What We Can Learn from Scenario Planning at Shell Oil
Article by: Leslie Martel Baer MA, MS and Herb Rubenstein, JD, MPA, PGA
Table of Contents
What Are Scenarios? 2
Why Develop Scenarios? 3
Shell’s Approach to Scenario Development 3
Laying a Foundation: Three Known Knowns 3
Two Key Understandings About Scenario Development 4
The Scenario Planning Team 4
Additional Invitees 4
Timeframes for Different Participants 5
The Scenario Planning Process 5
Shell’s Current Scenarios 6
Applying Energy Scenarios to Shell’s Strategic Decisions 6
How Organizations Can Embark on Their Own Scenario Planning 7
Applying Shell’s Scenarios to Your Own Organization 7
Scenario Planning: A Crucial Step in A Changing World 8
Bibliography 8
Acknowledgements
The authors wish to thank Peter Snowdon, Head of Communications, Shell Chemicals, for his presentation regarding the Shell scenario planning process to the students of the Global Energy Management (GEM) Program of the University of Colorado Denver Business School. The authors also wish to express their gratitude to the GEM Program for making the seminar in London in September 2011 possible, and to Cintia Gavay for describing the IHS scenario process during the same seminar.
Scenarios are, in essence, stories describing possible futures. Organizations can use scenarios to identify potential impacts to their strategy and operations. Shell International has been developing scenarios—for internal use and more recently to share publicly—since the 1960s. These scenarios have helped the firm to anticipate and navigate such unprecedented events as the oil crises of the 1970s, the collapse of the Soviet Union and the recent Arab Spring.
By examining why Shell has embraced scenarios and how they develop them, other firms can better understand the benefits of this approach and whether or not it would be constructive to undertake the activity themselves. Further, for firms that find the commitment of internal scenario planning out of reach, studying Shell’s scenarios allows them to leverage this extant resource in the process of more routine strategic planning.
What Are Scenarios?
To understand what scenarios are and what value they offer, let’s begin by understanding what they are not. They are not projections nor are they even forecasts; the information they provide is typically longer term than those tools and not as specific. Typically, they do not—if developed objectively and rigorously—express a preference on the part of their developers. And they are certainly not predictions.
Instead, scenarios are stories. As Peter Snowdon, [title] of Shell International points out, scenarios are plausible, recognizable, yet challenging stories about events and trends that could shape our future. These stories are special: they have been well researched and verified with data, are based on today’s realities, and describe potential realistic realities, unfolding before us. The stories told in scenarios are high stakes, guiding the allocation of billions—and, over decades described, trillions—of dollars in the anticipation of certain combinations of realities coming to pass.
Because scenarios describe multiple possible future realities, scenarios are typically developed in sets—Shell, for example, develops two scenarios together while IHS generates three in a set—so that the implications of different stories and their progression can be compared. As the Shell team points out in their update, Signals & Signposts, their two “Recession & Recovery” scenarios have essentially bracketed real world developments.
By their very nature, therefore, scenarios do not require consensus. Instead, developers discuss, debate and, above all, envision a variety of future possibilities.
Why Develop Scenarios?
As a result of the qualitative, narrative quality of scenarios, they allow an organization to answer the question “What if?” with respect to a broad range of potential futures. This “what if” strategic analysis permits preparation for those different possibilities, even if only in the mindset of the organization. In some situations, the preparation can and does go much deeper.
The process of scenario development itself creates a culture in which constructive argument and debate is encouraged, increasing participant engagement and commitment. Diverse viewpoints are gathered, best ideas are identified. This approach allows the team to create a set of scenarios that everyone can support, even if they disagree with the likelihood of specific features of one or another of the scenarios. Being aware of the possibilities and supporting the vision of them allows the organization to be “ahead” of the future, rather than always chasing behind it.
