Power of Facilitation: in hindsight, saved Royal Dutch/Shell from Arab-induced global oil price shocks in 1973…here is the story!

Preamble:

In hindsight, without deploying appropriate Facilitation methods/techniques, it would not have been possible for Pierre Wack (belonged to Strategic planning function in Royal Dutch/Shell) to make decision makers/managers of Royal Dutch/Shell to see and act on the EMERGING STORIES OF THE FUTURE that saved the company from oil price shocks in 1973…well, this INFERENCE is open for DEBATE.

Background:

The oil crisis began in October 1973 when the members of the Organization of Petroleum Exporting Countries (OPEC) proclaimed an oil embargo. The embargo was targeted at nations perceived as supporting Israel during the ‘Yom Kippur war’ in the Middle East. The initial nations targeted were Canada, Japan, the Netherlands, United Kingdom and the United States. The embargo also later extended to Portugal, Rhodesia and South Africa. By the end of the embargo in March 1974, the price of oil had risen nearly 400%, from US$3 per barrel to nearly $12 globally; US prices were significantly higher. The embargo caused an oil crisis, or "shock", with many short- and long-term effects on global politics and the global economy. It was later called the "first oil shock", (reference – Wikipedia)

The story…

Slow reaction to change is often costly. If we wish to know how quickly companies react to change, it is interesting to look at their behavior when they are subjected to large step-change shocks…the oil industry was subjected to an unprecedented discontinuity in 1973 with the First Energy Crisis and the world has drawn a lesson from this.

The first behavioral example relates to investment decisions in oil refining. 

Figure 1 shows the total industry demand for all oil products increased since 1945, through the crisis in 1973 until well into the eighties.

We can clearly see that consistent exponential growth was experienced until the crisis took place in 1973, after which demand leveled out.

Figure 1 also shows how the oil refining industry reacted to this unprecedented change in the business environment. The line representing world-wide refinery capacity in the industry shows very little initial reaction. The industry was obviously used to exponential growth, 6-7% per year; obviously it seemed difficult to imagine anything else.

Planning new and enhanced capacities had become a matter of routine. It was taken almost for granted that the business would expand 6-7% next year. Therefore, it was not difficult to figure out how much additional capacity was required every year. However, in 1973 the crisis occurred and demand started fall away, then came back and fell away again…the crisis started.

For the purpose of this article, our attention to enhancement of capacity during this time is quite important. For two years, the capacity enhancement continued to grow at the rate the industry was accustomed to i.e. 6-7% per year, with no apparent reaction to crisis. From then onward, we see capacity growth slowing down somewhat, but continuing. It was not until the early 1980s that the industry adjusted its capacity back to the level of demand.

The oil industry apparently took two years to discover anything at all had happened, and then required another 5-6 years to work out the real impact of the oil crisis…eventually the oil companies reacted, suitably changed their construction plan, and adjusted to the new situation, but only after taking years. In the process, they lost billions through the pressure of over capacity.

Lets us see what Pierre Wack of Royal Dutch/Shell looked at and how he worked with the decision makers/managers to save the company from oil price shocks. In hindsight, Pierre’s facilitation skill and competence must have been of the highest level…he made the decision makers/managers to THINK and change their mindset and get ready before the oil shock of 1973.

Pierre Wack looked at the events that might affect the oil price, which had been more or less stable since World War II. Oil was seen as a strategic commodity, and the consuming nations would do what they could to keep the price low since the prosperity of their economies depended hugely on oil. But there were several other significant events in the air. First, USA was beginning to exhaust its oil reserves. Meanwhile, American demand for oil was steadily rising. On the other side, the OPEC (Organization of Petroleum Exporting Countries), was showing signs of flexing its political muscle. Most of these countries were Islamic, and they bitterly resented Western support of Israel after 1967 six-day Arab-Israel war.

Looking closely at the situation, Pierre rightly realized that Arabs could demand much higher prices for their oil. There was every reason that they would. The only uncertainly was when. One could not know for sure, but it seemed likely to happen before 1975, when old oil price agreements were due to be renegotiated.

