Watching the World Shell's microscope focused on refining

With David Knott from London Royal Dutch/Shell began layoffs and cost cutting at its central offices in The Hague and London last February (OGJ, Mar. 6, 1995, Newsletter). John Jennings, chairman of Shell Transport & Trading Co. plc, told journalists May 16: "The new organization will enable us to operate better at regional and local levels, but it will be a few years before the full impact is felt. This year we expect results to get through to the bottom line."

May 27, 1996

3 min read

Royal Dutch/Shell began layoffs and cost cutting at its central offices in The Hague and London last February (OGJ, Mar. 6, 1995, Newsletter).

John Jennings, chairman of Shell Transport & Trading Co. plc, told journalists May 16: "The new organization will enable us to operate better at regional and local levels, but it will be a few years before the full impact is felt. This year we expect results to get through to the bottom line."

Not that recent RD/Shell bottom lines have been disappointing. For example, the group's first quarter 1996 income from operations was 1.616 billion ($2.456 billion), a 24% increase from first quarter 1995 earnings.

European refining

The group's microscope is focused on refining operations at the moment. Here the company is making a return on investment worldwide of 8%, as much as anyone else, but major changes are being discussed.

Jennings said, "In the U.S., Shell has made each refinery a separate company so managers have to look at commercial improvements of their own units, not just technical improvements."

In Europe, refiners are discussing plans to cut capacity in parts of the region in a bid to revive operating margins (OGJ, Mar. 25, p. 21).

"We are in discussions with other refiners in Europe," Jennings said. "The talks are very confidential. Over the next few months Shell will decide how it plans to respond to Europe's refining challenges."

Shell is not about to give its European refineries as much autonomy as U.S. plants, Jennings said, but this has not been ruled out: "We'll have to see what the U.S. experiment brings."

Jennings compared the problems of Europe's refiners with the oil price shock for offshore producers in 1986.

"At first, offshore operators said they couldn't make a profit on $15/bbl oil," Jennings said, "but they found solutions that have turned this around.

"Once the refining business gets its mindset around the fact that margins will settle very much lower than the past norm, we may get some very interesting innovations."

Shell's Far East refining problems are a contrast: "We need additional refining capacity there. We are mainly looking to find ways to modify and expand existing facilities rather than build greenfield (grassroots) plants."

Nanhai setback

Shell plans to build a greenfield refinery and petrochemical plant at Nanhai, China, with crude distillation capacity of 8 million metric tons/year and ethylene production capacity of 450,000 metric tons/year.

"This is the largest foreign investment currently under discussion in China," Jennings said. "Shell's 50% share of the planned investment is $3 billion, but project negotiations have proved particularly difficult, and economic problems wait to be resolved." (OGJ, Mar. 7, 1994, p. 28).

Shell's latest Nanhai setback has been the arrest of its representative in China, along with a representative of project partner China National Offshore Oil Corp. (Cnooc).

Jennings said, "The Shell and Cnooc officials have been accused of breaking state secrecy and are being held in a detention center. There has been press speculation that bribes have been paid, but they have not."

Besides tricky contract negotiations, Shell finds itself in a legal battle: "We are particularly concerned because our representative has a small child. We are making inquiries through a variety of channels to seek information on what she is accused of."