(FORTUNE Magazine) – SIR PETER HOLMES has a way of brushing death aside. He stepped on a land mine while serving with the British Army in Korea 40 years ago but escaped with minor injuries. Last summer he walked away from the crash of a small plane on a riverbank in Zambia, then fended off crocodiles and lions by lighting fires until help came 16 hours later. A good resume for a stunt man? Sir Peter, 58, is in an even more dangerous business -- oil. One of the six managing directors who run Royal Dutch/Shell Group, he is heir apparent to Chairman Lodewijk van Wachem, 60, who plans to retire next year. Skill at keeping wild animals away and surviving a walk through mine fields comes in handy. Imagine running a business where the price of raw materials seesaws between $4 and $40 per unit; where you are vulnerable to the whims of tyrants; where a single human error (an accidental spill) can cost your company $3 billion or more. With a century of experience, Royal Dutch/Shell has developed a range of strategies for safeguarding itself against aspects of its business that seem unmanageable. Any manager seeking ways to keep the evil genie of uncertainty in the bottle would do well to look closely at how Holmes and other executives at Shell solve the problem. The reward for properly handling risk is high. The Anglo-Dutch firm in 1990 passed Exxon as the world's largest oil company. With revenues of $107 billion, Shell is second only to General Motors (sales: $125 billion) on FORTUNE's Global 500 list of the largest industrial corporations. Moreover, for the second year in a row Shell ranked as the most profitable corporation, earning more than $6.4 billion. Shell also has one of the highest market capitalizations of any industrial company, $75 billion. That's more than all the shares traded on Spain's stock exchange. A Goldman Sachs investment report extols Shell as ''one of the world's great industrial enterprises . . . cash flow generation and the balance sheet are among the strongest in the world . . . an extremely well-managed enterprise.'' But not perfect. The glitch is the performance of the U.S. arm, Shell Oil, accounting for 30% of the parent's assets but delivering only 16% of earnings. It has suffered from one of those unexpected events -- a 1988 explosion at its Norco refinery in Louisiana that killed seven workers and left the company with insufficient capacity during a period of rich refining margins.

The company's culture seems in some ways paternalistic. There is a country club outside London that welcomes all employees. Exercise rooms abound both in the company's red brick office building in The Hague and in its tower on the south bank of the Thames in London. Says one executive: ''It's tough to get in, impossible to get out; a womb to tomb experience.'' At the same time, the culture encourages individual initiative. Most competitors, especially Exxon, have in recent years become much more centralized. At Shell, some 260 principal operating units are granted nearly complete autonomy. They can make almost all their own operating decisions, backed up by a clutch of service companies that offer research and technical support. Such decentralization and autonomy help managers to blend in with their local communities and to respond swiftly to new regulations, changing customer needs, and any crisis. Perched like a row of six crows atop the group, surveying the wide expanse of operations, are the members of the committee of managing directors. These men (no women yet) have been picked from the top ranks of Royal Dutch Petroleum and Shell Transport & Trading, the Dutch and British holding companies that have split ownership of the group 60%-40% ever since they got together in 1907. MEMBERS of the committee shuttle every other week between The Hague and London. They do all the big thinking on a strict consensus basis. Key planning and personnel decisions must be unanimous, which puts real constraints on the chairman. He may be seduced by the siren song of a financial fashion, but his colleagues are in a powerful position to overrule him. The setup works. Shell avoided the worst business fads of the 1980s. It didn't embark on a binge of buying other major oil companies, as did so many competitors, nor did it load up on debt. It also avoided costly detours into unfamiliar businesses, such as electronics and retailing. The committee kept the focus long term. Says Chairman van Wachem, ''We have been able to steer our own course. This is certainly a function of the people, but the organizational structure helps.'' Each managing director on the committee has run at least one local operating company at some point in his long Shell career. Adds van Wachem: ''We grow our own timber.'' Despite varying backgrounds, these top managers seem to share a cool urbanity while maintaining a touch of the buccaneer. The Cambridge-educated $ Holmes epitomizes the breed. He joined the company in 1956 to pay off debts from a climbing expedition in the Himalayas. He has run three separate operating companies -- in Nigeria, Libya, and Qatar -- but still managed to climb mountains, ski, and scuba dive. An enthusiastic photographer, he has published two books of photos. Of all the risks an oil company faces, global instability -- wars and rumors of wars -- may be the toughest to deal with. Shell uses three lines of defense: geographical diversification, sensible product diversification, and speed in adapting to change. Sounds easy enough. No competitor would disagree. It is the way Shell manages these strategies that has paid off so well. Shell is perhaps the most global of all energy companies. It explores for oil and gas in some 50 countries, refines in 34, and markets in more than 100. Political or economic turmoil in one place won't have much effect on the rest of the company. In countries where the political climate is especially delicate, Shell makes sure it gets high enough returns, usually by achieving a monopoly or near monopoly in the local market. If it can't earn rich margins in risky countries, it pulls out. The company limits product diversification