In particular, it makes sense that an energy company such as Shell would develop scenarios. Every three years, the company develops scenarios addressing global economic and political issues as well as another set focused on energy issues—the most recent set of which narrates out to 2050. More recently, the team has tackled an addendum to their energy scenarios that focus narrowly on the impacts of the 2008 recession. Clearly, as economic, political and energy issues impact every industry and business across the globe, these scenarios offer value in the planning process to a broad audience.
Shell’s Approach to Scenario Development: Laying a Foundation: Three Known Knowns
In developing its most recent set of energy scenarios, Shell began by identifying three facts or “hard truths” that everyone involved in the process would accept as given and within which the final scenarios must be able to operate. Shell calls these facts their “three known knowns”:
• Energy demand will accelerate.
• Supply will fall behind.
• Environmental stressors will continue to increase.
Once those known knowns were established, a host of “known unknowns” could be identified:
• How will we respond to changes in the environment?
• What energy technologies will be deployed?
• Do the right molecules exist to supply increasing energy demand without worsening environmental stressors?
• Are these molecules technologically accessible?
• Are there political barriers to accessing them?
Obviously, many different outcomes—requiring different paths—could be envisioned from analyzing these questions. That is, largely, the point: scenario planning, at Shell and elsewhere, is about embracing the uncertainty engendered by asking questions about the longer term.
Two Key Understandings About Scenario Development
The Shell team requires participants to accept not only of the foundational “known knowns,” but also of two key structural realities inherent to scenarios.
1. First, scenarios do not result by following a single path from a current state to a future one. They come from examining multiple paths from today’s state to multiple potential future states. The process inherently requires that more than one scenario or story be produced. As a corollary, one cannot assume that simply because multiple scenarios are produced that the scenarios in any way represent a probability or likelihood (prediction) of one over another or that the developers prefer one over the other.
2. Second, scenarios do not constitute mandates. Scenario planning is not a process that tells you what you and your team are going to do. It tells you what the world around you might do, which gives you an opportunity to prepare and respond accordingly.
Given these governing realities, Shell consistently produces two scenarios for each context it analyzes; however, it makes clear that the two stories are not “50/50 bets.” Multiple scenarios do not tell you which scenario is more likely to happen. But, as one identifies events unfolding, one can see with which scenario that event fits—one can see a step toward one scenario or another.
Because the scenarios do not offer probabilities and are not mandates, it is crucial that the drive to perform scenario planning come from the CEO and leadership of the organization. Without the leadership communicating their understanding of the value of the scenario development process, organization members may feel little impetus to invest in a process that produces qualitative stories rather than quantitative forecasts.
The Scenario Planning Team
Once leadership has made their commitment to scenario planning clear, an inclusive but well-structured strategy team must be developed. The team must comprise representatives of all organizational divisions and levels with “out-of-the-box” perspectives who can creatively envision a long-term future and the potential impacts to their functions. Then, these team members must be empowered with budgets and schedules that make the investment in scenario planning feasible.
Additional Invitees
Shell’s scenario planning workshops not only involves internal personnel. They hold workshops around the world in locations like Australia, Qatar, Singapore and Kuwait, including thought leaders on energy issues inside and outside of the industry. These external leaders are connected to a vast array of diverse people with insight into events that will shape our energy policy, industry, and access in the future.
These wide-ranging perspectives help the team to get past the typical response to many ideas: “But, that hasn’t happened before.” Getting past such thinking is what Mr. Snowdon describes as decision makers’ “golden ticket” to the future through scenarios.
Timeframes for Different Participants
The workshop process with a few hundred external participants can extend over 18 months. Then, Shell’s core team and approximately 50 experts continue the process.
The Scenario Planning Process
Shell’s scenario planning process is designed with feedback loops in which the stories developed built on existing data are checked and substantiated with additional data and data modeling. Then, they are adjusted to meet the needs of the verifying data and models and checked again. This process generates qualitative stories that can be used to answer “what ifs” in the transactional space of businesses consumers, while building credibility within the contextual space of economics and sociology.
