London Evening Standard: Vision needed to revitalise Shell: “It is just six months since possibly the biggest post-Enron scandal erupted at Shell with the stunning admission that a group regarded as one of the most reliable in the world had lied about the health of its business.” (ShellNews.net)
17 September 2004
SHELL chairman Jeroen van der Veer needs to give the presentation of his life next week, when he steps into the heart of the City to convince sceptics the struggling oil giant is on the way back.
After the worst year in the group's long, proud history, van der Veer will finally spell out his vision for improving Shell's reputation, restoring growth and, most importantly, finding more oil.
The setting is suitably ironic. Plaisterers' Hall, one of the largest livery halls in London, is touted as reflecting the 'grandeur of a bygone era'. Van der Veer now sorely needs to haul Shell into modern times. Deutsche Bank's respected oil analyst JJ Traynor says: 'The seeds of recovery are there ... the right presentation could provide the catalyst.'
It is just six months since possibly the biggest post-Enron scandal erupted at Shell with the stunning admission that a group regarded as one of the most reliable in the world had lied about the health of its business.
Former chairman Sir Philip Watts carried the can as Shell was forced to wipe almost a quarter of its proven oil and gas reserves from its books - some 4.4bn barrels. To put this in context, Britain as a whole has 4.3bn barrels of proven oil reserves left underground.
Out in unceremonious fashion went Watts, along with exploration chief Walter van de Vijver, while finance officer Judy Boynton was demoted to a still-undefined role.
Into the breach from Shell's Dutch half has stepped van der Veer. Slight and unassuming, he is as far away from the image of a corporate big-hitter as could be imagined - but he exudes a determination to steer the group back to its former glory.
So far, he has given little away to the City except talking about transforming a me-first culture and overhauling a controversial bonus system. But he has been working feverishly with his new lieutenant, former downstream boss Malcolm Brinded, to map out a future under the guidance 'more upstream, profitable downstream'.
With talk of the much-needed overhaul to Shell's creaking corporate structure already put off until November, analysts now want van der Veer to put far more meat on the bones of his recovery plan. Any gaps and Shell's share price, which has outperformed the market by 10% since the reserves fiasco broke, will head south.
The reserves crisis means Shell is only likely to replace as little as 60% of the oil and gas it brings to the surface this year, an awful return for a company with its range of global assets.
Production is expected to end this year about 4% below last year at a time of record crude prices, and could dip again in 2005 before finally picking up in 2006. It is here, in the exploration - or upstream - division, where the City's most pressing concerns lie.
Bruce Evers, an analyst at Investec, says: 'Upstream used to be the engine room for growth, but now it is the problem child. For Shell, it's now really a question of producing the most profitable barrels you can, rather than just producing barrels for the sake of it.'
To this end, van der Veer is largely expected to follow BP's lead and start chopping off some of the deadwood around Shell's vast exploration business as part of a bid to globalise the division and tear it away from the country-specific structure that contributed to the reserves crisis.
Some of the most vulnerable assets are not only those in West Africa - places such as Cameroon and Gabon - that Shell has held for ages, but also in the North Sea, where analysts are clamouring for the kind of decisiveness shown by BP when it sold its legendary Forties field last year to recycle the cash back into new frontiers.
Brinded, now installed as exploration chief, has so far shied away from committing to such largescale disposals but Shell could signal a radical break from its cumbersome past by putting on the table a prize such as Brent, the biggest producing field in Britain but one that began pumping oil 28 years ago.
Peter Hitchens, an oil analyst at Chevreux, says: 'It's basically about going out and changing the whole philosophy of the group. They need to ask themselves 'what do we need to do to turn this around and build up the acreage?''
Such a move would also help free yet more cash for an exploration programme that is currently reliant on 'quick payback' projects in Morocco, Malaysia, Nigeria and the Gulf of Mexico. Most of the extra $200m (£113m) found this year for the exploration budget has been absorbed by costly overruns at the vast Sakhalin project off Russia's east coast.
The downstream operation, which covers everything from refining to selling sandwiches at the petrol station, is also in need of a huge overhaul and the signs are that this arduous this has already begun.
Some $3.5bn was generated in the first six months this year in an Anglo-Dutch sale of the century that saw Shell hive off a swathe of downstream assets from Turkish gas power plants to a refinery in Delaware City, an oil products business in Portugal and a liquefied natural gas plant in India.
Since the half-year, the group has also announced plans to sell its $6bn chemical joint venture with BASF and is rumoured to be putting its InterGen power venture in the US on the block as well.
Analysts believe Shell has finally decided not to be in countries where it is a bit-part player. It has often boasted about having more petrol stations around the world than McDonald's has fast-food outlets but now seems to realise it cannot keep them all.
A bigger share buyback programme would also be a popular move - BP is already returning vast amounts of cash to investors - but the City is unlikely to cry 'show me the money' as long as van der Veer can convince he is spending it wisely.
Hitchens says: 'We need to know how they are going to grow the business and what they are going to do with the cash. They are the two messages that have to come through.'
How history has repeated itself
AS Jeroen van der Veer considers the best way to revive Shell, he could do worse than look at the history books.
The City was furious with BP 12 years ago. While Shell was seen to be getting it all right, BP was criticised from all sides. One analyst famously said: 'BP has no friends left.'
Unthinkable now, but Britain's biggest company was slammed for being outdated and adopting a bunker mentality. It was mentioned as a possible bid target. To complete the similarities between BP's problems then and the crisis van der Veer faces, the supermajor was even bracing itself for a huge class action lawsuit from US investors.
The reason for the onslaught was BP's first ever quarterly loss, a stunning £812m. It also halved the dividend and axed 11,500 jobs worldwide to eat into debt of $16bn.
It was suffering a severe bout of indigestion after splashing out on acquisitions and buying back 10% of its equity from Kuwait, which had bought 20% in a government sale in 1987.
As with Shell this year, BP's crisis brought an end to the spell of an all-powerful leader, chairman and chief executive Robert Horton. His role was split respectively between Lord Ashburton and David Simon. The latter dazzled the City with numbers and acronyms - 1,2,5 and PRT.
He vowed BP would pay down debt by $1bn a year, lift profit $2bn a year by 1995 and hold capital spending at $5 billion in 1993 and 1994.
He added: 'A return to Profitability and, with it, BP's traditionally high Reputation, will be achieved through successful Teamwork.'
The message was plastered all over that year's annual report. And it worked. Second-quarter losses of £812m were transformed into profits of £240m just a year later.