THE ECONOMIC WEEKLY May 21, 1955 The "Shell" Transport and Trading Company, Ltd. Greater Operational Activity Results in Increased Sales Volume Heavy Capital Expenditure Inescapable Substantially Enlarged World Consumption Sir Frederick Godber's views on Oil Prices

HE Annual General Meeting of through the capitalization of part of ber, was widely appreciated and T The " Shell " Transport and the company's share premiums re­ favourably commented upon, as Trading Company, Limited, will be serve. affording an opportunity of following held on June 1 at The Chartered In­ more closely the current trading When commenting on this issue surance Institute, 20, Aldermanbury, results of the group. I am glad to in my statement last year, I said that say that this year we propose to London, E.C. one of its objects was to broaden the publish similar results on a quarterly The following is the statement by basis of the ownership of the com­ basis, and that figures for the first the Chairman, Sir Frederick Godber, pany. You may, therefore, be inter­ quarter will be available within a few which has been circulated with the ested to learn that during 1954 re­ weeks. report and accounts for the year end­ gistered Ordinary stockholders in­ ed December 31, 1954: — creased by approximately 10,000, and I will now proceed to the report in December numbered over 142,000. on the group financial results for The Board of Directors You will appreciate, of course, that 1954. Little more than a year after his the number of individuals who own THE ROYAL DUTCH/SHELL resignation from the board owing to the equity of the company must ill health, Sir Andrew Agnew, our exceed this figure by a substantial GROUP REPORT ON THE colleague for so many years, has margin, there being no record of those YEAR 1934 passed away. who prefer to be registered in the In my statement last year I paid name of nominees, or of holders of Financial Position tribute to Sir Andrew's half-century Ordinary stock in bearer warrant Net income of the group for 1954, of devoted and untiring service to form. after taxation and* elimination of your company and to the group. I minority interests, was £134,474,218, By means of such issues from time recalled, too, his outstanding work in compared with £130,415,373 in 1953, to time the shareholder has obtain­ building up the group's tanker fleet ed in concrete form acknowledg Higher activity in all phases of the into one of the world's largest and ment of the growth of the assets group's operations resulted in an in­ most efficient maritime enterprises. which his shares represent, and of the crease in the volume of sales in 1954 I feel sure you will wish to join in business in which they are used. of nearly 10 per cent in world out­ extending sympathy to Lady Agnew side North America, and of 4 per and to all the members of his family The Royal Dutch/Shell Group cent in North America. This im­ Balance-sheet and Revenue The assets of The " Shell " Trans provement was reflected in an increase Statement port and Trading Company, Limited, in group net income before taxation The financial results of the group arc substantially in the form of in­ of £23 million. The greater part of vestments in a large number of com are reported elsewhere in this state­ this increase, however, has been off­ panics known collectively as the set by higher taxation provisions, to ment. The dividends paid to the Royal Dutch/Shell Group. Your which reference is made later. As parent companies for 1954 amounted company has a 40 per cent interest a consequence of these larger tax to £26,841,299, compared with in these companies and the Royal provisions, the net income of the £22,186,010 for 1953. In consequ­ Dutch Petroleum Company a 60 group after taxation increased by ence the net revenue of your com­ per cent interest. only £4 million over the previous pany, which consists mainly of divi­ year. This is a very significant fact. dends from the group, was The greater part of these invest­ £10,527,844, against £8,670,523 in ments is held through three princi­ Out of the 1954 income, dividends 1953. pal wholly owned operating compa­ of £26,841,299 have been paid to the parent companies—Royal Dutch After deducting the Preference nies—The Anglo-Saxon Petroleum Petroleum Company and The dividends paid and accrued and the Company, Limited, N.V. De Bataaf- sche Petroleum Maatschappij, and " Shell " Transport and Trading interim Ordinary dividend of is. per The Shell Petroleum Company Li­ Company, Limited. £1 unit free of income tax, paid on mited. The managing directors of January 18, 1955, there remains each of these three companies are Sales proceeds and other income, available for distribution; including identical and at present are: The amounting in 1954 to £1,851,039,- the carry forward from 1953, an Hon. Sir Francis Hopwood, Jonkheer 043, were higher by £150,324,593 amount of £9,538,414. J II Loudon, II Bloemgarten, J W than in the previous year. The greater proportion of the more valu­ The directors now recommend a Piatt, F A C Guepin, F J Stephens, able light products achieved in 1953 final dividend of 2s, per £1 unit L Schepers. sales was maintained in 1954, in spite free of income tax which, if approv­ At last year's annual general meet­ of the fact that the higher demand ed, will be pavable on June 8, 1955, ing I mentioned that it was proposed pressed more heavily on fuel oils. and will absorb £6,541,763. to make available a figure of group Geographically the improvement was Reference has already been made income for 1954 on a half-yearly particularly pronounced in Europe, in this report to an issue during 1954 basis. The publication of these where it is attributable to the record of 10,902,939 Ordinary shares results, which was made in Septem- level of economic activity reached 607 THE ECONOMIC WEEKLY May 21, 1955 in western European countries during It must be remembered that to- It is gratifying to note the increase 1954. The increasingly high stan­ come taxes are levied on group com­ in