To achieve this feedback and subsequent substantiation of the narratives, the Shell team follows these fundamental steps:
1. Asking, “Why are we here together for this process? What is the question we are trying to answer?”
2. Create a framework for a workshop process that can be replicated throughout the organization.
3. Gather together existing data.
4. Get the workshop participants to tell stories based upon those data.
5. Fact check the different versions of draft stories against previous and new data and models.
6. Identify the most consistent stories.
7. Brand the final scenarios to aid in assimilation by the organization.
8. Build strategies to respond to these stories.
Good scenarios are plausible, recognizable, and challenging. That means that the events and transitions occurring in the scenario must be ones that the scenario developers and users can envision occurring. Advancements in thin-film solar photovoltaic technologies make for a plausible scenario element. A time-traveling flux capacitor powered by banana peels does not. Because energy systems are big and complex, the scenario team is continually comparing the stories to calculations on the energy mix or portfolio, ensuring that the scenarios’ assumptions about that mix are realistic.
Further, the potential outcomes of a good scenario are recognizable and can, as a result, be applied to strategic planning. It is possible to assess what different scenarios mean for the bottom line and how to adapt to—or even instigate—these potential eventualities. Finally, a well-built scenario will challenge today’s assumptions and the status quo. They will get decision makers at every level to consider the “what ifs” that they will most likely be facing and prepare accordingly, rather than continuing to operate “as usual” without considering contingencies.
Shell’s Current Scenarios
In 2008, Shell released their most recent energy scenarios, “Blueprints” and “Scramble.” These two scenarios represent sharply different outcomes in response to the three “known knowns.” Blueprints is predicated on focused global leadership in addressing the challenges, whereas Scramble demonstrates a notable lack of international leadership, with nations becoming more isolated and nationalistic.
It is worth noting that, for the first time, Shell has abandoned one of its fundamental tenets of scenario planning: it has stated a preference for the “Blueprints” scenario and encourages users of its scenarios to take action to instigate activity in that direction. Key comparisons of the two scenarios are listed in the table below.
Blueprints Scramble
See the three known knowns as a challenge In the short term, the response to the known knowns is to be overwhelmed
Focus is on developing suites of solutions Focus is on keeping the lights on today
Leaders—beginning at the local level, such as mayors—share best practices with each other Governments, responding to supply and demand constraints and pressures on the physical environment, become nationalistic and competitive
A price on carbon evolves, eventually globally Coal and biofuels with poor energy balances (because they offer energy independence and support nationalistic goals)
Greater electrification of the vehicle fleet occurs Electrification is largely unpursued
A gap between supply and demand develops, but the transition in managing the gap is comparatively smooth The gap between supply and demand becomes painful
Applying Energy Scenarios to Shell’s Strategic Decisions
Beyond anticipating the 1970s oil crisis, Shell has demonstrated the tremendous practical value of their energy scenario planning. For example, the scenarios informed Shell’s decisions to sell a large refinery in the UK. Similarly, Shell determined to pull out of the Mackenzie pipeline project from Alaska across Canada to the Northern United States. By using their scenarios, Shell was able to ask, “What will energy prices look like with and without the pipeline under different conditions?” Because of the diversity of viewpoints embedded in the scenarios, the answers to this question help to describe a number of possible decisions and the implications for action by the organization for several years to come.
Shell’s scenarios have informed strategies in response to the growth in unconventional natural gas production in the U.S., the slow down in gross domestic product (GDP) in key markets, anticipating what OPEC may do in the face of low natural gas prices and rising petroleum prices, natural gas’s positioning as a bridge fuel—or more—to a cleaner economy, and the clear need for carbon capture and storage (CCS), particularly as new technologies that could capture carbon in road paving materials are faced with a slump in paving projects.
