially, see if the deal makes sense at this
point and time for the relevant stakeholders. Furthermore, the paper also provides an
examination of the employed strategy by way of existing literature in order to derive
conclusions regarding the value creation potential of the deal.
Shell’s Vision
A multitude of definitions and theories exist regarding the term strategy in contemporary
management literature. Some scholars even contend “that strategic management has become
an academic discipline in its own right” (Mintzberg et al., 2009; 19). Nevertheless, in
preparing this paper, the term strategy was understood as “the long-term direction of an
organization” (Johnson et al., 2014: 3). Hence, a key capability required in strategy creation
is foresight/vision.
The main objective guiding strategy direction in the private sector is that of maximising
profits for shareholders (Johnson et al. 2014: 6). Shell are known for their scenario analysis
prowess in the petroleum industry and Shell’s own website states that Shell has been
developing scenarios for the future since the 1970’s (Shell Scenarios, n.d.). These scenarios
have guided corporate level decision-making and subsequent strategies since then. Analysts
from the Wall Street Journal disclose “that executives at Shell decided to focus on gas in
anticipation of government restrictions on carbon emissions” close to a decade ago (‘Shell to
Buy BG Group for About $70 Billion’, 2015). Therefore, almost a decade ago, through their
mechanism of envisioning for the future, Shell had already set their strategy direction towards

6. 5
achieving maximisation of profits for shareholders by being a major player in the natural gas
sector. Thus, the strategy involved in the acquisition of BG by Shell appropriately represents
Shell’s aforementioned vision whereby Shell has identified natural gas as the “the next big
thing”: a product with abundant supplies and a growing market due to emerging
environmental concerns as well as a friendlier environmental outlook than that of oil, as
described by the Economist (‘A Vote for Gas’, 2015). To put things into context, Natural gas
has the lowest carbon intensity among most common fossil fuels and its carbon footprint is
half of that of coal at combustion (WB, 2015).
Pertinent Strategy Rationale
The name Henry Mintzberg is familiar to most management scholars because of the concept
of the five ps of strategy, a comprehensive set of approaches to developing strategy that fully
take into consideration the micro and the macro-environment of an organisation. Mintzberg
explains that “human nature insists on a definition for every concept” but argues that “the
field of strategic management can not afford to rely on a single definition of strategy” and
that “explicit recognition of multiple definitions can help practitioners and researchers alike
to manoeuvre through this difficult field” (Mintzberg, 1987: 11).
Among the five ps of strategy, Shell’s corporate strategy behind the acquisition of BG can be
closely related to what Mintzberg describes as strategy as a position. The idea behind strategy
as a position is that an organisation can pursue a niche position among competitors in a
market to achieve their business objectives irrespective of direct or indirect competition from
competitors.
As previously mentioned, petroleum majors have been undergoing a transformation from
predominantly oil to natural gas producing companies in the new millennium. In a
presentation to shareholders regarding the acquisition of BG, Shell detailed that the combined

7. 6
reserves of Shell and BG, as a result of the deal, would be able to yield close to 50 million
tonnes of natural gas per annum (mtpa) come 2018, the highest projected figure in the
industry (‘Recommended Combination with BG Group’, 2015: 11). A quick glance over the
petroleum landscape would suggest that this transformation is due to the perpetual price
volatility of petroleum products as shocks in oil prices usually brings with it a wave of
mergers and acquisitions such as those of the late 1990’s that involved companies like Exxon
and Mobil, Chevron and Texaco, among others (Shing, 2015). This is due to some companies
taking huge hits in their share prices during times of low petroleum product prices due to not
being prepared for such shocks, a failure that economists find it hard to comprehend due to
the cyclical nature of petroleum product prices since the early days of the industry
(Bergmann, 2015). However, as the Shell’s scenario analysis for the future of the industry
uncovered emerging concerns regarding the industry’s impact on the environment, some
researchers also point to the fact there are other factors involved and that these factors are the
petroleum majors’ own making. Maugeri (2013) explains that:
1. Petroleum majors began heavy cost cutting in the 1990’s by outsourcing and cutting
back on research and development (R&D); this accelerated the rise of small and
medium sized companies and has lead to increased competition over the years
2. Petroleum majors have discovered little oil in recent years despite increased
investment
3. Petroleum majors missed out on the shale gas revolution of the early 2000’s and the
more recent shale oil revolution which was mainly lead by small and medium sized
companies
4. Many discoveries of significant reserves around the world are by small and medium
sized companies

