YOU’RE the head of a major multinational corporation trying to work out your business strategies for the future. How do you do it?
Shell has its own solution – scenario planning. The scenarios, which are produced in pairs, are essentially two alternative visions of the future world economy. Shell’s various businesses and subsidiaries can then use these scenarios to assess their plans and see how they would fare in different situations. They are designed to be extreme, rather than definite predictions.
Yann Cramer is the general manager of innovation and technology sourcing at Shell Lubricants. He describes himself as a “user” of the scenarios.
“The way I describe the approach is, we ask ourselves, what is the crossroads that we have reached as a society? If we took this route, if the whole society, the whole economy, took this route, we would get to a future which we can describe, and give it a name. If the whole economy and society were to take a different route we would get to another future. We don’t believe that it’s just either or, we exaggerate the effect on purpose,” Cramer explains. “The two extremes between them cover a range of possible futures, against which we assess the robustness of our thinking and our various business strategies and long-term investments.”
Shell’s very first scenarios in 1972 were developed by a man called Pierre Wack, who realised that it might not always be business-as-usual as far as the oil industry and the global economy were concerned. Shortly after this, many Middle Eastern nations imposed an oil embargo on Western nations for US support for Israel in the 1973 Arab-Israeli war. The oil price spiked, something foreseen in those initial scenarios, leaving Shell better prepared for the 1973 oil shock.
Since then, Shell has identified new crossroads and come up with new scenarios every four or five years.
“The crossroads we find society at today is probably not going to be very different next year, but four or five years down the line, things might change significantly enough that we want to change the scenario,” says Cramer.
Coming up with the scenarios is a “collaborative effort” according to Cramer. The scenarios team works with Shell’s in-house experts, business experts and academics to identify the various forces which might influence the global economy in the coming years, including societal trends, energy supply and demands and geopolitical shifts.
“This is a thinking tool to assess the robustness of our strategies and challenge ourselves about whether we are imaginative enough in our strategies in terms of the future that we might face,” says Cramer. “It’s not a straightforward planning tool.”
It’s not only Shell who can benefit from the scenarios. Over time, Cramer says that Shell has become quite famous for its scenarios, and that they have always attracted interest from other companies, governments and academia.
“Shell has always considered that the scenarios are a good way to prompt debate with stakeholders. Sometimes it’s customers, sometimes it’s influencers, principalities, governments, you name it, it’s a good way to prompt the discussion,” says Cramer.
NEW LENS SCENARIOS
Shell’s current scenarios are the New Lens Scenarios, named, as you might think, as ‘lenses’ through which to view the future. The New Lens Scenarios consider two different futures for the next 50 years. Over this time, the population is expected to climb past 9bn, and become more prosperous, with many more people climbing out of poverty. The global energy demand is likely to double by 2050 compared to 2000. How society reacts to such changes could greatly affect the future. In the next half-century, increasing urbanisation is likely to have a big impact on the global economy. The rate is staggering.
“It’s equivalent to one New York City every six weeks,” says Cramer. “By 2050 it’s expected that three-quarters of humanity will live in an urban environment, as opposed to about half now.”
The first described lens, or scenario, is “Mountains”. In this scenario, it’s envisaged that those with power and influence will continue to have power and influence. The Mountains world is stable but not very economically dynamic.
“Because decision-making power is concentrated, it’s a world where you can implement major policy and infrastructure decision from the top down,” says Cramer.
By contrast, in the second scenario – the “Oceans” world – the pressures of the world’s emerging economies and new forms of economy reshuffle the cards, with change largely happening from the bottom up. Power is more devolved, politics is destabilised, compromise becomes important, and the world is a lot more fluid and prone to rapid change. Solutions to challenges may be much more localised and diverse.
Cramer explains the difference between Mountains and Oceans using the analogy of the battle between conventional taxi owners and drivers, and the app-based newcomer Uber.