to tightly linked and synergistic energy and chemical businesses, rarely straying far from what it knows best. This mix helps to smooth out quarterly bumps. A good balance is struck among upstream (exploration and production), downstream (refining and marketing), and related chemicals (industrial, agricultural, and petrochemicals). Speed in reacting is not only a defense for Shell but a competitive weapon. When Spain revoked its state oil company's monopoly on service stations two years ago, Shell rapidly established a presence and is now developing a network of gas stations there. Just before the Iron Curtain parted, Shell invested in Interag, the state-owned company that had long distributed its products in Hungary. Shell has more than 1,000 such deals worldwide, many with local governments. WAR GAMING helps Shell prepare for the unexpected. Local operating companies simulate supply disruptions on a regular basis. Four times a year the crews of its 114-tanker fleet face surprise simulated accidents. When the Gulf war erupted, Shell lost several hundred thousand barrels of oil per day from Kuwait and Iraq. But a set of procedures had been drafted for locating and bringing in alternative, preapproved crudes. Says van Wachem: ''I don't think we missed a beat.'' Top managers don't even try to forecast oil prices or political cataclysms. Yet it is critical that they anticipate fundamental changes in the industry, since they are spending billions on projects that may take years to complete, such as a plant in Malaysia to convert natural gas or development of a new field in the North Sea. So they study and debate detailed scenarios developed by the planning department that sketch reasonable but contrasting alternatives for how the world may look in ten years. Each region and each operating company uses them to formulate strategy. The two current scenarios are called Sustainable World and Global Mercantilism. The first assumes that solutions are found to the major international economic disputes. Europe successfully unifies, and Japan and the U.S. avoid a trade war; free trade prevails across the globe, and stable growth is maintained. As a consequence, environmental issues receive more attention. The implications for Shell: new emission restrictions and a reconfiguration of the energy industry in which less oil and more natural gas is used. Global Mercantilism depicts a gloomier future in which regional conflicts lead to a destabilized world. Trade wars and recession rage. Trading blocs form and consensus on environmental issues is never achieved. This scenario implies less regulation, a piecemeal approach to environmental issues, and much greater oil consumption. Probably the real world will fall somewhere between the two extremes. But instead of trying to guess the most probable outcome, managers are encouraged to look at a wide variety of ''what if'' possibilities. The scenarios aim to stretch conventional thinking. In recent years the physical risks of producing oil have declined while the financial and environmental risks have escalated, particularly as more rigs have been erected in deeper water and on arctic terrain. Shell's spending on advanced technology (the $845 million it invested on R&D last year was the most by any oil company) helps on both fronts. Better equipment usually means fewer lives put in danger. It also means drilling more cheaply. In effect Shell uses technology to attack the economics of risk. To illustrate: Drilling a well costs as much as $20 million, and typically only one in ten strikes oil. Automated drilling procedures can cut these costs by about a third. And Shell is the world leader in so-called three-dimensional seismic technology, which vastly improves the odds of a strike. Though other companies use the technique, Shell's superior software gives it an advantage. This technology has been so effective in the Niger Delta that two out of three wells have hit oil. It also helped locate the Mars field in the deep waters of the Gulf of Mexico, a discovery announced last spring. Oil analysts estimate the potential reserves at between 400 million and one billion barrels of oil and gas equivalent, making this the largest U.S. find in 20 years. Outside analysts figure that Shell's finding costs over the past five years have been about $2.90 per barrel, vs. an industry average of some $4.60. The company's supersolid balance sheet makes all this possible. In this wickedly expensive business, projects come with price tags so big they make you choke: $2.5 billion to more than $5 billion for a liquid natural gas plant, including the ships to carry the stuff away. But a treasure chest of $10.5 billion in cash and marketable securities and only 8 cents of debt for every dollar of equity puts Shell and prospective partners in a strong position to acquire oil fields or to buy stakes in companies. Typically Shell spends more than $1 billion a year on such purchases. Even better, the company can pay for its own expansion without a trip to the financial markets. Over the next five years, van Wachem, Holmes, and their associates plan to spend an astonishing $60 billion of cash flow to expand every area of the business, including $25 billion to augment Shell's presence in the Far East and in Latin America. SHELL does pay a small penalty for keeping so much cash on hand and for placing such immense long-term bets. Its return on investment has averaged around 12%: good, but below Exxon's 13%. Shell intends to reach 14% over the next few years, not by doing anything radically different -- that isn't the Shell style -- but by squeezing more out of existing operations. The company's approach to managing risk shows that even in a tumultuous, high-stakes business it is possible to remain calm and profitable. If the oil business is a bullfight, then Shell is its best matador. Managing director John Jennings, who heads the upstream operations, can give a figurative flick of the cape and say, ''We have 100 years of global experience under our belt. The world holds no fear for us.''

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