8. 7
As a result of the detailed factors above, petroleum majors have for years been relinquishing
some degree of their competitive advantage to small and medium sized companies. Thus, the
transformation we are witnessing is a necessary step towards regaining some competitive
advantage in an industry whose landscape has dramatically changed since the turn of the
millennium. Moreover, going back to Mintzberg conception of strategy as a position, the
Shell-BG deal showcases Shell’s intention to carve out a niche position among fellow
transforming petroleum majors as well as newly competitive smaller sized companies by
becoming one of the world’s largest integrated natural gas producers.
Strategic Scope
So far, throughout the paper, the term “corporate strategy” has been used to describe the
Shell-BG deal and the fundamental changes that are taking place among majors in the
petroleum industry. Corporate strategy is the highest level of strategies in an organization and
“is concerned with the overall scope of an organization and how value is added to the
constituent business of the organisation as a whole” (Johnson et al., 2014: 7). Thus, the scope
of an organization, in terms of products and markets, is central to corporate strategy (Johnson
et al., 2014: 225). Johnson et al. (2014) provide three key questions dealing with the notion of
the scope of an organisation and how it relates to corporate strategy:
1. How broad to make the portfolio?
2. How should the ‘parent’ add value?
3. Which Strategic Business Units (SBU) to invest in?
The first question is easily answered in the previous section regarding Shell’s strategy
rationale behind the acquisition of BG: to be one of the world’s largest integrated gas
producer in the near future as natural gas becomes a key energy resource in the coming years
as gas utilisation technologies develop.

9. 8
The question regarding how the ‘parent’ can add value requires a brief description of the
concept of parenting advantage. Parenting advantage is derived from corporate level
decisions that shape individual business units in an organisation in a manner that adds value
to these business units. Durden (2015) argues that one of the most compelling reasons why
Shell has chosen to acquire BG is because of the potential operating synergies. As figure 1
illustrates below, Shell and BG have massive regions of operational overlap in their upstream
operations. Hence, the deal provides a massive cost leadership potential, cost leadership
being the process of “becoming the lowest cost organisation in a domain of activity”
(Johnson et al. 2014: 194).
Figure 1: Shell + BG Operational Overlap
Source: Royal Dutch Shell, ‘Recommended Combination with BG Group’ (2015)

10. 9
Furthermore, Shell (2015: 8) claim that, in monetary terms, the expected synergies amount to
roughly $2.5 billion by 2018 and they are detailed as follows (‘Recommended Combination
with BG Group’, 2015):
1. Selling, general and administrative expenses: Corporate, administrative, organization
and information technology operational efficiencies
2. Jointly operated procurement spending efficiencies
3. Reduced marketing and shipping costs
4. Reducing exploration activities
For the third question, analysts can only speculate on which SBUs will be of particular
interest to further investment by Shell but the general industry trend of investment in natural
gas greatly aids predictions. Analysts at Forbes Magazine (2015) posit that:
“It makes sense for Shell to be optimistic about the outlook for global liquid natural
gas (LNG) demand because it is the market leader in terms of net LNG production. At
26 mtpa, the company’s current LNG capacity stands at around 11% of the total LNG
supply worldwide. If we add BG’s net liquefaction capacity to that, the combined
entity would be currently holding around a 14% share in the global LNG market.
With the completion of the new liquefaction facilities under construction by 2018, the
companies expect their combined net LNG capacity to be around 45 mtpa,
significantly more than the second largest player in the industry, Exxon Mobil”.
Strategic Motives
Keeping in mind the above discussion on the strategic scope involved in the deal at hand,
observing the proposed acquisition of BG by Shell from Johnson et al.’s perspective on
motives for mergers and acquisitions, some strategic motives can be identified. The motives

11. 10
can be grouped into two categories namely strategic motives and financial motives (Johnson
et al., 2014: 332-334).
Strategic motives of the deal involve extension, consolidation and capabilities (Johnson et al.,
2014: 332-333). The extension aspect is simply points to the fact that Shell is planning on
committing to unprecedented levels of natural gas operation that are in line with their
corporate strategy for growth and maximising shareholder profits. The consolidation aspect
of the deal’s strategic motive sheds light on Shell’s plan for increasing market power by
reducing competition through acquiring BG which gives Shell more bargaining power against
demand for their products and services as well as against other suppliers and on the synergies
Shell expect to benefit from the deal as outlined in the previous section regarding the scope of
the deal. The capabilities aspect of the deal can be related to Shell’s desire to maintain its lead
as the petroleum industry’s largest net LNG producer that is line with the corporate strategy
that is increasingly in favour of operations in the global natural gas sector, a discourse shared
by Garcia et al. (2014: 25) especially since BG’s current LNG capabilities can be described
as a set of dynamic capabilities.
Financial motives of the deal involve asset stripping/unbundling (Johnson et al., 2014: 334).
Aside from BG’s aforementioned and proven future potential capacity, BG also maintain a
huge presence in the Santos Basin off the South Atlantic coast of Brazil and newly
discovered massive natural gas reserves off the South Indian Ocean coast of Tanzania.
Projected deep-water drilling in the Santos basin is expected to boost Shell’s crude oil
production from 50,000 barrels per day (bpd) to 550,000 bpd once production commences
(‘Shell's BG Deal: It's All About LNG and Pre-Salt Development’, 2015) while the proven
reserves in Tanzania amount anywhere from 25 to 30 trillion cubic feet (tcf), as of May 2013,
according to the Energy Information Agency of the United States (EIA) (‘Tanzania’, 2015),
among the highest in the world. Couple these with the $20 billion Australian facility