cash and securities, which at the dard of quality of group companies' panies by fiscal authorities all over the end of 1954 together amounted to products also contributed to the im­ world, in fact by more than 50 differ­ £346 million. Against this improve­ provement, since it resulted in pub­ ent governments. In the same way ment, however, must be set very sub­ lic preference for them becoming the income of £134 million is spread stantial forward capital commitments; more marked. over an equally large number of moreover taxation liabilities have countries, and while a few of these risen to £129 million, and these In the USA sales and income of contribute a very significant propor­ must be met irrespective of the Shell Oil Company were higher, in tion, no preponderant part is attri­ course of our future generation of spite of the US oil industry's general butable to activities in any one coun­ funds. It is essential for our cash experience during 1954 of more diffi­ try. position to be strong, in order cult conditions, which were reflected Assets and Liabilities that we may be in a position in a reduction of allowable produc­ to meet requirements for funds tion of crude oil, and in one of the Turning now to the statement of in nearly every country in the smallest annual increases in consump­ assets and liabilities, you will see world, in most of which facilities for tion since the war. that some changes in presentation are raising funds are limited or negli­ made, in order that a more detailed Costs and expenses of the group gible. and clearer picture of the financial rose in total at about the same rate Capital Expenditures position may be given. Long-term as sales. Operating expenses amount­ receivables have been separated from Our capital expenditures during ed to £1,044 million in 1954, against current receivables, and a new item, 1954 were quite as high as was £977 million in 1953. In addition short-term borrowings, appears under predicted a year ago. The figures to those costs directly attributable to current liabilities. This is made up for the past four years in millions of the production, manufacturing, trans­ of bank overdrafts, short-term accom­ pounds were as shown in the table porting and marketing of oil and modation bills with banks, and long- below. chemicals, there arc other heavy term borrowings due within one year; expense connected with exploration About two-thirds of these outlays the two last items were formerly and with research, both of which in­ have been met from depreciation and included in accounts payable. In creased. In 1954 group companies other provisions, and the remainder addition, separate figures have been spent more than £50 million on from the retained earnings of the shown for cash and for short-term exploration in an intensification of group. marketable securities. the search for new oil; this, like the In the light of information avail­ expenditure on research, is a cost in­ There have again been substantial increases in property, plant, and able at present it appears probable curred to safeguard our future posi­ that the future levels of capital ex­ tion. equipment, the gross investment in which stood at £1,664 million at the penditures will, if anything, be even Depreciation, depletion and amorti­ end of 1054. The rise in the figure higher than in the recent past. Since sation charges were, at £155 million, for investments from £85 million to such vast sums are concerned, it is higher than in 1953 by £7 million. £104 million is due to a number of desirable to give an explanation of 'The upward trend in this item during causes, the chief of which is the the factors governing them. recent years has thus continued, and group's initial investment in Iran; In the survey of activities it is is likely to do so in the future in there were also other substantial in­ suggested that the rise of world view of the high level of present day vestments in joint production, refin­ energy demand over the next 25 years capital expenditures. ing, and marketing enterprises. may be of the order of 3 per cent Larger sales have also meant higher Stocks of materials have continued annually, in which case demand .sales taxes, excise duties and similar to fall—from £102 million to £92 would double within this period; levies, which rose by £58 million in million—despite the higher level of and that the oil industry will have 1954 to a total of £406 million. The activities and some rising prices. to contribute an increasing propor­ steep increase in this item is in great This is due to the development in tion of these great additional require­ part attributable to the increase in group companies of the most mo­ ments. Moreover the capital expen­ sales in Europe, where these levies dern methods of material indenting diture necessary for finding, produc­ are particularly onerous. and stock control, by means of which ing, shipping, manufacturing and they have taken full advantage of the marketing each extra barrel of oil has Taxation on income of group com­ easier world markets for materials. risen considerably in recent years. panies throughout the world in 1954 The increase in trade has resulted in This trend is attributable to higher was £102 million, and was thus £19 the value of oil slocks and of accounts capital costs in all phases of the in­ million higher than in 1953- This receivable rising to £216 million and dustry—to the ever-increasing cost of increase is principally due to the fact £100 million respectively. finding new oil to replace reserves; that taxable income was substantially higher in 1954 than in 1953- The provision also includes certain charges in respect of extra or new taxation levied during 1954 and relating partly to prior years, as is to be ex­ pected in operations so widespread and diversified as those of the group. In some years such charges arise, while in other years amounts may be brought back into the accounts, In 1955 these factors operated on balance in our favour, but in 1954 this was not the case.