“A ‘Mountains’ kind of decision is to ban Uber and other new entrants. Governments and other municipalities always support the traditional taxi services. On the contrary, opening the market to new entrants would be a more ‘Oceans’ type of decision,” he says.
Of course, the two scenarios are likely to have a big influence on the energy mix. Cramer says that the rise in energy demand has to be taken in the context of the increasing difficulties of being able to obtain energy. There won’t be a silver bullet, and all types of energy sources will be needed.
In Mountains, Shell believes that fossil fuels will continue to play a big role, because of the sheer demand for energy, but nuclear energy is also likely to form a major part of the mix. This is a top-down solution, with the support of governments and big companies, those with power and influence, necessary for its implementation.
In Oceans on the other hand, while again, fossil fuels will continue to play a role, the most likely non-fossil option is solar energy.
“Solar is a form of energy that you can harvest through local and even individual decision making. You can decide to put solar panels on your house. If you have a piece of land, you can build a solar farm and sell excess power to your neighbours. If you’re the mayor of a town, you can decide that you’re going to have a solar farm in your town,” says Cramer. “You can’t build a nuclear power plant in your back yard!”
Transport is also something likely to change depending on the route we take, especially personal transport. Shipping and aviation are harder to predict because of the range and energy density required. Again, there will not be a single solution, but many.
“One of the big challenges in the automotive world is entering a world where instead of just having the internal combustion engine, we will enter a world where we have multiple types of motorisation technologies that co-exist,” says Cramer.
In the top-down Mountains scenario, the use of liquid fuels will decline and electric and hydrogen fuel cell cars are likely to become more common, which both require new infrastructure. In Oceans, the use of liquid fuels is likely to continue.
“They may be very different molecules to the ones that exist today but they will be liquid fuels because that would enable people to continue to use existing fuel distribution infrastructure. In an Oceans scenario where you can’t so easily deploy new infrastructure on a very large geographical basis, you’ve got to reuse what you have,” says Cramer.
He explains that the future we are likely to see will not be Mountains or Oceans, but somewhere between the two, partly depending on geography.
“The point is not to cast a judgement on which scenario is the best or not, it’s not even to predict whether the world is going to go more Mountains or Oceans, it’s purely to say, we don’t know. That was the lesson from the first oil shock when the first scenario was created. We want to have a description of different futures,” says Cramer.
A RATHER ACCURATE CRYSTAL BALL
It’s not only Shell’s early scenarios, suggesting the coming oil shock, that turned out to be not just helpful, but quite accurate.
In the 1980s, Shell scenarios predicted the political upheaval that would lead to the collapse of the Soviet Union and the emergence of Russia as a global power. The scenarios also imagined the oil price collapse in the 1980s, and in the 1990s, the acceleration of the Chinese economy, the pressures of environmentalism and the rise of market liberalisation, information technology and the use of natural gas.
In 2001, Shell came up with two scenarios it called Business Class and Prism. Business Class described a situation where the economy was driven by a globally-connected business elite, who had more in common with each other than with the traditional economies of their countries. In Prism, the unique cultures and traditions of different regions played a much bigger part in shaping the economy.
“Those forces are still at play. We still see today the Business Class forces and the Prism forces competing against each other. What I find really powerful in considering those scenarios in hindsight, is that the crossroad they were describing and those forces that would push society were very relevant, because we still see them at play 15 or 20 years later,” says Cramer.
It will be interesting to see what the next scenarios will envisage. Perhaps a new climate deal from Paris will push one scenario towards increasing use of renewables, the phasing out of coal and natural gas, and a drive to energy efficiency. Perhaps the failure of the Paris talks will lead to an energy free-for-all and even greater demands. This, however, is speculation, and Cramer isn’t making any predictions.
Cramer thinks that the next scenarios will probably be published in the next three or four years. Whatever happens in the future, based on the past 40 years, it seems likely that Shell’s scenario planners will have thought of it.