By Stanley Reed, with Andy Reinhardt
Why would Royal Dutch Shell hire Jorma Ollila as its non-executive chairman? At first glance the news, announced on Aug. 4, seems like a shocker. But Ollila, who won't take the job until June 1, 2006, when he steps down as CEO of Finnish phone giant Nokia (NOK ), fills a number of needs for Shell (RDS.A and RDS.B ). As a Finn, Ollila will be a neutral national at a company that just united its sometimes scrappy British and Dutch wings on July 20.
More important, Shell has embarked on a huge makeover, after a number of stumbles, including a reserves scandal that led to the ouster of CEO Philip Watts and two other top Shell executives last year. One of the world's best-known CEOs, Ollila should bring Shell cachet. He is also known for being highly ethical, which could help the oil giant polish its image.
Since Ollila, 54, became head of Nokia in 1992, he has transformed Finland's leading company from a money-losing $3.6 billion a year conglomerate making everything from cables to televisions to the world's leading mobile-phone maker, with annual sales of about $40 billion. While not an oilman, Ollila is a quick study, with an engineering and financial background. He once worked at Citibank.
Even though he won't have operating responsibility, taking the high-profile Shell job is a calculated risk for Ollila. His career at Nokia would be hard for anyone to top. Analysts do think Shell's performance will probably improve over the next few years, giving Ollila a chance to take some credit.
But only recently, Shell showed that it's still prone to nasty surprises. In late July, the company announced that its Sakhalin II gas project in Russia -- a flagship -- would wind up costing $20 billion instead of $10 billion. Morgan Stanley forecasts that Shell will earn net income of $21.5 billion this year -- a 16% increase over 2004.
Jeroen van der Veer, who replaced Watts as Shell's group head in March, 2004, has been scrambling to fix the corporate structure and culture that have contributed to a sub-par performance in recent years. Melding the British and Dutch wings is a move critics have urged for years. This major streamlining exercise should make decision-making easier and allow the company to participate in more takeovers, which it has largely avoided in the past. Van der Veer admits, though, that right now assets in the industry are too expensive for major deals to make sense, thanks to high oil prices.
Van der Veer is also trying to turn around Shell's lagging exploration track record. He plans to spend an industry-leading $1.8 billion this year and next on hunting for major oil and gas troves that he calls Big Cats. To help fund the higher spending, he plans to sell about $15 billion in assets by 2006. He's also setting up an internal academy to train executives in managing the multibillion projects that he sees in Shell's future.
It all sounds good, but Shell still has its problems. Thanks to its lackluster exploration record and failure to snatch up other large companies when prices were cheap in the late 1990s, Shell may be forced to play catch up. That could mean higher spending than rivals such as ExxonMobil (XOM ) and BP (BP ) at a time when costs in the industry for everything from drilling rigs to steel pipe are soaring at close to a 10% annual clip.
Ollila will undoubtedly make a great public face, but it's going to take more than that to fix Shell. There will doubtless be times that will test even Ollila's communication skills.