608 THE ECONOMIC WEEKLY May 21, 1955 to rising costs of capital goods, such appear to have taken place, and the market price at a given moment is as ships; to the public demand for Press here as well as elsewhere gave too high? higher quality products, which entails much publicity to distorted versions, The total profits of the major oil increasing use of expensive plant such which alleged that the document companies, including our own, re­ as catalytic cracking and reforming accused the oil industry of charging present large sums in terms of units; and to the demand for a higher extortionate prices through the ma­ money. But the quantity of oil standard of technical services, which chinery of an international oil cartel. which is sold is also very large, as is frequently involves the provision of Such accusations are not included the capital required to put it into extra equipment. in the report itself, nor is there any consumption. I will use our own foundation for them. In this sense, therefore, much of companies' results in dealing with our capital expenditure may be de­ Nevertheless, these distorted this question. Our business is pri­ fensive, and consequently does not "leakages," and the sensational cri­ marily financed by our shareholders, offer prospects of any great increase ticism indulged in on the strength who provided the money with the of income- The normal test of of them, engendered a good deal of sole object of receiving some reason­ profit-earning cannot be applied to interest in the subject generally, able return on it in relation to the such investment, which must be whereas probably the report itself, circumstances. The profit of the treated rather as a cost of maintaining if it had not been so heralded, group for the last year was £134 our business than as new investment would not have done anything of million, and this means a return on on which added return can be ex the kind, either on its merits as a capital employed of less than 14 per pected. study or as sensational material. In cent. We sold 26 thousand mil­ fact since its publication views on lion gallons of oil and therefore on ECE Report on Oil Prices its limitations have been widely- all operations, that is on producing, The explanation which I have just endorsed in the Press, as well as by shipping, refining, and marketing given you should afford a good spokesmen of HM Government and combined, our profit margin world­ understanding of the financial admi­ the US State Department. Never­ wide was about 1 ¼d per imperial nistration of the group's operations, theless, in the light of the events gallon. By what standards can either and for that matter of the business which I have described it is appro of these results be judged excessive? of any of the larger companies in the priate that I should supplement my Even so, only a small proportion international oil industry. I have comments on the finances of the of these profits go to the sharehold­ given explanations on similar lines in group in relation to certain state ers in dividends. I explained to you previous years and I hope, therefore, ments and inferences in the ECE last year in cold terms that, if we that you have been adequately in­ document and the critical expres­ arc to maintain our business all over formed, and so have obtained an sions which it evoked. the world in strength and in pro­ gress, heavy capital expenditure is understanding of the financial aspects The point, supposedly extracted inescapable;; and also that, since of the industry. out of the document, which has the capital requirements of the inter­ been responsible for most publicity I stress this because recently there national oil business have now out­ is that prices of oil products, such has been considerable publicity con grown the money markets of the as petrol, in western Europe may be cerning oil prices arising out of a world, they can be financed only by too high. The reasons given for this document published last March by retaining in the business an appreci­ suggestion are that such prices are the United Nations Economic Com­ able proportion of earnings. Even linked to prices in the USA, and mission for Europe. This document in the USA, where capital is much that the cost of producing crude oil set forth the results of a study made, more plentiful, it has been estimated in the Middle East, which is the on its own initiative, by the Secre­ that 90 per cent of gross invest­ main source of supply for western tariat of that Commission for its Coal ment in the oil industry since the Europe, is lower than that in the Committee, and while there seems to war has been financed by funds United States. Actually the docu­ have been a serious effort to elucidate generated within the industry. for the committee the basis and ma- ment does not contain any such chinery of prices at present charged statement in this precise form. Tin's I have already commented on the for oil in western Europe, the fact is the interpretation applied by great increase in energy requirements that on the author's' own admission those responsible for the publicity forecast for the future, and the part the document had to be based on in­ to certain phraseology in it; but which