Shell reorganizes for speed and profit

Royal Dutch/Shell reacted to recent criticism from financial analysts by changing its command structure and slating a 5-year restructuring program.

In the wake of the formation of two supermajors by mergers of British Petroleum Co. plc with Amoco Corp. and Exxon Corp. with Mobil Corp., Shell was accused of being too slow to react to events and too unwieldy (OGJ, Dec. 7, 1998, p. 42).

Announcing the restructuring program on Dec. 14, Shell Chairman Mark Moody-Stuart said, "I am absolutely clear that our group's reputation with investors is on the line."

A major part of the restructuring will involve the sale of about 40% of Shell's chemicals portfolio, while high-cost producing assets and refineries will also be chopped.

Moody-Stuart said "clearing out the cupboard" so drastically would require the company to write off in fourth quarter 1998 a special charge of more than $4.5 billion after tax.

This will include charges for laying off more than 4,000 of the company's global work force of 105,000. While most of this total has been announced over recent weeks, more layoffs are anticipated, though Moody-Stuart would not give a figure, because the consultation process has barely begun.

Staff changes will go right to the top. Complex decision-making structures in Shell's exploration & production and oil products business units will be replaced by a chief executive officer and an executive committee in each unit.

The aim is to enable business decisions to be made more rapidly and to clarify accountability. Shell's smaller gas & coal, chemicals, and renewables businesses are already headed by CEOs.

Moody-Stuart said that, after restructuring, the company must achieve a more focused and efficient investment program: "We have had to make tough choices, but, although we have made some very big cuts with an $11 billion global spending program, we still have plenty of room for growth and to remain ahead of the competition."

The third step will be a crackdown on costs, said Moody-Stuart, with the intention of saving $2.5 billion/year on current spending by 2001: "I will ensure that we have the right people in place to deliver on our promises. If we identify obstacles in our system at any level, they will be removed."

Targets

Shell based its plans for the next 5 years on an assumption that the long-term average price for Brent crude oil will be $14/bbl. At the same time, the group expects worldwide growth in gross domestic product to average 1.5-2%/year, a sharp reduction from the previous assumption of 4%/year.

Yet Shell plans for growth in both sales volumes and profits in the period and expects to reach a return on average capital employed of 14% by 2001, up from a 9% return in the 12 months ended Sept. 30, 1998.

The hike of more than 50% on current returns would come from a combination of cost reductions, volume increases, disposals, and restructuring of underperforming assets. It is expected to be achieved by 15% returns from E&P, 7% from downstream gas and power, 15% from oil products, 15% from chemicals, and 5% from other areas.

Shell said oil production is expected to grow 10% by 2001, with significant increases planned in the U.S., U.K., Oman, and Australia.

Gas sales are anticipated to grow 25% by 2001, with a significant rise in U.S. production and new projects such as Nigeria LNG and Oman LNG (see story, p. 36), plus field developments in the North Sea, Egypt, and Argentina coming on stream.

Cutbacks

In a bid to reduce its chemicals portfolio by 40%, Shell plans to reduce the number of its product businesses to 13 from 21 through divestment.

The company intends to retain its major cracker products, petrochemical building blocks, and high-value polymers, where it has strong market positions, with a view to speeding up the achievement of market leadership. It intends to reduce its 50% interest in the Montell BV polyolefins joint venture by half, however, and said an alliance with a partner offering complementary market development capabilities offers the best long-term value.

The chemical business is expected to write down $1.1-1.3 billion after tax, most in fourth quarter 1998, with a further $200 million being set aside for reorganization in 1998 and 1999. The aim is to reduce costs by $300 million/year in chemicals by 2001.

Shell also plans to sell its stake in the Altura Energy Ltd. upstream joint venture with Amoco Corp. in Texas and to restructure its Aera Energy LLC joint venture with Mobil Corp. in California. Shell expects to write down losses on these assets, and also $1.8-2 billion in after-tax losses from Venezuelan producing assets, caused by low oil prices.

The company also intends to sell part of its downstream gas business in the U.S.-Tejas Gas Corp.-and to restructure what it retains, with a further writedown of $500-700 million after tax.

Meanwhile, the restructuring of Shell Europe Oil Products will go ahead as announced last month, in addition to the closure of Sola refinery in Norway and a recognition that the Reichstett refinery in France "does not have a long-term future" (see story, p. 30).

Other plans include transformation of the downstream Equilon and Motiva alliances in the U.S. "to reap the $800 million/year synergies" and a reduction in Shell Oil and Shell U.K. Exploration & Production staff, along with a reduction in overall E&P operating costs from $3.3/boe this year to less than $2.5/boe by 2001.

Outlook

Shell said its capital investment plans are still geared towards growth but "have been moderated in response to the more difficult environment."

The group aims to spend $11 billion in 1999 and a similar level thereafter, including an anticipated $6.3 billion/ year outlay in E&P during 1999-2003.

"All proposed E&P investments," said Shell, "are expected to produce fully satisfactory returns at a Brent price of $14/bbl and still meet minimum investment hurdle rates at a price of $10/bbl."

In oil products and chemicals, Shell intends to invest $2.2 billion/year and $700 million/year, respectively, with the bulk of the outlay in the oil products side to go toward marketing.

Moody-Stuart said that oil prices could well remain at about $10/bbl for the next year or so, but that, even at this price, Shell would remain financially robust.

"We have the capacity to take up real growth opportunities," said Moody-Stuart, "such as the opening of low-cost production or distress sales. But we have a great deal of work to do in our own shop.

"We have looked at merger possibilities and will continue to look at such possibilities, and, if the right opportunity arises, we will act. But we are large enough to be the leading company on our own without any merger.

"We have to focus on producing the same outstanding growth in dividends and shareholder value that Shell has delivered for the last half a century."