These examples are joined by Shell’s somewhat astonishing anticipation of the Arab Spring: with the data used to build the scenarios showing unusually young Middle Eastern populations and climate conditions causing a food shortage, the tension point for significant political unrest across the region was made visible, with clear consequences for oil production and transportation in the Middle East—albeit less obvious timelines for action by the organization.
How Organizations Can Embark on Their Own Scenario Planning
In some cases, a company may find it useful to develop their own scenarios, with a focus on their own industry or region. In doing so, Shell’s method provides a good fundamental model for any organization’s scenario planning process. Ensure, however, that key aspects of the process receive due attention:
1. Engage a broad spectrum of voices in your process to ensure that impactful events outside of your business or industry are considered.
2. Establish clear budgets, timelines and personnel for the process, with support from the top; not allocating assets to the process will only ensure that it founders or even dies out completely.
3. Allow information to flow in all directions during the process, and ensure that data is continually collected.
4. Determine the number of scenarios that you will accept as a finished product. Shell typically produces two, whereas IHS currently operates with three: “Global Redesign,” “Metamorphosis,” and “Vortex.” Determine the number of scenarios that will best suit your organization’s purposes or allow the draft stories to guide you to an appropriate outcome.
5. Determine the audience of your scenario products. Will they be reserved for your internal market, or can you create value by making them public?
6. Be prepared to invest in effective branding for your final scenarios. By creating visual and other standards for each scenario, you will quickly have your audiences mentally referring to all that a given scenario entails by simply seeing a logo or hearing a scenario name.
Finally, it is crucial for organizational leadership to recognize that this is not a journey their team must make alone. Organizations such as the Scenario Planning Institute at Colorado State University offer training and research resources on scenario planning, as well as consulting services through which they assist clients in scenario development projects (Scenario Planning Institute 2011).
Applying Shell’s Scenarios to Your Own Organization
Not every organization will find it valuable to embark upon its own scenario planning process. Fortunately, many organizations will find that referring to Shell’s, IHS’s or another organization’s scenarios valuable in their strategic planning. For example, a transportation company could examine the possibilities for future fuel prices and the potential for new fuel options to be broadly available. A utility could undertake similar assessments.
Further afield, a manufacturing firm with overseas operations and markets could use these scenarios to examine various possibilities for the availability of human capital, raw resources, and available income for disposal on their products. The company may then develop fully deployable contingency plans, based upon the most impactful outcomes of the scenarios. Or, it might simply take a “monitor and see” posture, being aware that the unfolding of certain events will signal one scenario or another, with the concomitant implications for its business. Such awareness could permit the firm to make a timely retreat into one market or advancement into another, or prompt the development of a new product line to maintain competitiveness under changing conditions—well in advance of a change triggered by an annual forecast.
Conclusion: Scenario Planning: A Crucial Step in A Changing World
Shell has clearly demonstrated the value of its scenario planning. It has consistently anticipated major global economy and energy trends. Their process—which includes support from the top, a clear budget allocation, a diverse set of stakeholders, the development of plausible, recognizable, and challenging narratives grounded in data and models, and commitment to underlying truths about today’s environment—creates a scenario product that will achieve buy-in throughout the organization, engendering engagement and incorporation into planning cycles.
By applying this information and thinking approach to strategic planning, businesses can “get ahead of the future,” rather than always chasing it. As such, the technique offers an invaluable advantage to any firm that deploys it.
Bibliography
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IHS's Global Energy Scenarios. Performed by Cintia Gavay. IHS UK Offices, Londong. 2011 йил 28-Sep.
Scenario Planning Institute. 2011. http://www.scenarioplanning.colostate.edu/ (accessed Mar 20, 2012).
Shell International BV. "Scenarios: An Explorers Guide." The Hague, 2008.
Shell International BV. "Shell Energy Scenarios to 2050." The Hague, 2008.
Shell International BV. "Signals & Signposts." The Hague, 2011.
Shell's Scenario Planning. Performed by Peter Snowdon. London Marriott Hotel Kensington, London. 2011 йил 27-Sep.