the oil industry is expected to complete knowledge of relevant facts, since the wording of the document play in filling these. We should be and that its conclusions, as well as might without too much stretch of failing in our duty to the public as many of its statements, are according­ imagination carry the implication in well as to our shareholders if we did ly erroneous and academic, makes it question, and since it has been not continue to make whatever pro­ very questionable whether it ought quoted in many quarters as a posi­ vision is possible to enable us to play to have been presented to the com tive criticism of the industry, it is our part in this expansion. To the mittec as a contribution of value. best that I should deal with it as extent, therefore, that these future such. requirements must be financed out Furthermore, on the accepted of earnings, it is a complete fallacy precept that a little learning is a Prices and Profits to regard such earnings as profits in dangerous thing, it is even more I am sure that all of you must the conventional sense. Moreover, questionable whether it should, or know that, like most other commo­ should prices fall to a point where even would, have been published in dities, crude oil and also oil products it became impossible for the indus­ the ordinary course of events. How­ are sold on the basis of market prices. try to make adequate provision for ever, the decision to publish it was Market prices in their movement's financing expansion, there would be undoubtedly influenced by the fact are not necessarily respecters of costs, a shortage of oil products, with the that before even the coal committee, let alone costs in one particular area consequence that economics would for whom it was prepared, had had or particular phase of the business. eventually prevail. This would in­ an opportunity of considering the What, therefore, is the criterion by evitably, after a period of disloca­ document, leakages of its contents which to judge whether or not, a tion, bring us back to where we are

609 May 21, 1955 THE ECONOMIC WEEKLY today, which shows clearly enough Contributing to this increase was at the greater depths which modern what is the influence which must ' the rising demand for fuel oil, which methods enable trie drill to reach, or govern prices in the industry. continued into the early months in off-shore waters. The search of this year, and which dur­ goes on, but year by year becomes I would, however, like to put one ing the winter months reached for these reasons more hazardous more test to this question. Are oil such a level that it stretched more difficult and more costly, prices too high for the economic available fuel oil supplies world-wide health of the consumer? I have made reference earlier to to the limit. In consequence the the large capital sums which the It is impossible to assert seriously price of that product rose in Febru­ industry is, called upon to spend; a that they are since oil products are ary of this year. The world's future considerable proportion arises from probably the main victims of taxa­ energy requirements are likely to the increasing demands for refineries tion all over the world. make further heavy demands on the in the areas of consumption. I do oil industry, in particular for fuel oil, not propose to go in detail into the You will see from the financial until such time as atomic energy arguments for or against this trend, statements that the payments of becomes a significant factor. since they vary widely in the differ­ sales and excise taxes by group ing circumstances of one country as companies were three times group A consequence of the unexpected­ compared with another. It is, how­ net earnings. World-wide they re­ ly buoyant demand for all products ever, as well to sound a note of warn­ present over one-fifth of sales pro­ over the winter months was the ing that there is a minimum limit of ceeds, but in Europe they reach rapid rise of short-term tanker capacity below which a refinery, if one-third. If petrol in Europe freight rates, which by February last it is to produce the high quality of is taken by itself—and its price has had more than doubled between the products increasingly in demand, been especially criticised—well over trough of midsummer and the peak cannot economically be justified half of our realizations represent sales of winter. At the height of this Self-sufficiency, however, appealing or similar taxes. Such heavy im­ activity tankers on short-term charter it may be from the point of view of posts inevitably raise the cost of amounted to as much as one-fifth of national prestige, can in certain cir­ living since, taking the United the total tonnage employed in mov­ cumstances only be at the expense Kingdom as an example, four-fifths ing oil, and consequently this rise of flexibility, and hampers the re­ of petrol used is for industrial and in short-term rates was a major placement and modernization of commercial purposes or for public factor during the winter months in equipment which is so necessary. authorities. Therefore, while it freighting costs. In contrast, the Up-to-date quality at the lowest cost might with reason be asserted that basis used for