12. 11
producing gas from coal and other assets in Trinidad and Tobago and Kazakhstan (‘A Vote
for Gas’, 2015), it is easy to see why Shell have embarked on this acquisition journey. Shell
have seemingly estimated that BG’s assets simply have more potential than what they are
paying for; even it is at a premium of 52% for BG shareholders (‘Recommended
Combination with BG Group, 2015).
Potential for Value Creation
As mentioned before, corporate strategy in the private sector usually has maximising profits
for shareholders as the main objective. Thus, in order for the Shell-BG to be able to create or
add value, it must be profitable for shareholders of both sets of companies albeit at different
periods. The following is an analysis provided by Forbes Magazine on the matter of value
creation in the Shell-BG deal (‘Shell's BG Deal: It's All About LNG and Pre-Salt
Development’; 2015):
“Shell plans to acquire BG Group in a cash and stock deal valued at 1,350 pence per
BG share. The company will pay BG shareholders 383 pence in cash and 0.4454 class
B shares in itself for each share of BG held. This translates into a total valuation of
around £47 billion or $70 billion – at yesterday’s (8th
of April) closing price – which
represents a 52% premium to the 90-day volume-weighted average trading price for
BG’s stock; The combined entity will have net proven hydrocarbon reserves of
approximately 16.7 billion barrels of oil equivalent (boe) and a reserves to production
ratio of around 12.4 years, based on the latest annual figures reported by both
companies; After adjusting figures for the post-tax operating cash flows impact, and
the dilutive effect of the deal, it would mean annual cash inflows of approximately
$1.25 billion for Shell’s current shareholders, starting in 2018. If we assume that these
cash flows will continue in perpetuity, it would translate into a value addition of

13. 12
around $8.75 billion for its current shareholders at the time of the deal, which is just a
small fraction (36.5%) of the total premium being paid by the company”.
Therefore, looking at the above figures, the deal not only has a potential to reward both sets
of shareholders but it also adds value to Shell’s organisation as a whole by injecting a degree
of longevity into their operations which ties into their corporate strategy of emphasising more
investment into the global natural gas sector.
Challenges
Like any other business transaction, not all is rosy with the Shell-BG deal. The following are
some of the potential challenges associated with the deal (Magueri, 2015):
1. Gas to oil transformation threatens profitability of petroleum majors, which is today
still largely based on oil fields that were developed many years ago and whose output
is in steady decline
2. Currently, natural gas is worth much less than oil, is often difficult to market, and
most of its margins are taken up in the cost of transportation, liquefaction, storage etc.
3. Discoveries in regions like East Africa will require larger investments than other
regions due to factors like the lack of skilled labour that will have to be imported at a
high cost
4. Big gas discoveries in the United States have caused the price of gas to drop to a point
where it is worth about 20% of oil for the same energy output, making many gas
projects barely profitable
5. Petroleum majors have watered down many of the capabilities that once required
countries to turn to them if those countries wanted to develop their oil and gas
reserves

14. 13
6. Petroleum majors have also cut back on research and development. As a result, the
majors have been equalled or even surpassed in technology by others including the
service companies and some of the national oil companies like Petrobras in Brazil,
which is now a world leader in deep-water technology
7. Cutting back on specialized people and on R&D while continuing to invest billions a
year can eventually become a recipe for bad decisions and poor performance

15. 14
Conclusion
Shell’s planned acquisition of BG has been met with mixed responses from analysts but the
fact the boards of both the merging companies have approved the terms of the deal points to
the fact they see the potential of where this deal could take them. The challenges, especially
those associated with natural gas, have been listed in the previous sector but investment and
advancement in the technology for gas utilisation have unprecedented levels of incentives
nowadays due to initiatives such as the Global Gas Flaring Reduction (GGFR) public private
partnership led by the World Bank Group in partnership with the International Finance
Corporation. As natural gas continues to grow in profitability and with respect to its friendlier
environmental outlook compared to other non-renewable sources of energy, the corporate
strategy employed by most petroleum majors to emphasise investment into the natural gas
sector will make more sense over time.
The trajectory of petroleum majors from their cost cutting days of the 1990s has steadily
weakened their market position in terms of capabilities. Thus, this new strategy direction
towards natural gas can be considered as the lifeline they have been looking for to regain
some competitive advantage in the petroleum industry, other than the enormous financial
power and very low indebtedness they maintain that are both the result of cash flows from
investments made 20 to 30 years ago (Maugeri, 2013).
Conclusively, the title (Dinosaurs Mating to Survive in the Era of Mammals) aptly captures
the situation in the industry and what majors are doing to keeping being “majors”.

16. 15
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