Pierre wrote two set of stories about the future, with projected/possible price figures. One story presented the conventional wisdom at Royal Dutch/Shell: somehow the oil prices would stay stable, but for that to happen, a miracle would have to occur – like new oil fields, for instance, might have to appear in non-Arab countries. The second scenario looked at the more plausible future – an oil price crisis sparked at OPEC.

Pierre shared with Shell’s decision makers/managers his reading on the inevitable oil crisis and its implications.

Pierre waited for a change in behavior at Royal Dutch/Shell, but no observable change in behavior came. That is when he worked on his breakthrough Scenarios and presented it to the decision makers/managers. He made them discover full ramifications of possible oil price shocks. “Prepare”! The refiners and marketers also started seeing something new in the horizon…refinery might become low growth industry. He also warned drillers and oil explorers who sought new oil to get ready for possibility that OPEC countries would take over their oil fields.

Pierre also made decision makers/managers of Royal Dutch/Shell to identify those forces which might churn out a few new stories and their possible influences…like mentioned earlier, USA exhausting oil reserve, oil demand on rise in America, OPEC likely to flex muscle power, Arab-Israel war etc.

Pierre was not interested in predicting the future. His goal was liberation of people’s insights in the company and helped them see alternative future environment (future-Oil crisis/another future-Stable oil price).

It seems Pierre was right. In October 1973, after the ‘Yom Kippur’ war in the Middle East, there was an oil price shock…the Energy crisis engulfed the world. It came in the form of an embargo and production cutbacks from the Arab states. Control of oil became known as the "oil weapon."

Of the major oil companies, it appears, only Royal Dutch/Shell was best prepared for change and faced the oil price crisis. The company’s decision makers/managers responded quickly. During the following years, Royal Dutch/Shell’s fortune unfolded favorably. From one of the weaker of ‘’Seven Sisters’’, the seven largest global oil companies, it became one of the two largest and, arguably, the most profitable. Pierre facilitated the change…change of mindset of decision makers/managers of the company. He made them to look at closely the new knowledge developing at the fringes and change view of reality and to match up with reality as it is going to be.

What Pierre exactly did – he helped decision makers/managers deliberate and develop ‘scenarios’ to take a long view in a world of great uncertainly and write stories about the way the world might unfold tomorrow…stories that can help them to recognize, adapt to changing aspects of present environment and understand alternative future environments.

In retrospect, Pierre clearly used POWER OF FACILITATION in Royal Dutch/Shell to make decision makers/managers to have ‘strategic conversations with alternative future’, made them feel the ‘shocks’ likely to come from oil price crisis and build ‘memories of future’.

Learning from Pierre Wack… from the point of view of facilitation:

Relying on soft data, ideas, convictions and intuition:

In facilitating scenario exercises, there is a ‘critical uncertainty’ and that is the subject matter itself … scenario teams do not deal with established or discernable facts about the past or the present, they are concerned with the future much of which is inherently uncertain and about which there are no ‘facts’ … therefore, they need to rely on soft data, ideas, convictions and intuition.

Perhaps, Pierre demonstrated his Facilitation competencies (listed below) - facilitation is an ‘art’’ which requires a wide range of skills:

1. Evoking the group’s (decision makers/managers) collective attention
2. Actively inquiring into defensive routines
3. Anticipating problems and helping people through process

At the same time, as a facilitator, Pierre must have been aware of how his own defensive reactions (normally triggered during facilitation)… and the need for his large enough presence to embrace all sides of any intense polarization that might arise.

To conclude, the purpose of writing this article is establish the ‘Power of Facilitation’ and the ‘Power of Facilitator’ in impacting long lasting change…ranging from individual to team to organization!!!

Reference: Internet research/The Sixth sense by Kees van der Heijden, Ron Bradfield, Goerge Burt, Gaorge Cairns &Scenarios - the art of strategic conversation by Kees van der Heijden George Wright