establishing the freight can be provided only if the refiner the consumer is paying too much, rates charged by group companies re­ is in a position to keep pace with it is not the basic price which is sulted in variations of less than 10 the rapid developments in refinery responsible for this, and Govern­ per cent during the corresponding techniques. ments mast hold the view that the period. basic price of oil is economically so The world tanker position remains favourable to the consumer that he RECENT GROUP in surplus. Though the winter de­ ACTIVITIES can afford to pay much more in the mand brought tankers out of lay-up, form of taxation. at the period of highest demand, Bombay Refinery None of the information which I there were still over one million As has become customary, a sepa­ have now reviewed and amplified is tons idle. Moreover, a record rate and illustrated survey of acti­ new to you. I have given it in more total of 4 ½ million tons of vities is being circulated with this concise terms in previous years, par- new buildings became available report. The achievements of group ticulariy last year, and it is a curious in 1954 and the building pro­ companies in 1954 follow the pattern fact that the authors of the ECE gramme still continues at the very of increasing and intensive activity in document, seeking knowledge as they high level of 8 million tons, about all phases of the business, which has been the keynote of past reports. obviously were, seem to have neg­ half of which will come into service lected industry reports. The same this year. The creation of this The wide range of these activities must apply to many of the other modern tanker fleet with its lower includes the considerable develop­ critics, who could not have seriously operating costs must be detrimental ments in marine exploration areas, to the trading prospects of older raised some of the questions which of which drilling in the off-shore tankers in a continuing highly com­ they did, if they had had the know­ Texas and Louisiana concessions, in petitive market, and their increased ledge which has been conveyed to Qatar (Persian Gulf) and the Gulf ' scrapping or conversion to other uses the shareholders of this company in of Paria (Trinidad) are examples. In will become still more necessary. recent years, and which would have the Gulf of Paria, where we operate been available by reading the reports, The future requires that supplies with partners, oil has been found had they made any effort to procure of crude oil, the raw material from since the end of the year, though the them. which the industry's manifold oil extent and nature of the find have products are derived, be at all times yet to be determined. World Oil Conditions available in sufficient quantity to ful­ Last year I mentioned that oil had Total world oil consumption in fil potential demands. This can only been found in Nigeria. Although 1954 showed a substantial increase be achieved by continuous explo­ since then oil indications have been over the 1953 level, for which the ration for new oil discoveries. It found in a second well also located latter months of the year were main­ will be appreciated that over the in the coastal area, much further work will be required before the ly responsible. Though the growth past years those prospects which value of this discovery can be in the USA was one of the smallest were most readily accessible have assessed. of the post-war years, in the rest of already been tested, with the conse­ the world, excluding the Russian quence that reserves for the future In the refining sphere, Geelong sphere, it approached the remark­ must be sought, for the most part; (Australia) started operating in mid- able figure of 10 per cent. in remote and less accessible regions; 1954 and Bombay early this year, 610 THE ECONOMIC WEEKLY May 21, 1955 whilst the capacity and scope of our £5 million for the acquisition of the the individual provisions, of ILO manufacturing facilities are being entire issued share capital of Petro­ conventions. This committee had expanded in many places to meet chemicals Ltd, and in full settlement its second session during the Bom­ growing product requirements. of the claims upon that company. bay conference. India has ratified Supplementing the transportation The terms of the offer were accepted, up till now only 22 out of a hun­ chapter in the survey, a further 19 and Petrochemicals Ltd has conse­ dred and odd ILO conventions. The general purpose tankers of 18,000 quently become a group company. committee on conventions, it is ex­ tons are expected to be delivered by The acquisition of this interest gives pected, will enable the Government the builders during 1955, as well as the group an immediate entry into of India to ratify more conventions seven of the 31,000-ton ships on a chemical field in the United and thereby confirm India's rightful order. These deliveries will further Kingdom which is complementary to place as one of most advanced coun­ improve the efficiency of the fleet. its present interests; it will also pro- tries of industrial importance, by In February of this year an offer vide rights in certain new and im­ ILO standards. was made by Shell Chemicals Ltd of portant fields of chemical research. What may be considered to be the most important item on the agenda, viz, the Second Five-Year Indian Labour Conference Plan, did not receive adequate atten­ N E of the blessings conferred industrial relations were very broad- tion. In the First Five-Year Plan, O by the Second World War ly discussed. Various amendments Labour had been relegated to the was the adoption by the Indian to the Minimum Wages Act, which background and was almost neglect­ Government of the annual tripartite slill awaits full implementation, ed. Full details of the Second Five- conference on the model of the were suggested. The desirability of Year Plan have not yet been made International Labour Conference. extending the provisions of the Em­ available. However, from the mea­ The exigencies of war necessitated ployees' Provident Funds Act, 1952, gre details doled out to the public, active and willing co-operation of to 16 new industries (employing the Plan has evoked much interest. Capital and Labour and this was 10,000 workers or more) and to The Labour Ministry have already sought through consultation with plantations and mines was stressed. suggested for inclusion: extension these two partners of industry during An employers' association suggested of existing social security schemes, the annual conferences. The war the introduction of an unemploy­ workers' education, a fresh agricultu­ ended in 1945; but this healthy prac­ ment insurance scheme in place of ral labour enquiry, industrial muse­ tice of State consultation with indus­ the present prohibitive provision for ums, training for welfare, housing, try and labour has come to stay. pay-off and retrenchment compensa­ establishment of a Central Labour Within its limited sphere, the con­ tion. The main findings of the Institute and expansion of employ­ ference has proved useful in varying Agricultural Labour Enquiry (1950- ment service organisation. The con­ measure for all the three parties. 51) were summarised for the con­ ference was requested to suggest Industrial democracy under the ference to make any recommenda­ more schemes for further improve- paternal care of the State is at work tions in the field. The factual find ment of labour. The progress made here. It is the Parliament where ings of a Labour Bureau monograph in the implementation of the First the representatives of three parties on " Child Labour in India " were Plan was also reviewed. Naturally discuss past events, present maladies placed before the conference to make an important and comprehensive and future legislation. Within a suggestions for checking the evil of item like the Second Five-Year Plan democratic set up, it is convenient child labour, which seem to persist could not be adequately discussed for a popular Government to get the in spite of the protective legislation. alongwith 16 other items. A special views of employers and workers on Details of the proposal for setting session, preferably the next session non-controversial topics. Contro­ up of a wage commission were called of the conference, may be wholly versial subjects are kept away for by an all-India workers' organisa­ devoted to discuss the role of indus­ from the conference. Here is a tion. It was proposed to change the try and labour in the implementation forum which provides a common name " Working Class Cost of Liv­ of the Second Five-Year Plan. By- ground to employers and workers to ing Index Numbers" of the Labour then, the Planning Commission accuse each other in an academic Bureau series to " Consumer Price would have finalised the Second Plan fashion. Once a year, the three Index Number for Working Class", and the Planning Minister who is parties come together and discuss as the latter was more appropriate. also a specialist in labour problems across the table problems of general Both in it; structure and contents, should help the deliberations by lay- as well as topical interest. the Indian Labour Conference is a ing down certain guiding principles miniature model of the International for industry and labour. Until recently, the sessions of the L a b o u r Conference. Naturally, conference were being held in Delhi. India's relations with the ILO pro Lately, however, there has been a vide important topics for discussion. welcome change. The 12th session The Bombay session reviewed the was at Nainital (1952), the 13th was work of the ILO conferences and at Mysore (1954) and the 14th committees held in 1954 and dis­ session was held in Bombay. cussed the various proposals for con The Bombay session was as usual ventions . and recommendations on a success, because the. subjects chosen the agenda of the 58th session of for discussion provided little scope the International Labour Conference for any divergence of opinion. The being held at Geneva during June subjects taken up, however, were 1955. The earlier session of the important enough to interest all the Indian Labour Conference had Set three parties. Action taken on the up a tripartite three-man committee decisions of the previous session to draw up a programme of imple­ (Mysore, January 1954) was review­ mentation of the principles, if not ed. General matters in the field of 611